Investing in Casinos & Las Vegas
1. Introduction
Today I would like to turn my attention to a very special REIT: VICI Properties. This REIT invests mainly in casinos and owns a number of highly lucrative casinos on the world famous "Strip" in Las Vegas. In addition, the REIT owns a number of other casinos spread across the U.S. and even four first-class golf courses. Doesn't seem particularly interesting at first glance? That's what I thought at first, until I took a close look at the company, its figures, its business model and its outlook. I spent a lot of time researching and collecting the relevant information. Almost as much time I invested again to write this article. DisclaimerYesterday I invested a first tranche in VICI and plan to invest further tranches.
2. VICI Properties fields of activity/business model
VICI Properties Inc. is a U.S.-based REIT specializing in casinos, hotels and golf courses. Its current real estate portfolio consists of 43 casinos with approximately 11 million square feet of space, 58,700 hotel rooms and approximately 450 restaurants, bars and nightclubs. Among the best-known properties are the famous "Caesar's Palace" casinos (see Hangover), "MGM Grand," "the Mirage" and "the Venetian" in Las Vegas. Also away from Las Vegas, VICI owns further casinos in Atlantic City ("Las Vegas of the East Coast") and other locations in the USA. Furthermore, VICI Properties owns four "Championship Golf Courses", i.e. golf courses on which international championships are held. [1]
The business model is simple: VICI Properties owns the buildings and the land and leases them by means of so-called "Triple Net Lease" (NNN). This lease model is particularly lucrative, because in addition to the normal lease payments, the tenant also agrees to pay all costs of the leased property, including taxes, insurance and maintenance costs [5]. Accordingly, the NNN rental model generates a predictable and low-risk cash flow, because any maintenance costs are explicitly borne by the landlord and not the owner of the real estate. It is also important to note that VICI acts only as a landlord and has no operational risks. The biggest risk is that the casino operators themselves might experience difficulties and that there might be a loss of rent. There is a detailed elaboration on this in the "Risks" section below.
3. history
VICI Properties was established as a REIT in 2017 as part of the bankruptcy restructuring of "Caesars Entertainment Operating Company". At that time, VICI already owned 19 casinos (including the world-famous Caesars Palace) and 4 golf facilities and leased them through NNN [6]. At that time, annual rent was $630 million. Since 2018, a series of acquisitions followed, including the purchase of "Harrah's Las Vegas" for 1.1 billion USD.
In 2022, two major acquisitions took place: in February 2022, "the Venetian" and its associated complex in Las Vegas were purchased for USD 4 billion, and in April 2022, its major competitor "MGM Growth Properties" was purchased for USD 17.2 billion. The MGM Growth Properties acquisition alone added 13 new properties to VICI's portfolio, making VICI the largest land and property owner on the Las Vegas Strip in one fell swoop. [6]
VICI Properties was then added to the S&P 500 in June 2022. [7]
4. figures
We now deal with the bare numbers. Due to the relatively recent history, only figures from 2018 are available [2],[3]:
Sales:
2018: $897 million || 2019: $894 million (-0.33% YoY*) || 2020: $1225 million (+37.0% YoY) || 2021: $1509 million (+23.2% YoY) || 2022 (partial forecast): $2530 million (+65.9% YoY)
FFO/Share (Funds from Operations / Share):
The key figure FFO/share (funds from operations per share) is a better indicator for REITs than EPS, i.e. earnings per share. In simple terms, FFO/share shows how much cash flow was generated from operations per share.
2018: $1.57 || 2019: $1.25 (-20.4% YoY) || 2020: $1.75 (+25.6% YoY) || 2021: $1.76 (+0.6% YoY) || 2022 (partial forecast): $1.72 (-2.2% YoY)
Dividend/Share (paid quarterly):
2018: $0.9975 (payout ratio 63.5%) || 2019: $1.17 (+17.3% YoY, payout ratio 93.6%) || 2020: $1.255 (+7.3% YoY, payout ratio 71.7%) || 2021: $1.38 (+10% YoY, payout ratio 78.4%) || 2022: $1.48 (+7.2% YoY, payout ratio 86.0%)
*YoY = Year over Year, i.e. annual change
Revenue growth (with the exception of 2019) since 2018 has been impressive and of course driven by the acquisitions made. In 5 years alone, revenue has grown by about 180%. That's almost a tripling of revenue in 5 years and an average revenue growth of about 23% per year.
