VICI - Why My Military Experience Will Help Me Navigate The Rough Market Seas With These 3 REITs

2023-06-26 09:45:00 ET

Summary

• I discuss the benefits of investing in REITs, specifically VICI Properties, Agree Realty, and National Retail Properties, highlighting their strong management and consistent dividends.
• All three REITs have well-laddered debt maturities and are well-prepared to navigate the high-interest-rate environment with minimal debt maturing in 2023.
• Despite potential risks such as tenant defaults on rent, I believe these REITs offer investors an opportunity to buy shares closer to their 52-week lows and benefit from their historical occupancy ratings.

A Glimpse into my Investment Journey

I grew up in a small town called Hurtsboro, Alabama. It was surrounded by a lot of other small towns, located close to the Alabama/Georgia border. It's located about 30 miles south of Auburn, home of the Auburn Tigers. Go tigers! My town and family are split down the middle between the Alabama Crimson Tide and the Auburn Tigers. Growing up there our college football teams were all we had. No professional teams in sight. Growing up I never really thought about what I wanted to do when I graduated high school. A few of my family members had joined the military, including my sister. My father told me he would pay for my college, but I knew at 18 years old I would get into the party life like most teens, and didn't want to potentially waste his money. A few family members asked me also what I wanted to do after graduation. After telling them I wasn't sure, my aunt said "hey you should join the Navy like your cousin."

After thinking about it for a period, I decided I would talk to a recruiter. I'll admit I was a little scared because my cousin could never pass the ASVAB score to get in the Navy. I honestly think he wasn't trying either if I'm honest. After talking to a recruiter, I took the ASVAB and passed on my first try. I remember being nervous after I submitted my test. A short while later they told me I passed. I wanted to spend the summer at home so I asked them could I join at a later date. The recruiter told me they only had July or December. I thought to myself "I do not want to be marching in the winter in Great Lakes." So I elected to leave in July. Two months later, I was shipped off to bootcamp.

After graduation I was stationed on my first ship, the U.S.S. Rodney M. Davis (FFG-38). A few months later, I was sailing on my first ever deployment to support Operation Enduring Freedom. That was a long 8 1/2 months. This was my first time away from home. Away from family and friends, and out of the country. I wasn't making much money back then, but I also wasn't able to spend much being trapped in the middle of the ocean on 453 feet of steel. I quickly realized that deployments were a great way to save money. I didn't have any bills or responsibilities as a 18 year old kid fresh out of high school, so I was able to save a good chunk of my paychecks. I was pretty good at saving money, but I was always intrigued about investing.

I would hear the older, experienced sailors talk about investing sometimes on the ship. One investment they would always talk about was real estate investing. Flipping houses. They would talk about buying homes, then renting them out to tenants when they get orders to a new duty station. Most sailors move duty stations every 3 years, and because of this, this income strategy seemed risky. Everyone makes it sound easy, but finding a tenant is not always guaranteed. Especially a quality tenant. They also never talked about the other things that can be viewed as negative associated with investing in real estate. This includes things like management fees, property taxes, closing costs, etc. Moving every 3 years, I never wanted to deal with the headache of finding a tenant . I've seen plenty of sailors struggling to make ends meet because of having to pay double rent until they find a tenant. And the Navy does not care, when it's time to go, it's time to go! I decided then that I would wait until retirement until purchasing a property.

Fast forward multiple years and deployments later, I discovered REITs. In my 21 years of service, I can't recall many sailors talking about investing in them, or even mentioning them . When I discovered them, I did extensive research to learn more about them. One of the first REITs I came across during my research was VICI Properties ( VICI ). Being that I was very familiar with Vegas, I decided to start a position. Seeing the foot traffic, and cash flow that went through that place, this investment was a no-brainer.

Get Rich Like Buffett In Vegas!

