VICI properties (VICI 1.26%) offers investors a generous 4.2% dividend yield at a time when a S&P500 Index funds only give you 1.5%. However, the real estate investment trust (REIT) is relatively young and still has a highly focused portfolio. However, management is already taking steps to change the diversification issue as it seeks to increase investor appeal.
Play games from the start
VICI Properties was founded in late 2017 following a spin-off Caesar’s entertainment. The move really was a way for Caesars to raise capital, as it was effectively selling its properties to VICI. Back then, casino-focused REITs were rare. They still are, noting that VICI has completed the acquisition of Peer MGM growth properties In late April. The only other major competitor at this point is gambling and leisure properties.
There are a few issues with the casino niche. First of all, there are only so many desirable gaming properties to buy. That’s not to say the investment opportunities are exhausted, but there’s not a great runway for growth if these REITs want to focus on owning the best casinos. Secondly, the most attractive casinos are huge assets that usually include the casino itself, hotels, restaurants, shopping and entertainment spaces. All of this is affected when the demand for casinos falls during tough times like recessions.
This is not to say that casinos are not desirable assets. Except that a little more diversification wouldn’t hurt the company’s growth prospects.
Where to from here?
At this time, VICI owns 43 properties with eight tenants across the United States. It has notable exposure to Las Vegas destination assets (45% of rentals) and smaller regional gaming areas. The average remaining lease term is a whopping 43 years, with 96% of leases including regular rent increases. Those are pretty impressive numbers compared to other REITs that use the net-lease structure. With a net lease, the tenant bears most of the operating costs of the asset he uses.
So casinos are a solid foundation, but where does growth come from? The answer is either more casinos or diversification outside of the casino space. The latter offers far more possibilities, even assuming that VICI remains focused on experiential values. For example, it has a relationship with Great Wolf Lodge, a company that operates water park resorts.
This investment is currently taking the form of two loans, one of which was agreed in July. But VICI also recently secured a loan deal with Cabot, a company that builds golf resorts. This particular agreement includes a sale/leaseback component that allows VICI to expand its real estate portfolio into what it calls the “pilgrimage sector.”
The most important thing here, however, is that it gives the casino landlord the opportunity to try a different type of property. And so, over time, add valuable diversification to the portfolio via a new growth platform. There’s no telling where these non-casino investments will ultimately take the REIT, as success here could tempt it to buy everything from movie theaters to amusement parks.
Bigger, better, more options
If you’ve looked at VICI and pulled out due to the highly concentrated casino portfolio, maybe it’s time to watch this REIT again. As it’s thoughtfully meant to go beyond gambling, it appears it’s slowly becoming more and more enticing for conservative income investors. There’s no reason to jump on board right now, as gaming will remain a huge business for years to come, but it’s definitely a name worth putting on your watch list as it’s starting to take the necessary steps undertake to become a much broader 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.