VICI Properties: Undervalued Stock With Solid Dividend Growth Outlook (NYSE:VICI)

Achieving and maintaining success as a dividend growth investor depends on owning businesses with a reasonably high probability of being around in 10 years or even 20 years. As a dividend growth investor, this is why I tend to search for business models that can stand the test of time.

The real estate investment trust or REIT sector is one of my favorite sectors for that very reason. I believe the need for high-quality commercial real estate won’t be going anywhere anytime soon.

This business model becomes even more appealing when it adds an experiential twist that also satiates the vices of consumers. In my view, no REIT better encompasses this blueprint than the experiential REIT, VICI Properties (NYSE:VICI).

Last month, I boosted my position in VICI by 41.7% with my capital deployment. Now, my weighting is 1.5% and the REIT is my portfolio’s 17th-biggest holding.

When I initiated coverage with a buy rating in April, I appreciated VICI for the trend in which 76% of consumers surveyed valued experiences greater than material possessions or “stuff.” The REIT’s portfolio of world-famous properties was another plus that I believed could drum up business for its tenants. VICI’s investment-grade balance sheet was another positive. Finally, shares looked to be substantially undervalued.

Today, I’m going to be reiterating my buy rating for VICI. The company’s revenue and AFFO per share grew in the first quarter. Las Vegas continues to gain traction with events that are huge draws. VICI’s balance sheet remains solid. My updated fair value estimate still demonstrates its shares to be on sale.

Catalysts Abound For VICI

On May 1, VICI released its first-quarter financial results. From my vantage point as a shareholder, the company certainly didn’t disappoint.

VICI’s reported $951.5 million in revenue during the first quarter, which was up 8.4% over the year-ago period. For more context, that was $14.9 million ahead of Seeking Alpha’s analyst consensus for the quarter. Juxtaposed against a 3.9% year-over-year increase in the diluted weighted-average share count, this shows that VICI continues to create value for shareholders.

The way that the REIT did it in this quarter was the same as in previous quarters. The Las Vegas market doesn’t move the needle for VICI as much as it has in years past. But it still made up approximately 47% of the company’s total rent roll as of May 2024.

Las Vegas remains one of the most iconic entertainment destinations on the planet. CEO Ed Pitoniak indicated in his opening remarks during the Q1 2024 Earnings Call that Las Vegas visitation numbers were up 4.2% in the first quarter. Mr. Pitoniak also underscored a recent study from the University of Toronto. This study found that Las Vegas was the only North American city that has surpassed pre-pandemic unique visitation numbers.

Viva Las Vegas indeed!

These healthy dynamics are what supported another quarter of 100% rent collection from tenants. So, in six-plus years as a publicly traded REIT, the company’s tenants have yet to miss a single rent payment.

Secondly, VICI also added to its property portfolio over the last year. The company’s acquisition activity has taken its gaming property count from 49 to 54 during the first quarter. Then, there’s the acquisition of 39 Bowlero locations. These moves contributed to growth in VICI’s rent roll.

Finally, CPI-linked rent escalators within 50% of VICI’s contractual rent base contributed to same-store rent growth of 1.7%. That’s 4x the select triple net lease REIT average of 0.4%.

Shifting gears, VICI’s AFFO per share rose by 6.1% over the year-ago period to $0.56 for the first quarter. Disciplined cost management helped the company’s AFFO margin expand by almost 110 basis points to 61.3% in the quarter. That is how AFFO per share growth outpaced revenue growth (accounting for the higher share count) during the quarter.

Looking ahead, VICI’s growth outlook remains promising. The company reaffirmed its midpoint guidance of $2.235 in AFFO per share for 2024 ($2.22 to $2.25). The FAST Graphs analyst consensus anticipates AFFO per share will be $2.25 – – the top end of this guidance range. That would represent a 4.7% growth rate over the 2023 AFFO per share base of $2.15.

Beyond 2024, growth remains decent. In 2025, the FAST Graphs analyst consensus is that AFFO per share will increase by 3.6% to $2.33. For 2026, another 3.7% growth in AFFO per share to $2.42 is being projected.

VICI’s CPI-linked rent escalators are set to improve to 56% of the rent roll by 2026. By 2035, this will grow to 96%. That will provide a bigger tailwind to organic growth rates.

Las Vegas’ continued ascension as an entertainment mecca is another thing that VICI has going for it. Whether somebody is a concert-goer, foodie, or gambler, the city has entertainment options for everybody the world over.

Earlier this year, Las Vegas hosted the NFL’s Super Bowl 58. Yet another massive draw is on the horizon as well. On May 4, WWE announced that Las Vegas’ Allegient Stadium will be the host of WrestleMania 41 on April 19 and April 20, 2025. The announcement from WWE offers more proof that Las Vegas has firmly established itself as an odds-on favorite for major sports entertainment events.

On May 1, VICI shared that it would be providing up to $700 million in capital financing to The Venetian Resort Las Vegas. These funds will be used to renovate hotel rooms, optimize the gaming floor, and enhance entertainment and convention centers to improve the overall guest experience.

