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VICI: Play Casino Recovery Without the Gamble
Stock Analysis & Ideas

VICI: Play Casino Recovery Without the Gamble

VICI Properties (VICI) is a real estate investment trust (REIT), whose holdings are dedicated to casinos and other entertainment properties on the Las Vegas Strip and nationwide.

I am bullish on VICI stock. (See Analysts’ Top Stocks on TipRanks)

Safer Way to Play Recovery

During the spring of 2020, the first wave of the pandemic in the United States, the Las Vegas strip was closed.

It was an eerie scene as the usually jam-packed area was empty, save for some police patrolling the empty buildings and the occasional dog walker.

Obviously, the casinos lost millions in revenues. However, most of the casinos do not own the buildings in which they reside. These are generally owned by REITs and under triple-net leases.

Triple-net means the lessee is responsible for the repairs and maintenance, the taxes, and the insurance. The REIT collects the rent. Even during this tumultuous period, rents were paid.

Vici Properties owns properties occupied by Caesars Entertainment (CZR), MGM Resorts (MGM), The Venetian, Penn National (PENN), and several others.

Other than Las Vegas, VICI rents properties across the U.S. Some of these include MGM Detroit, Hard Rock Cincinnati, and Harrah’s in New Orleans.

They reported 100% rent collection through September 2021. In this way, an investor can take advantage of the resurgence in gaming without the risk.

The casino operators in most cases issued debt and equity raises to finance operations in 2020 as revenue tumbled. Vici was paid in full and so were its shareholders through dividends. Vici did not cut its dividend in 2020.

Advantages of REITs

REITs function differently than traditional corporations. They have certain tax advantages.

REITs are pass-through entities, meaning the income tax liability is passed to the individual owners. The company does not pay corporate income tax.

In turn, the REIT must return 90% of its income to shareholders, usually as dividends. Vici currently has a dividend yield of 4.5% and has a history of annual dividend raises since 2018 — when the REIT was formed.

Another advantage to an REIT like Vici is that the rent is tied to inflation. When inflation is high, rents are automatically escalated. Vici reports that 97% of its rental agreements are subject to escalators based on the consumer price index (CPI).

When everyone is worried about inflation, Vici investors can rest easy. The average lease term is also over 43 years, one of the longest of the triple-net REITs.

Purchase of MGM Growth Properties

In August 2021 VICI announced the purchase of MGM Growth Properties (MGP) for $17.2 billion.

This deal added 15 properties to Vici’s holdings and made it the Las Vegas Strip’s largest landlord. This is great news, as the Strip has made a resounding recovery.

Nevada gaming revenues are currently coming in above 2019 levels each month. MGP holders will receive Vici stock as consideration upon deal closing. Each share in MGP will net the holder over 1.33 shares of VICI stock. The deal is expected to be closed in the first six months of 2022.

Funds From Operations (FFO)

REIT results are measure differently than traditional corporations. Earnings-per-share (EPS) is not the optimal metric by which to measure an REIT. Instead, and investor should use FFO or adjusted FFO (AFFO).

FFO and AFFO adjust for noncash expenses, nonrecurring items, and preferred distributions, in order to determine that amount of cash available to fund operations and common dividends.

Vici Properties is currently making $2.33 FFO per share. This is well above the current dividend of $1.44 per share.

This is clearly positive, and signals that an increase may be in the cards. In total, FFO has grown over 135% over the past three years, and FFO per share has grown 59% over that time. Both are well above pre-pandemic figures.

Wall Street’s Take

Wall Street analysts are extremely bullish on VICI stock, with a Strong Buy consensus rating, based on seven Buys, one Hold, and no Sell ratings.

The average VICI price target of $35.59 implies 18% upside potential.

VICI Stock Summary

Even during the height of the pandemic, the casino rent was paid. The Las Vegas Strip was for months completely shuttered. The casinos suffered mightily, yet landlords were still paid and, in turn, paid dividends to shareholders.

This means that even during the most dire time in history for casinos VICI continued to profit.

Now that the Strip, and casinos around the country, are back at near full-throttle, VICI continues to be the best way to capitalize on this recovery.

Disclosure: At the time of publication, Bradley Guichard owned shares of VICI and MGP.

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