VICI Properties (VICI -0.92%) offers investors a generous 4.2% dividend yield at a time when an S&P 500 Index fund will only get you 1.5%. The real estate investment trust (REIT) is relatively young, however, 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.

Playing games from the start

VICI Properties was created in late 2017 after being spun off from Caesars Entertainment. The move was really a way for Caesars to raise capital, as it effectively sold its properties to VICI. At the time, casino-focused REITs were rare. They still are, noting that VICI closed on its acquisition of peer MGM Growth Properties in late April. The only other large competitor at this point is Gaming & Leisure Properties.

There are a couple of problems with the casino niche. First off, there are only just so many desirable gaming properties to buy. That's not to suggest that the investment opportunity has been exhausted, but there's not a huge runway for growth if these REITs want to focus on owning the top casinos. Second, the most attractive casinos are massive assets that usually encompass the casino itself, hotels, eateries, shopping, and entertainment space. All of which take a hit when casino demand falls during difficult periods, such as recessions.

That's not to suggest that casinos aren't desirable assets. Just that a little more diversification wouldn't hurt the company's growth prospects.

Where to from here?

At this point, VICI owns 43 properties with eight tenants spread across the United States. It has notable exposure to destination-based Las Vegas assets (45% of rents) and smaller regional gaming areas. Its average remaining lease term is a huge 43 years, with 96% of its leases including regular rent hikes. Those are pretty 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 asset they occupy.

So casinos are a solid foundation, but where does growth come from? The answer is either more casinos or diversification outside the casino space. The latter provides far more opportunity, even assuming that VICI continues to focus on experiential assets. For example, it has a relationship with Great Wolf Lodge, a company that operates water park resorts. 

This investment is currently in the form of two loans, one of which was agreed to in July. But VICI also recently inked a loan deal with Cabot, a company that builds golf resorts. This particular agreement has a sale/leaseback component to it, allowing VICI to expand its property portfolio into what it describes as the "pilgrimage experience sector." 

The most important thing here, however, is that it gives the casino landlord a chance to try its hand with a different property type. And thus, add valuable diversification to its portfolio over time via a new growth platform. There's no telling where these non-casino investments will eventually lead the REIT since success here could entice it into buying everything from movie theaters to amusement parks.

Bigger, better, more opportunity

If you have been looking at VICI and have pulled back because of the highly concentrated casino portfolio, it might be time to start watching this REIT again. As it looks to thoughtfully expand beyond gaming, it appears that it will slowly become more and more enticing to conservative income investors. There's no reason yet to jump aboard right away since gaming will remain a huge business for years to come, but it is definitely a name worth putting on your watch list as it starts taking the steps necessary to become a far broader business.