|  | | | | VICI Properties (VICI): The house’s house |
| On the heels of our discussion of Disney (DIS) in Issue #4, we want to highlight an investment held in our Income Builder Model Portfolio that is also a play on the theme of entertainment tourism. As we previously noted, the Experiences segment (which includes theme parks and cruises) now generates the vast majority of Disney’s operating profits. We pivot here to VICI Properties (VICI)—the leading platform for “experiential real estate” with an unparalleled footprint on the Las Vegas Strip. |
| | It was the day after Christmas, 1946. Just over a year earlier, Japan surrendered, putting an end to World War II. America was still euphoric.
With Jimmy Durante headlining, Bugsy Siegel opened the Flamingo Hotel on the Vegas Strip. It was named for his girlfriend Virginia Hill, an Alabama farmer’s daughter who received the nickname Flamingo because of her red hair and long legs.
The grand opening was a complete disaster. The weather was bad. Bugsy and his partners launched the casino and night club before construction of the hotel was completed. Many gamblers had nowhere to stay. Losses immediately mounted. The property closed two weeks later. |
|  | | The Flamingo reopened in March 1947 and began to turn a profit. But Bugsy, a New York transplant with a sordid past, did not have the confidence of his partners. They thought he was skimming off the top, and he certainly may have been. In June of that year, he was shot dead in his Beverly Hills mansion.
The Flamingo is important in Las Vegas history as a prototype for the opulent casino hotel and resort that would ultimately define the city. The Flamingo and its investors had a rough start but, after a series of ownership changes and renovations, The Flamingo survives to this day.
Sitting at the very center of the Strip, The Flamingo, now part of Caesars Entertainment (CZR), is the oldest continuously operated resort in Vegas.
Sometimes difficult circumstances give rise to great business opportunities. |
| | Las Vegas, Nevada is associated, quite deservedly, with various manifestations of human imperfection. But it first came to be known as a rather peaceful place.
Spanish for “The Meadows,” Las Vegas was given its name by explorers who stumbled upon the area in the early 1800s. It was a lush section of grassland in the Mojave Desert that was irrigated by a natural spring.
Mormon missionaries later visited. They tried (and largely failed) to convert the Southern Paiute people who were indigenous to the region. Otherwise, this special spot in the desert would remain a bit of a secret—until the gold rush.
Gold was discovered in Nevada in 1849. As J.P. Morgan said, “gold is money.” And money changes everything. Thanks to gold, Las Vegas would soon take on the “colorful” persona that it is now known for worldwide.
With prospectors and miners flooding the area, saloons and bordellos sprang to life in the oasis. By 1905, a railroad connecting Los Angeles and Salt Lake City was completed, and Las Vegas became a popular stop.
The City of Las Vegas was formally incorporated in 1911. Initially, gambling was technically outlawed, although clandestine casinos operated. The city’s true nature could not be denied for long, however.
In 1931, Nevada became the first state to legalize gambling. At approximately the same time, construction began on the Hoover Dam, a Depression-era infrastructure project that was also an unprecedented engineering achievement. |
| | We are here to celebrate the completion of the greatest dam in the world, rising 726 feet above the bedrock of the river and altering the geography of a whole region: we are here to see the creation of the largest artificial lake in the world-115 miles long, holding enough water, for example, to cover the whole State of Connecticut to a depth of ten feet; and we are here to see nearing completion a power house which will contain the largest generators and turbines yet installed in this country, machinery that can continuously supply nearly two million horsepower of electric energy. - FDR, Dedication of the Boulder Dam, 9/30/1935 |
| | The dam was originally referred to as the Hoover Dam, after Herbert Hoover, who was President when construction commenced. After FDR won the the election in 1932, his Interior Secretary actually renamed it the Boulder Dam. The name Hoover Dam was restored in 1947 by Congress.
