VICI properties (VICI 1.26%) offers investors a generous dividend yield of 4.2% at a time when a S&P 500 The index fund will only get you 1.5%. The real estate investment trust (REIT) is, however, relatively new and still has a very focused portfolio. But management is already taking steps to reverse the diversification issue as it seeks to broaden investor appeal.
Playing games from scratch
VICI Properties was created in late 2017 after being spun off from Caesars Entertainment. The move was really a way for Caesars to raise capital as it sold its holdings to VICI. At the time, casino-focused REITs were rare. They are still, noting that VICI closed on its acquisition of peers MGM Growth Properties at the end of April. The only other major competitor at this point is Games and leisure properties.
There are some issues with the casino space. First, there are only so many desirable gaming properties to buy. That doesn’t mean the investment opportunity is exhausted, but there isn’t much runway for growth if these REITs want to focus on owning the best casinos. Second, the most attractive casinos are massive assets that usually include the casino itself, hotels, restaurants, shopping and entertainment spaces. All of these take a hit when casino demand falls during hard times, such as recessions.
This is not to say that casinos are not desirable assets. Just a little more diversification wouldn’t hurt the company’s growth prospects.
At this point, VICI owns 43 properties with eight tenants spread across the United States. It has significant exposure to destination-based Las Vegas assets (45% of rentals) and smaller regional gaming areas. The average remaining lease term is 43 years, with 96% of its leases including regular rent increases. These are quite impressive numbers compared to other REITs that use the net rent structure. With a net lease, the lessee is responsible for most of the operating costs of the asset they occupy.
So casinos are a strong base, but where is the growth coming from? The answer is either more casinos or diversification outside of the casino space. The latter offers many more opportunities, even assuming that VICI continues to focus on experiential assets. For example, it has a relationship with Great Wolf Lodge, a company that operates water park resorts.
This investment is currently in the form of two loans, one of which was agreed in July. But VICI also recently signed a loan agreement with Cabot, a company that builds golf resorts. This particular deal has a sale/leaseback component, allowing VICI to expand its portfolio of properties in what it describes as the “pilgrimage experience sector”.
The most important thing here, however, is that it gives the casino owner a chance to try their hand at a different type of property. And so, add valuable diversification to its portfolio over time through a new growth platform. It’s unclear where these non-casino investments will ultimately take the REIT, as success here could entice it to buy everything from movie theaters to amusement parks.
Bigger, better, more opportunities
If you’ve looked at VICI and been put off by its highly concentrated casino portfolio, it may be time to start looking at this REIT again. As it looks to expand cautiously beyond gaming, it looks like it will slowly become more and more attractive to conservative income investors. There’s still no reason to jump right in as gaming will remain big business for years to come, but it’s definitely worth putting on your watchlist as it begins to take the necessary steps to become a much wider business.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Gaming and Leisure Properties and VICI Properties Inc. The Motley Fool has a disclosure policy.