FFO/share shows a growth of just under 10% since 2018 which at first glance doesn't look that impressive with a revenue growth of 180%. This is largely due to the large acquisitions made during this period. Indeed, a peculiarity of REITs is that acquisitions are often also made by issuing new shares (i.e. dilution), so that the number of outstanding shares tends to increase for REITs. This is not peculiar to VICI and is the case with almost all REITs. More important to note, however, is that VICI continued to earn well, especially during the tough Corona years of 2020/2021 with lockdowns and restrictions, which yes, hit casinos, hotels and restaurants particularly hard. During this period 100% of rents were paid on time in cash [9]. This is a major advantage of VICI: they do not act as casino operators themselves, but simply rent out the buildings.
One might think that the billion-dollar takeover would have a very negative impact on VICI's debt and that this could become a major problem in times of rising interest rates. However, a look at the balance sheet reveals that while VICI has USD 13.7 billion in liabilities - this is offset by a net asset value (i.e. the value of tangible and intangible assets) of around 37 billion, so that the liabilities are covered almost three times by the net asset value. Looking at the balance sheet, it is also noticeable that the interest on the liabilities has been secured at least until 2024, with a large part of the liabilities falling on the years after 2027.
Despite the huge acquisitions, a good dividend is paid. This is very well covered by FFO: on average about 75% of FFO is paid out. Dividend growth over the last 5 years has been 49.4% or an average of 8.2% per year.
5 Comparison to other REITs
Whether VICI is a good investment depends mainly on whether there are comparable alternatives - i.e. whether there are other REITs that are comparable. All data for comparison was taken from [2].
Various ratios are now compared with those of other REITs. Here I compare VICI with the popular/solvent REITs: Realty Income $O (-0.83%) (retail), STAG Industrial $STAG (-0.74%) (logistics), W.P. Carey $WPC (-0.72%) (diverse), STORE Capital $STOR (retail) and Simon Properties Group $SPG (-1%) (entertainment). Important in the selection was mainly the popularity/awareness and covering different industries to get a direct comparison of different industries with the casino/entertainment industry in which VICI operates. In addition, I also use the median value of all REITs as a comparison to get a general idea of how an "average" REIT performs in certain metrics. Dividend yield, dividend growth, price-to-book ratio and debt-to-equity ratio are compared. Dividend yield is a good snapshot of current profitability and dividend growth is a good indicator of how the company is performing. The price-to-book ratio is a possible indicator of undervaluation and the debt/equity ratio is an indicator of the company's debt.
Dividend Yield:
VICI: 4.21% || Realty: 3.95% || STAG: 4.45% || W.P. Carey: 4.88% || STORE: 5.30% || Simon Properties: 7.49% || Sector median: 4.06%
Of course, the dividend yield is only meaningful to a limited extent, as it is always a snapshot and the dividend yield is of course always calculated based on past dividend payments and the current share price. Nevertheless, a good first impression, because VICI is above the sector median.
Dividend growth (average of the last 5 years):
VICI: 8.2% || Realty: 3.82% || STAG: 0.83% || W.P. Carey: 1.24% || STORE: 5.83% || Simon Properties: 3.50% || Sector median: 1.77%.
Here you can see that the dividends of VICI grow relatively strongly. Only STORE Capital can keep up in the last 5 years. Comparing the 8.2% average dividend growth with the sector median, it is also clear that this is an excellent growth.
Price-to-book ratio:
VICI: 1.51 || Realty: 1.72 || STAG: 1.73 || W.P. Carey: 2.18 || STORE: 1.51 || Simon Properties: 10.79 || Sector median: 1.73
The price-to-book ratio (P/B ratio) determines how much higher the current price is compared to the book value, roughly speaking equity minus debt, of the company. In the case of REITs, of course, equity consists primarily of the value of the properties and the available cash. Consequently, a low price-to-book value may indicate a comparatively favorable share price. Here we see that VICI, together with STORE Capital, has the lowest P/B ratio. Realty and STAG are just above it and are in the range of the sector median.
