Vici is the only company we’ve retained from our 2024 global portfolio, as we think it has much value to offer. The thesis for the company remains — it is cheap at current prices given the way it has structured its portfolio and how it manages leases and downside risks.
The company’s case is also relatively unchanged and most of its business prospects are the same — with the only major change being higher interest rates from when we added the stock in August last year. Higher interest rates increase the cap rate and the cost of capital, particularly for REITs such as Vici, and hence, the required return is higher. Despite this, we still think Vici has an excellent portfolio of assets that are capable of generating strong shareholder returns.
To recap, Vici is one of the largest triple net lease REITs globally, with 100% rent collection since its formation. The company also has progressively hedged its portfolio for inflation risks, with inflation-linked escalation for its rent rolled over the long term and 96% protection by 2035.
Almost three-quarters of Vici’s tenants are from the S&P 500 and 80% of its rent roll is derived from SEC reporting operators, which provides transparency into tenant performance and health. Logistics-wise, gaming regulations create high barriers to entry and limit gaming tenants’ ability to move locations, contributing to Vici’s 100% occupancy rate, which is further augmented by a secure 41-year weighted average lease term for its portfolio.
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Furthermore, with around 33 acres of undeveloped and underdeveloped land around the Las Vegas Strip, there is much opportunity available for Vici’s growth pipeline. This pipeline is supported by right-of-first-refusal and right-of-first-offer agreements, which provide more flexibility to the REIT.
Checklist-wise, compared to other triple net lease REITS, Vici is superior in almost every aspect. In terms of its occupants’ business model, it covers both experiential and operational, reflecting revenue diversity. For its underlying asset financial transparency, Vici is subject to stricter reporting standards from gaming regulators, such as the requirement to report gross gaming revenue from assets. Better financial transparency is a merit for both investors and the business.
Next, the barriers to entry are high, as licences are competitive and the capital required is substantial. The type of Vici’s real estate is differentiated and non-commoditised, which implies that it is less affected by business and economic cycle fluctuations. Additionally, Vici’s cash flow volatility is very low, and as it reports, there has been none to date. Vici reported positive same store rent growth, too, over four times more than the average of its peers for the previous comparable period.
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In Vici’s 3QFY2024 results, total revenues increased 6.7% y-o-y, while net income and earnings per share grew by 31.7% and 27.4%, respectively, over the same period. The ›AFFO (adjusted funds from operations), a key REIT metric, increased 8.4% over the same period, while the quarterly cash dividend grew 4.2% on a y-o-y basis. Management also slightly revised the guidance upwards, reflecting optimism in the company.
In terms of the company’s financial health, Vici has an investment-grade balance sheet, which broadens its access across capital markets as an unsecured borrower, greatly providing financial leverage to the company to capture growth opportunities. Relative-valuation-wise, Vici trades at a 17% and 4% discount to local peers for its forward PE and price to funds from operations (PFFO), reflecting that it is a cheap pick compared to peers. The dividend yield of Vici is currently at a healthy 5.9%.
Vici is a great REIT because it is able to pay consistent and increasing dividends. Since its IPO, Vici has achieved a dividend CAGR of 7%, which is attributable to its methodical portfolio construction and consistent annual earnings growth from same-store rent escalations.
Sentiment-wise, there are 22 “buy” calls, three “hold” calls and no “sell” calls for Vici from analysts, with an average target price of 20% above its current trading price of US$29.45 ($39.97). Based on our in-house valuations (see Charts 1a and 1b), we think that the fair value for the company is US$37.89.
Disclaimer: This article is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This article does not take into account an investor’s particular financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor's own discretion and/or after consulting licensed investment professionals, at their own risk.
