One of the younger, more appealing real estate investment trusts (REITs) on the scene hasn’t necessarily appealed to investors lately. Vici Properties (VICI 0.24%), which specializes in experiential properties — primarily casinos — is down nearly 12% in price over the past six months. That looks particularly weak next to the S&P 500 index’s sub-2% rise during the same period.
I think investors are being overly cautious here because they fear an uptick in inflation could dampen Vici’s fundamentals. I believe the stock is a definite buy, and here’s why.
Let them entertain you
Firstly, Vici has an unbeatable mix of top entertainment facilities in its portfolio. It’s well represented on the Las Vegas Strip, as it owns and leases Caesars Palace operated by Caesars Entertainment, MGM Grand operated by MGM Resorts International, and the Apollo Global Management-run Venetian Resort.
In the casino business, it’s hard to top that lineup of assets alone. Vici complements this advantage with a diverse clutch of other entertainment properties, including a 38-property chain of bowling alleys operated by Lucky Strike Entertainment.
Thanks to a long-tail, growing economy, many Americans have enough spare cash in their pockets to spend on entertainment. Those casinos are humming, and the bowling alleys ring with the sounds of strikes and spares. Compounding that helpful trend, Vici operates its properties under long-term, triple-net leases in which the tenant is obligated to pay key property-related expenses in addition to rent.
All this makes for an operator that’s steadily growing its fundamentals. In its most recently reported quarter, Vici’s revenue rose by almost 7% year over year to hit nearly $965 million. Over the same stretch, adjusted funds from operations (AFFO, considered the most crucial profitability metric for REITs) saw a greater improvement, rising by over 8% to a shade under $594 million.
If a REIT is growing its profitability, you can be sure it is spitting out more in dividend payments (after all, they are required to dispense at least 90% of their taxable income to maintain their REIT status). Since landing on the stock market in early 2018, Vici has declared quarterly dividend raises at least once every year. Over that span, its payout has increased sharply, from $0.16 per share to the current level of just over $0.43.
That shakes out to a dividend yield of almost 6%, far higher than the typical payout of a blue chip stock. Other REITs boast higher rates, but none have a stronger and more focused portfolio in the entertainment niche.
Profiting from fun
I feel Vici’s stock is a victim of investor fears about the economy, both gazing backward and peering forward. When inflation growth was higher than it’s been lately, many worried about its effects on discretionary spending. As for the looming future, we are currently on the brink of a new presidential administration that might reignite inflationary growth if it follows through with promised tariffs on foreign goods.
Yet, popular entertainment venues are resistant to such headwinds. Particularly in times of trouble, people want to escape from such problems and will readily consume entertainment if they have the means to do so. Anyone can walk into a Las Vegas casino and — assuming they have the discipline and are relatively clear-headed — stick to a budget while enjoying several rounds of games.
Vici is a first-in-class owner of such facilities, and it’s proven it knows how to grow its take from them. This is an underappreciated stock, and I think, in time, more investors will discover its value. That’s why I believe it’s a buy now.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Vici Properties. The Motley Fool has a disclosure policy.
