VICI - Starting Over From The Ground Up

2024-01-05 07:00:00 ET

Summary

• I love writing about my failures because it's a way for my readers to learn from my mistakes.
• Leases are a significant part of the value creation process in real estate, and in this article, I wanted to emphasize the importance of lease negotiations.
• I’m now in my 14th year on Seeking Alpha, and based on where I’m sitting right now, I believe that 2024 could be the best year yet.

My regular readers know this already, but newer ones might not.

Before I began writing here on Seeking Alpha, I was a commercial real estate developer. I spent over two decades in the trenches literally learning how to create value "from the ground up."

My first job out of college was as a leasing agent, where I helped a developer find tenants for a brand-new power center. That meant I had to learn how to negotiate leases for a variety of property types, from retail, to office, to industrial.

I remember one of my first restaurant deals was an out parcel in front of a new Home Depot ( HD ). That was when I helped arrange a build-to-suit building for Rock-Ola Café.

This was the expanding company's first South Carolina location. And as an incentive to seal the deal, I agreed to put the alcohol license in my name. (Obtaining one required being a resident of the state.)

When the restaurant opened, I took my girlfriend there, where the waitress asked to see my driver's license after I ordered a beer.

I was pretty proud of that first deal. And possibly embarrassed that she didn't recognize who I was.

Remember, I was young and humility was in short order.

So I told her to compare my driver's license with the ABC license behind the bar. And to remember me next time.

Clearly, there was a whole lot I still needed to learn from there, including how to be more gracious.

More Lessons to Learn

That was my first lesson in lease negotiations, where clearly I put something on the line. Liquor licenses are no small thing.

Gradually, though, I got more leverage to bargain with.

When I graduated from leasing agent to developer, I amassed a portfolio of leases for national chains like:

• CVS
• Dollar General
• Dollar Tree
• Hibbett Sports
• Cato
• Advance Auto
• PetSmart
• Party City

It taught me that the lease contract was a significant part of the value-creation process. For example, my first lease with Advance Auto was a gross lease that made me responsible for taxes, insurance, and maintenance.

I deducted these costs from my development proforma. But they were never accurate, which means my net operating income (income less expenses) wasn't very predictable.

Eventually, I decided to insist on triple-net leases, where the tenant pays those costs. I also learned that leases with percentage rent clauses can be extremely lucrative.

A few years ago, I purchased a shopping center in North Carolina leased to Lowes Foods (the supermarket chain), CVS Health ( CVS ), and Family Dollar. It was less than a $2 million deal, and my expansion-dependent goal was to double the net income.

CVS specifically was paying me something like $3.00 per square foot with a generous percentage rent clause. And it sent my first payment around two weeks before Christmas.

I'll never forget getting it. When I opened up the check for $80,000, I thought it was from Santa Claus.

I used part of it to buy my wife a very nice gift. So I know she was thankful for the check, too.

A Cautionary Story About Candy

That's not to say I always won out in the contracts I negotiated. I got smarter and stronger, but not perfect.

And since I always like balancing my content here on Seeking Alpha, here's an example where I lost out…

Around 17 years ago, I built a shopping center for the Bi-Lo grocery chain, Rite Aid (RADCQ), and Dollar Tree (DLTR). It took me over two years to purchase the site, which was previously an elementary school that got relocated.

Bi-Lo and Rite Aid signed 20-year leases, which is typical for grocery and drug stores. Dollar Tree, meanwhile, signed a 10-year lease.

Before long, I got an email from Bi-Lo notifying me that I was in violation of the "grocery exclusive" clause in the lease.

There could be no more than 10% of grocery products being sold at the Dollar Tree. And, apparently, it was selling candy and paper plates.

I remember my first thought being along the lines of, "Candy! Are you kidding me?"

I pushed back, but they easily won out because of the terms of the contract. I was forced to choose between negotiating with Bi-Lo or paying Dollar Tree to terminate its lease.

The latter option would involve reducing my rental income by around $100,000 per year. If you capitalize that rent by 8%, I would have lost $1.25 million in value.

So I wrote a check to Bi-Lo: something that was more than $100,000 but less than $500,000. And, a few months later, I sold the entire shopping center to a REIT for around $12 million.

The construction loan was around $9 million, so I did win out in the end. But it was a hassle I wouldn't forget.

More Hard Candy to Swallow

Speaking of candy, I remember building one of my first shopping centers. This time, Party City (PRTYQ) was the tenant of contention.

Not that it was the company's fault. The problematic party was outside of its control and one I should have handled differently.

Another important lesson learned in the end.

The store was supposed to be open around two months before Halloween. That would allow Party City time to upfit and stock the property properly.

Knowing that it negotiated a provision that gave it seven days of free rent for every day I was late in turning over the space. This was something I was very well aware of.

I informed my general contractor of these penalties to avoid any issues. Unfortunately, though, I thought that would be enough and didn't include any late penalties in that contract.

