Vici Properties (VICI 1.57%) is offering investors an attractive 5.8% dividend yield. That's well above the broader market, with the S&P 500 yielding just 1.3%, and the average real estate investment trust (REIT) paying out 4.3%. Before you jump aboard this high-yield REIT, however, there are some things you need to understand. One big one is that Vici has been slowly trying to improve its portfolio in a very important way.
What does Vici Properties do?
As a real estate investment trust, Vici Properties owns physical assets that it rents out to others. It uses the net-lease model, so its tenants are responsible for most property-level operating costs. However, the REIT has a specific focus: It looks to own experiential properties. In other words, places where people come together in groups to have fun.
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Vici started out in the niche asset of casinos. It currently owns around 54 gaming properties. These are a mix of regional casinos and destination casinos in Las Vegas. The properties are gigantic, containing gambling, hotels, retail, food, and entertainment within them. Although that hints at diversification, without the gambling, none of the other businesses in the casino would have much value. So gambling is the big story.
Also, the REIT has two tenants that make up the vast majority of its rent roll. Caesars Entertainment (CZR 1.27%) accounts for 39% of rent and MGM Resorts (MGM -1.25%) is 35%. Together, these two gaming giants occupy 31 properties. So not only is there a very heavy exposure to casinos, that exposure is highly concentrated as well. To be fair, there are only a small number of large casino operators, so that's kind of to be expected. But investors shouldn't ignore the issue.
Vici is slowly improving its portfolio diversification
All of that said, Vici is aware of the concentration issue. While casinos will likely always be a major factor in the company's portfolio, it has started to branch out to other areas. For example, it owns the Chelsea Piers fitness and entertainment complex in New York City. And it has been working with Bowlero, which operates bowling alleys. It has also made loans to a number of other experiential property operators, which Vici hopes may someday lead to property acquisitions. The list includes Great Wolf Lodge, which runs indoor water parks, and a number of resort operators, including Margaritaville.
At this point, Vici owns 39 non-gambling properties and 54 gambling properties. On the surface, that sounds like there's a lot of diversification, but given the size of casinos, there actually isn't. A bowling alley just doesn't compare in size to a Las Vegas casino. So all told, non-casino rents make up just a tiny portion of the REIT's rent roll (less than 2%). That's better than zero, which was the case not too long ago, but this is still a highly concentrated REIT.
However, for those that think long-term, Vici is building the foundation for more diversification. It has already started that process with the Chelsea Piers purchase and the Bowlero assets. But that's really just the beginning of what is likely to be a very lengthy diversification effort. And there's a valuable pipeline of non-casino expansion opportunities in the loans it has made to other experiential asset operators. So Vici is getting better on the diversification front, and it looks like there is more to come.
The real draw here, however, is that by diversifying the asset types the REIT is buying management is increasing the levers it can pull to support growth. Casinos are highly regulated and there are only so many available for purchase. Looking to other types of experiential materially increases the runway for growth.
Is Vici right for you?
If you are a conservative dividend investor, Vici's concentration in the casino space may put you off. That's completely reasonable, especially given the economic sensitivity of casinos. However, if you are willing to stomach a little uncertainty, Vici is working toward a future in which its casino revenue allows it to branch out into new areas, improving its diversification over time. That could be well worth the risk given the attractive yield. Plus, it has increased its dividend every year since the company started paying one, including right through the coronavirus pandemic.
