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Motley Fool Issues Rare “All In” Buy Alert
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Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.A 0.70%) (BRK.B 0.86%), is well known for many wisdom-filled investing and non-investing quotes. Here’s one of my favorite investing quotes: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
The most surefire way to adhere to this timely advice is to buy companies with proven business models at reasonable valuations. The gaming, hospitality, and entertainment real estate investment trust (REIT) known as VICI Properties (VICI 0.90%) arguably fits these requirements. Let’s dig into what makes this high-yielding stock a convincing buy for income investors.
VICI Properties’ real estate portfolio consists of four championship golf courses and 43 gaming facilities in 15 U.S. states with nearly 60,000 hotel rooms and over 450 restaurants and bars. Some of the company’s most famous properties in the world are Caesars Atlantic City, Excalibur in Las Vegas, and Harrah’s Las Vegas.
VICI Properties is the top choice of major experiential companies (i.e., golf courses and casinos) when they need to parlay their real estate into capital. The REIT purchases these properties and then releases them to those same businesses as tenants. This capital is often used by tenants to pay down debt or build or acquire new properties. And tenants then don’t have to take on further debt to expand their businesses.
In exchange for access to this capital, tenants agree to pay a base rent check to VICI Properties each month and bear all responsibility for property insurance, maintenance, taxes, and utilities. And if that wasn’t enough, 47% of the company’s rent roll is tied to inflation via the Consumer Price Index (CPI) in 2022, and that’s set to climb to 96% by 2035. This builds in a source of steadily growing rent revenue for VICI Properties.
High traffic to its properties along with quality tenants such as Caesars Entertainment (CZR 4.66%) and MGM Resorts International (MGM 2.94%) has allowed the business to hold up exceptionally well in a tough operating environment. This is how VICI Properties has been one of the only REITs that has collected 100% of its rent due so far through the COVID-19 pandemic.
As the biggest player in the experiential real estate game already, VICI Properties may have a tough time continuing to grow. But with the company partnering with water park resorts operator Great Wolf Lodge and golf resort operator Cabot, VICI Properties should have plenty of investment opportunities to pursue for the foreseeable future.
Image source: Getty Images.
VICI Properties offers yield-focused investors a whopping 4.3% dividend yield, which is almost three times the S&P 500 index’s 1.6% yield. And the best part is that this high starting income looks to be safe and set to grow moving forward.
That’s because VICI Properties’ dividend payout ratio will likely be around 76% in 2022, which is in line with its targeted payout ratio of 75%. This should give the company the flexibility it needs to grow its dividend as fast as its adjusted funds from operations (AFFO) per share in the years ahead.
Of course, no investments are entirely risk-free. The biggest risk to VICI Properties is that its rent is extremely concentrated in Caesars Entertainment and MGM Resorts International, both of which aren’t investment grade tenants. For context, the two tenants comprised 76% of its annual base rent as of June 30, 2022. Since leases could be renegotiated in bankruptcy procedures, this is why shareholders in VICI Properties would be wise to closely monitor the financial health of these two tenants moving forward.
VICI Properties isn’t the cheapest REIT available for investment. But for its track record of steady dividend growth throughout its limited history as a company, the stock is sensibly valued. This is supported by VICI Properties’ forward price-to-AFFO-per-share ratio of just 17.6 at the current $34 share price.
And VICI Properties’ price-to-book ratio of 1.5 is just above its median of 1.3. Considering that the company’s balance sheet was just upgraded by credit rating agencies to investment grade, and it was added as an S&P 500 component recently, this is hardly an expensive valuation either.
Kody Kester has positions in VICI Properties Inc. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends VICI Properties Inc. and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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