Vici Properties (VICI 0.83%) is one of the largest casino real estate investment trusts (REITs) in the world. This company provides investors with an excellent way to capitalize on the surging gaming market in Las Vegas and hedge against inflation. Even during the Las Vegas Strip shutdown, the house (that would be Vici) was paid and so were its shareholders. This is set to continue as we head to 2022.
During the early days of the pandemic, in the spring of 2020, the Las Vegas Strip was closed. It was an eerie sight to see building after building locked up and empty. The only people on the four-mile-long Strip were police officers and a few dog walkers taking advantage of the space. The casinos lost billions of dollars in revenue. For example, Caesars Entertainment's revenue fell from $587 million in the fourth quarter of 2019 to only $127 million in the second quarter of 2020. Likewise, revenue at Las Vegas Sands fell from $3.5 billion to only $62 million. Still, the rent was paid. Vici's total revenue held steady throughout the pandemic. Gambling stocks are inherently sensitive to economic downturns; however, the owner of the house won even during the worst disaster Las Vegas has ever seen.
Shown below is the percentage change in revenues for Vici, Caesars, and Las Vegas Sands in the first half of 2020, when the lockdown went into effect.
The Las Vegas Strip is back in business, and business is good
To be sure, a prolonged downturn that caused gaming companies to vacate their buildings would do a lot of harm to landlords. This was the case during the 2007-09 financial crisis and the aftermath, which lasted for several years. All indications are, however, that Las Vegas is back and performing even better than it was in 2019. For example, monthly Nevada gaming win -- a key barometer of industry health -- exceeded $1 billion for seven straight months through September, as shown below, topping pre-pandemic levels. Gaming win is the total net take of the state's casinos from gaming activities before deducting other expenses.
When the house gets paid, so do you
A REIT is structured with certain tax advantages over a typical corporation. To keep this tax status, it must return more than 90% of taxable income to shareholders each year in the form of dividends. While one in five companies were cutting their dividends in 2020, Vici raised its dividend 11%. In fact, Vici has raised its dividend every year since its inception in 2017. In 2021, the company raised its payout again, boosting it by almost 10% from $0.33 a quarter to $0.36. The stock now yields more than 5%. The dividend, having just been raised, is incredibly safe and the payout ratio is just 69.5% of the REIT's adjusted funds from operations (AFFO).
Vici agreed to acquire MGM Growth Properties earlier this year, further expanding its portfolio of casino-resort properties. MGM will bring seven premier Las Vegas locations with it, including the MGM Grand, New York-New York, and Mandalay Bay. This acquisition is expected to be immediately accretive to AFFO per share. The deal is forecast to close in the first six months of 2022.
A "triple net" inflation hedge
It seems that everyone these days is concerned about inflation, and for good reason. Inflation has risen from 2.3% in 2019 to more than 6% in 2021. Investors are looking for ways to hedge rising prices, and Vici offers an opportunity to do this. According to the company, 97% of its rental agreements have automatic escalators based on the consumer price index (CPI). When the CPI rises, so do rents. Higher rents flow through to AFFO and investors can expect larger dividend payments in turn. Vici's leases are what is known as triple net, meaning the tenant pays the insurance, property taxes, and building repairs and maintenance expenses. Finally, Vici has some of the longest-term leases in the business, a source of financial stability. According to the company, its average lease term is more than 43 years. For comparison, Store Capital, a net-lease REIT focused on single-tenant properties, has an average term of 13.5 years.
Place your bets on Vici
Las Vegas absorbed the perfect storm during the pandemic. The entire Las Vegas Strip was closed and people were wondering if the city would ever recover. But recover it has. For holders of Vici, those were worrying times; however, the company's revenue never faltered. The dividend was raised in the second quarter of 2020 against all odds. Investors enjoy a growing REIT with several advantages, like long-term triple net leases tied to the CPI. This makes Vici a terrific buy-and-hold dividend investment for 2022.