If you've visited Vegas then you can see why VICI is a worthwhile addition to any income portfolio. In Vegas, almost everything is over-priced! ATM fees are $10 dollars, drinks are around $30 dollars or more, and there's an entrance fee for just about everything. People go to Vegas to spend their hard-earned money. Why not get a piece of it is my thought process. I remember watching a video of Warren Buffett and he stated: When I was 21 years old, we went through Las Vegas and I went in and saw all these well-dressed people who had come a thousand miles or so, and they've come to do stupid things! And I thought, boy am I gonna get rich! That comes to my mind every time I go to Vegas. I am not a huge gambler; I mostly go to Vegas to people watch, relax by the pool, and admire my properties.

VICI Properties is an S&P 500 experiential real estate investment trust that owns one of the largest portfolios of market-leading gaming, hospitality, and entertainment destinations. This includes Caesars Palace, MGM Grand, and the Venetian Resort, three of the most iconic entertainment facilities on the Las Vegas Strip. They also own four championship golf courses and 34 acres of undeveloped land adjacent to the Las Vegas strip. I believe VICI's management is patiently waiting for the right opportunity, or the right buyer to come along with an offer. I would love to see VICI add ground leases to the portfolio, and I think this could be a perfect opportunity to do so.

Furthermore, VICI also collected 100% of its rent during COVID. In fact, VICI has collected 100% rent since its inception in 2017. This further shows the quality of this fairly new REIT. VICI spun off from Caesars Entertainment (CZR) in 2017 and became the fastest REIT ever to get from IPO to S&P inclusion in a little under 5 years. VICI also has an investment grade credit rating from all three major credit agencies.

Does Everything Doesn't Stay In Vegas?

Although we talk about VICI's iconic hotels located on the Vegas strip, the company also owns hotels in 14 other states including the Southern gaming destination: Biloxi, Mississippi.

Mississippi is home to eight casino resort hotels, with 24 hour gambling, concert entertainment shows, and several restaurants. Tourism has been growing on the coast of Mississippi, mostly notably in Biloxi. Biloxi is known for its gambling and its beaches. The average tourism for coastal Mississippi was about 14.6 million for FY2022. The state did see a slight drop-off, equating this to inflation and gas prices.

At the beginning of the year, VICI acquired the real estate assets of PURE Canadian Gaming Corp with an initial lease term of 25 years with four 5-year tenant renewal options. They also have contractual annual escalators in years two, three, and four+. Together, these total close to 250,000 Sq Ft of gaming space. PURE is the largest gaming operator in Alberta with assets in two of the largest cities in the province.

Additionally, VICI acquired four casinos in Alberta, Canada from Century Casinos, and lease back such assets to Century in an amended existing master lease. Alberta is the third largest casino market in Canada. The gambling market in Canada is estimated at a total of $14 billion. Last week, Canada opened its newest ' Vegas-Style' resort , estimated at $1 billion, which is said to be the largest in Canada and North America. It currently sits on 33 acres, and has 328,000 square feet of gaming space. It's also expected to generate more than half a billion in economic impact in the province.

Durability & Growth

VICI has raised the dividend every year since going public, while targeting a 75% AFFO payout ratio. This is more conservative since REITs are required to payout 90% of their earnings in the form of dividends. They also reported Q1 AFFO growth of 18.6% year-over-year which is great in this murky trading environment. Management believes this will be the highest among REITs generally and the S&P 500 REITs specifically . They also reported having $859 million of equity dry powder, due to their unsettled forward equity and approximately $650 million in cash.

Monthly Checks Anyone?

Up next is one of my absolute favorite REITs and monthly payers, Agree Realty (ADC). Since going public in 1994, ADC has developed over 40 community shopping centers primarily throughout the Midwest and Southeast. It operates a portfolio of 1,908 properties in 48 states, leased primarily to grocery and home improvement stores. These stores are considered essential no matter the state of the economy.

