VICI properties (VICI 1.26%) offers investors a generous 4.2% dividend yield at a time when the an S&P 500 An index fund will only earn you 1.5%. However, the real estate investment trust (REIT) is relatively young and still has a highly focused portfolio. But management is already taking steps to change the diversification problem as it seeks to broaden its appeal to investors.
Plays games from the beginning
VICI Properties was established in late 2017 after being spun off from Caesars Entertainment. The move was really a way for Caesars to raise capital as it effectively sold its properties to VICI. At the time, casino-focused REITs were rare. They still are, noting that VICI is done acquiring a partner MGM Growth Properties at the end of April. The only other major competitor at this stage is Gaming and recreation properties.
There are several problems with the casino niche. First, there are only so many desirable gaming properties to buy. That doesn’t mean the investment opportunity is exhausted, but there isn’t a huge runway for growth if these REITs want to focus on owning the best casinos. Second, the most attractive casinos are massive assets that usually include the casino itself, hotels, dining, shopping and entertainment space. All of them take a hit when casino demand drops during tough times, such as recessions.
This is not to say that casinos are not desirable assets. Just a little more diversification won’t hurt the company’s growth prospects.
Where to from here?
VICI currently owns 43 properties with eight tenants spread across the United States. It has notable exposure to destination-based assets in Las Vegas (45% of rentals) and smaller regional gaming areas. Its average remaining lease term is a whopping 43 years, with 96% of leases including regular rent increases. These are pretty impressive numbers compared to other REITs that use the net lease structure. In a net lease, the lessee is responsible for most of the operating costs of the asset it is leasing.
So casinos are a solid foundation, but where is the growth coming from? The answer is either more casinos or diversification outside of the casino space. The latter provides much more opportunity, even assuming VICI continues to focus on empirical assets. For example, there is a relationship with Great Wolf Lodge, a company that manages water park resorts.
This investment is currently in the form of two loans, one of which was negotiated in July. But VICI also recently entered into a loan agreement with Cabot, a company that builds golf resorts. This particular agreement has a sale/leaseback component that allows VICI to expand its property portfolio in what it describes as the “pilgrimage experience sector.”
The most important thing here, however, is that it gives the casino owner a chance to try his hand at a different type of property. And thus add valuable diversification to your portfolio over time through a new growth platform. There’s no telling where these non-casino investments will ultimately lead the REIT, as success here could entice it to buy everything from movie theaters to theme parks.
Bigger, better, more options
If you’ve been looking at VICI and pulled away because of the highly concentrated casino portfolio, it might be time to start looking at this REIT again. As it looks set to expand beyond gaming, it looks like it will slowly become more enticing to conservative income investors. There’s no reason to jump in right away yet, as gaming will remain a huge business for years to come, but it’s definitely a name worth putting on your watchlist as it starts to take the necessary steps to become a very wider business.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Gaming and Leisure Properties and VICI Properties Inc. The Motley Fool has a disclosure policy.