Vici Properties(NYSE: VICI), a real estate investment trust (REIT) that owns casinos and entertainment properties across the U.S. and Canada, is often considered a stable dividend play. Over the past five years, its stock has risen nearly 30% as its reinvested dividends lifted its total return to almost 70%.
Some investors might be reluctant to buy Vici as it trades near its all-time high, but I believe it’s still a compelling buy for four simple reasons.
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REITs buy a lot of real estate properties, rent them out, and split the rental income with their investors. To maintain a favorable tax rate, they need to distribute at least 90% of their pre-tax earnings to their investors as dividends. That’s why many REITs pay such high dividends. Vici currently pays a forward dividend yield of 5.5%, compared to the 10-Year Treasury’s 4.4% yield.
Over the past two years, many REITs struggled as rising interest rates made it tougher to buy new properties, generated more headwinds for their tenants, and drove yield-seeking investors toward risk-free CDs and T-bills. But as interest rates decline, those headwinds should dissipate and bring back the bulls.
Vici owns 93 properties across the U.S. and Canada. Its top tenants include Caesar’s Entertainment, MGM Resorts, Penn Entertainment, and Century Casinos. Many of the top casino resorts in Las Vegas — including Caesars Palace, MGM Grand, and the Venetian — rent its properties.
Vici’s massive exposure to the gaming sector might seem risky, but casinos are generally resistant to recessions. It locks its tenants into multi-decade contracts, and the complex real estate regulations for the gaming industry give it a wide moat and limit the ability of its tenants to relocate their businesses.
That’s why Vici has maintained an occupancy rate of 100% ever since its initial public offering in 2018 — even as the COVID-19 pandemic rattled the travel, hospitality, and casino gaming markets. Most of Vici’s long-term leases are linked to the consumer price index (CPI), so it can consistently raise its rent to keep pace with inflation. That makes it more resistant to inflationary headwinds than other REITs that don’t provide CPI-linked leases. To top it off, Vici is a triple net lease REIT, which means its tenants are responsible for covering all of a property’s real estate taxes, insurance costs, and maintenance fees.
REITs aren’t usually valued by their earnings per share (EPS) since they keep issuing new shares to fund their real estate purchases. Instead, they gauge their growth with their funds from operations, or the cash generated by their core operations excluding any gains or losses from property sales.
From 2018 to 2023, Vici’s adjusted funds from operations (AFFO) per share grew at a steady compound annual growth rate (CAGR) of 8.5%. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which also cuts through a lot of that noise, rose at a CAGR of 32%.
At $32 a share with an enterprise value of $50.7 billion, Vici’s stock still looks cheap at 15 times last year’s AFFO per share and 17 times its adjusted EBITDA. Realty Income, one of the world’s largest REITs, trades at 14 times last year’s AFFO per share.
Vici has raised its dividend every year since its public debut six years ago. It’s committed to returning at least 75% of its AFFO to its investors as dividends. That hefty dividend should become a lot more attractive to income investors as interest rates decline.
Vici isn’t a high-growth stock, but it’s a great play for income-oriented investors who want predictable long-term returns. Therefore, I believe it’s a good idea to load up on this stock before the Fed cuts interest rates again and drives even more investors back to REITs.
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Leo Sun has positions in Realty Income and Vici Properties. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Vici Properties. The Motley Fool has a disclosure policy.
