VICI property (VICI 1.26%) offers investors a generous 4.2% dividend yield at a time when a S&P 500 The index fund will only give you 1.5%. However, the real estate investment fund (REIT) is relatively young and still has a highly focused portfolio. But management is already taking steps to change the diversification issue as it seeks to broaden its investor appeal.
Play from the start
VICI Properties was created in late 2017 after being spun off Caesar entertainment. The move was indeed a way for Caesars to raise capital, as he actually sold his properties to VICI. At the time, casino-focused REITs were rare. I still am, noting that VICI has closed the peer takeover MGM Growth Properties at the end of April. The only other big contender at this point is Property for games and leisure.
There are a couple of problems with the casino niche. First of all, there are just so many desirable gaming properties to purchase. This is not to say that the investment opportunity has been exhausted, but there is not a huge growth track if these REITs are to focus on owning the best casinos. Second, the most attractive casinos are huge assets that usually include the casino itself, hotels, restaurants, shops, and entertainment spaces. This all takes a hit when casino demand drops during tough times, like recessions.
This is not to say that casinos are not desirable assets. Except that a little more diversification wouldn’t hurt the company’s growth prospects.
Where do we go from here?
At this point, VICI owns 43 properties with eight tenants spread across the United States. It has significant exposure to destination-based Las Vegas businesses (45% of rents) and smaller regional gaming areas. Its average remaining lease term is a whopping 43 years, with 96% of its leases including regular rent increases. These are quite impressive numbers compared to other REITs that use the net lease structure. With a net lease, the tenant is responsible for most of the operating costs of the property he occupies.
So casinos are a solid foundation, but where does the growth come from? The answer is either more casinos or diversification outside the casino space. The latter offers many more opportunities, even assuming VICI continues to focus on experiential assets. For example, he has a relationship with Great Wolf Lodge, a company that manages water park resorts.
This investment is currently in the form of two loans, one of which was agreed in July. But VICI also recently signed a loan deal with Cabot, a company that builds golf courses. This particular deal has a sell / lease component, allowing VICI to expand its portfolio of properties into what it describes as the “pilgrimage experience sector”.
The most important thing here, however, is that it offers the casino owner a chance to try their hand at a different type of property. And then, over time, add valuable diversification to its portfolio through a new growth platform. It is unknown where these non-casino related investments will ultimately lead the REIT as success here may entice it to purchase everything from cinemas to amusement parks.
Bigger, better, more opportunities
If you’ve been watching VICI and retired due to the highly concentrated casino portfolio, it may be time to start looking at this REIT again. As it seeks to carefully expand beyond the game, it appears that it will slowly become more and more appealing to conservative income investors. There is still no reason to jump on board right now as games will remain a huge business for years to come, but it is definitely a name worth putting on your checklist as it begins to take the necessary steps to become. a much wider activity.
Reuben Gregg Brewer has no position in any of the aforementioned stocks. The Motley Fool recommends Gaming and Leisure Properties and VICI Properties Inc. The Motley Fool has a disclosure policy.