The initial $400 million investment will be funded in 2024 ($100 million in Q2 and $150 million each in Q3 and Q4). The remaining $300 million could be used at any time until November 1, 2026.

This investment also comes with terms that are favorable to VICI: Annual rent will increase on the first day of the quarter following each capital funding at a 7.25% yield. This is a remarkably high-quality investment with a 7%+ cap rate, which is a very attractive investment opportunity for VICI.

Concluding with a discussion of VICI’s balance sheet, the company is financially sound. VICI’s total outstanding debt load is 99% secured at fixed rates, which insulates it from any further potential interest rate hikes. The REIT’s net leverage ratio of 5.4x as of March 31 was also within its targeted net leverage ratio of between 5.0x and 5.5x. These elements are what support a BBB- credit rating from S&P on a stable outlook (unless otherwise sourced or hyperlinked, all details in this subhead were according to VICI’s Q1 2024 Earnings Press Release, VICI’s May 2024 Investor Presentation, and VICI’s Q1 2023 Earnings Press Release).

Nearly 20% Upside To Fair Value

Since my buy rating in April, shares of VICI have edged 3% higher as the S&P 500 index (SP500) notched 8% gains. Even so, my fair value estimate remains meaningfully above the current $28 share price (as of July 1, 2024).

VICI’s P/AFFO ratio of 12.4 is well below its normal P/AFFO ratio of 16.2 over its time as a publicly traded REIT. That normal P/AFFO ratio coincides with the fact that interest rates were zero or low for most of that time.

Moving forward, I don’t think this will remain true. Thus, I believe that a re-rating of one standard deviation lower to a P/AFFO multiple of 14.6 is realistic. This is further supported by VICI’s mid-single-digit annual AFFO per share growth prospects.

After this week is complete, the calendar year 2024 will be 52% in the books. That would leave 48% of the year left and another 52% of 2025 ahead in the next 12 months. This is how I get a 12-month forward AFFO per share input of $2.29.

Plugging a P/AFFO multiple of 14.6 in with this input, I get a fair value of $33 a share. Astute readers will note that this is below my initial fair value estimate of $35 a share.

This can be explained by a change in my valuation methodology rather than a negative change in VICI’s fundamentals. For the macro reason that I noted above, I merely changed my stance from a reversion to the normal P/AFFO to one standard deviation below the norm.

From the current share price, this implies VICI is trading at a 16% discount to fair value. If the REIT matches the growth consensus and returns to my fair value multiple, it could deliver 40% cumulative total returns by the end of 2026.

Future Dividend Growth Should Be Solid

VICI’s 6% forward dividend yield is significantly more than the real estate sector median forward yield of 4.6%. That is enough for a B grade for forward dividend yield from Seeking Alpha’s Quant System.

VICI’s intrigue doesn’t end there, either. The five-year compound annual growth rate of the company’s dividend was 7.6%, which was leagues ahead of the real estate sector median of 0.2%. That earns VICI an A grade for the metric from the Quant System.

In the years to come, the Quant System anticipates annual forward dividend growth will be 5.2%. That’s also well above the real estate sector median of 3%.

Aside from mid-single-digit annual growth prospects, this is backed up by a secure payout. Assuming a 6% hike in the Q4 dividend per share to $0.44, VICI would be on pace to pay $1.685 in dividends per share in 2024. Against the $2.25 AFFO per share analyst consensus for the year, that would be a 74.9% AFFO payout ratio.

This would be below the 90% AFFO payout ratio that rating agencies desire from VICI’s industry per The Dividend Kings’ Zen Research Terminal. That is also in line with the 75% AFFO payout ratio the company is targeting. This gives VICI the flexibility to keep up with 5% to 6% annual dividend raises for the foreseeable future.

Risks To Consider

VICI is a quality REIT, but it isn’t without its risks that are worth highlighting.

Just as I discussed in my previous article, concentration risk remains the most pressing risk to the REIT. As of March 31, Caesars and MGM Resorts International made up a combined 74% (36% and 38%) of the total rent roll (info sourced from page 20 of 68 of VICI’s Q1 2024 10-Q Filing). This means that if either of the two tenants experience financial challenges, rent collection efforts could be adversely impacted. In a worst-case scenario, that could weigh on VICI’s financial results and force a dividend cut.

Situated not far from the Hoover Dam, the REIT’s geographic concentration poses risks as well. If the Hoover Dam encountered a dam failure or burst, Las Vegas’ water supply and electricity supply would become strained. That could shut down the city for an indefinite period, which would have a materially unfavorable impact on VICI’s fundamentals.

Summary: VICI Is Too Good To Pass Up Here

VICI is a REIT that I’m thrilled to own in my portfolio. Despite its relatively short operating history as a publicly traded REIT, no other major REITs of which I am aware can match its 100% rent collection rate thus far. VICI has fine growth prospects as well. Best of all, shares still offer compelling value right now. That’s why I’m maintaining my buy rating.