The dam has been crucial to the development of Las Vegas. While the dam continues to generate enough electricity to power 750,000 households across multiple states, almost all the fresh water serving Las Vegas is drawn from Lake Mead, the artificial reservoir created by the project. The thousands of construction workers who were brought in to build the Hoover Dam also helped fuel the growth of more casinos.
Within a few years of the dam’s completion, the Strip was born. The iconic roadway known as the Las Vegas Strip, which remains the city’s main attraction, traces its roots to 1939. A Los Angeles police officer named Guy McAfee, fleeing corruption charges, decided to move to Vegas. He established the Pair O’Dice Club on a dusty 4-mile road that he named in honor of his hometown’s Sunset Strip.
Two years later, another Californian named Thomas Hull founded the El Rancho Vegas on the Strip. It was the city’s first luxury resort, with beautiful gardens and a large pool. Bugsy was inspired. His vision for The Flamingo was to take this luxury concept to the next level. |
| In the many decades that followed, Las Vegas and the Las Vegas Strip would evolve into one of the most important tourism and conference destinations in the country and the world.
Vegas would soon become home to the Rat Pack and Elvis Presley. Evel Knievel would spend 29 days in a coma there following an ill-advised New Year’s Eve 1967 fountain jump at Caesar’s Palace (although there is some speculation Evel made the coma story up to burnish his mystique). The great Siegfried and Roy would continue this noble tradition of high-risk live entertainment. |
|  | | | Today, Las Vegas is known worldwide as a largely judgment-free entertainment hub that meets the needs of everyone from the most dissolute gamblers to young families.
Vegas is still thriving
In 2023, Las Vegas attracted approximately 40 million visitors and 6 million convention-goers. The city has more than 150,000 hotel rooms averaging over 80% occupancy, 33 stadiums and arenas (including Allegiant Stadium, site of the most recent Superbowl and home of the Las Vegas Raiders) and some 15 million square feet of meeting space.
After several years of construction and $2.3 billion, Sphere just opened with a 40-show residency by U2 that began in September 2023. Sphere is a one-of-a-kind event space containing the largest LED screen in the world. It is directly connected to the Venetian by a pedestrian walkway. We have yet to see it, but everyone we know who has visited has been blown away. |
|  | | The Las Vegas Metropolitan area has grown over the past 60 years from just over 100,000 in 1964 to more than 2.3 million people today. Despite the pandemic, which brought tourism to a temporary halt, gaming in Vegas is as robust as ever. |
|  | Source: Nevada Gaming Control Board |
| | Gaming is not the only source of revenue for the Las Vegas economy but is of course a major pillar. The growth in gaming revenue post-pandemic has a couple of interesting possible interpretations.
On the one hand, it represents pent-up demand and a desire among consumers for entertainment-focused tourism. We observed this previously in the context of DIS and the success of its theme parks (in contrast with the other business segments).
The post-pandemic growth in gaming revenues also reflects inflation. A $100 bet placed in April 2024 is not the same thing as a $100 bet placed in January 2020. To the extent Vegas is a place where paper money comes to circulate, the entire local economy is something of an inflation hedge. Commercial asset-owners in Vegas shouldn’t mind inflation too much. |
| | Veni, vidi, vici. [I came, I saw, I conquered.] - Julius Caesar, 47 B.C., after prevailing at the Battle of Zela (modern day Turkey) |
| | If Las Vegas has conquered gaming and entertainment tourism in the United States, VICI Properties (VICI) has arguably conquered gaming and entertainment real estate.
VICI was formed on October 6, 2017 as a real estate spin-off from the bankruptcy reorganization of Caesars Entertainment. Set up as a Real Estate Investment Trust (REIT), the company undertook an Initial Public Offering on February 5, 2018 that raised approximately $1.4 billion.
The VICI backstory begins about a decade earlier.
The credit bubble that had fueled a housing bubble of epic proportions (and nearly brought down the global financial system) also led to an unprecedented leveraged buyout wave.
On the eve of the 2008 financial crisis, private equity investors closed on one of the biggest leveraged buyouts ever. The $31 billion LBO deal for Caesars was in fact the 7th largest in history.
