In 2024, most stocks have shown strong performance; however, the same cannot be said for the real estate sector. Many companies in this sector have seen double-digit declines. One notable example is VICI Properties, which is down 3% year-to-date and currently trading in the mid-to-lower end of its 52-week range. Despite this, the stock has a strong buy rating from Quant, a buy rating from Wall Street analysts, and a solid 4.1 out of 5 from Seeking Alpha. A slight increase to 4.5 would tip it into a strong buy category.
Fundamental Analysis
VICI offers an attractive dividend yield of 5.6% and appears undervalued compared to the sector median. It trades at a forward price-to-FFO (Funds From Operations) ratio of 11.7, which we’ll explain later in the analysis. To preview, the company has a B+ valuation grade, an A+ for growth, and an A+ for profitability, making it a compelling REIT to consider for your portfolio.
For those unfamiliar, VICI Properties is a real estate investment trust (REIT) specializing in gaming, hospitality, and entertainment properties. Its portfolio includes iconic locations like Caesars Palace and The Venetian. The company generates revenue through long-term triple net leases with major operators such as Caesars Entertainment and MGM Resorts. Currently, VICI owns 93 properties with 13 tenants, and its largest tenants—Caesars and MGM—account for 74% of annualized cash rent. While this concentration may seem significant, the weighted average lease term across all tenants is 41 years, with Caesars at 31 years and MGM at 51 years.
Over the past five years, VICI Properties’ stock has risen about 26%. Returns would be even higher if dividends were reinvested. The broader REIT sector has faced headwinds, including rising interest rates, which have increased borrowing costs and made bonds more appealing for income-seeking investors. Concerns about economic slowdowns, changes in demand for commercial real estate, and sector-specific challenges have also weighed on valuations. However, with interest rates expected to decrease—potentially by 25 basis points this week—prospects for the REIT sector and VICI Properties could improve.
Looking ahead, earnings expectations for VICI over the next four quarters indicate growth in just one quarter, though the company has exceeded expectations in three of the last four quarters. If VICI achieves its FFO target by December 2025, the forward price-to-FFO ratio will drop to 11.3.
When assessing VICI's metrics, its dividend safety score is a borderline 50, suggesting moderate risk of a dividend cut over an economic cycle. Still, the company increased its dividend by 4.2% in September 2023, in line with average inflation rates. VICI has consistently raised its dividend by 10% annually over the past five years.
VICI's valuation appears favorable. It trades near the lower end of its intrinsic value range, indicating potential undervaluation. Dividend yield theory supports this, as the current yield is above the five-year average. The forward price-to-FFO of 13.4 is below both VICI's five-year average and the sector average of 17.
Regarding adjusted funds from operations (AFFO), VICI maintains a payout ratio of 75%, a consistent target set by management. Sales growth is robust, averaging 10% in recent years, though projected to slow to 3% over the next year. The company’s revenue grew from $200 million in 2017 to $3.61 billion in 2023. Unlike typical companies that engage in share buybacks, REITs like VICI often issue new shares, which can dilute investor positions.
Return on invested capital (ROIC) is strong at 8%, and operating margins remain high, fluctuating between 92% and 96% in recent years. One concern is VICI’s net debt-to-EBITDA ratio, which stood at 5.86 in 2023. While this is anticipated to decrease to 5.4 over the next year, the ideal target is 3.5.
Key Investment Highlights:
Dividend Yield: VICI offers an attractive 7% dividend yield, making it appealing for income-focused investors.
Valuation: VICI appears undervalued, trading at a forward Price-to-FFO of 11.7x, which is below the sector median of 17x.
Portfolio Strength: Specializing in gaming, hospitality, and entertainment properties, VICI owns iconic assets like Caesars Palace and The Venetian, with long-term triple-net leases providing steady cash flow.
Growth and Profitability: The stock boasts an A+ rating for both growth and profitability, reinforcing its strong operational performance.
Debt Management: While net debt-to-EBITDA remains elevated at 5.4x, management has shown efforts to reduce this ratio over time.
Investment Outlook
If interest rates continue to decline, VICI is well-positioned for growth. The combination of a solid dividend yield, undervaluation signals, and stable revenue streams makes VICI Properties a compelling consideration for your portfolio.
Despite these debt concerns, VICI's dividend appears sustainable, and there are no immediate red flags suggesting a dividend cut. Institutional investors remain optimistic, with buying activity significantly outpacing selling over the past year.
Comparing VICI's performance to its peers, it has under performed over the last year but ranks mid-tier over five years, delivering a 64% total return. Against the S&P 500, VICI has also under performed, reminding investors to consider ETFs as an alternative.
Valuation
A fair valuation for VICI Properties averages $37 based on three models: multiples valuation, dividend discount, and discounted cash flow (DCF). Given the current price of around $30.40, this suggests a solid margin of safety of approximately 20%. Wall Street analysts project an 18% upside to $36 over the next year, not including dividends.
Conclusion
In summary, VICI Properties offers a compelling dividend yield, solid growth potential, and appears undervalued. Let us know your thoughts, and remember to sign up for our free weekly articles highlighting quality stocks and market insights.
Comments