VICI Properties Q1: Upside Require Patience, Collect Near 6% Yield (NYSE:VICI)

Introduction

I’m sure like myself, other investors are a little impatient waiting for upside in VICI Properties (NYSE:VICI), an experiential REIT that invests primarily on the Las Vegas Strip. They’re the landlord to iconic hotel & casinos like The Venetian, Caesar’s Palace, and MGM Grand to name a few.

In it’s short track record, the company has experienced some fast growth, but the share price has been a little disappointing in the process. Although I’m a shareholder and VICI is currently one of my largest holdings, I can admit my frustration with the REIT.

When it comes to my investments, I try to remain unbiased and honest in my assessments. I’ve been bullish on VICI for quite some time, and after their recent earnings, my thesis remains the same. In this article I discuss the company’s recent earnings, fundamentals, and how investors collect a well-covered yield near 6% for their patience.

Previous Thesis

I wrote an article on VICI Properties two months ago titled: They’re A REIT To Own For Steady Income And Strong Upside. Despite the challenging economic environment, the REIT delivered a nice beat on both the top & bottom line with AFFO beating the consensus by $0.09 and revenue beating by $11 million to close out the year strong.

I also touched on the company’s Bowlero (BOWL) deal, which didn’t seem to resonate with shareholders that well. I thought the REIT offered investors strong upside to my price target of nearly $38 and 2 months later, I still think this holds true. Since then, the stock’s share price has remained relatively flat, declining slightly from $29.45 to roughly $29 where it currently trades.

Price Has Remained Relatively Flat

Since its IPO, revenue and AFFO has shown strong, steady growth. And although the share price grew over that period, it has remained relatively flat the past few years. In my opinion, this can be attributed to a few factors: the REIT electing to go outside of gaming, its share issuance to fund growth relatively quickly, and the fact that the company has a shorter track record having spun-off from Caesar’s Entertainment (CZR).

So, while the market may still not know what to make of the experiential REIT just yet, if the company continues to execute on its growth initiatives, I anticipate the share price following suite in the coming years. Also, not to forget that REITs have been in a bear market for the last 2 years, so this has likely played a part in the REIT’s share price as well.

Solid Growth On The Year

It doesn’t seem like the market was too impressed with the company’s earnings, but I thought they delivered solid results, especially considering the current macro environment. During their Q1 earnings, VICI delivered AFFO of $0.56 and revenue of $951.5 million. Both of these grew year-over-year by 8.4% and 10.3% respectively. So, despite the share price remaining flat quarter-over-quarter, the REIT delivered some respectable growth on an annualized basis.

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On a sequential basis however, VICI’s FFO declined more than 22% from $0.72. But Q4 was a very strong quarter for the REIT as they beat analysts’ expectations by $0.09. This surpassed my expectation as I predicted VICI’s AFFO to be in a range of $550 million to $553 million for the quarter. But the company delivered more than $570 million in AFFO. Moreover, revenue grew more than 2% from $931.9 million to $951.9 million on a quarterly basis. So, aside from the drop in FFO, numbers were solid, and grew nicely from Q1 ’23.

Long-Term Outlook On Growth

Subsequent to the first quarter’s end, VICI provided a loan to one of their portfolio tenants, The Venetian, for extensive upgrades to its property. This was through the company’s Partner Property Growth Fund Strategy. And while some may be skeptical of this, it gives the landlord, in this case VICI, the ability to charge higher rents, and also collect interest on loan payments.

This $400 million loan that has a yield of 7.25% will be initially funded in 3 quarterly draws. Annual rent under the existing lease for the tenant will increase on the first day of the quarter and incrementally to 2.0% in 2029. This ensures continued growth as VICI typically has higher rent escalators in its leases vs the 1% – 2% for some of their peers. Additionally, The Venetian’s rent escalators beginning in 2031 will be equal to 2.0% or CPI and capped at 3.0%. This positions them for steady revenue growth for the foreseeable future.

