VICI Properties (VICI 0.42%) has been an outlier. It was the only real estate investment trust (REIT) in the S&P 500 index to deliver positive returns last year. Its stock price has risen more than 10% since the bear market began in early 2022. That's an impressive performance considering that the S&P 500 is down 18%, and REITs listed in that index have fallen 28%.
That outperformance likely makes investors wonder if shares are still worth buying. Here's a look at whether that's the case.
What's driving VICI Properties' outperformance?
VICI Properties is coming off a transformational year. The company completed two needle-moving deals. It closed its $17.2 billion merger with fellow gaming REIT MGM Growth Properties. VICI Properties also purchased the Venetian Resort Las Vegas for $4 billion. Those deals made it "the leading real estate owner on America's most dynamic commercial street, The Las Vegas Strip," according to comments by CEO Edward Pitoniak in the fourth-quarter earnings release. In addition, the company secured another $4.5 billion of investments across various gaming and nongaming properties to diversify its portfolio.
All this wheeling and dealing has significantly bolstered the company's financial results. Total revenues skyrocketed 72.3% to $2.6 billion, and adjusted funds from operations (FFO) soared 61.7% year over year to $1.7 billion. While adjusted FFO only increased by 6.1% on a per-share basis to $1.93, that's due to a significant increase in outstanding shares following the merger. Given the timing of those transactions, it has yet to experience the full impact of its accretive deals.
More of that benefit will flow to the bottom line this year. The REIT sees its adjusted FFO rising to $2.10-$2.13 per share. That's a nearly 10% increase from last year at the midpoint, even though it expects outstanding shares to continue rising as it funds additional investment opportunities.
To buy or not to buy?
Even after outperforming over the past year, shares of VICI Properties trade at a relatively attractive valuation compared to its peers'. The REIT sells for about 16 times its 2023 FFO estimate and a 4.6% dividend yield. For comparison, fellow gaming REIT Gaming & Leisure Properties (GLPI -0.05%) sells at about 14.5 times its 2023 FFO forecast and a 5.3% yield. Meanwhile, VICI Properties trades fairly in line with other large net lease REITs. For example, Realty Income (O 0.24%) trades at 16.6 times forward FFO and a 4.8% dividend yield, while W. P. Carey (WPC -0.85%) sells for 16.2 times forward FFO and a 5.2% dividend yield. While VICI Properties might not be a screaming bargain, it isn't expensive, either.
That makes it look like a solid investment opportunity, especially given its long-term growth potential. While the company is already the largest experiential net lease REIT by a wide margin and has a leading position on the Las Vegas Strip, it has six pillars to drive growth in the future:
Image source: VICI Properties Investor Relations Presentation.
As that slide showcases, the REIT has many avenues to continue growing its gaming portfolio. In addition, VICI Properties has expanded into several nongaming sectors, giving it additional platforms for future growth. For example, it's helping Canyon Run fund the development of new wellness resorts, Grey Wolf expand its family resorts, and Cabot develop destination golf experience properties. These partnerships should provide additional investment opportunities as those companies continue expanding.
On top of that, there's significant embedded growth within its gaming portfolio over the long term. Half of its leases currently have contractual annual rate increases tied to inflation. With inflation running high these days, the lease rates for that half of its portfolio will grow more rapidly. Meanwhile, that percentage will gradually grow to 96% by 2035, increasing its exposure to inflation-driven rent growth over the longer term.
The numbers still look good
VICI Properties might not be dirt cheap following its strong performance during the bear market. However, it trades at a reasonable valuation, especially considering its growth prospects. On top of that, it pays an attractive dividend, which the company should be able to continue growing at a healthy rate. These features make VICI Properties look like a low-risk bet with a high probability of paying off. It could continue producing double-digit total annualized returns in the coming years.
