2023-03-14 07:00:00 ET
Summary
- VICI Properties Inc. was one of our best REIT picks in 2022 (+13%), outperforming the entire REIT sector and all S&P 500 REITs (by a long shot).
- We initiated coverage in 2018 and shares have returned over 13% annually since our inaugural report.
- Although rates have increased the WACC for most all REITs, we believe VICI is positioned to add value and continue to deliver dividend growth and superior shareholder returns.
- We would not be surprised to see Six Flags enter the picture (for VICI) as activists are seeking to split the company into OpCo and PropCo entities.
When I first heard of VICI Properties Inc. ( VICI ), it was in 2018, just after the real estate investment trust ("REIT") listed shares on the NYSE (February 1, 2018) and raised around $1.4 billion. The company had just spun from Caesars Entertainment, Inc. (NASDAQ: CZR ) after Caesar had emerged from Chapter 11 bankruptcy protection in October 2017.
At that time, VICI was the third gaming REIT in the U.S. with a portfolio of 20 Caesars gaming properties around the U.S., including Harrah’s Las Vegas, Caesars Palace, and four racetracks. Also, VICI owned four golf courses and two undeveloped parcels along the Las Vegas Strip.
So, I published my first research report on VICI (July 2018), with an inaugural BUY recommendation and a 2018 year-end price target of $24.00.
Since that first recommendation, VICI shares have returned 13.5% annually (79%) and I’ve never downgraded, only upgraded to Strong Buy during the depths of the pandemic.
What’s most impressive about this REIT is the speed at which the company became an S&P 500 constituent – one of 29 S&P 500 REITs selected by their market size, liquidity, and representation of the respective group. The majority of companies included are large cap as they tend to positively impact overall performance.
I don’t know of any other REIT that became an S&P 500 constituent in just 5 years from birth. In addition, VICI is the only S&P 500 REIT that generated positive returns in 2022 (of 13%) as shown below:
As many of my readers know, I’m in the process of writing REITs For Dummies, and in the manuscript draft I have put together a compelling case on how VICI has created real economic value for shareholders by investing capital at rates of return that exceed their cost of capital.
It’s true that VICI has grown by an incredible pace since 2018, and it’s easy to see why some doubt whether the pace can continue, given the current interest rate environment.
Thus, a thoughtful way to research VICI is to examine the company’s cost of capital, which is critical for determining value creation and for evaluating strategic decisions. The cost of capital incorporates both the time value of money and the risk of investment in acquisitions.
Let’s Start with the VICI Balance Sheet
In April 2022, VICI achieved its goal of an investment-grade credit rating as both S&P and Fitch rated the company BBB- allowing it to raise $5 billion of investment-grade debt across a series of 3, 5, 7, 10 and 30-year tenures to fund the acquisition of MGM Growth Properties (formerly MGP).
This marks the largest REIT IG debt issuance ever and also VICI's ability to access the 30-year tenure was a first for a first-time investment-grade REIT issuer.
As noted above, VICI was added to the S&P 500 Index (SP500) last year, marking the fastest time line a REIT has been added to the index (from IPO to inclusion) and deepening the company’s access to equity capital.
VICI Investor Presentation
In November 2022, VICI raised $575.6 million of net equity proceeds through a forward sale agreement and utilized the ATM throughout 2022 raising a total of $696.6 million in net proceeds.
As of February 24, 2023, VICI had approximately $3.8 billion in total liquidity comprised of $426 million in cash, cash equivalents and short-term investments as of December 31, 2022 and $2.4 billion of availability under the revolving credit facility.
At the end of Q4-22 VICI had $17.1 billion in debt, which reflects the consolidation of the $3 billion of CMBS debt that encumbers the MGM Grand/Mandalay Bay JV. VICI bought out Blackstone private REIT’s ("BREIT") 49.9% interest in these two iconic assets.
The purchase price values the entity at $5.55 billion or a 5.6% cap rate on 2023 rent and VICI assumed the CMBS debt with a coupon of just 3.55% (until 2030). That’s easy to compute: The cash on cash equity yield was 8% and the debt cost is 3.55%.
At the end of Q4-44 VICI’s net debt to adjusted EBITDA pro forma for a full year of activity was 5.7x with a weighted average interest rate of 4.4%, taking into account the hedge portfolio and a weighted average 6.7 years to maturity.
VICI Presentation
As seen above, VICI’s next maturity comes due in May 1, 2024 ($1.5 billion at 5.625) and there are no maturities due in 2023. Across the entire net lease sector, we’ve seen cap rates resetting and VICI’s ability to access competitive debt now that it is investment grade broadens access across capital markets.
The Moat Get Wider
VICI is now the second largest triple net lease REIT with ~$2.9 billion of annualized cash rent and 100% rent collection from formation to date. 50% of VICI’s leases have CPI-linked escalators (in 2023) and 96% of leases have CPI-linked escalators over the long-term (subject to applicable caps).
VICI’s robust uncapped CPI escalator resets are extremely valuable to the growth of the business model. Also, the gaming regulatory environment creates high barriers to entry and limits VICI’s tenants’ ability to move locations, contributing to the 100% occupancy rate.
VICI also announced its first international investment by closing on the acquisition of 4 casino properties in Alberta, Canada. The management team said that it “will be planting the seeds of growth for the next 5 years and beyond.”
