Vici Properties (VICI +0.18%) is not a stock for the faint of heart, given that it is highly focused on leasing properties to just one type of business. But the business on which this real estate investment trust (REIT) is focused is a good one. Here's why dividend growth investors will want to take a look at Vici Properties and its lofty 5.7% yield, backed by a steadily growing dividend, right now.
What does Vici Properties do?
Vici Properties is, at its core, a net lease REIT. That means it owns physical properties that it leases out to single tenants and those tenants are responsible for most property-level costs. This type of business approach is not at all unique in the REIT sector. What is unique about Vici is that it is focused almost entirely on casino properties. These are giant assets that are very different from most other property types, as they generally include gambling facilities, hotels, convention space, restaurants, and retail all in the same structure.
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Do not read that last sentence and think that Vici is diversified. Yes, the casino properties it owns house a large number of different businesses. But it is the casino that brings in the customers that use the other facilities. Without that casino the hotels, restaurants, and retail businesses would likely go out of business very quickly. The REIT generates something close to 98% of its rent revenue from casino properties.
Although gambling has been resilient over time, the business tends to be economically sensitive. As such, recessions can be a very tense time for casino operators and, tangentially, their landlords. However, there is a big difference between the casino operators to which Vici Properties leases assets and Vici Properties. Even when times are tough the rent still has to be paid. On that score, the recession and non-essential business closures that occurred during the early days of the coronavirus pandemic didn't stop Vici Properties from continuing to increase its dividend on an annual basis.
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If you like casinos, Vici Properties is an interesting angle
For more conservative investors (who probably don't understand the draw of gambling), buying directly into the casino industry might not make a lot of sense. The risk of a business slowdown during recessions would just be too big to bother with. However, Vici Properties isn't exactly a direct investment in the space. It is tangential and, most importantly, its business owns the most critical asset of all -- the house. As they say, the house always wins. The dividend hikes during the worst parts of the COVID-19 pandemic have shown that to be true.
But don't think the good news stops there. Part of the reason why Vici Properties has been able to keep raising its dividend every year since it became a public company in 2018 is that it has built-in rent hikes in its leases. Simply put, every year it generates a little more cash and that lets it pass a little more income on to shareholders via a growing dividend. How long can this go on? The REIT's average remaining lease term is a gigantic 41 years. A decade is normally considered a good average remaining lease term for a net lease REIT, so Vici's remaining lease term is exceptional. And it provides a long runway for continued steady dividend growth.
NYSE: VICI
Key Data Points
To be fair, there's probably not a huge amount of growth potential within the Casino sector. Vici Properties already owns a rather impressive collection of assets, including some of the most iconic properties on the Las Vegas strip. However, modest acquisition activity and capital investment plans at existing properties should help to boost growth over time, along with the company's effort to push outside of the gambling sector. Right now that largely involves bowling alleys and a large gym complex in Manhattan (together less than 2% of rents). But it is making loans to non-casino businesses that could, eventually, lead to more differentiated property purchases.
All in, Vici Properties has an attractive dividend yield right now and solid prospects for continued dividend growth over time. For investors who don't mind a concentrated investment, this REIT is probably worth a deep dive today while Wall Street appears to be downbeat on the stock. Vici Properties stock trades down about 12.4% from its 52-week high and 16% from its mid-2022 highs.
Vici Properties could be an exciting investment
To be clear, conservative dividend investors probably won't find Vici Properties attractive. Being so reliant on just one type of tenant (noting that two of the company's tenants, both of which are industry-leading operators, account for a massive 74% of its rents) will probably keep some investors up at night. However, if you can handle a little risk, Vici Properties' solid dividend growth through the COVID-19 pandemic, long lease terms, built-in rent escalators, and lofty 5.7% dividend yield (the average REIT yields just 3.8% while stocks in the S&P 500 offer a paltry 1.2% average yield) should make this a very attractive stock if you are looking for a long-term dividend growth opportunity today.
