VICI Properties Is The Name to Beat Among Gaming REITs

Posted on: August 1, 2020, 08:00h.

Last updated on: July 31, 2020, 10:37h.

VICI Properties (NYSE:VICI) reported second-quarter results on Wednesday that narrowly beat Wall Street forecasts, prompting one analyst to say the Caesars Palace owner exhibits “stability in the midst of uncertainty.”

Harrah’s on the Las Vegas Strip. Owner VICI Properties is seen as a real estate star. (Image: Reno Gazette-Journal)

Of note to investors, the gaming real estate investment trust (REIT) said it collected 100 percent of rent in the June quarter – no small feat when considering US casinos were closed for all of April and many were shuttered for significant portions of May and June. VICI said that positive trend is continuing as it’s collected all of owed July lease obligations.

VICI remains our top idea of the gaming REITs, a space where we are bullish,” said Wolfe Research analyst Jared Shojaian. “We see attractive value and a path to multiple re-rating from 1) gaming REIT convergence to the triple-net REIT average 2) improvement to its key tenant, Caesars and 3) record low interest rates.”

In late June, Shojaian initiated coverage of VICI with an “outperform” rating. He maintains a price target of $29 on the owner of several Harrah’s properties, implying upside of 33.5 percent from Friday’s close.

Working With Tenants

In what is a rough climate for gaming companies, VICI is showing a willingness to work with tenants. For example, in June, the real estate firm helped Caesars, then Eldorado Resorts, monetize the Caesars Forum Convention Center at Caesars Palace on the Las Vegas Strip while buying 23 acres of unused land on the Strip from the casino giant.

Those deals were worth a combined $503.5 million and were pivotal in helping Eldorado complete its quest to acquire Caesars. The buyer subsequently took the seller’s name.

VICI’s benevolence didn’t end there. The REIT struck a deal with JACK Entertainment whereby it will spend $18 million to refurbish the patio area at JACK Thistledown Racino in Ohio. The benefit to VICI is that the lease on that property will be extended by five years and starting in April 2022, the rent will go up by “incremental” $1.8 million.

Shojaian said the deal with JACK is another example of VICI exchanging “value for value” and that could facilitate more growth down the road.

Other Pluses for Investors

Although VICI owns Caesars Palace and Harrah’s on the Las Vegas Strip, an area that’s struggling mightily because of the coronavirus pandemic, the largest US gaming center accounts for just 30 percent of the real firm’s annual rental income, a favorable trait in today’s challenging climate.

Shojaian noted that VICI’s payout ratio based on a run-rate of acquired funds from operations (AFFO) is 64 percent, well below the 80 percent average on its peers. That could put a dividend increase on the table next mont, according to the analyst. The REIT last boosted its payout in September 2019.

“If VICI increases the dividend prior to its 75 percent target ratio then the yield would jump to 6.4 percent,” said the analyst. “We find that to be attractive value, particularly against other alternatives and the risk-free rate.”

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