One of the more interesting publicly traded REITs on the market today has got to be VICI Properties (NYSE:VICI). For those not familiar with the company, it operates as a major owner of gambling and other gaming related assets. By investing in these types of properties, and diversifying somewhat over the years, the company has grown to be a rather large enterprise with a market capitalization as of this writing of $30.72 billion.
Back in April of this year, I wrote my first article about the company. I ended up taking a bullish stance based on historical growth and the overall quality of the institution. When I rate a company a ‘buy’, I am making a bet that shares will outperform the broader market for the foreseeable future. Technically, this is what has happened, with shares up 9% compared to the 8.3% achieved by the S&P 500. But that return disparity is, I would argue, statistically insignificant.
Fundamentally speaking, things have actually been going quite well for the company. Revenue, cash flows, and other profitability metrics, have all been on the rise. Net leverage has fallen and management has continued to make some good investments. The stock is not exactly cheap. And relative to other specialty REITs, it does appear to be a bit on the pricey end of the spectrum. But given the data in its totality, I would argue that keeping the company rated a ‘buy’ makes the most sense at this time. Of course, this picture can change. On July 31st after the market closes, management is expected to announce financial results covering the second quarter of the company’s 2024 fiscal year. Profitability is expected to follow revenue higher. This is true on a per share basis as well. Assuming nothing negative comes out of the woodwork, I think that my bullish assessment of the company will play out nicely.
Results continue to impress
When I wrote about VICI Properties earlier this year, we had data covering through the final quarter of the 2023 fiscal year. Results today now extend through the first quarter of 2024. By every important metric that I could think to look at, the picture for the company improved on a year over year basis. Revenue, for instance, jumped 8.4% from $877.6 million to $951.5 million. Every revenue category for the company improved year over year. But the most significant improvement came from income associated with lease financing receivables, loans, and securities. Sales jumped 10.3% from $371.1 million to $409.3 million.
Author – SEC EDGAR Data
In general, though, the company saw improvement on its top line. And this was because of a multitude of factors. One of the biggest improvements came from the addition to the company’s portfolio of the 49.9% of the MGM Grand/Mandalay Bay lease agreement, as well as some other additions such as the Rocky Gap Casino portion of its master lease agreement with Century Casinos.
With revenue rising, profitability for the company also jumped nicely. Operating cash flow, for instance, rose by 4.2% from $522 million to $543.7 million. If we adjust for changes in working capital, we get an increase of 10.3% from $534.5 million to $589.8 million. Given that we are talking about a REIT, there are other profitability metrics to be paying attention to as well. Most notably would be FFO, or funds from operations. This metric rose from $520.2 million to $590 million. The adjusted figure for this expanded from $528.6 million to $583.2 million. And lastly, EBITDA for the company grew from $710.3 million to $765.3 million.
VICI Properties
Speaking about growth, it is worth noting that management has never really stopped focusing on expanding the business. After the end of the first quarter, on May 1st of this year, the company entered into an agreement to provide up to $700 million of capital to the Venetian Resort for the purpose of major reinvestment projects. $400 million worth of that funding is planned for this year. The owner of that resort has the ability to tap into the other $300 million if those funds are needed between now and November 1st of 2026. This money will carry with it an annual yield of 7.25%. And starting on March 1st of 2029, there will be a 2% annual escalation rate on rent, with the ability to potentially push this up to 3% starting in March of 2031.
Even though VICI Properties is focused on what’s best for its investors, its partner in this has an opportunity to walk away a winner. That’s because these funds will make major improvements to that property. Improvements include the complete updating of 4,000 suites and $188 million worth of investments being made into the resorts Convention Center. New gaming offerings that will include multi-year naming rights partnerships with major companies like Yahoo will also be invested in. The good thing about this kind of investment is that VICI Properties has a history of working in the resort space. Just on the Las Vegas Strip alone, the company owns 10 trophy assets that consists of 660 acres of underlying land and that have 41,400 hotel rooms to them. This is in addition to 5.9 million square feet of conference, convention, and trade show space.
As I detailed in my initial article on the company, VICI Properties does have a history of other types of investments as well. In the first quarter of 2024, for instance, the company originated $115 million of senior loans split between two different assets. The larger of these was for the Margaritaville Resort in Kansas City that is under development. However, some of the funding went to equipment for the fitness club at One Madison in New York City. As a player in the experiential assets space, the company has plenty of other properties (or investments in properties) as well, including bowling alleys, citrus farms, and more.
Author – SEC EDGAR Data
It is with these types of investments in mind and the impact those could have on the company that analysts seem to be forecasting continued growth for the company. For the second quarter of the 2024 fiscal year, they currently anticipate revenue of $953.7 million. This would be comfortably above the $898.2 million reported one year earlier. They are also forecasting adjusted FFO per share of $0.66. This would be an increase over the $0.54 in adjusted FFO per share reported for the second quarter of 2023. If this comes to fruition, and if the firms share count remained unchanged from what it was at the end of the first quarter, this would translate to an increase in adjusted FFO from $540.4 million to $688.6 million. In the table above, you can see revenue and various cash flow metrics that are important to the company. These cover the second quarter of 2023. In all likelihood, if revenue and adjusted FFO both increase during this time, all of these metrics will increase.
One of the really great things about management is that while they don’t provide any guidance when it comes to revenue, they do provide estimates involving adjusted FFO. For the year as a whole, they are forecasting adjusted FFO per share of between $2.22 and $2.25. At the midpoint, that would translate to nearly $2.34 billion. If we assume that other profitability metrics will rise at the same rate that adjusted FFO is expected to relative to last year, then this would imply adjusted operating cash flow of $2.35 billion, FFO of $2.69 billion, and EBITDA totaling $3.11 billion.
Author – SEC EDGAR Data
Using these figures, I was able to easily value the company as shown in the chart above. For a REIT, VICI Properties it’s not exactly cheap. But it is far from being expensive. Having said that, relative to similar specialty REITs, it is a bit on the pricier side. In the table below, you can see, using two of these valuation metrics, how shares of the company stack up against shares of similar firms. On a price to operating cash flow basis, three of the five firms ended up being cheaper than VICI Properties. But this number ticks up to four of the five when it involves the EV to EBITDA approach. One other thing that I would like to touch on briefly is leverage. It can become very easy for a REIT to see leverage increase too much. The incentives to grow rapidly, combined with their overall structure, makes this a true risk. The good news is that the picture for the business is actually getting better. The net leverage ratio for 2024, if net debt remains unchanged from where it is, should be about 5.23. This is actually down from the 5.59 that I calculated in my prior article on the company.
Company | Price / Operating Cash Flow | EV / EBITDA |
VICI Properties | 14.0 | 16.2 |
Iron Mountain (IRM) | 25.9 | 24.1 |
Gaming & Leisure Properties (GLPI) | 13.0 | 14.4 |
Lamar Advertising (LAMR) | 15.3 | 15.7 |
EPR Properties (EPR) | 7.7 | 12.8 |
OUTFRONT Media (OUT) | 9.3 | 12.6 |
Takeaway
Fundamentally speaking, VICI Properties seems to be doing really well for itself. It’s true that the firm is not cheap. However, it is attractively priced for such a high-quality enterprise. Growth continues to impress, both on its top and bottom lines. And leverage has come down a bit from my prior calculation. Add all of this together, and I do think that the firm still deserves a ‘buy’ rating at this time.
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