VICI Properties Vs. Realty Income: Which Is The Best REIT For 2023?

[Bong Hwan Ahn]

VICI Properties Vs. Realty Income: Which Is The Best REIT For 2023?

Jan. 31, 2023 8:05 AM ETRealty Income Corporation (O), VICICVX, CZR, DG, MGM, WPC, YUM76 Comments63 Likes

Summary

• VICI Properties outperformed Realty Income in 2022.
• I believe that this outperformance will continue in 2023.
• I explain why.
• We're currently running a sale at my private investing ideas service, High Yield Landlord, where members get access to portfolios, market alerts, real-time chat, and more. Learn More »

Chee Siong Teh

VICI Properties (NYSE:VICI) was one of the best-performing REITs of 2022. It generated a 13% return even as its close peer Realty Income (NYSE:O) and other REITs suffered large losses:

Data by YCharts

But is it still a good investment opportunity for 2023?

I believe so and here are three reasons why:

Reason #1: VICI Owns The Best Properties in the Net Lease Peer Group

Most net lease REITs like Realty Income invest in traditional net lease properties such as Dollar General (DG) convenience stores, Taco Bell (YUM) quick-service restaurants, and Chevron gas stations (CVX).

Dollar General

These properties can be great investments, but VICI owns much better assets than that. It owns mainly trophy casino net lease properties such as the Caesars Palace (CZR), the Venetian, and the MGM Grand (MGM).

1. These are true trophy properties that are irreplaceable.
2. They have been built to last pretty much forever.
3. They are mission-critical to their tenants, meaning that they cannot just move elsewhere. That's because the property itself has brand value and the casino license is typically tied to the property.
4. The new supply of such properties is limited since the barriers to entry are very significant.
5. And the risk of property obsolescence is also very small.

VICI Properties

Now compare that to regular Dollar General-type properties owned by Realty Income:

1. These properties are typically built to last 20-30 years. Then you tear it down and start all over again.
2. The property itself also isn't as essential to your tenant and so they hold a lot more leverage on you at the time of the lease renewal. If you cannot come to a deal, they may just move across the corner.
3. The supply is also a lot greater since there are lower barriers to entry.
4. And the risk of property obsolescence is greater. Think about gas stations or bank branches as an example.

Costar

So that's the first reason why I prefer VICI.

People are always comparing VICI to other net lease REITs like Realty Income, but in reality, they really aren't comparable.

Yes, they own use net lease structures, but the assets of VICI are far better.

Reason #2: VICI Has Stronger Leases

VICI's leases have much longer terms at 42 years vs. just around 9 for other net lease REITs like Realty Income. So the risk of vacancy is much lower.

They also have greater annual rent hikes, averaging around 2%, compared to closer to 1% for most other net lease REITs.

Their leases are true "triple" net leases, and not "double" net leases. This means that their tenants are responsible for all expenses, including even the maintenance of the properties. Actually, it is even better than that: according to VICI's leases, their tenants must reinvest a percentage of their revenue into capex each year.

In comparison, it is not uncommon for other net lease REITs like Realty Income to be responsible for some things like the condition roof and the parking lot. That's what you call a double net.

VICI also has periodic CPI adjustments in its leases to provide protection against inflation. Most other net lease REITs, with the exception of W.P. Carey (WPC), don't have that.

VICI Properties

VICI also has master lease protections, which means that it will put many properties under one lease. This matters because it prevents your tenant from defaulting on one property but continuing to occupy another.

It is thanks to these stronger leases that VICI was able to collect 100% of its rent in 2020, but other net lease REITs only collected 70-90%. VICI actually hiked its dividend by 11% in 2020 and another 9% in 2021.

Reason #3: Reasonable Valuation

Finally, despite owning better properties and having safer and more rewarding leases in place, VICI is today still priced at a small discount relative to its net lease peers.

	VICI Properties	Realty Income
P/FFO	14.4x	17x
Dividend Yield	4.6%	4.4%
Payout Ratio	66%	75%

I would argue that VICI deserves to trade at a premium valuation given all that we explained earlier.

I think that it deserves to trade at closer to 18x FFO, which would price it at closer to $40 per share, which is 20% above today's share price.

The company also pays a near 5% dividend yield and I expect it to grow its cash flow annually by 5-7% on average.

So you have a clear path to double-digit total returns and an additional 20% of repricing upside on top of it.

Recap:

To recap, here's a table that summarizes all the differences between VICI's properties and those of its net lease peers:

	Casino Net Lease	Average Net Lease
Cap rate	7-9%	5-7%
Rent escalations	1.5-2% (or CPI)	1-1.5%
Lease Length	Many decades	~10
Normalized Rent Coverage	3-4x	2-3x
Occupancy Rate	100%	98-99%
NOI Margin	95-100%	90-95%
Capex Need	Very low	Low
Barrier-to-Entry	High	Low
Lease Renewal Likelihood	Very high	High
Technology Risk	Below average	Depends
Master Lease Protection	Yes	Occasional
Mission Critical Real Estate	Yes	Yes, but to a lesser extent
Lease expiration in next 5 years	0% for VICI	3-5% per year on average
Competition for Investments	Low	High
Investment Spreads	Above average	Average
Iconic Assets	Some	No

When you take all of this into account, it is hard to argue against pricing VICI at a premium valuation. This is why I think that VICI is a better opportunity than Realty Income and most other net lease REITs.