Investment thesis
Uncovering consumer trends is essential to successful entrepreneurship. This exact trait enabled a group of individuals to identify and capitalize on the human need for entertainment and gambling, which led to the creation of Las Vegas. Gambling has been around since the earliest times, offering a unique historical depth that reflects a deep-rooted need for gambling, valuable insurance in the face of uncertainty, whether technological change, regulatory risk or economic cycles. .
VICI properties (NYSE: VICI) provides an additional layer of security for those who wish to be exposed to the mains. It is a real estate investment trust “REIT” that specializes in leasing properties to gaming operators. Thus, its revenues are a derivative of the performance of the gaming industry, immune to the cyclicality of revenues. Its 5% dividend is guaranteed by long-term triple leases with creditworthy corporate tenants.
Macro-Trends
Alternative assets are growing in popularity with institutional investors, reinvigorating the sector and pushing prices higher. Companies like Blackstone (BX) are buying assets left and right, and the public is starting to feel that as well. Investment funds are snapping up real estate in front of retail buyers “without coming down to view the property”, according to reports. The reason stems from a change in investment behavior, particularly from institutional investors, such as government, sovereign and pension funds. For example, the Los Angeles County Retirement Fund raised its private equity target from 10% to 17% last year.
Property prices are rising rapidly and although the pandemic has hit the gaming industry, it has recovered quickly. If you missed the recent rally in gaming stocks, an investor bought the dip but still has their equity more or less the same. Just before the pandemic, VICI was trading at $24 per share, down from $29 at the time of this writing, not reflecting its edge in buying the dip. In 2020, VICI spent $4.5 billion on investing activities.
business model
REITs allow investors to invest in US properties and mortgages, and VICI focuses its business on leasing properties to gaming operators. A REIT typically finances its real estate portfolio with equity and debt, the latter often in the form of debt securities rather than mortgages. VICI holds $4.6 billion in debt, consisting of notes at various maturities. One might wonder if a REIT distributes 90% of its income, how does it intend to repay its debt? I don’t believe VICI intends to do that, and that’s a good thing. The company will likely continue to refinance its bonds, letting inflation and rising house prices take care of the balance. At some point, the value of the property and the rents will become so large that the amount of debt will be insignificant, and while you wait for that to happen, VICI will pay you a 5% dividend.
Since we are talking about long-term strategy, technological trends and the shift to online gambling cannot be ignored. While some of the gaming activity is moving online, I don’t think it can completely replace the real face-to-face experience. However, it must be recognized that these trends are detrimental to VICI and the commercial REIT industry.
The gaming industry has shown resilience in the face of the pandemic. VICI collected 100% of rents in 2020, although it waived certain capital investment requirements during the period. The company derives its revenue from a limited number of gaming operators, namely Caesars (CZR), Penn National Gaming (PENN), Hard Rock, Century Casinos (CNTY) and JACK Entertainment. This concentration of revenue on a small number of customers creates risks. A default by a tenant will result in a severe blow to VICI’s revenues. However, States have their way in the game and are incentivized to replace the licenses of non-functioning operators with other operators, thus facilitating the replacement of the tenant in the event of failure.
what you buy
Property | Site | About. Square of the Casino pi. (in thousands) |
Harrah’s Lake Tahoe | Stateline, NV | 54 |
Horseshoe Tunic | Robinsonville, MS | 63 |
Harrah’s North Kansas City | North of Kansas City, Missouri | 60 |
JACK Thistledown Racino | North Randall, Ohio | 57 |
Harrah’s New Orleans | New Orleans, LA | 101 |
Mountaineer Casino Resort & Racecourse | New Cumberland, West Virginia | 72 |
Metropolis of Harrah | Metropolis, IL | 24 |
Harrah’s Laughlin | Laughlin, Nevada | 56 |
Caesars Palace Las Vegas | Las Vegas, Nevada | 124 |
Harrah’s Las Vegas | Las Vegas, Nevada | 89 |
Lake Tahoe from Harvey | Lake Tahoe, Nevada | 51 |
Harrah’s Joliet (1) | Joliet, IL | 39 |
Horseshoe Hammond | Hammond, IN | 117 |
Caesars Southern Indiana | Elizabeth, IN | 74 |
Greek Casino Hotel | Detroit, Michigan | 100 |
Harrah’s Council Cliffs | Council Bluffs, Iowa | 21 |
Horseshoe Council Cliffs | Council Bluffs, Iowa | 60 |
Jack Cleveland | Cleveland, Ohio | 96 |
Hard Rock Cincinnati | Cincinnati, Ohio | 100 |
Harrah’s Philadelphia | Chester, Pennsylvania | 111 |
Century Caruthersville | Caruthersville, Missouri | 21 |
Century Cap Girardeau | Cape Girardeau, Missouri | 42 |
Bossier City Horseshoe | Bossier City, LA | 28 |
Margaritaville Resort Casino | Bossier City, LA | 30 |
Harrah’s Louisiana Downs | Bossier City, LA | 12 |
Gulf of Harrah Coast | Biloxi, MS | 31 |
Caesars Atlantic City | Atlantic City, New Jersey | 113 |
Harrah’s Atlantic City | Atlantic City, New Jersey | 156 |
Total number of casinos | 28 | 1,902 |
Source: VICI Annual Report. Table created by the author
VICI has 28 properties in addition to a few golf courses. All of its buildings are leased under long-term contracts to creditworthy customers. The company is geographically diverse, which reduces regulatory risk as states adjust their gambling regulations. The creditworthiness of VICI’s clients and the long-term nature of the contracts improve the predictability of income and the payment of dividends.
Summary
Institutional investors are pouring money into alternative assets away from traditional vehicles such as bonds and stocks, reviving the real estate market, including gambling real estate, as evidenced by the recent Mirage to sell Ilast month, and the structural changes in institutional fund holdings discussed above.
VICI should benefit from these trends, given its strong balance sheet and the predictability of its revenues from long-term triple-net leases for creditworthy gaming operators. This strength is reflected in its 100% cash rent collection ratio during the pandemic. The company is a good addition to his portfolio, offering stable dividends to reduce market volatility, in addition to a potential capital gain to increase his distribution yield by 5%.