At the time, credit conditions were dangerously easy. NINJAs (No Income, No Job or Assets) were notoriously buying $700,000 homes in the Florida exurbs with nothing or 1% down. Similarly, leading private equity firms Apollo Group and Texas Pacific Group were lent $24 billion to fund their purchase of Caesars with only a fraction of that required as an equity commitment.
With an overburdened balance sheet stacked with junk bonds, the new owners of Caesars were operating with little room for error. After the banking crisis transitioned into one of the worst recessions in American history, Caesars unsurprisingly saw a meaningful and sustained decline in visitors to its properties.
By 2015, as debt maturities loomed, the Caesars deal was a bust.
As the Global Financial Crisis (and later the pandemic) demonstrated, the gaming and hospitality industries can be volatile. Playing the slots and going on vacation are not quite necessities (at least for most of us). This vulnerability can make it difficult to attract investment capital to the sector.
VICI was created in response to this problem. While the Caesars deal failed because there was way too much debt, taken on at the worst possible moment, there was still considerable asset value within the business.
The investment bankers, private equity investors and bondholders who were left holding the bag on this busted deal figured out a way to make the most of it. If they could isolate the most valuable and stable components of the Caesars empire, there would be investor interest. Even if many investors were still scarred. |
| The foundation of value of any hospitality business is the real estate upon which it sits. While the operating businesses that utilize the land and buildings can be quite valuable if managed well, they cannot exist without these physical real estate assets.
VICI was created not only to isolate the hard asset value that existed within Caesars. It was designed to give those real estate assets the most stable and low-risk profile possible. This is why VICI was formed with a Triple Net Lease structure. |
| | Triple Net Lease: Triple net leases (or NNN leases) are agreements in which a landlord charges a lower monthly rent to commercial tenants, who are then responsible for covering three costs that are normally the responsibility of landlords: maintenance, insurance, and property taxes. Triple net leases are long-term leases, with a typical term of ten years but potentially much longer. Importantly, landlords aren’t responsible for the upkeep of the buildings — the tenant has very specific contractual obligations to bear any construction costs or improvements needed to make the land useful. |
| | A triple net lease arrangement removes variability from a landlord’s cash flows, especially when it comes to investment in the physical structure, which can be the most unpredictable element.
A triple net lease structure also reduces the credit risk a landlord bears. Because the landlord has fewer obligations, the rent burden to the tenant is lower. With this structure, the tenant is therefore less likely to default on his rent and risk eviction from the physical premises that are required by the operating company. |
| A foundation of stable cash flows
Coming out of bankruptcy, the VICI story needed to be solid. To accomplish this, the company was established with a core of real estate from the Caesars portfolio and attractive long-term triple net lease agreements with Caesars Entertainment.
Caesars remains VICI’s largest tenant and contributes approximately 40% of annualized rent. |
|  | Source: VICI Properties (data as of Feb 2024) |
| Although VICI began operations as an entity that housed Caesars real estate, that core of assets was always just intended as a starting point. The goal was to build the company into the leading platform for investment in “experiential real estate.”
Experiential real estate is an evolving category that originates with gaming but also includes hospitality, wellness, golf, sports, theme parks, live performances and other facilities used for entertainment. |
| While VICI undertook a number of smaller growth transactions in the years following its listing, the company took a major step forward in 2022 with two transformative transactions. First, VICI acquired the Venetian, an iconic property on the Strip that now represents about 9% of company revenues (and as mentioned is now the closest hotel to the Sphere with direct pedestrian access).
