VICI Properties (NYSE:VICI) is a high-quality REIT with compelling fundamentals and a good track record. Last summer, I rated VICI as a “Hold” due to shares having risen considerably. Since then, VICI has pulled back, and the recent closing of the deal with Blackstone (BX) has improved its growth outlook. Combined with other growth investments over the last year and organic performance, 2023 should be a substantially more profitable year for the REIT, and its valuation has become attractive again.
VICI Properties has seen its shares pull back since I wrote my last article last summer, which has made its valuation decline. At the same time, solid underlying business progress and the closing of a recent acquisition have increased VICI’s scale further and improved the near-term earnings outlook, making shares look even better today.
Closing Of The Blackstone Deal
Last December, VICI Properties and Blackstone announced that they had agreed to a deal that would see the former buy a 49.9% stake, that was previously owned by Blackstone, in MGM Grand (MGM) and Mandalay Bay – two iconic Las Vegas properties. In fact, MGM Grand is the biggest hotel in the world, offering almost 7,000 rooms.
While the properties were partially owned by VICI before the deal (it owned the remaining 50.1% not owned by Blackstone), it has become the sole owner of these famed properties via this deal. The deal values the properties at $5.5 billion, including debt. VICI’s out-of-pocket cost for the deal was considerably less, however. VICI agreed to pay $1.27 billion in debt, with the remainder being accounted for via its assumption of the existing property-level debt.
VICI’s counterparty in this deal is Blackstone’s REIT, ‘BREIT’, which had seen some redemptions last fall and which could thus utilize the cash influx from the deal. Since BREIT is mostly focused on residential real estate in markets such as Texas, selling a non-core asset such as the two partially-owned hotels in Las Vegas made sense for the REIT. Importantly, the deal also makes sense for VICI Properties, which is now the sole owner of these two landmark properties.
The following statement was part of the deal announcement (emphasis added by author):
VICI Properties intends to fund the transaction through a combination of cash on hand, proceeds from the settlement of existing outstanding forward equity sale agreements and assumption of the remaining 49.9% of the existing property-level debt. VICI expects the transaction to be immediately accretive to AFFO per share upon closing.
Acquisitions that are being made for the sake of making acquisitions aren’t beneficial for shareholders – if anything, management benefits from empire building. But that is not the case here, as VICI has been clear about this deal being accretive for shareholders immediately, i.e., even before potential synergies have been captured. Due to the low interest rate on the property-level debt – 3.6% fixed through 2032 – that’s not surprising, as this makes it easy for an acquirer to get a nice investment spread on this acquisition. The cash portion was partially funded with cash on hand, while proceeds from equity issuance were used as well. Overall, not too many shares will be issued to finance this deal, however, which is why it is not too surprising that management expects that adjusted funds from operations will see a positive impact directly after the deal has closed (which has now happened, on January 9).
The contract with tenant MGM Grand runs through 2050, with two 10-year options following that. Rent increases are fixed through 2035, at 2% a year. While that’s less than the current rate of inflation, it is expected that inflation will come down meaningfully in 2023 and beyond, which should make these fixed rent increases more attractive, all else equal. Even a 2% rent increase per year will boost VICI’s revenues meaningfully over time, while financing costs are not rising due to the fixed interest rate. Since this is a triple-net lease, the tenant is responsible for all operating expenses – inflation, which increases operating expenses, is thus not VICI’s problem.
Acquisitions Drive VICI’s Growth
VICI Properties has a history of crafting major deals, and that has been beneficial for shareholders in the past. Since management makes sure that these deals are accretive on a per-share basis, funds from operations have risen at a compelling pace in the past. The deal with Blackstone will have a similar impact, but that is not the only acquisition VICI has made in recent weeks.
Instead, the company also has announced a deal worth $300 million for a new asset in Mississippi in December. While that’s not a deal that is comparable in size to the Blackstone deal and some other deals VICI has made in the past, it should be accretive as well. The going-in cap rate of this deal is 8.3%, which should allow for a highly compelling spread versus VICI’s cost of capital.
Via these acquisitions and organic business improvements, VICI Properties has managed to generate highly attractive growth in the past. During the most recent quarter, VICI’s revenue rose by a massive 100% year over year, to a little more than $750 million. Even with future acquisitions and just-closed acquisitions such as the Blackstone deal, VICI will not grow at a similar rate in the future – that’s a mathematical impossibility. Investors should also note that the per-share growth rate is not as massive as the overall company-wide growth rate. Still, I believe acquisitions will drive above-average growth in the future compared to the wider REIT universe. And despite some dilution, growth is also seen on a per-share level:
While the per-share growth rate was well below the company-wide funds from operations growth rate of more than 80%, the 8.5% AFFO per share increase is still attractive. Most REITs are growing at a slower pace, and considering REITs are primarily seen as income vehicles, even a mid-single-digit AFFO per share growth rate would be solid.
Growth in 2023 will likely be stronger on a per-share basis, due to the accretive impact of the Blackstone deal and due to the fact that VICI is capturing synergies on other recent deals as those are “stomached”. Analysts believe that VICI Properties will see its adjusted funds from operations grow to $2.37 this year, which would be a sizeable improvement versus 2022. It is not guaranteed that VICI will meet or beat the analyst consensus, but its historic track record should ease investor concerns – VICI has an “Earnings Revisions” grade of A+, making it likely that these estimates will rise over time instead of being revised downwards.
If VICI were to earn $2.40 per share this year, that would translate into a quite attractive valuation. With shares being valued at $33 right now, that would make for an FFO multiple of less than 14, which translates into an FFO yield of more than 7%. For a strong performer like VICI, that would be quite attractive, I believe. Even if VICI underperforms expectations and earns just $2.30 this year, that would still not translate into a high valuation, as shares would be valued at 14.3x forward FFO in that scenario. Even if that happens, one could argue that VICI is undervalued – I believe that a case could be made for a fair value FFO multiple in the high teens range. That does not mean that VICI will see its share price rise immediately, but for long-term-oriented investors, the current valuation could be intriguing.
VICI Properties is a high-quality REIT with unique assets. Its growth focus is pronounced, but investors benefit from that as management makes sure that deals are accretive on a per-share basis. The recent Blackstone deal looks like a nice driver for 2023’s FFO, and following a share price pullback versus last year’s highs, VICI is now trading at a rather inexpensive valuation.
Add a dividend yield of 4.7% that is well-covered, and VICI has potential as both a dividend growth investment and as a total return pick at current prices.