2023-09-22 14:00:00 ET
Summary
- VICI's top and bottom line growth have been excellent over the past five years, well exceeding the sector median, with the management recently raising the FY2023 profit guidance.
- Shareholders have also benefitted from the REIT's high growth cadence, thanks to the raised quarterly dividends by +6.4% despite the sustained share dilution.
- While part of VICI's rental escalator is tied to the CPI, the Fed only expects to reach the 2% inflation target rate by 2025, suggesting VICI's excellent intermediate-term prospects.
- We expect the REIT to continue to exceed expectations, thanks to the high hotel occupancy rates and robust casino demand in Las Vegas as international guests return.
The VICI Investment Thesis Remains Robust Here, Thanks To The Highly Competent Management Team
VICI Properties Inc. ( VICI ) is an interesting REIT to observe, attributed to the management's strategic choice to focus on casino and golf real estates, while calling Caesars ( CZR ) and MGM ( MGM ) two of its largest tenants .
At the time of writing, CZR accounts for 18 or the equivalent of 33.3%, and MGM accounts for 13 or 24% of VICI's 54 gaming properties across the US and Canada.
While casinos have been highly profitable pre-COVID, it is apparent that things have taken a drastic turn during the pandemic, one that has forced multiple US tribes to diversify beyond gaming at that time.
The same has been observed for CZR, with it still reporting negative GAAP operating incomes of -$254M and margins of -2.2% over the last twelve months (+81.1%/ +10.7 points sequentially), despite the top-line expansion to $11.41B (+9.9% sequentially).
This is compared to its FY2019 revenues of $2.52B, operating incomes of $125M, and margins of +4.9%.
MGM seems to be having it worse, with LTM revenues of $14.77B (+29.7% YoY), operating income of -$1.25B (-231% sequentially), and margins of -8.5% (-16.8 points sequentially), compared to the FY2019 levels of $12.46B/ $1.41B/ +11.4%, respectively.
Depending on how market sentiments develop after the FOMC meeting in September 2023, we believe there may still be more pessimism ahead for VICI, since part of its rental escalators is tied to the CPI (capped at 3%).
With inflation appearing to be peaking, warranting the recent rate freeze, Morningstar has also projected a potential Fed pivot by early 2024, potentially moderating the REIT's rental revenues (Income from sales-type leases) from the $495.35M reported in FQ2'23 ( +3.5% QoQ / +32% YoY).
VICI's Valuations
Seeking Alpha
Perhaps this is why Mr. Market has grown pessimistic about VICI's near term prospects, with the stock trading at FWD Price Sales of 8.60x and FWD Price/ FFO of 12.58x, compared to its 1Y means of 9.08x/ 14.02X, and 5Y means of 9.73x/ 14.13x, respectively.
However, we believe the correction has been overdone, since the REIT has been able to collect 100% of its rent over the past 5.5 years, despite the impact of the hyper-pandemic uncertainties on its two main tenants.
VICI's Growth Rating
Seeking Alpha
While VICI is obviously still very young, formed in 2017 as part of the CZR bankruptcy reorganization, the management appears to be highly competent indeed, with Seeking Alpha grading its growth potential as A+ across the board.
Particularly, while its top and bottom line growth have been excellent over the past five years, well exceeding the sector median, the consensus similarly expects the same outperformance moving forward.
These numbers are also observed in VICI's excellent FQ2'23 results, with AFFO of $540.4M ( +2.2% QoQ / +25.6% YoY ) and AFFO per share of $0.54 (+1.8% QoQ/ +12.5% YoY).
This is on top of the management's raised its FY2023 AFFO guidance to $2.145B ( +26.1% YoY ) and AFFO per share of $2.125 (+10.1% YoY) at the midpoint. This is compared to the previous midpoint guidance of $2.135B (+25.5% YoY) and $2.115 (+9.5% YoY), respectively.
We expect VICI's future growth opportunities to be robust as well, with the expanded partnership with Canyon Ranch and international expansion in Canada with the acquisition of certain gaming properties from Century Casino, partly funded by the $870M of net proceeds from forward sale agreements and $2.4B in revolving credit facility.
These may built upon the excellent performance reported in the Las Vegas casinos, with the region generating nearly all-time high margins, as CZR and MGM both report high hotel occupancy rates and robust casino demand in the latest quarter as international guests return.
The high growth cadence has directly contributed to VICI's excellent shareholder returns as well, with the management recently increasing the quarterly dividends by +6.4% to $0.415 in September 2023.
This is an impressive feat indeed, given the sustained share dilution to 1,007.97M by FQ2'23 (+4.14M QoQ/ +111.42M YoY).
As a result, we concur with management's commentary in the recent earnings call, with the REIT's outsized growth being relatively cheap compared to the other S&P 500 REITs.
So, Is VICI Stock A Buy , Sell, or Hold?
VICI 5Y Stock Price
TradingView
For now, the VICI stock has returned much of its gains since early 2023, with it currently retesting the critical support level of $30. However, investors need not fret, since the recent decline is attributed to the natural correction after the September 20, 2023 ex dividend date .
We believe this correction also triggers opportunistic entry points for interested income investors, due to the expanded forward dividend yield of 5.38%, compared to its 4Y average of 4.91% and sector median of 4.94%.
However, VICI investors must also note that much of the growth discussed above comes at an expensive price, with expanding debt of $16.62B ( in line QoQ / +21.1% YoY ).
While the management has competently managed its interest rate headwind, fixing its weighted average interest rate at 4.34% by the latest quarter (in line QoQ/ -0.15 points YoY), it still faces growing annualized interest expense of $814.3M (in line QoQ/ +52.9% YoY).
At the moment, VICI remains highly profitable based on its forward guidance, with robust liquidity at $738.7M in cash (+198.3% QoQ/ +20.3% YoY).
The management is also near its leverage target of between 5x and 5.5x, against the current 5.6x, suggesting that the management has been able to achieve both growth and healthy balance sheet thus far.
In the meantime, the Fed only expects to reach its 2% inflation target rate by the end of 2025, suggesting VICI's excellent top-line prospects for at least two more years, as similarly demonstrated by the raised FY2023 guidance. These factors imply that the current critical support level may hold after all.
Based on the raised profit guidance and its NTM AFFO per share valuation of 14.46, the stock is trading near its fair value of $30.72 as well.
As a result of the highly attractive risk/ reward ratio, we are rating the VICI stock as a Buy here.
For further details see:
VICI Properties: A Highly Profitable Gaming REIT With Discounted Valuations