VICI Properties Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

VICI Properties Inc. is a real estate investment trust (REIT) focused on owning and acquiring gaming, hospitality, and entertainment destinations, primarily within the United States. It leases its properties to tenants, typically on a triple-net basis.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

VICI Properties Inc. operates as a real estate investment trust (REIT), specializing in experiential real estate assets. This means that they primarily focus on properties such as casinos, hotels, and entertainment venues. They do not conduct the actual operations of these businesses, but instead, act as the landlord, leasing properties to operating companies.

VICI’s business model is centered around long-term, triple-net leases, which means tenants are responsible for almost all property-related expenses, like taxes, insurance, and maintenance. This model provides stability and predictability in revenue, making it suitable for a REIT.

Their main sources of revenue are from rents received from the lessees under these agreements. The revenue generation is largely dependent on the ability of lessees to operate their businesses, which means that the health of the gaming, hotel, and entertainment industries has a significant impact on the financials of the company.

The company’s portfolio is quite diverse geographically and includes iconic properties such as Caesars Palace Las Vegas and the Venetian in Las Vegas, and many properties in other gaming jurisdictions throughout the United States and Canada. The scale of the portfolio makes VICI a significant player in the gaming and entertainment real estate sector.

Moat Analysis: 3 / 5

VICI’s moat is somewhat complex and has its strengths and weaknesses. Here’s a breakdown:

  • High Barriers to Entry: The primary strength lies in the difficulty of replicating VICI’s portfolio due to its scale and the high level of regulatory scrutiny for the gaming industry. Owning and operating large scale casinos and entertainment venues requires significant financial and operational capacity, limiting the number of companies that can effectively compete. This creates a natural barrier for new entrants.
  • Long-Term, Triple-Net Leases: These lease structures provide very stable and predictable income streams. Given the triple-net nature, VICI is largely insulated from day-to-day operational costs of tenants, which greatly reduces the variability of its expenses and cash flow.
  • Location and Reputation: VICI’s properties often are prime real estate, especially those located in tourist hubs like Las Vegas. These properties are in prime locations and well-known, giving VICI an edge over newer entrants that lack such prime locations. However, many newer gaming properties can be replicated.
  • Lack of Differentiation: While each property may have different characteristics, the fundamental service that VICI provides—leasing space—is highly commoditized. There’s very little that makes VICI stand out in the eyes of the average tenant other than location and lease terms, which are not unique.
  • Customer Concentration: A significant portion of VICI’s revenue comes from a few large tenants, particularly Caesars and MGM. While these companies are strong and stable, they add a significant risk to VICI as a REIT as their financial distress can lead to lease defaults, rent reductions, and even termination.
  • Dependence on Industry Health: VICI’s performance is heavily reliant on the success of the gaming, hospitality, and entertainment sectors. Economic downturns or regional crises that significantly affect these industries will directly harm VICI’s performance. This dependence limits its diversity and flexibility.

Moat Rating: Taking into consideration all the elements, I rate VICI’s moat as a 3/5. There are clear structural elements that make it difficult for new players to replicate their business, such as high capital requirements and regulatory hurdles, especially within the gaming industry. However, the company also has some weaknesses including its dependence on its few large clients, and reliance on specific industries and its relative inability to differentiate its product offering.

Risks to the Moat and Business Resilience

Several factors could harm VICI’s moat and business resilience:

  • Tenant Defaults: The biggest risk to VICI is that tenants may have difficulty meeting their rental payments due to poor financial conditions or other difficulties such as economic downturns or crises. This would negatively impact VICI’s revenue and ability to cover its debt and distributions.
  • Industry Downturns: The gaming and hospitality industries are sensitive to economic conditions, consumer spending, and travel trends. Major shifts can severely impact the tenant’s ability to generate profits and in turn pay rent to VICI.
  • Increased Competition: New resorts or casinos could lead to a higher supply of hotel and gaming space, increasing tenant’s ability to bargain, putting pressure on lease rates and occupancy. Technological innovations may change the type of space required by the business. New forms of entertainment also compete with VICI’s properties.
  • Changes in Regulations: Regulatory changes around gaming or real estate law can have a big impact on VICI’s lease contracts, tax treatment, property rights, or operations.
  • Interest Rate Risk: Increasing interest rates can negatively impact the value of VICI’s properties and their ability to maintain low-cost borrowings. In periods of low rates, the spread between ROIC and WACC is high, while in higher rate environments it may decrease. High interest rates can lead to higher cap rates, which negatively impact value of properties. The value of properties with lease in place for long periods of time is negatively impacted by higher rates because the lease payment does not increase with those rates. The company’s debt is generally tied to variable interest rates, which will also directly increase the interest expense of the company as rates increase.
  • Lack of diversification: VICI is highly dependent on the US market for growth, as the vast majority of their properties are located in the country. Other geographies could offer growth opportunities and reduce risks associated with local downturns. While REITs in general are not incredibly diverse, VICI is especially limited.