VICI’s universe of opportunities is growing, especially as it looks internationally and pursues other experiential sectors. On the latest earnings call , one analyst asked about Six Flags ( SIX ) and the possible sale-leaseback idea that one activist (Land & Buildings) has floated, and VICI’s CEO, Ed Pitoniak replied (emphasis added):
“…we won't comment on any specific situations. But we have talked in the past on our earnings call and in our investor engagements about our interest in the theme park space. We think it has an awful lot of attributes to remind us in very good ways of our gaming investments . These are very complex assets. They're very large-scale assets. They're very capital-intensive assets.
They have proven themselves over decades. What we also find interesting about the theme park landscape in the U.S. is it is really an un-networked landscape….it is a category and experiential category that we believe has real investment merits for us, both strategically and economically.”
Back in December 2022, Land & Buildings wrote a letter provoking the sale-leaseback concept:
“Six Flags could add $11 per share today by unlocking its real estate value. The Company owns and operates 17 parks across North America. L&B believes that Six Flags is a prime candidate for an Opco/Propco separation and that its real estate is likely valued at more than the Company’s entire current equity market capitalization of approximately $1.8 billion.
We took a look at SIX’s debt maturity schedule, and it seems that the company could benefit as it has large maturities looming in 2024 and 2025.
iREIT
VICI clearly has experience executing on large M&A transactions (i.e. MGP) and SIX would be a drop in the bucket. Many analysts and investors forget that rising rates are positive for dominating REITs that enjoy a cost of capital advantage. As more and more corporations look to refinance debt, they will look to net lease REITs as a means to monetize real estate and either paydown debt or invest in the core business (for SIX it would be adding more rides).
WACC is Back!
REITs create value by investing cash to generate more cash in the future and the amount of value they create is the difference between cash inflows and the cost of the investments made. If you achieve lower volatility than your peers’, your cost of capital will be slightly lower, which is the case with VICI. VICI’s Equity Yield (AFFO/P) is lower than most peers:
iREIT (AFFO/P)
I put together a debt cost calculator using credit ratings and reasonable assumptions with regard to the 10-year unsecured debt pricing for VICI and several of the closest peers:
iREIT (author's assumptions for 10-year unsecured debt)
Now, I put together a WACC model using 65% equity and 35% debt for all peers (in order to get an apples-to-apples comparison). As you can see below, VICI’s WACC is 6.2%, slightly higher than Agree Realty ( ADC ), Realty Income ( O ), and Four Corners Property Trust, Inc. ( FCPT ):
The most recent deals announced by VICI include the 4 casinos in Canada for ~C$271.9M (US$200.8M) with an acquisition (year 1) cap rate of 8.0% (25-year initial term) and four 5-year tenant renewal options.
In addition to the $350 million financing arrangement with Koch Industries' real estate investment arm to complete the construction of Fontainebleau Las Vegas. Sources indicate the year-one yield on this transaction was above 8%.
Assuming VICI’s WACC is 6.2% these deals ($550 million) generate investment spreads of 180 basis points, which is in-line with VICI’s historical investment spreads.
Show Me The Money
Keep in mind that since 2018, VICI has produced an AFFO (adjusted funds from operations) per share compound annual growth of 7.7% and a quarterly dividend per share CAGR of 7.9%.
VICI’s AFFO for Q4-22 was approximately $488 million or $0.51 per share and total AFFO in Q4 increased approximately 75% year-over-year, while AFFO per share increased approximately 15.5% over the prior year.
VICI initiated 2023 AFFO guidance for 2023 of between $2.10 per share and $2.13 per diluted common share. This reflects the full year of 2022 closed acquisitions as well as the acquisitions completed in January (PURE Canadian Gaming acquisition and the acquisition of Blackstone's 49.9% stake in the MGM Grand/Mandalay Bay JV).
Now using $2.12 as the midpoint for 2023 and assuming zero multiple expansion, we model VICI to return approximately 14% (or 18% annualized):
However, we consider VICI cheap, especially when compared with other S&P 500 REITs. While the average REIT multiple may be 16x, the average S&P 500 REIT multiple is running around 22x and VICI is considerably cheaper than that!
FAST Graphs
VICI’s closing price as of March 10, 2023 was:
Yahoo Finance
VICI’s dividend yield is 4.7% (ex-dividend date is March 22, 2023):
Yahoo Finance
Our most-likely scenario for VICI has shares returning over 20% annually as the company continues to close the valuation gap with other S&P 500 REITs.
As the company has proven, it can generate meaningful profit margins consistently by continuing to maintain capital markets discipline and attractive pricing power - empirical evidence supports the idea that growth and ROIC are the key drivers of value.
I suppose that since VICI is a gaming REIT, readers won’t be offended since I’m using this “double down” analogy. Remember that in blackjack you should “double down”…
- When your hand totals 11
- When your hand totals 10 – unless the dealer is stronger
- On a Soft 16, 17, or 18
- On a Hard 9.
You should not double down when…
- Never double on a dealer Ace
- Never double if your hand is higher than 11.
I must conclude this article with another gaming analogy, and this one by the legendary investor, Benjamin Graham,
"There is a close logical connection between the concept of a safety margin and the principle of diversification. One is correlative with the other."
He went on to say,
"Diversification is an established tenet of conservative investment. This point may be made more colorful by a reference to the arithmetic roulette wheel… Therefore, the more numbers (a gambler) wagers on, the better his chance of gain."
Thus, while I may recommend doubling down on VICI (which in fact I will be doing tomorrow), always remember to maintain responsible diversification. In other words, don’t put all of your VICI eggs in one basket.
Happy SWAN Investing!
For further details see:
VICI Properties: Doubling Down