ADC has all the things I look for and enjoy about a stock. Conservative, efficient, and consistent. The company literally has the word "consistency" plastered on page 4 of its June investor presentation. Over the past 5 years ADC has given shareholders an almost 74% return! One of the reasons for this is their portfolio consists of 68% investment-grade tenants and has a 99.7% occupancy rating. Their holdings include the likes of Walmart ( WMT ), Dollar General ( DG ), with Walmart being their top tenant. It also leases to one of my other favorite dividend stocks Kroger ( KR ). At its current price, ADC is trading less than $2 above its 52-week low of $63.34, making it a screaming buy in my opinion.

It is also to be noted that investing in these three REITs will give investors monthly dividend checks with VICI paying in the months of January, April, July, and October. And NNN paying in the months of February, May, August, and November. As stated previously, ADC pays monthly.

Price Return VS Peers

Below is how ADC stacked up against some of its popular monthly paying peers. Although Agree Realty and Realty Income ( O ) are the only ones in the green, ADC almost doubles O while the others are all in the red for the past 5 years. I think this speaks volumes about the management team of ADC. Leading that team is Agree Realty's CEO Joey Agree, who I think is one of the best. I've had the privilege of speaking with Mr. Agree through personal message. And hopefully one day I'll get to meet him in person. The bottom line, " bad managers are bad for business". But bad management surely isn't a problem for ADC.

Since being appointed CEO in 2013, ADC has more than tripled in price return at 141% compared to 55% the 10 years prior being appointed CEO. Before that he served as President and Chief Operating officer for four years.

Dividend Growth

Similar to VICI, ADC also has a more conservative payout ratio at 76%. The company also has a 6.1% compound annualized dividend growth over the past ten years. With their low payout ratios, both companies have adequate room to grow their dividend and I think will continue raising their dividends for many years to come.

Ship Missing An Anchor?

In the Navy, one of the things required to get any ship underway is a working anchor. Without this, ships are grounded until this issue is fixed. Every portfolio needs an anchor, just like every track team has an anchor. This is one of the most important members on the team. NNN REIT (NNN) comes to mind when I think of this.

NNN primarily invests in high-quality properties subject to long-term leases, with a weighted average lease expiration of 10.4 years. Their portfolio consists of 3,449 well-diversified properties in 49 states with convenience stores being 16.3% of annualized base rent. Automotive service is second at 14.4%. No matter if we fall into a deep recession which many are predicting, people will always need and shop for certain store items such as cigarettes, gas etc. and need their cars fixed. Basically these are considered recession resistant.

Consistent Dividends and Shareholder Returns!

NNN has managed to pay consistent, growing dividends like clockwork! 33 years to be exact. Being the third longest of all public REITs and 99% of all public companies to achieve this feat, this is something management can be proud about. In 2022, the company maintained their consistent low dividend payout ratio of approximately 67% of AFFO. With 33 years of growing dividends under their belts, NNN also returned a total of 7.3% and 6.7% to shareholders over the past 5 and 10 years. Furthermore, it has beaten the S&P Index from years 15 on. I plan to hold my NNN shares forever and expect the company to keep their track record of double digit returns.

Risks

Although we are experiencing a slowing economy, and REITs have seen their prices drop by over 30%, my viewpoint offers investors an opportunity to buy shares of these companies closer to their 52-week lows. One thing to be aware of are tenant defaults on rent with the Fed's promise of a higher for longer interest rate environment and the threat of a recession in the near future. But with each stock's historical occupancy rating maintained through the recent pandemic, I don't see this as a huge problem going into the second half of the year. Additionally, because REITs are taxed as ordinary income investors may consider holding these in a tax-advantaged account such as an IRA.

In closing

One advantage investors get buying these three REITs besides the dividend and investment grade balance sheets is that all three are trading close to their 52-week lows, making all three a buy in my opinion. Investors also get a monthly dividend check due to each REIT's pay structure. Each company's management has a stellar track record, and are well-prepared to navigate the rough seas currently, and likely going into 2024. Hope you enjoyed this article and me sharing my military experiences with readers.

Readers let me know in the comments what you think about these three REITs. Also would love to hear about your experiences in the military, or family members or friends who have served.

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