Liabilities/equity:
VICI: 0.658 || Realty: 0.642 || STAG: 0.715 || W.P. Carey: 0.885 || STORE: 0.868 || Simon Properties: 5.983 || Sector median: 0.907
The ratio of liabilities to equity shows how high the liabilities are compared to the available equity. A low ratio therefore shows that the value of the portfolio is comparatively large compared to the existing liabilities. The ratio is also independent of the current share price. Here, Realty is at the top together with VICI. Roughly speaking, $1 of equity is matched by only about $0.65 of liabilities. The sector median of 0.907$ liabilities per 1$ equity shows that this is a very good value.
Summary:
In all categories, VICI is able to keep up with the popular and well-known REITs and even come out on top in many categories. This is a possible indicator that VICI is a quality REIT. The comparison with the sector median is also interesting: in every category, VICI is better off than the sector median, and in some cases very clearly.
6. moats
We would now like to give an overview of so-called moats of VICI. Moats are factors that protect a company's business model so strongly that potential competition cannot simply destroy the business model.
We start first with VICI's unique locations. As mentioned in the History section, VICI is the largest building and land owner on the Las Vegas Strip through its acquisition of MGM Growth Properties. Buildings on the Las Vegas Strip are in hot demand and potential competition cannot simply build a new casino on the Las Vegas Strip. VICI's portfolio includes world-renowned casinos with arguably the world's best location for gaming, which cannot be easily copied. Moreover, it is very difficult for new investors to acquire casinos due to the strict regulations and complicated policies behind gambling. So the competition has an enormously hard time getting a foot in the door.
Another moat is the crisis-proof nature of the business model. It's hard to believe, but gambling is a very crisis-proof business. During the last severe economic crisis of 2008 to 2010, the number of tourist visits to Las Vegas only dropped from about 39 million annually to 36 million annually, a decline of only 7.7% [11]. If we now consider that 87% of all tourists go to a casino and gamble at least once during their visit, it shows how crisis-proof pure gambling is [12]. The occupancy rate of hotels is stable at 90% and 16 of the 20 largest hotels in the world are located in Las Vegas [12]. But more and more tourists are not only interested in pure gambling but also in experiences like good food, shows, big events and sightseeing.
This ties in seamlessly with another moat of VICI: the business model is very difficult to destroy by digitalization or BigTech. CEO Edward Pitoniak explicitly talks about how Las Vegas does not sell product but experiences [13]. Most visitors to Las Vegas are not there just for the gambling, but for an overall experience. 38% of all Americans have been to Las Vegas at least once [12]. Unlike retail, the casino experience in Las Vegas or other comparable gambling capitals is very difficult to destroy through digitization. Similarly, the experience of travel cannot be digitized.
Another important point is that this is a completely new REIT category. It has been almost impossible to invest broadly in gaming and the "Las Vegas experience" until now. However, VICI Properties already bundles 43 casinos, 450 restaurant, bars and nightclub into one package that is very easy to invest in. This is particularly interesting for institutional investors, as it brings another type of risk diversification.
7. risks
Risks are, of course, on the one hand the focus on the USA and in particular on the Las Vegas location. Although there are also several casinos in Atlantic City, Indianapolis and Detroit in the portfolio, the main revenues are generated in Las Vegas. In addition, the golf courses contribute only an insignificant portion of the company's revenues. Consequently, an investment in VICI is a kind of bet on the future of Las Vegas as an experience and casino location.
