VICI Properties Inc. (NYSE: VICI) is a real estate investment trust (REIT). It engages primarily in the business of owning gambling, hospitality, and entertainment destinations. Its geographically diverse portfolio consists of 43 properties across approximately 62 million square feet.
Like most REITs, VICI Properties offers an attractive dividend yield of 4.58%. The company's dividend per share has increased at a compound annual growth rate (CAGR) of 11.4% between FY 2018 and 2021. The company also recently completed the $17.2 billion acquisition of MGM Growth Properties LLC and the $4 billion acquisition of the assets held by The Venetian Resort Las Vegas.
While this company is only a few years old, it has wasted no time expanding. Full-year revenue between 2018 and 2021 has increased 68%, or a CAGR of 18.9%. Over the same period, net income increased 94%, or a CAGR of 24.6%. These are exceptional growth rates for a company that invests in physical assets. So the real question is, how did they expand that quickly?
Since its formation, the company has made $29 billion worth of investments. Most of this is engaged in buying properties already in use, affording VICI Properties instant returns. 96% of the company's leases are subject to inflation-linked escalators (increases). These escalators protect the company's rents from inflation, making it attractive for investors seeking to use it as a hedge. The average lease term on its properties is 43 years. The long lease gives the company plenty of time to find new lessees and generate profits without the recurring costs of finding new tenants.
Unlike most REITs, there is low cyclicality with VICI Properties' investments. This is due to the robustness of the gambling industry and the geographic spread of the company's properties. This should allow VICI to continue to grow should the US economy experience a downturn.
VICI Properties has a relatively poor credit rating, though this is gradually improving. As a result, investors demand high bond yields for lending the company money. The company has been paying relatively high-interest rates on its debt despite a low-interest rate period. As the Fed continues its rate hikes, VICI will have to spend more on its debt repayments, lowering profits and returns.
The company relies on a few lessees to pay the bulk of its owed rent. VICI Properties estimates that Caesars will represent 42% of total annualized cash rent, while MGM will represent approximately 36% of total annualized rent by 2022. The gambling industry is very competitive, and with rising interest rates, these major lessees may struggle to pay the rent. A default by one of these lessees will significantly hurt VICI's revenue and ability to repay its outstanding debts.
The company's immense investment expenditure and solid profit and dividend growth rates indicate that it could potentially deliver stable returns to shareholders over the coming years. It may prove a suitable inflation hedge due to the inflation-linked increases built into its lease agreements. VICI Properties does rely on two companies for the majority of its rental income, which is a major risk. However, the company has already proven that it aims to continue expanding, which should lower its reliance on the two largest tenants. Should one of these lessees fail, VICI would likely attract a new tenant relatively quickly due to the value and quality of its properties.
Does VICI Own Caesar's Palace?
Yes, the company owns Caesar's Palace.
What is a REIT?
A real estate investment trust is a company that owns, operates, or finances income-producing real estate while paying 90% of taxable income out as dividends.
What is a Triple Net Lease?
A lease agreement whereby the lessee agrees to pay rent, utilities, and all the property expenses.
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