1. introduction
Today I would like to focus on 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. The REIT also owns a number of other casinos across the USA 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 very close look at the company, the figures, the business model and the outlook. I spent a lot of time researching and collecting the relevant information. I then spent almost as much time writing 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 REIT from the USA that specializes in casinos, hotels and golf courses. The current real estate portfolio consists of 43 casinos with approximately 11 million square meters of space, 58,700 hotel rooms and around 450 restaurants, bars and nightclubs. The best-known properties include the famous Caesar's Palace casinos (see Hangover), "MGM Grand", "the Mirage" and "the Venetian" in Las Vegas. VICI also owns other casinos outside Las Vegas in Atlantic City ("Las Vegas of the East Coast") and other locations in the USA. VICI Properties also 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 rents them out by means of so-called "triple net leases" (NNN). This rental model is particularly lucrative because, in addition to the normal rental payments, the tenant also undertakes to bear all the costs of the rental property, including taxes, insurance and maintenance costs [5]. Accordingly, the NNN rental model generates a predictable and low-risk cash flow, as any maintenance costs are explicitly borne by the landlord and not the property owner. It is also important to note that VICI only acts as a landlord and has no operational risks. The greatest risk is that the casino operators themselves may experience difficulties and default on rent. A detailed explanation of this can be found in the "Risks" section below.
3. history
VICI Properties was founded as a REIT in 2017 as part of the insolvency restructuring of Caesars Entertainment Operating Company. At that time, VICI already owned 19 casinos (including the world-famous Caesars Palace) and 4 golf courses and leased them via NNN [6]. At that time, an annual rent of USD 630 million was achieved. A series of acquisitions have followed since 2018, including the purchase of Harrah's Las Vegas for USD 1.1 billion.
In 2022, two major acquisitions were made: in February 2022, "the Venetian" and the associated complex in Las Vegas were purchased for USD 4 billion and in April 2022, its major competitor "MGM Growth Properties" was acquired for USD 17.2 billion. The acquisition of MGM Growth Properties alone added 13 new properties to VICI's portfolio and made 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 will now look at the bare figures. Due to the relatively recent history, only figures from 2018 are available [2],[3]:
Turnover:
2018: USD 897 million || 2019: USD 894 million (-0.33% YoY*) || 2020: USD 1225 million (+37.0% YoY) || 2021: USD 1509 million (+23.2% YoY) || 2022 (partial forecast): USD 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 per share in the operating business.
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
The sales growth (with the exception of 2019) since 2018 is impressive and is of course also driven by the acquisitions made. In 5 years alone, turnover has risen by around 180%. This corresponds to an almost tripling of sales in 5 years and an average sales growth of approx. 23% per year.
FFO/share has grown by just under 10% since 2018, which at first glance does not seem so impressive with sales growth of 180%. This is largely due to the large acquisitions made during this period. A special feature of REITs is that takeovers are often carried out by issuing new shares (i.e. dilution), so that the number of outstanding shares in REITs tends to increase. This is not unique to VICI and is the case with almost all REITs. However, it is much more important to mention that VICI continued to earn well, especially in the tough coronavirus years of 2020/2021 with lockdowns and restrictions, which hit casinos, hotels and restaurants particularly hard. During this period 100% of rents were paid on time in cash [9]. This shows a major advantage of VICI: they do not act as casino operators themselves, but merely rent out the buildings.
One might think that the billion-euro takeovers 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 VICI has USD 13.7 billion in liabilities - compared to a net asset value (i.e. the value of tangible and intangible assets) of around 37 billion, meaning that the liabilities are covered almost three times by the net asset value. A look at the balance sheet also reveals that the interest on the liabilities has been secured until at least 2024, with the majority of the liabilities falling in the years after 2027.
Despite the huge takeovers, a good dividend is paid. This is very well covered by FFO: on average, around 75% of FFO is paid out. Dividend growth over the last 5 years amounted to 49.4% or an average of 8.2% per year.
5 Comparison with other REITs
Whether VICI is a good investment depends above all 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 key figures are now compared with those of other REITs. Here I compare VICI with the popular/solid REITs: Realty Income $O (+0 %) (retail), STAG Industrial $STAG (+0,31 %) (logistics), W.P. Carey $WPC (-0,36 %) (diverse), STORE Capital $STOR (retail) and Simon Properties Group $SPG (+0,18 %) (entertainment). The most important factors in the selection were popularity/familiarity and the coverage of different sectors in order to obtain a direct comparison of different sectors with the casino/entertainment sector in which VICI operates. I also use the median value of all REITs as a comparison to get a general impression of how an "average" REIT performs in certain key figures. Dividend yield, dividend growth, price-to-book ratio and debt-to-equity ratio are compared. The 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-to-equity ratio is an indicator of the company's indebtedness.