Business Resilience: VICI has shown resilience due to the stable long-term nature of its leases. However, it could be vulnerable to major shocks in the industries it serves. Strong management that can proactively mitigate tenant issues, adapt to changing regulations, and manage its risk will be the key to business success.

Financial Analysis

  • Revenue Distribution: Almost all of VICI’s revenue is rental income, with very minor other income, primarily tied to lease modifications. In the nine months ended September 30, 2023, VICI recognized $2.27 billion in revenue. This is highly reliant on long-term lease contracts.

Almost all revenue comes from casino-related leases with MGM (50% approx.), Caesars (approx. 30%), and others (approx 20%).

  • Margins: VICI has fairly high operating margins due to the nature of its business. In the nine-months of 2023, they had an operating margin of 67%, but these numbers can have wide fluctuations given amortization, depreciation, and special one-time items. The company’s interest income is low but their long term debt and current leases are a liability, so these are also taken into account when looking at profitability. However, their free cash flow margin is very high (approx. 75%) which is why the business can maintain profitability and a large dividend.
  • Balance Sheet Health: Their debt-to-equity ratio is at 1.7. On one side of the equation, this leverage helps to generate higher ROIC, as the company borrows and reinvests at a higher rate of return. However, this high debt balance means that in times of uncertainty they are at a greater risk. The company is able to meet interest expense but has little leeway for any unexpected event. On a more fundamental note, a real estate company or a REIT cannot have too much debt since the value of the property is based on cash flow (profits), and profits can be impacted by a credit crunch, making debt more expensive for the company. The company is in a somewhat strong liquidity position with around $450 million in cash on hand. I rate VICI’s balance sheet as a 3/5.
  • Historical Financial Performance
    • Consistent Revenue Growth: VICI has grown steadily with increasing revenues year-over-year.

A lot of the recent revenue growth can be attributed to acquisitions, mainly from the MGM Growth Properties deal. This trend is expected to continue.

*    **Consistent EBITDA:** Operating profits (EBITDA) have been generally consistent showing strong profit margins for VICI, as a REIT it can easily generate a good amount of cash flow.
*   **Free Cash Flow Generation:** VICI generates strong free cash flow, as it is a capital light business, with most operational costs passed over to the tenant, making a compelling investment for dividend investors.

Their high free cash flow margin combined with the company’s ability to access credit at favorable terms allows the business to invest in growth and increase share holder value.

  • Share Buybacks: VICI does not typically repurchase shares, as they believe their equity to be fairly valued, but it can be used in certain circumstances to benefit shareholders.
  • Dividend Payouts: A REIT is required to pay out at least 90% of its taxable income in dividends to shareholders, and as a result, VICI has a very attractive dividend payout rate, consistently around 4-5% per share.

Understandability Rating: 2 / 5

While VICI’s business model is straightforward to understand on the surface—a REIT that owns and leases casinos and other related properties—the financial technicalities of valuation and operations is somewhat complicated. VICI’s main business depends on several complex financial calculations including real estate valuation, which is difficult to estimate. The underlying factors that contribute to its success involve many elements, including the general market, trends in gaming and hospitality, debt levels, and the quality of its management. For the layperson, understanding the nuances of VICI’s profitability, its unique structure, and how various market and economic conditions affect its profitability will be relatively complex. Hence, I rate the understandability at a 2/5, being reasonably complicated for a casual investor.

Recent Concerns and Problems

  • Higher Interest Rates: High interest rates pose some challenges for the REIT and other heavily levered businesses. Even though the interest rate increases tend to be slow and are more favorable over long term, it will still negatively impact their debt burden, which will require higher revenue or better optimization.
  • Inflationary Pressures: Similar to interest rates, inflation creates a more difficult environment for REITs as the price to maintain their properties go up. These costs increase liabilities and puts pressure on the company’s cash flow.
  • Tenant’s Operational Success: VICI’s success is largely tied to how profitable and well their tenants perform. Should any of them encounter financial distress, the effects will directly impact their ability to generate predictable revenue.

Overall, these risks are present within the sector, and are not necessarily unique to VICI. For the foreseeable future the sector may remain vulnerable given economic conditions, but VICI has strong enough properties and long term leases to cushion the impact.