When you think of the companies that performed well during the COVID-19 pandemic, you're probably thinking of technology and stay-at-home stocks like Zoom Video Communications or Peloton Interactive. Resort and gaming properties probably wouldn't top your list -- images of empty casinos and the deserted sidewalks of the Las Vegas Strip probably come to mind.
So you may be surprised to hear that gaming and resort real estate investment trust VICI Properties (NYSE:VICI) not only survived during 2020, it continued to generate attractive growth. Now it's positioned itself through strategic acquisitions to keep its growth engine moving forward. With an attractive dividend and reasonable valuation, VICI could be a worthy addition to your portfolio.
Performance during the pandemic
Many real estate investment trusts (REITs) struggled to collect from tenants in 2020. This was not the case for VICI, which collected 100% of its rents, on time and in cash. And this was at a 100% occupancy rate.
Unlike some REITs, which may have thousands of properties to rent across many small and medium-sized tenants, VICI only owns 17 large properties. These properties are rented by large, best-in-class tenants, including Caesars Entertainment, Penn National Gaming, and Century Casinos. While the tenants obviously had a challenging year, their financial strength enabled them to continue to pay their rent.
For the full year, VICI's revenue increased by 37%, resulting in 28.7% growth in adjusted funds from operations (AFFO, what REITs typically use for earnings). Investors were handsomely rewarded with a 10.9% increase in the dividend to $0.33 per share. At recent prices, that's an attractive dividend yield of 4.3%.
VICI's business model has staying power
VICI's leases are all triple-net. That means the tenants are responsible for expenses on top of the rent, including taxes, insurance, and maintenance. If there's a crack in the parking garage, the tenant pays to fix it. These leases are all long-term, often spanning decades, and have built-in annual rent increases that protect VICI from inflation.
But the most attractive thing about VICI's business model is its wide moat. VICI owns trophy properties in the best locations. These include premier properties on the Las Vegas Strip, such as Caesars Palace and Harrah's. These properties cannot be replicated, as there is no more land available on the Strip.
The tenants that operate these trophy properties are in a strong position, as there is only so much competition available. A new casino opening up three miles outside of town, for example, has little effect on the trophy casinos.
Lastly, live gaming cannot easily be threatened by online disruptors. Sure, online gaming exists, but the experience of gaming live, and all of the associated activities (shows, restaurants, etc.), cannot be replicated online.
If you've attended one of those painful "virtual happy hours" this past year, you know how that's a poor substitute for the real thing. Humans are social creatures and want to experience these activities in the real world (more on that in a bit). That means that there will always be demand for live entertainment businesses like those of VICI's tenants.
VICI isn't standing still
VICI's growth has continued into 2021, with a 46.8% increase in first-quarter revenue year over year. Most important was the announcement of the $4 billion acquisition of the Venetian Resort Las Vegas and the Sands Expo and Convention Center.
It's hard to understate the importance of the Venetian acquisition. The Venetian is the largest single hotel complex in the U.S., and the Sands Expo and Convention Center is the country's largest privately owned meeting and event space. Upon closing, the property will generate $250 million in incremental annual rent without any direct increases in operating expenses. The tenant, Apollo Global Management (NYSE:APO), has signed a 30-year lease that escalates every year with inflation. And VICI is developing a continual pipeline of new projects around the world in addition to the Venetian.
What are the risks?
The biggest risk to VICI this year is a resurgence of COVID-19 around the world, resulting in a postponement of travel-related activities. However, that risk is much less today than it was even a few months ago.
Roughly 60% of all adults in the U.S. have received at least one COVID vaccine dose. Much of the world is behind this rate, but many places are catching up. As pent-up demand to travel begins, VICI's gaming and resort properties should be major beneficiaries. According to the Las Vegas Review Journal, weekend hotel occupancy rates are already topping 95%, with midweek occupancy over 50%. Caesars Entertainment reported that its weekend hotel occupancy in Las Vegas is already booked "for the foreseeable future."
The first big test for business conventions will be the World of Concrete conference, set to run June 7-10. Assuming that event runs smoothly, that could be a catalyst for continued confidence in traveling to business conferences. The favorable vaccination data and declining COVID case rates suggest that 2021 could be a monster year for gaming and leisure travel, and particularly for Las Vegas.
The bottom line
VICI Properties is a well run triple-net REIT with trophy properties, growing revenue, and plans for continued expansion. It thrived during the pandemic and even raised its dividend.
Like many REITs, VICI was hit with a massive drawdown in Q1 2020, declining 60% from peak to trough. However, the stock price has since fully recovered. Despite that rebound, shares still trade at a reasonable valuation, at roughly 16.5 times projected 2021 AFFO.
As the world begins to recover from COVID-19, travel and event-related investments may be looked on more favorably by investors. In the meantime, shareholders can enjoy a growing dividend.