Description

Description:  VICI is a triple net lease REIT with a portfolio of 20 gaming properties including Caesar's Palace Las Vegas, Harrah's Las Vegas and other properties in regional markets  that serve major metropolitan areas like Atlantic City, Chicago, Dallas, Kansas City, Memphis, Omaha, Nashville, New Orleans, and Louisville.  VICI recently emerged from bankruptcy as a spin-off from Caesars although it is entirely independent. In total, VICI owns more than 34M square feet of real estate with over 14,000 hotel rooms, 150 restaurants and 34 acres of undeveloped land adjacent to the Las Vegas Strip.In January of 2018, VICI IPO'ed at $20/share and raised about $1.39B which it used to retire debt and add to its war chset of cash for future acquisitions which now totals about $800M.

Thesis: VICI has a pipeline of bult-in growth opportunities via three call options at a 10% cap rate on CZR properties. They also have a call option on the forthcoming Las Vegas Convention Center that is being developed by CZR's. Additional upside from other acquisition opportunities within CZR portfolio and elsewhere. I believe sale/leaseback activity could pick up as a result of the tax reform which caps interest expense deductibility but not rent. MGP could ultimately be a buyer.

Proforma Valuation at IPO Reasonable: VICI should earn $1.41 proforma FFO/share at the outset. The current price of $19 suggests a valuation of just under 13.5x  which is in-line with the broader tripl net lease REIT peer group despite much better organic growth prospects. While VICI trades at a premium to MGP and GLPI, it is a "cleaner" story than MGM with better growth prospects. VICI has no conflict of interest with its main tenant whereas MGP is 70% owned by MGM. Also, VICI has call options at very attractive cap rates (10%) on three properties whereas MGM' ROFO doesn't have set cap rates (and includes only one property). The 5.3% div yield is well covered at 3.5x EBITDAR/rent and represents 70% payout of FFO.

Octavius Tower - potentially $.08 accretive: VICI has a right of first refusal on Octavius Tower in Las Vegas. This is a relatively new hotel part of Caesar's Palace built in 2011. Bankruptcy documents suggest the capacity for Octavius to pay $35M in rent. If VICI acquires the property for 12.5x rent using 50/50 debt and equity it's accretive by $.08/share. 

Centaur Gaming properties - potentially $.05 accretive: CZR recently acquired Centaur Gaming which consists of two high quality gaming properties in Indiana. CZR mentioned on the call that they would consider doing a sale/leaseback transaction with VICI at some point post-close. Centaur does $140M in EBITDA with CZR guidance of $190M in a couple of years. Assuming $140M though, and rent coverage of 1.67x, that equates to rent of $84M which would be $.06 accretive assuming 50/50 mix of debt and equity.

Call Option Properties potentially $.12 accretive: VICI has a call option to acquire three properties at a 10% cap rate until 10/6/22. The three properties are Harrah's Atlantic City, Harrah's New Orleans and Harrah's Laughlin (Colorado River). The agreement stipulates $130M in rent and acquisition price of $1.3B. Assuming the calls are exercised, these properties would be $.13 accretive to FFO/share assuming 50% mix of debt and equity.

Convention Center Call Option potentially $.01 accretive: I estimate the new convention center, which opens in 2020, could generate approximately $55M in EBITDA. CZR and VICI have a put call agreement on the property at 7.7% cap rate. If VICI acquires the property at 13x EBITDA with 50% mix of debt and equity it is accretive by $.02/share.

Tax Reform Could Boost Pipeline: VICI will seek to acquire gaming properties from other operators as well. The advantage VICI has vs peers is that it has no conflict of interest. MGP is majority owned by MGM and GLPI has cross-ownership with PENN via Peter Carlino who owns a significant stake in both. Another potential boost is tax reform which puts a cap on the interest expense deductibility to 30% of EBITDA. This will ultimately become 30% of EBIT. I believe that this interest cap will make sale/leaseback transactions a more attractive form of financing given there is no cap on rent for tax deduction purposes.

MGP Bid: MGP recently proposed a buy-out offer at $19.50 which was quickly rejected by VICI. I wouldn't be surprised if MGP came back with a higher offer at a later date. I believe MGP could pay $24 and still have the deal be accretive.

Valuation: My target price of $24 equate to 14x '19 FFO/share. Adding an additional $2.10 in dividends in two years equates to a total return of 28% over two years.

Risks: The greatest risk is interest rates and REIT sentiment souring due to rising rates. I believe VICI can overcome this potential risk with growth but nonetheless we could see multiple compression form a rising rate environment. Additionally, the portfolio is 17% exposed to Atlantic City. Although CZR's as an entity is over 3x covered on EBITDAR/rent basis, Atlantic City could prove a difficult market over time. Although it is growing at the moment due to casino closures, there is a new Hard Rock coming to the market this summer and Revel could potentially re-open after being acquired for $200M. The legalziation fo gaming in Texas, while unlikely, could impact some of the VICI properties that feed into Texas, such as the Bossier City, LA casinos. Dallas exposure represents about 7% of the portfolio. VICI is heavily dependent on CZR and while CZR has a pipeline of growth for VICI, it is unclear whether VICI can grow beyond CZR. VICI will compete with MGP and GLPI and other growth opportunities could prove difficult.

Catalyst

For triple net lease REITs, the catalysts are always accretive deals. VICI can exercise its call options on three properties at any time which would be nciely accretive to FFO/share.