Looking at my dividend growth portfolio, I lack some exposure to the real estate sector. I own shares in several real estate companies spanning over several sub-categories including offices, retail, and skilled nursing facilities, and I am willing to add more REITs to my portfolio.
Since Park Hotels (NYSE:PK) have eliminated its dividend in 2020, I had no exposure to this subsector. While Park Hotels and other peers have not reinstated their dividends yet, VICI Properties (VICI) is one REIT that has been paying dividends and increasing them over the past several years.
I will analyze the company using the graph below, which represents my methodology for analyzing dividend growth stocks. I am using the same methodology to make it easier for me to compare analyzed stocks. I will look into the company’s fundamentals, valuation, growth opportunities, and risks. I will then try to determine if it’s a good investment.
Revenues have increased by over 300% even when taking into account the increase in the number of shares. REITs tend to issue shares, so metrics should be compared on a per-share basis. The company is growing mainly through acquisitions of new properties, and also by increasing gradually the rent in its current properties. The company is finalizing two major acquisitions from MGM and Las Vegas Sands, and these acquisitions will increase rent revenues by more than $1B.
The FFO is the funds from operations that represent cash flow from their operations and the preferred measurement of operating performance. VICI has enjoyed significant growth in FFO per share since it was established as a REIT. The company’s future growth rate will be fueled by future acquisitions and will be diluted by the share issuance needed to fund the acquisitions. According to the consensus of analysts, as seen on Seeking Alpha, investors should expect mid-single digits growth in FFO per share.
The dividend is an important metric for every REIT. The company has been paying and increasing since the end of 2018, and in October it offered a 9% increase, which was the third increase since the company went public. The company is relatively new, and so is its track record. The management is committed to an increasing dividend, and investors should feel safe with the payout being 70-80% of the AFFO. The initial yield of almost 5% is attractive by itself.
The number of shares outstanding has been climbing extremely fast, and shareholders are diluted. However, dividend growth investors who invest in REITs should know that this is not a bug, it’s a feature. REITs fund their growth using debt and equity, unlike most dividend growth stocks, which rely mostly on debt and internal cash flows. When you see the increase in shares, take into account that it is fine as long as the revenue per share and FFO per share are growing.
The company’s Price to AFFO ratio is the prominent measurement for the valuation of REITs. The company’s current P/AFFO is 14.6 when taking into account the estimates for 2022. The current valuation is cheaper than the rest of the real estate sector. It can be justified as investors are still worried regarding the prospect of hotel REITs during the pandemic.
The graph below is from Fastgraphs.com and it shows exactly that. The company is trading right now below its average valuation, which is of course a good sign for investors. The company’s expected growth rate together with the current price to AFFO ratio makes VICI a fairly valued company.
To conclude, VICI is showing strong fundamentals. The company enjoys strong revenue growth through acquisitions of new properties, and it translates it into growing FFO, which fuels the dividends. This fantastic package comes at a fair valuation with the current P/AFFO being below the company’s average.
VICI is going to be the most dominant landlord in the Las Vegas strip. The company once all deals are finalized will one 660 acres on the strip. It will give VICI a very dominant position with very little competition within this American landmark. In addition, the focus on American properties is also an advantage over ownership in Macau as tensions between the United States and China may always be risky for businesses and VICI avoids it.
Another growth opportunity is the ability of VICI to be resilient to most disruptions when it comes to traveling. One of the risks for the hotels business is new disruptive tech companies such as Airbnb (NASDAQ:ABNB). VICI is investing in premium assets, with premium services such as top-notch casinos and restaurants. The clients that come for the entire experience are not the same ones who look for a budget stay in an Airbnb.
Diversification is another opportunity. One of the reasons why I stayed on the fence when it came to VICI was the fact that almost all of its revenue came from one single tenant. The acquisition of the Venetian is diversifying VICI, and the acquisition of MGM will push Caesars below the 50% mark. The company is still concentrated around two tenants, but it is a much healthier position.
Deal closures are still pending. All the assumptions regarding VICI take into account a successful acquisition and assimilation, and that the assets will perform as expected. These are massive purchases that will account for roughly half of the revenues. The company will have to focus on assimilating these more assets and looking for acquiring even more.
Debt load is another risk, and it is a prominent one for REITs. REITs carry a relatively higher debt load compared to other dividend growth companies, and they require constant access to the debt markets. Moreover, the current inflationary environment implies that we are going to see rate hikes over the next several years which will increase interest expenses.
The third is Covid. The pandemic is not over yet. The current Omicron wave is highly contagious even if not as lethal as previous waves. However, as long as the pandemic is still present, there is a higher level of uncertainty when we look at hotels, and especially Hotel and gaming REITs whose tenants are hotels and casinos, and care a high debt load and high dividend payout.
VICI is a good company with a short track record. The company has stable fundamentals and what I believe to be a decent valuation. In addition, the company has several growths prospects and despite being young, it has built a leading position in one of the main leisure markets in America. The company will keep leveraging its size to grow in Las Vegas and its experience in Las Vegas to grow beyond.
The company does have some risks. Some are short-term such as Covid while others are more of long-term risks such as debt management in an environment of increasing interest rates. All-in-all I believe that the risks are well priced in VICI and with the acquisitions completed, it will be a stable dividend payer yielding 5%, and a solid option for dividend growth investors.