A few months later, in April 2022, VICI acquired MGM Growth Properties (MGP). Like Caesars, MGM Resorts International (MGM) had split out its real estate assets into another listed vehicle. While MGM, like CZR, remains an independent operator of those properties, the real estate assets of both of MGM and CZR are now largely housed within VICI. |
| | The addition of the MGP portfolio, together with the recent closing of our Venetian acquisition, elevates VICI to the top ranks of American 4-wall REITs, making VICI a Top-5 REIT by EBITDA and a Top-10 REIT by enterprise value. We also become the largest owner of hotel and conference real estate in America, within what we believe is the superior transparency and integrity of the Triple Net Lease model. - VICI CEO Edward Pitoniak, 4/29/2022 |
| | The Venetian and MGP transactions catapulted VICI into a real estate industry leader. With greater scale and improved diversification, the company also earned an investment grade debt rating in 2022 and entered the S&P 500 index. Today, VICI owns some 60,000 hotel rooms and nearly 7 million square feet of event space, which makes it the largest owner of hotel rooms and meeting space in America.
Las Vegas now contributes approximately half the rental base of VICI. VICI has a dominant position on the Strip with ten trophy assets. VICI properties are indicated below in blue. |
|  | | Cash flow stability
The VICI investment case can be understood as a highly secure cash flow story. VICI tenants have not missed a single rent payment in the history of the company. This includes 2020, when nationwide lockdowns sent gaming revenue briefly to zero. The tenant base is very high quality with 75% of revenues coming from S&P 500 companies.
The composition and structure of the leases also support cash flow stability. Many REITs have a large number of small tenants, who are prone to fail here and there. VICI has a small number of large tenants and reports an average rent per asset that is some 70x higher than peers.
As discussed above, the triple net lease structure reduces cash flow volatility. VICI’s lease agreements are further protected by parent guarantees (applies to more than 90% of leases) and master lease protections (applies to 80% of leases). These are important contractual features, as they impose more expansive legal obligations upon tenants to make their rent payments.
To maintain its status a REIT, VICI must pay out a certain amount of its net income to shareholders every year in the form of dividends. Currently, VICI pays out approximately 75% of its AFFO (Adjusted Funds From Operations).
AFFO is a measure of free cash flow for REITs. AFFO can be thought of as cash that is available after all expenses to pay shareholders a dividend (without incurring debt). Currently, VICI offers a dividend yield just below 6%.
Given the security of the company’s cash flow streams, we view the dividend yield as very attractive. Despite the fact that the company retains about a quarter of its excess cash flow generation, investors are getting a nearly 6% return just from dividends that are ultimately funded by highly secure lease agreements. This return ignores any growth potential.
Multiple growth avenues
But the company does grow its cash flows. In fact, over the past five years, VICI has been able to grow its quarterly dividend by more than 7% per year. |
|  | | VICI is able to generate cash flow growth in two ways—automatically and by acquisition.
Escalators
VICI’s lease agreements with its tenants not only minimize default risk but have built-in growth features. These include annual rents escalators. The specific terms of these escalators vary by tenant but tend to offer 1.5% to 2% growth at a minimum.
In some cases, the escalators are structured around changes in the Consumer Price Index. The rents associated with MGM, for example, will ultimately grow at the greater of 2% or CPI (with a 3% cap). A similar arrangement applies to the Caesars leases, except there is no CPI cap.
In commercial real estate, the devil is in the details of the lease agreements. Currently, about half of VICI’s leases are eligible for CPI-linked inflation protection. These leases were written such that they become more favorable to VICI over time. By 2035, the company estimates nearly all of its current leases will offer inflation protection.
Expansion
There are other attractive contractual features of VICI’s relationships with its main tenants that will drive long-term growth, especially in Las Vegas. Our discussion of Las Vegas history above was not just intended as a walk down memory lane. The point was to underscore the continued evolution of the city as a globally relevant tourism hub.
A bet on VICI is to a large degree a bet on Vegas. Sports is becoming increasingly important to Las Vegas (along with sports betting, which especially appeals to younger demographics). Oakland’s loss is Vegas’s gain. The Raiders moved to Vegas in 2020, and the A’s plan to relocate there in 2028. The NHL expansion team, the Vegas Golden Knights, was created in 2017 and won the Stanley Cup in 2023. The first Las Vegas Grand Prix, a Formula One race, was held in November 2023.