Furthermore, VICI has additional opportunities for growth, specifically in the Las Vegas area. The REIT still owns land on the Las Vegas Strip that they could enter into an agreement with potential tenants in the future. Or they can simply enter into the ground lease market like peer Gaming and Leisure Properties (GLPI), which would give them longer, predictable growth as ground leases are typically 50-99 years in length. Moreover, since emerging from COVID, management stated there has been 12 consecutive quarters of GGR growth in Las Vegas.

Dividend Positioned For Further Growth

VICI has also grown its dividend at a rapid pace since going public roughly 6 years ago with a CAGR of nearly 8.0%. And although the REIT is still in its growth stage and issuing shares pretty rapidly, the dividend is still well-covered by AFFO. Furthermore, their yield is very attractive at nearly 5.7% at the time of writing.

This past March, VICI sold 9.7 million shares at an average price of $31.61 for $305.5 million. On an annualized basis their outstanding shares have increased by roughly 40 million to 1.043 billion shares. And using their quarterly dividend of $0.415, the REIT would need roughly $433 million to safely cover the dividend.

During the quarter, VICI’s AFFO came in at $583.2 million, giving them a safe AFFO payout ratio of roughly 74%. This is significantly lower than their direct competitor Gaming And Leisure Properties’ forward AFFO payout ratio of 82%. For further comparison purposes, this is similar to one of the highest quality REITs currently, Agree Realty’s (ADC) 73%. Furthermore, management expects AFFO to grow this year to $2.22 – $2.25, or $2.32 billion and $2.355 billion, representing a growth rate of nearly 4% at midpoint.

Healthy Leverage Despite Rapid Growth

Despite its rapid growth, VICI hasn’t gone up the risk curve regarding its leverage level for the sake of growth. The company has stayed within its target range of 5.0x – 5.5x the last two quarters, while continuing to make investments.

And despite this being higher at the start of 2023, this is still within a safe range for REITs. At the end of Q1 their net debt-to-EBIDTA was 5.4x, down from 5.5x at the end of Q4. Moreover, their debt had remained flat at $17.1 billion year-over-year while managing to lower their leverage level from 5.6x.

Furthermore, management prudently entered into a forward swap agreement for its $1.5 billion worth of debt that was initially due this month, so the REIT has no debt due until 2025. This had a weighted-average interest rate of 3.50% and VICI has $17.1 billion total due.

But as previously mentioned, the company recently bolstered its liquidity by selling shares, giving them total liquidity of $3.5 billion. This includes $515 million in cash; so from a liquidity standpoint, VICI is in a strong financial position to navigate further headwinds.

Still Offers Great Value

With a forward P/AFFO ratio less than 13x currently, I think VICI offers investors a solid entry point. Additionally, they currently trade closer to their 52-week low of nearly $27. For comparison purposes, VICI’s forward price-to-AFFO ratio sits higher than direct peer Gaming And Leisure Properties’ 11.55x.

Using the Dividend Discount Model, I have a price target slightly lower than analysts’ $35.65 at $34 a share. With interest rates likely to remain higher, I used a lower expected growth rate of 3.0% in comparison to my previous thesis of 3.5%. Still this gives investors roughly 18% upside. Additionally, you get a dividend yield near 6% while you wait for favorable economic conditions.

Risks To Thesis

Although VICI has some quality tenants and is a landlord for iconic properties located in one of the most visited destinations in the world, 98% rent is still derived from gaming. And although they’ve been diversifying outside the space with investments in youth sports and health & wellness, tenant concentration is still a risk. If MGM Resorts (MGM) and/or Caesar’s Entertainment experience financial hardship for some reason, this could negatively impact the REIT’s financials going forward.

Investor Takeaway

Although VICI’s share price has been somewhat stagnant the past few years, the company continues to execute on growth and diversify outside of the gaming space, which puts them in a stronger financial position for the future.

Additionally, the REIT sector has been in a bear market for 2 years which also has likely played a part in the flat share price. But once interest rates decline, I suspect VICI will offer investors some great upside along with solid dividend growth for the foreseeable future.

The company’s fundamentals remain strong and they delivered solid growth during the quarter on an annualized basis. With a forward P/AFFO below the sector median’s, I continue to rate the stock a buy.