VICI Price Target Updates and NAV Model

• VICI Properties is a net lease gambling REIT with a higher-than-average dividend yield and exceptional growth in AFFO per share.
• VICI's management has been more aggressive in acquisitions compared to Gaming and Leisure Properties, resulting in better performance on fundamentals.
• Elevated interest rates are a negative for valuation, but mostly offset by the surprisingly high growth in AFFO per share.
• VICI's direct exposure to interest rates from refinancing is pretty low. I estimate less than a 6% headwind to AFFO over 4 years.
• Since readers occasionally ask for more info about NAV models, I am showing our NAV model.

VICI Properties (VICI) is a net lease gambling REIT. It sounds similar to Gaming and Leisure Properties (GLPI).

However, there are at least 2 significant differences:

1. Readers actually ask for research on VICI.
2. VICI’s management has done a substantially better job.

If you just looked at the returns to shareholders over the last 5 years, you wouldn’t know there was a big difference. However, VICI was dramatically more aggressive in acquisitions. That was very important for fundamentals.

VICI Strategy

VICI primarily owns gambling properties. Tenants have long-term net leases. Escalators are typically in the 1.5% to 2.0% range. Some are tied to CPI, but the CPI adjustment is capped.

Some properties have some variable rent adjustments, which is not so common for net lease REITs. Those adjustments cause rent to be influenced by revenue for the tenant. That could be good or bad for the REIT depending on how tenants perform.

Huge Growth in AFFO

Compared to the equity REIT universe, VICI has a higher-than-average dividend yield at 5.9%.

REITs with such high dividend yields generally have much lower growth in AFFO per share.

VICI is an exception. From 2019 to 2024 (using consensus estimate for 2024), VICI’s AFFO per share had a CAGR (compound annual growth rate) of 8.74%.

That’s outstanding.

That’s a huge growth rate for any REIT, but it is particularly huge for a REIT paying out a bigger dividend. VICI has a 5.9% dividend yield.

VICI has the cash for that dividend because they buy properties with higher capitalization rates. However, those properties also grow NOI (net operating income) much slower. There’s a very strong correlation between high cap rates and slower growth.

Since tenants are signed to net leases, property operating margins are pretty close to 100%.

The contractual revenue growth was typically around 1.5% to 2.0%.

Therefore, you wouldn’t expect same-property NOI to grow much faster than that. It could grow slower if there are problems, but growing faster is extremely difficult.

Instead, we would expect to see a REIT like VICI attempt to boost AFFO per share growth rates by issuing shares and acquiring properties.

That’s exactly what VICI did:

This is an important tool for REITs to enhance the returns to shareholders.

It’s a simple process:

• Trade above NAV.
• Issue new shares.
• Acquire properties.

People who don’t understand REITs will scream that the REIT is diluting shareholders by issuing new shares.

However, VICI’s performance was driven by effective issuance of shares.

If VICI pledged to never issue another share, we would need to reduce targets significantly to reflect a lower growth rate.

For reference, I built the same chart for GLPI and Realty Income (O):

Realty Income was also quite active with acquisitions. Realty Income’s acquisitions simply didn’t provide as much accretion as the acquisitions for VICI.

I don’t think VICI can do that every year. However, it was an outstanding run. It reflects well on management.

While GLPI’s numbers look pretty weak compared to the others, I should remind investors that they materially reduced leverage. Because they were reducing leverage, AFFO per share was naturally going to grow slower.

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That One Transaction

VICI’s massive growth involved several acquisitions, but there was one particularly huge one.

A few years ago, VICI acquired MGM Growth Properties LLC. It was a huge acquisition. The total cost to VICI was $17.2 billion.

VICI’s total enterprise value today is about $47.9 billion. So that transaction was dramatic.

Great move. Beyond being accretive, the deal included 2% escalators for the first 10 years. After that the escalator would be the greater of 2% of CPI (subject to 3% cap).

That’s a bit better than I’ve seen on many of their other leases.

Interest Rate Exposure

Like most companies, especially landlords, interest rates create a headwind.

VICI’s exposure to refinancing is relatively small.

To test interest rate exposure, I’m marking all debts that expire through the end of 2028 to roughly where I think the company could refinance them today.

• My assumed interest rate: 6.26%
• 5-year Treasury today: 4.34% (spread 1.92%)
• 10-year Treasury today: 4.32% (spread 1.94%)

Further, I was able to pull up data on VICI’s bond maturing August 15th, 2030.

There are some costs to issuing a bond.

If VICI wanted to issue a new bond, the actual effective cost to the company would probably be about 0.1% to 0.2% above the yield to the customer.

That means 6.04% to 6.14%.

That’s slightly lower than the 6.26% rate I used.

The trailing AFFO per share (from 2023) was $2.15.

Marking all debts that expire by 2028 to 6.26% would increase interest expense by $127.5 million.

Based on shares and units outstanding presently, that would come to about $.12 per share.

That’s about 5.6% of the trailing AFFO value. That’s good for a REIT.

NAV Estimates

Consensus NAV estimates came in at $30.57 per share:

I’m going to concur with that consensus estimate for today.

I think the NAV per share estimate line is suspiciously smooth, but my math supports that estimate.

After the article on GLPI, I thought it would be nice to show investors the calculations.

Consequently, I enhanced the layout of the model to make it much easier to read.

I hope you enjoy it. This is for everyone who has asked for more NAV demonstrations.

After browsing through the historical transactions for VICI, I concluded that an appropriate cap rate would probably be somewhere around 7.5%.

I plugged that in as I was preparing the article and noticed that my NAV estimate is very similar to the consensus estimate.

Meanwhile, the market implied cap rate is slightly under 8%.

Issuing Shares

I like to know where an equity REIT decides to issue equity. That can be another useful indicator.

VICI was extremely active in 2021 around $29.00 to $29.57.

In 2023 through 2024, VICI issued shares ranging from about $29.57 to $33.00.

Note: These are gross proceeds. The cash to the REIT is slightly lower because the banks get a cut for… for… being banks. It’s always been a bit of an annoyance for me since I don’t see the middleman providing much value.

I found over $7 billion in issuances within that range.

Stock-Based Compensation

The growth rate for AFFO per share was strong enough to be suspicious. I went to check if the value was being inflated by stock-based compensation. It was not. Stock-based compensation (which artificially inflates AFFO) was 0.81% of AFFO in 2019. It was 0.71% of AFFO in 2023. Therefore, the REIT was not sneaking overhead into stock-based compensation to fake AFFO per share growth. Total stock-based compensation went up, but it’s more useful to look at it relative to other values like AFFO.

Target Adjustments

The increase in interest rates is driving a negative adjustment.

The negative adjustment would be in the low to mid-teens.

However, VICI delivered surprisingly robust growth in AFFO per share.

The growth in AFFO per share offsets most of the reduction for higher interest rates. (Correction: said lower interest rates)

Consequently, we ended up at a negative 3.1% adjustment.

Given the interest rate headwinds, that’s quite a small adjustment.

Overall, I would say this is a very positive update. Given the pressure from interest rates, target updates will generally be negative. But in this case, the adjustment is small because VICI delivered such strong growth.

No change to VICI’s risk rating. It remains at 3.0. That’s a pretty typical risk rating for an equity REIT with a BBB- credit rating.

VICI is slightly inside our target range. Given some of the other bargains, I would like to see an even bigger discount before opening a position. However, it does warrant a place on our radar due to the combination of dividends and potential growth.

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