Amid soaring Treasury yields, triple-net real estate investment trusts (REITs), including casino REITs, stumbled last year. But VICI Properties (NYSE: VICI) could emerge as a winner from the group in 2024.
Caesars Palace on the Las Vegas Strip. Owner VICI Properties could be a winner among triple-net REIT stocks this year. (Image: CNN)
The Caesars Palace owner is positioned to buck the bearish triple-net trend this year and potentially deliver above average growth, according to Stifel analyst Simon Yarmark. He rates the largest casino REIT a “buy,” with a $35 price target, implying upside of about 9.3% from the December 29 close.
VICI’s rent escalators, which are tied to the Consumer Price Index (CPI), are positive attributes at a time when there’s concern inflation could again accelerate.
VICI should benefit from meaningful lease escalations in the above-average inflationary environment. In total, we estimate that lease escalations should result in ~$71 million of incremental rent in 2024 that was not captured in 2023 results,” noted Yarmark.
Of that $71 million, an estimated $39 million is derived from VICI’s two master leases with Caesars Entertainment (NASDAQ: CZR).
Why VICI Could Rebound in 2024
VICI, the largest owner of domestic casino real estate, like other REITs, is sensitive to changes in interest rates. That means the stock was pinched last year as Treasury yields spiked.
However, the reverse scenario could be at play in 2024. Ten-year Treasury yields have declined from the October highs, as the futures market has increasingly priced in the possibility of multiple rate cuts this year by the Federal Reserve. Some fixed-income experts believe one of those reductions could arrive before the end of the current quarter.
Lower interest rates, a diverse tenant base, and a steadily rising dividend could be among the tailwinds to propel VICI shares this year.
VICI’s client roster includes Apollo Global Management, Century Casinos, and Hard Rock International, among others, confirming the gaming REIT is diverse across regions and casino sizes. MGM and Caesars, the two largest operators on the Las Vegas Strip, combine for 76% of VICI’s adjusted revenue.
“VICI generates over $500 million of free cash flow on an annual basis post the dividend,” added Yarmark. “The dividend was recently raised and historically has been raised in 3Q. If they were to reinvest the $500 at a 7.0%-8.0%, this will provide additional acquired funds from operations (AFFO) next year.”
VICI Could Make More Acquisitions This Year
New York-based VICI has a history of being acquisitive, which has enabled the REIT to diversify its geographical and tenant exposures. That trend could continue this year.
Because of a series of previously struck agreements, including some with Caesars, VICI has rights of first refusal (ROFR) on various gaming property assets across the country, should operators decide to sell this year in bids to generate cash.
“Looking at 2024 growth, the company has a put/call agreement on Harrah’s Hoosier Park and the Horseshoe Indianapolis, which can be exercised until year-end 2024. Under the terms of the agreement, Caesars could put the assets to VICI at an 8.0% cap rate, while VICI could call them at a 7.7% cap rate,” concluded Yarmark. “Beyond that, the company has a put/call agreement on the Caesars Forum Convention Center and ROFR agreements on casino assets both in Las Vegas and regional markets.”
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