I’ve added VICI Properties (NYSE: VICI) to my portfolio over the past few months, and recent developments have made me even more enthusiastic about this investment opportunity. In this article, I’ll provide an update on VICI Properties and explain why I believe it offers significant potential for double-digit earnings growth and potential multiple expansions, possibly reaching a P/FFO ratio of 18-20x. Most importantly, I’ll show you why this stock qualifies for my minimum 15% annualized upside target, even on a conservative basis.

VICI Properties: An Overview

Since VICI Properties went public a few years ago, it has consistently traded within an attractive valuation range of approximately 12-15x P/FFO. Notably, the company has improved its credit rating from junk to investment grade (BBB-) and currently offers a dividend yield of 5.14% at the current share price level. VICI’s share price has fluctuated between a high of just above $35 per share and a 2-year low below $31 per share.

While the stock’s overall performance may seem moderate, it has provided an impressive annualized rate of return of approximately 11.8% for investors who bought in 2018, surpassing market averages. However, those who applied valuation logic and invested during periods of undervaluation have seen even more substantial gains, with annualized returns approaching 36%, or 184% since the COVID-19-related decline.

VICI Properties stands out as a qualitative owner of mission-critical entertainment and experiential properties, boasting a diverse portfolio of 50 properties and 4 golf courses. Approximately 80% of its tenants are publicly traded companies, and the company operates in both the United States and Canada.

Key Strengths of VICI Properties

One remarkable detail that sets VICI Properties apart is its 100% occupancy rate. Furthermore, the average weighted lease duration as of June 30th exceeded 41 years, demonstrating the stability of its income streams. With a conservative 75% FFO payout ratio, the company’s 5%+ yield appears to be secure.

An additional advantage lies in VICI’s inflation-protected leases, with 96% of its leases linked to CPI escalators over the long term. This feature provides a natural hedge against inflation.

The company has a strong track record as a capital allocator, having invested in over $30 billion worth of assets since its inception, with $21 billion in equity proceeds. VICI’s current enterprise value (EV) exceeds $50 billion.

Potential Concerns and Opportunities

While VICI Properties may lack the extensive diversification of other REITs of its size, with Caesars accounting for 40% of its ABR and MGM representing another 36%, it’s important to note that the company is still in its formative years. VICI Properties is actively exploring opportunities to invest in various experiential properties beyond the gaming industry.

The core investment thesis for VICI Properties centers on the mission-critical nature of its assets, which I argue surpasses even industry stalwarts like Realty Income (O) and Agree Realty Corporation (ADC). These assets have provided some of the best CPI protection in the entire REIT industry.

Despite being primarily focused on North America, VICI Properties owns some of the world’s most prestigious casinos. The company’s plans for continued growth include expanding into other experiential sectors, such as the wellness industry, as evidenced by its recent acquisition of Canyon Ranch.

Why Invest in VICI Properties

The wellness sector is a promising area of growth, offering robust revenue per room (Rev/room) figures, as evidenced by the company’s impressive $1,720 in 2022. VICI Properties is already a market leader in this sector.

The company’s investment in Canyon Ranch, a preferred equity transaction valued at $150 million with a 10-year term, also provides VICI with options to call the real estate assets of the company, further enhancing its strategic position in the wellness industry.

VICI Properties recently expanded into Canada through a sales leaseback arrangement involving four casinos, demonstrating its commitment to growth and diversification.

Conclusion and Investment Thesis

VICI Properties stands out as a top-tier player in an attractive sector, known for its resilience even during economic downturns. Its investment thesis is underpinned by its strong fundamentals, capable management team, attractive yield, and considerable upside potential.

Even if we assume some degree of underperformance, VICI Properties remains an appealing investment opportunity, potentially offering annualized returns in the range of 6-8%. However, I believe the company is poised for significant outperformance over time.

Market analysts are generally bullish on VICI Properties, with 19 out of 20 analysts rating it as a “BUY” and an average price target of $37.84, representing a current upside of 23.5%.

In conclusion, I have increased my allocation to VICI Properties by 30%, and I plan to add more if I observe further weaknesses or if the stock does not recover. I target a long-term allocation of 2-3% to this REIT.

In summary, I am confident in VICI Properties’ prospects, and I give it a conservative price target of at least $38 per share, based on a 2025 estimated P/FFO ratio of 16-17x, offering investors a double-digit upside potential. Therefore, I consider VICI Properties a “BUY” and a compelling addition to my portfolio.