For reasons I won't list here, the space was delivered around three weeks late. That meant Party City obtained around 150 days of free rent, or around $40,000.

And it was all on me.

I learned my lesson the hard way: yet another very expensive lesson in candy.

Build Your REIT Portfolio from the Ground Up

As I hope I have demonstrated, leases are an extremely important part of the rental profit business. Both landlords and their investors should consider the nuances involved.

Always.

That's one of the reasons I recommend owning a portfolio of real estate investment trusts over private real estate. Most of the REITs I own have experienced management.

They know the lease negotiation process inside and out, upside and down, through and through.

As a young scrappy developer, I had to learn about leases the hard way. And I didn't have REITs' scale advantage to negotiate with these national chains.

In addition - and most importantly - my portfolio was highly leveraged. So I was forced to sign personal guarantees for many of my loans.

There were some other factors working against me, some my fault and some outside of my control. Believe me when I say it's hard to unwind millions of dollars of debt when your business partner is stealing money.

All put together, I was up to my eyeballs with debt when the tide went out in 2008.

More hard lessons learned.

Of course, it all led me to Seeking Alpha. Little did I know that when I landed here in 2010, I'd become a trusted REIT influencer, author of four books (and counting), a teacher, and an ETF index advisor.

But I know now I wouldn't be able to give the kind of successful analysis I do without all that experience - both the good and the bad.

So, just as I started my career in real estate "from the ground up," I find it fitting that I was able to pivot my career to help REIT investors create value in the same way.

Now that I'm done reminiscing about my journey, let's discuss two REITs on my radar right now.

Game On!

VICI Properties Inc. ( VICI ) is a gaming REIT and has become one of my top REIT holdings.

The company went public in 2018 and has since blossomed into one of the largest REITs, with a market capitalization of ~$33 billion and a member of the S&P 500.

100% of VICI's lease contracts are triple net (tenant pays for all expenses) and 96% of rent is long-term CPI protected.

Back when I began my career in real estate (over 30 years ago), I would have never dreamed that I would become a landlord to iconic assets such as The Venetian, Harrah's, The Mirage, Caesars Palace, and Mandalay Bay.

Also, as a VICI shareholder, I'm a fractional owner in 26 acres of undeveloped land strategically located adjacent to The LINQ and behind Planet Hollywood, as well as 7 acres of Strip frontage property at Caesars Palace; all of which are subject to and part of a master lease with Caesars Entertainment (CZR).

Now, there's no way that VICI could have assembled such a massive portfolio without a strong balance sheet : 99% fixed rate debt outstanding, 83% unsecured debt, and 6.1 weighted average years to maturity. VICI has solid credit ratings from S&P (BBB-), Fitch (BBB-), and Moody's (Ba1).

I've been impressed with VICI's dividend growth record, 8.3% CAGR since 2019.

Shares remain attractive today (as seen below), with a P/AFFO of 14.8x and dividend yield of 5.2%. Analysts forecast 5% growth in 2024 which translates into our total return forecast of 15% (over 12 months).

She Blinded Me With Science

Alexandria Real Estate Equities, Inc. ( ARE ) is a specialty office landlord that owns campuses in "innovation clusters locations" such as Greater Boston, San Francisco Bay, NYC, San Diego, and the Research Triangle.

Like VICI (gaming sector) I could have never been able to be a landlord to high-quality life science buildings had it not been for the REIT structure.

ARE is also an S&P 500 company (like VICI), with significant liquidity ($5.9 billion) and a client base of over 800 tenants, of which 91% (of the top 20 tenants) are investment-grade or publicly traded large-cap companies.

As of Q3 2023 , ARE collected 99.9% of its rent and the weighted-average lease term (as of Q3-23) was 11.0 years. The company has also maintained steady occupancy. 95.1% in the latest (Q3) quarter.

The balance sheet is in fortress shape, with 99% of debt subject to fixed interest rates and net debt to adjusted EBITDA of 5.1x. The company has investment-grade ratings from S&P (BBB+) and Moody's (Baa1).

I've been impressed with ARE's dividend growth record, 5.5% CAGR since 2019.

Shares remain attractive today (as seen below), with a P/AFFO of 17.9x and dividend yield of 3.9%. Hopefully, you added shares at $91.66 when I recommended that to our Investing Group subscribers back in late October (+41% returns in 60 days).

Analysts forecast 5% growth in 2024 and 2025, which translates into a total return forecast of 20% (over 12 months).

In Closing

I'm now in my 14th year on Seeking Alpha and based on where I'm sitting right now, I believe that 2024 could be the best year yet …

Not just on Seeking Alpha, but in my 30+ year career in commercial real estate!!!!

These two examples - VICI and Alexandria - are just a few of the REITs that serve as the foundation for my multi-million-dollar income portfolio.

Part of my goal in 2024 is to increase my real estate holdings which include both public and private real estate.

I look forward to sharing more "lessons learned" articles with you in 2024, and I wish you the very best. As always, thank you for the opportunity to be of service.

Happy SWAN Investing!

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