Vici Properties (VICI 4.11%) and EPR Properties (EPR 5.65%) have one major similarity: These real estate investment trusts (REITs) own experiential assets. They also have lofty yields, with Vici offering 5.8% and EPR paying an even more alluring 8.4%.
Before you jump into a position in either of these REITs, however, you'll want to get to know them a little better.
Vici is heavily focused on casinos
Although Vici management highlights that it owns 39 non-gaming properties to balance its 54 casino assets, the REIT only generates around 2% or so of its rents from non-gaming properties. That makes sense, given that modern casinos are massive assets that encompass gambling, hotels, retail, and entertainment all in one property. The company's non-gaming assets are largely bowling alleys leased to Bowlero. Bowling alleys are relatively small properties.
Image source: Getty Images.
Add to the casino concentration concern the fact that two Vici tenants, Caesars Entertainment and MGM Resorts, account for nearly 75% of the rent roll, and it becomes even more obvious that concentration is a big issue to consider with this stock. The REIT is working on this issue and has a pipeline of non-casino assets that it may end up buying, effectively giving it more levers to pull as it seeks to grow its portfolio. Still, casinos are the name of the game here.
EPR Properties is more diversified
By comparison, EPR Properties is drastically more diversified within the experiential space. It owns movie theaters, amusement parks, ski resorts, fitness and wellness properties, and experiential hotels (such as hotel/water park combinations). It also has a tiny bit of exposure to gambling -- those properties account for around 2% of rents. That said, its largest exposure is movie theaters at 37% of rents, a percentage that has fallen dramatically over the last few years. This is on purpose, as the REIT is working to become more diversified.
NYSE: EPR
Key Data Points
Bringing people together at a bad time
Given Vici's lack of portfolio diversification, you might think that EPR is the better option. But EPR had to cut its dividend during the pandemic. The big culprit was its movie theater exposure, as movie chains weren't in a particularly strong state entering the global health crisis. Given that financial weakness, EPR had to cut deals with movie theater operators to help them survive the shut-down and social-distancing periods.
Vici, by contrast, continued to increase its dividend annually through the pandemic, largely because its casino tenants were financially strong enough to muddle through that difficult time.
In the first quarter, Vici's adjusted funds-from-operations (FFO) payout ratio was around 74%. EPR's adjusted FFO payout ratio was roughly 76%. So they are both in roughly the same position right now on this metric.
NYSE: VICI
Key Data Points
That said, Vici's business remains just as strong as ever, while EPR is still trying to work back from a difficult period. But it is doing so, with rent coverage from its theater tenants back to pre-pandemic levels. Its other groups of tenants, meanwhile, have rent coverage levels that are well above their pre-pandemic rates. All in all, EPR is stronger today than it was before pandemic conditions forced it to cut its dividend. That suggests that the current yield is perhaps an opportunity for investors with a contrarian bent.
Neither REIT is a risk-free investment
Given the history here, investors looking to play it safe will probably prefer Vici as it's building on a strong foundation of casino assets. However, the risk/reward balance seems attractive at EPR as it muddles through movie industry difficulties while also diversifying away from that troubled niche. Only those willing to take on a more aggressive investment will be interested in that story. But given the improving trends in EPR's business and the stock's high yield, the story seems increasingly compelling.
