If you’re considering purchasing a real estate investment trust (REIT), it is important to analyze the metrics of the REIT itself as well as the tenants that comprise the largest percentage of its business. Strong tenants that pay their rents on time and grow their business year after year make the best tenants and carry the least risk for the REIT during various economic cycles.
Take a look at one REIT whose tenant base is strong and has an occupancy rate that is the envy of most other REITs, especially in tough economic times.
VICI Properties Inc. VICI is a New York-based experiential REIT that specializes in owning and operating gaming, hospitality and entertainment properties. Its triple-net portfolio includes well-known Las Vegas hotels such as Caesars Palace, MGM Grand and the Venetian Resort Las Vegas.
VICI Properties, which formed as a REIT in 2017, was a spinoff from Caesars Entertainment Operating Company as part of a Chapter 11 reorganization. The initial public offering (IPO) was held on Feb. 1, 2018. VICI Properties’ portfolio consists of 49 gaming facilities, with 59,300 hotel rooms and over 450 restaurants, bars, nightclubs and sports books.
One reason VICI Properties has performed relatively well despite the rising interest rates of the past year is that over 40% of its leases have 2% to 3% annual lease escalators for inflation. Investors were not as concerned about rising inflation impacting VICI Properties as they were with some other REITs.
Another positive was VICI Properties’ Feb. 16 announcement that it entered into a triple-net lease agreement with Cherokee Nation Businesses, the operator of Gold Strike Casino Resort, in Tunica, Mississippi. The initial annual rent is $40 million, and the lease has a 25-year term, with three 10-year tenant renewal options. The lease also includes rent escalators.
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Recent earnings also were strong. On Feb. 23, VICI Properties announced its fourth-quarter operating results. Funds from operations (FFO) of $0.51 was 15.91% above FFO of $0.44 in the fourth quarter of 2021. Revenue of $769.91 million was better than the estimate for $752.76 million and a 100.94% increase over revenue of $383.15 million in the fourth quarter of 2021.
VICI Properties has a total return of 0.41% year-to-date and a 52-week total return of 24.69%. It pays a quarterly dividend of $0.39 and the annual dividend of $1.56 yields 4.89%.
The following chart details the tenant base of VICI Properties as of the end of 2022:
The three largest tenants of VICI Properties are:
Caesars Entertainment Inc. CZR, VICI Properties’ largest tenant, leases and operates properties such as Caesars Palace Las Vegas and Harrah’s Las Vegas as well as several leading regional gaming facilities. It accounts for 40% of VICI Properties’ total base rent. In addition to the casinos, it operates attractions such as zip lines, carnivals, golf clubs, concerts, nightclubs, retail shops, spas and salons.
It was founded in 1996 as Eldorado Resorts Inc. a hotel and casino entertainment company. In June 2020, Eldorado merged with Caesars and kept the Caesars Entertainment name. Eldorado paid $18 billion in cash and stock to acquire Caesars Entertainment.
In April 2021, Caesars Entertainment purchased the sports betting company William Hill for $3.7 billion. Ten months later, Caesars Entertainment announced a multiyear deal with the Cleveland Cavaliers to become the basketball team’s official sportsbook partner.
In its fourth-quarter operating results, Caesars reported a 9% improvement in revenue, which was particularly a result of its digital sports book business and beat the analysts’ estimates by $10 million. But generally accepted accounting principles (GAAP) earnings per share (EPS) was negative $0.70 and missed the consensus estimates by $0.40.
MGM Growth Properties LLC leases and operates 15 of VICI Properties’ assets, including MGM Grand, Mandalay Bay, MGM National Harbor Hotel & Casino and Borgata Hotel.
MGM Growth Properties was formed in 2015 and went public six months later.
MGM Growth Properties was acquired by VICI Properties in April 2022 for $17.2 billion in a deal that included the assumption of approximately $5.7 billion of debt. VICI Properties received over $1 billion in initial annual rent from the newly acquired properties. The deal, which included all or part of 16 properties owned by MGM, made VICI Properties the largest owner of hotel and conference real estate in America, according to VICI Properties CEO Ed Pitoniak.
Presently, MGM Growth Properties comprises 36% of VICI Properties’ total base rent.
The Venetian Resort Las Vegas is a luxury world-class complex at the center of the Las Vegas Strip and is one of the largest integrated resorts in the world. Its website states that every room is a suite that is nearly double the size of the average Las Vegas hotel room. Features include Italian marble baths, sunken living rooms with sofas and armchairs, restaurants, shopping and other amenities.
The Venetian resort complex includes the Palazzo resort adjacent to the Venetian as well as the Venetian Convention and Expo Center and the MSG Sphere at the Venetian. The Venetian-Palazzo complex includes the world’s second-largest hotel, accounting for 4,049 rooms, 3,068 suites and a casino of approximately 120,000 square feet. It also has an indoor shopping mall, four concert theaters and the Guggenheim Hermitage Museum.
The Venetian Resort was created in 1996 when the Sands Hotel was torn down. It was modeled after the architecture of Venice, Italy, while using replicas of famous landmarks in that city. It was completed in 1999. The Venetian was sold to VICI Properties in February 2022. VICI Properties bought the land under the Venetian facilities for $4 billion, and Apollo Global Management Inc. bought the operations of the facilities for $2.25 billion as part of a triple-net lease agreement with VICI Properties.
The Venetian Resort presently comprises 9% of VICI Properties’ total base rent.
The three VICI Properties tenants comprise 85% of VICI’s annual base rent. So while VICI Properties is well-diversified in terms of its total tenant portfolio, it contains some risk because only three of its 11 tenants comprise 85% of the total base rent.
Another risk is that it’s a specialized REIT dependent upon one industry that has seen boom and bust cycles over the years.
On the other hand, VICI Properties presently has a 100% occupancy rate and average remaining lease terms of over 43 years. The tenants are solid and stable. Travel to Las Vegas has increased notably since 2021, despite the inflationary environment. Caesars Entertainment sports betting is a high-growth business as well.
Another thing that VICI Properties has going for it is annual capped rent escalators. All pre-existing leases have 2% to 3% rent escalators.
On March 9, KeyBanc Capital Markets Inc. analyst Todd Thomas upgraded VICI Properties from Sector Weight to Overweight but did not cite a price target, nor had one been assigned previously. Most importantly, this was the first analyst upgrade for VICI Properties since October 2021.
It’s apparent that VICI Properties is one of the fastest-growing REITs, and it’s been able to accomplish all of this growth in only six years. It has nearly doubled its FFO over the past five years, from $0.33 to $0.64. Revenue during that time has grown from $218.28 million to $769.91 million.
VICI Properties was crushed in early 2020 when COVID-19 struck the United States. Its share price fell by two-thirds in a month’s time and reached a low of $8.42 the third week of March. Since that time, the shares are up nearly fourfold.
Barring another pandemic, VICI could continue to grow and perform well over time. It has even been said that gambling businesses thrive during economic downturns, so a recessionary environment is not a certainty to negatively impact on the earnings of VICI Properties’ tenants.
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