VICI’s footprint in Las Vegas is particularly well-suited to take advantage of this evolution of Vegas into a major sports city. VICI owns six casinos and adjacent land within the “sports triangle” formed by the three major professional sports teams. Professional sports have not only increased the attractiveness of these assets but create long-term development opportunities. |
|  | | Across VICI’s portfolio, the company enjoys various rights of first refusal (“ROFRs”) and put/call agreements. These give the company preferential access to development and expansion deals that are typically adjacent to existing properties.
As discussed, VICI also has an excellent track record in M&A and has become the premier acquisition platform in the experiential segment. Since the company was formed, management has consistently shown a disciplined approach to pursuing value-enhancing acquisition opportunities.
Key risk considerations
Investors evaluating VICI should be mindful of several important risk factors.
Customer concentration: The vast majority of the company’s revenues come from two publicly traded gaming and hospitality companies, CZR and MGM. We view both companies as strong operators with reasonable balance sheets that are unlikely to default on rent payments barring the most extreme circumstances. We also take great comfort in the lease agreements and the uninterrupted rent payments through the pandemic. Nonetheless, the failure of either of these businesses for whatever reason would be damaging to VICI shareholders.
Industry concentration: VICI owns real estate in the gaming and hospitality sectors. Any prolonged event that hurts the business of VICI’s tenants (such as a severe recession, a terrorist attack, another pandemic) would on the margin threaten VICI’s ability to collect rents.
Tax treatment: As a REIT, VICI dividends are generally taxed at ordinary income rates. Tax-sensitive investors may want to consider owning the shares in retirement accounts or other tax-sheltered vehicles.
Interest rates: As a REIT, especially a “triple net” REIT, a stock like VICI competes with bond alternatives (notwithstanding the growth element). If long-term interest rates continue to rise substantially, this would continue to be a headwind for the share price. (Alternatively, a decline in long-term rates would likely be quite favorable.) |
| | Everybody deserves a fresh start every once in a while. - Bugsy Siegel |
| | Born from the ashes of many mistakes, VICI is a solid real estate play that is unaffected by many of the negative trends now affecting commercial real estate. Its core market, Las Vegas, is continuing to evolve in very positive ways. VICI is also leading the development of a relatively new and promising real estate category—experiential—at a time when traditional office and retail real estate is suffering and potentially facing obsolescence.
Why now?
From its 2017 listing through mid-April 2024, VICI shares have delivered a total annualized return of just over 12%, only slightly lagging the S&P 500. VICI has substantially outperformed real estate peers, with the S&P Real Estate Select Sector Index delivering barely positive returns over the same time frame. |
|  | VICI management has executed well on its business plan. VICI’s relative performance over this time frame is particularly impressive given the macro headwinds of the past three years.
Supported by underlying cash flow and AFFO growth, the dividend has grown by over 25% over the past three years. During this time frame, the stock entered the S&P 500, and the company was awarded an investment grade rating.
Yet the share price is slightly down. This is primarily due to interest rates. As bonds have become more attractive, investors are expecting a higher yield from a long-term cash flow story like VICI. The dividend yield on VICI is now up from 4% to close to 6%. |
|  | Over the past three years, the yield on the 10-year Treasury has moved up approximately 3%. It is quite possible we could see further upward movement in Treasury yields, but it is unlikely that it will be of the magnitude that we have just experienced.
A much higher rate environment is now priced into VICI shares. If interest rates grind higher, the dividend yield could continue to widen, but this will not necessarily impact the dividend itself or its growth rate. If rates stabilize or decline, VICI could see upside as the dividend yield resets to lower levels.
VICI offers a unique combination of solid current income and visibility into income growth. The significant move in long-term interest rates has suppressed upside in the share price in recent years that otherwise would have been driven by cash flow growth—but it also now creates an interesting entry point for investors comfortable with rate risk. |
| | VICI Properties (VICI): Company Snapshot |
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