Of course, the Corona situation is also a risk factor for VICI. Possible lockdowns and travel restrictions from abroad could massively reduce the number of tourists in Las Vegas. However, a look at the numbers also shows that previous lockdowns and travel restrictions have succeeded in keeping 100% of all rents of the rented properties on time (see the "Numbers" section). So even during the Corona crisis, decent money was earned and there was no decline in rental income. Of course, this is also due to the business model, as VICI does not operate the casinos but only acts as a landlord. A comparison with the REIT Simon Properties, which also specializes in the entertainment industry with a focus on cinemas, theaters and restaurants, shows that in 2020 the latter recorded a decline in revenue of 18%, while VICI achieved revenue growth of 37%. In addition, Simon Properties posted a loss in 2020 and 2021, while VICI posted stable profits and and was able to make acquisitions without high debt.
8. outlook
CEO Edward Pitoniak's long-term goal is for VICI to deliver 12% returns per year to its investors [14] (dividend and capital gains).
A look at the historical data shows: In 2018, the stock started at $20 per share. At the end of 2021, the stock stood at USD 30.11 per share. That makes a price gain over 4 years of 10.11 USD per share. Add to that the dividends of 4.8025 USD. In total, therefore, a return of 14.91 USD was achieved. This corresponds to a return of 74.55% in 4 years or an average of 14.94% per year. This means that the targeted 12% return per year is plausible, but of course serves not as a forecast for future returns.
In 2022, a price gain of 4.26 USD per share and a dividend payment of 0.72 USD per share could be achieved until today (03 August). This results in a return of +16.6% for 2022 year to date. For comparison, the S&P 500 is -14.71% year to date, the NASDAQ 100 is -21.82% and the DAX is -15.9%. Since going public in 2017, VICI has outperformed both the S&P 500, NASDAQ 100 and DAX. While the DAX is up 9.68% during this period, the S&P 500 is up 65.18%. The NASDAQ 100 stands at +94.42% over the same period, while VICI put in a performance of 163.92% [15].
The dividend forecast for 2023 is $1.56 per share, and that's on FFO of $2.15 per share. This would result in dividend growth of 8.3%, FFO growth of 22.2%, and an FFO payout ratio of 72.6%.
VICI thus performed (significantly) better than the major indices S&P 500, NASDAQ 100 and the DAX in its still short history. The forecasts for the current and coming year show a continuation of this trend in purely economic and balance sheet terms. Whether this will also be reflected in the share price remains to be seen and is certainly in the famous crystal ball.
Personally, I think the chances are not too bad that the targeted annual return of 12% can be achieved in the long term. The combination of fast growing dividends and good share price development through clever and at the same time reasonable acquisitions is hard to top in my opinion.
#reit
#dividende
#buyandhold
#analyse
#vici
9. sources
[1] VICI Properties Homepage: https://viciproperties.com/
[2] Seeking Alpha: https://seekingalpha.com/symbol/VICI
[3] Yahoo Finance:
https://de.finance.yahoo.com/quote/VICI/financials?p=VICI
[4] CNBC: https://www.cnbc.com/2021/08/04/vici-properties-buys-mgm-growth-properties-for-17point2-billion.html
[5] Investopedia: https://www.investopedia.com/terms/t/triple-net-lease-nnn.asp
[6] Wikipedia: https://en.wikipedia.org/wiki/Vici_Properties
[7] Casino.org: https://www.casino.org/news/vici-properties-gets-nod-to-join-the-sp-500-index/
[8] Focus: https://praxistipps.focus.de/ffo-funds-from-operations-definition-des-wirtschaftsbegriffs_125115
[9] Seeking Alpha: https://seekingalpha.com/news/3597218-vici-properties-collects-100-percent-of-rent-in-q2-july
[10] VICI Properties Earnings Q2 2022: https://s1.q4cdn.com/751481880/files/doc_financials/2022/q2/VICI-Q2-2022-Form-10-Q.pdf
[11] Las Vegas Blog: https://www.las-vegas-blog.de/wie-viele-touristen-besuchen-jedes-jahr-las-vegas/
[12] Isa Guide: https://www.isa-guide.de/isa-casinos/las-vegas/allgemeine-infos/las-vegas-in-zahlen
[13] YouTube: https://www.youtube.com/watch?v=54pbg1W-zOg
[14] Wide Moat Research: https://www.widemoatresearch.com/vici-properties-ceo-ed-pitoniak/
[15] Seeking Alpha:
