One of the best yields and passive income streams that investors can buy, in my view, relates to VICI Properties Inc. (NYSE:VICI) which is a concentrated real estate investment trust with a large portfolio of entertainment properties.
Despite the more cyclical nature of VICI Properties’ underlying earnings, I think that the dividend is well-protected and will probably continue to grow even if the U.S. economy were to slide into a recession in 2024.
The low pay-out ratio, which is on-par with the AFFO-based pay-out ratio of dividend champ Realty Income Corp. (O) and the inclusion of trophy assets supply two justifications for buying VICI Properties in 2024.
My Rating History
My inflation-themed article about VICI Properties VICI Properties: Don’t Miss This 4.5% Dividend Yield was published almost a year ago. The core argument for buying and owning VICI Properties’ stock was that the trust included rent escalators in its lease contracts which effectively provided the trust and passive income investors with an inflation hedge.
This has played out well as the trust’s FFO is growing organically and I see rent escalators as a good reason to invest in the trust moving forward also. I update my thesis and think that VICI Properties, even in a low-rate environment with receding inflation, is a compelling passive income instrument as the trust maintains a moderate pay-out ratio and raised its dividend by a respectable 6% in the third quarter.
VICI Properties’ Real Estate Concentration: Opportunities And Risks
VICI Properties is a net lease real estate investment trust focused on the entertainment industry. Thus, the trust owns a portfolio that contains a large number of casino properties, particularly in Las Vegas. As was the case last year, the trust’s real estate portfolio is anchored in gaming/casino properties of which the trust owned 54 as of the end of 3Q-23.
Other core assets besides casinos and gaming properties include convention space, a considerable number of hotel rooms (60K plus) and even golf courses.
Included in the gaming portion of VICI Properties’ real estate portfolio are casino properties that stand out with their universal name recognition and that are associated with Las Vegas itself. VICI Properties’ core Las Vegas trophy assets include the Mirage, Caesars Palace, Park MGM and The Venetian Resort.
Las Vegas needs no introduction and has been a tourist attraction for decades. The city attracted 41 million visitors in the last twelve months (as of September 2023), from inside as well as outside of the United States many of whom are spending a boatload of cash in Las Vegas and, of course, in the city’s main attraction: It’s casinos. As such, Las Vegas’ tourists are an extremely important revenue source for the city as well as for VICI Properties’ casino properties.
While this presents a big opportunity for VICI Properties to produce above-average funds from operations and dividend growth moving forward, the trust’s Las Vegas-anchored gaming portfolio is vulnerable to a decline to a recession-driven decline in tourist traffic.
A key strength of VICI Properties’ portfolio focus is a relatively high barrier to entry. Building a new casino is expensive and requires a lot of capital while land supply is also limited at the Las Vegas strip.
Related to this, VICI Properties have an exceptionally long weighted-average lease term of 42 years (including renewal options) compared to the more conventional triple net lease retail real estate investment trust.
Growth In Adjusted Funds From Operations
VICI Properties is enjoying robust growth in its underlying cash flow which for real estate investment trusts is most often expressed as FFO or AFFO with the latter adjusting for certain non-cash income and expense items.
VICI Properties’ adjusted cumulative FFO since January has risen 34% YoY to $1.62 billion while its EBITDA (adjusted) has soared 38% to $2.16 billion. The underlying business trends are therefore healthy and the portfolio maintained a 100% occupancy rate in the third quarter.
The portfolio is perfectly leased, so I don’t expect this to change in the near future either. I expect VICI Properties to continue to grow its FFO, both organically and through acquisitions.
I can see the trust getting more aggressive with acquisitions, possibly during a recession which is typically when bargains become available and real estate prices are cheap.
Acquisition-driven FFO growth is therefore something that I will think will play a major role in VICI Properties’ evolution moving forward.
How Safe Is VICI Properties’ Dividend?
I would say the trust’s dividend is reasonably safe and I think that the combination of a growing dividend with a moderate dividend pay-out ratio makes VICI Properties a quite compelling passive income investment.
It was only in the last quarter that VICI Properties raised its dividend pay-out from $1.56 per share per quarter (annualized) to $1.66 per share per quarter, reflecting a dividend raise of 6.4%. The dividend pay-out ratio in 3Q-23 was 72%, based on adjusted funds from operations and in the last twelve months VICI Properties paid out 75% of its AFFO.
Realty Income Corp. (O), which is a retail-oriented and not an entertainment-focused real estate investment trust that is often considered to be the gold standard in the dividend growth investor community, had a 12-months dividend pay-out ratio of approximately 76%, based on adjusted funds from operations, so the argument could be made quite convincingly that VICI Properties offers top-of-the-class dividend safety.
What Is VICI Properties’ AFFO Multiple?
VICI Properties sees $2.14-2.15 per share in adjusted funds from operations in 2023 and could probably produce 4-5% AFFO growth in 2024 if the U.S. economy keeps out of a recession. Based on $2.145 per share in AFFO this year and taking into account a stock price of $31.88, VICI Properties is selling at an AFFO multiple of 14.9x.
My thoughts on valuation over time have not changed since VICI Properties is selling for virtually the same multiple. With that said, I think a 17x multiple of VICI Properties may be appropriate given the strength of the underlying dividend and portfolio performance. This estimate would imply a target value of $36.
Another experiential REIT is EPR Properties Inc. (EPR) whose stock is selling for an AFFO multiple of 9.4x, but the trust has a spottier dividend growth record and has large exposure to struggling movie theaters.
Realty Income is selling for an AFFO multiple of 14.4x. Though Realty Income is not a direct competitor to VICI Properties (though it now owns some gaming properties), I use the trust as a reference point for the dividend pay-out ratio since Realty Income is often regarded as one of the safest blue-chip REITs in the industry.
What Headwinds Must Passive Income Investors Be Prepared To Deal With?
VICI Properties is a more cyclical REIT investment than other real estate investment trusts, particularly those that run a core residential strategy.
Las Vegas itself is a city that has risen and fallen many times as it is very dependent on tourism and a strong economy. Thus, VICI Properties’ profits may fluctuate more than profits of residential-focused real estate investment trusts during bad economic times.
By that same token, VICI Properties also has the chance to produce stronger profit and dividend growth during good economic times compared against real estate investment trusts that compete in less-cyclical REIT sub-sectors like residential or retail.
VICI Properties is a solid choice for passive income investors in 2024 with or without an inflationary backdrop that provided the original justification for me to buy the entertainment-focused real estate investment trust in 2023.
Amongst the reasons that I think are particularly convincing to own VICI Properties is the moderate pay-out ratio, which stacks up the best REITs in the market, the 6% dividend hike and the focus on long-term lease contracts.
Even in a low-rate environment, obviously, I think VICI Properties is a compelling investment and I expect the experiential REIT to grow its dividend in 2024 as well.