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%
The dividend yield is of course only of limited significance, as it is always a snapshot in time and the dividend yield is of course always calculated on the basis of past dividend payments and the current share price. Nevertheless, this is a good first impression, as 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 VICI's dividends are growing relatively strongly. Only STORE Capital has been able to keep up in the last 5 years. If you compare the 8.2% average dividend growth with the sector median, it is also clear that this is 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 share price is compared to the book value, i.e. roughly speaking equity less debt, of the company. In the case of REITs, equity naturally consists primarily of the value of the real estate and the available cash. A low price-to-book value can therefore indicate a comparatively favorable share price. This shows that VICI, together with STORE Capital, has the lowest P/B ratio. Realty and STAG are just above it and are around 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 high 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$ equity is offset by only around 0.65$ liabilities. The sector median of 0.907$ liabilities per 1$ equity shows that this is a very good value.
Summary:
In all categories, VICI can 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: VICI is better than the sector median in every category, in some cases very clearly.
6. moats
We would now like to provide an overview of the so-called moats of VICI. Moats are factors that protect a company's business model to such an extent that potential competitors cannot simply destroy the business model.
Let's start with VICI's unique locations. As already mentioned in the "History" section, VICI is the largest building and land owner on the Las Vegas Strip following the acquisition of MGM Growth Properties. The buildings on the Las Vegas Strip are in high demand and potential competitors 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 gambling, which cannot simply be copied. It is also very difficult for new investors to acquire casinos due to the strict regulations and complicated politics behind gambling. It is therefore extremely difficult for competitors to get a foot in the door.
Another moat is the crisis-proof nature of the business model. It may be hard to believe, but gambling is a very crisis-proof business. During the last severe economic crisis from 2008 to 2010, the number of tourist visits to Las Vegas only fell from around 39 million annually to 36 million annually, a decline of just 7.7% [11]. Considering that 87% of all tourists go to a casino at least once during their visit and gamble there, this 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]. However, tourists are increasingly not only interested in pure gambling but also in experiences such as good food, shows, major events and sightseeing.
This ties in seamlessly with another of VICI's moats: the business model is very difficult to destroy through digitalization or BigTech. CEO Edward Pitoniak explicitly states that Las Vegas is not about selling products but experiences [13]. Most visitors to Las Vegas are not just there for the gambling, but for the 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 disrupt through digitization. Just as the experience of travel cannot be digitized.
Another important point is that this is a completely new REIT category. Until now, it has hardly been possible to invest broadly in gambling and the "Las Vegas experience". However, VICI Properties already bundles 43 casinos, 450 restaurants, bars and nightclubs into a package that is very easy to invest in. This is particularly interesting for institutional investors, as it offers a further form of risk diversification.
7. risks
One risk is, of course, 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 revenue is generated in Las Vegas. In addition, the golf courses only contribute an insignificant proportion of the company's revenue. 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 coronavirus 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 figures also shows that the previous lockdowns and travel restrictions have been successful 100% of all rents for rented properties on time (see "Figures" section). This means that even during the coronavirus crisis, the company earned a decent amount of money 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 it recorded a decline in revenue of 18% in 2020, while VICI achieved revenue growth of 37%. In addition, Simon Properties posted a loss in 2020 and 2021, while VICI posted stable profits and was also able to make acquisitions without high debt.
8. outlook
CEO Edward Pitoniak's long-term goal is for VICI to provide its investors with a 12% return per year [14] (dividend and share price gains).
A look at the historical data shows: In 2018, the share started at USD 20 per share. At the end of 2021, the share price was USD 30.11 per share. This represents a price gain of USD 10.11 per share over 4 years. Added to this are the dividends of USD 4.8025. A total return of USD 14.91 was therefore achieved. This corresponds to a return of 74.55% over 4 years or an average of 14.94% per year. This means that the targeted 12% return per year is plausible, but is of course not serve as a forecast for future returns.
In 2022 to date (August 3), a price gain of USD 4.26 per share and a dividend payment of USD 0.72 per share have been achieved. This results in a return of +16.6% for 2022 to date. For comparison: the S&P 500 is -14.71% to date, the NASDAQ 100 is -21.82% and the DAX is -15.9%. Since its IPO in 2017, VICI has outperformed the S&P 500, the NASDAQ 100 and the DAX. While the DAX has risen by 9.68% in this period, the S&P 500 has gained 65.18%. The NASDAQ 100 is up 94.42% over the same period, while VICI has performed 163.92% [15].
The dividend forecast for 2023 is USD 1.56 per share with FFO of USD 2.15 per share. This would mean dividend growth of 8.3%, FFO growth of 22.2% and an FFO payout ratio of 72.6%.
VICI has therefore (significantly) outperformed 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 it will also be reflected in the share price remains to be seen and is certainly a matter for 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. In my opinion, the combination of fast-growing dividends and good share price performance through clever and sensible acquisitions is hard to beat.
#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:
