As a triple net lease real estate investment trust that owns casino real estate properties, VICI Properties (VICI) operates a highly predictable, low volatility business.  VICI is a landlord that is paid rent by casino operators like Caesars Entertainment and MGM Resorts.  4Q21 was no exception to VICI’s consistent financial performance with all reported key financial metrics right in line with Wall Street estimates. 

Stock Reaction:  Given the low-volatility business model, VICI shares normally do not react much to earnings.  The stock opened lower in a weak market, but during what we thought was a very bullish conference call the stock firmed up nicely.

Earnings Analysis:  The most important figure in VICI’s earnings reports is adjusted funds from operations (AFFO), which is a measure of recurring profits after maintenance capital expenditures.  AFFO is also a good measure of funds available for dividends; REITs are required to pay out the substantial majority of AFFO.  In 4Q21, VICI’s AFFO was 44 cents, down a few pennies from the year ago figure.  However, this understates VICI’s growth as it is depressed by the large share issuance related to the company’s soon-to-close acquisition of peer gaming REIT MGM Properties and just-closed acquisition of The Venetian Las Vegas Strip casino from Las Vegas Sands.  EBITDA grew over 5%.  Closing of these two major acquisitions are a catalyst for organic AFFO growth in the mid-single-digits in the years ahead.  Future acquisitions are likely, and can drive total growth to the upper single-digits.  Importantly, VICI has negotiated inflation protection into almost all its leases in the form of rent escalators.  Management issued guidance for 2022 of $1.80-$1.84 per share, but excluded any benefit from the MGM acquisition.  Analysts are estimating $1.94 as they include the acquisition.

The bulk of the questions on VICI’s conference call concerned the recent sale of Wynn Resorts Encore Boston Harbor at an all-time low cap rate (or all-time high multiple) to a new entrant to casino gaming.  Management feels the transaction highlights the underlying value of VICI’s large portfolio that includes several similar properties.  There could be concern that a new entrant is driving down the return on future acquisitions made by VICI, but we agree with management that presently the new entrant justifies VICI’s business model and shows that casino properties have been fully accepted by institutional investors.

Another highlight of the call was management recapping a series of capital improvements being undertaken by its tenants across several of its properties.  These property upgrades improve the credit quality and replacement value of VICI’s portfolio that already trades below replacement value.

Target Price:  We believe VICI shares can trade back to recent highs in the low $30s, producing a total return of 15-20% over the next year when including the current dividend that produces a 5% yield.  In a suddenly uncertain stock market environment, we find comfort in VICI’s predictability and the elevated dividend yield.  Catalysts ahead include the closing of the MGM Properties acquisition and increased ownership of VICI by REIT-dedicated funds as it will be one the top three REITs in terms of market cap.  Longer term, we see expansion in VICI’s multiple as casino properties proved their worth through COVID.  VICI never saw a missed payment in 2020 or 2021 even though many of its casinos were closed or operated with restrictions for long stretches.  The all-time record sale of Encore Boston to an established REIT, but new entrant to casino real estate, is a strong proof point for multiple expansion for VICI shares, which trade at a discount to other triple net REITs.

VICI is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov