Casino reits

VICI Properties (NYSE:VICI) is Real Estate Investment Trust (aka an REIT) which specializes in the acquisition, ownership and leasing of large-scale destination entertainment and leisure resorts. These include casino, hotel convention center, dining, entertainment and retail properties. VICI recently acquired MGM Growth Properties for $17.2 billion in cash and stock, and the combined company now dominates the csino property industry with a diverse portfolio of over 43 gaming facilities and 122 million square feet of property.

This stock caught my eye because George Soros (Trades, Portfolio) was buying MGM Growth Properties shares in the first quarter of 2022 according to his firm's latest 13F filing with the SEC. Soros is well-known for investing in stocks right before they are acquired, so it is always interesting to look through his portfolio updates. In this article, we'll take a look at VICI to evaluate its potential as a long-term inflation hedge.

Business model

VICI Properties is a dominant REIT which specializes in the casino industry. The REIT owns iconic casino properties such as Caesars Palace Las Vegas, MGM Grand and the Venetian Resort Las Vegas. They also have over 58,700 hotel rooms and more than 450 restaurants, bars, nightclubs and sportsbooks. Their mission is to be Americas most dynamic experiential leisure and hospitality real estate company.

They operate with a triple net leasing model which means a tenant rents an entire freestanding commercial building and pays for all property expenses. This is highly advantageous it means VICI doesnt have to cover any property upkeep expenses.

Source: VICI investor materials

The company has the longest lease term compared to competitors at a Weighted Average Lease Term (inclusive of all tenant renewal options) of 43.2 years. Rents can be increased at an average of 1.8% (in line with the Fed's long-term average inflation goal).

The MGM Growth Properties acquisition, which was made with $17.2 billion in cash and stock, enhanced VICIs portfolio to include iconic properties such as the MGM Grand, Mandalay Bay and Luxor.

Their properties now dominate the entire Las Vegas strip with ~660 acres upon completion of the MGP transaction. The Las Vegas strip has been called the most economically productive street in the U.S., beating even places such as Fifth Avenue and Madison Avenue in New York. Moving forward, the company has plans to grow from other experiential properties such as gaming, theme parks, sports entertainment and even water parks.

Financials

VICI's most recent full-year financial results were for the full year of 2021. Revenue increased by 25% in 2021 to $1.5 billion, up from $1.2 in the prior year. Gross profit came in at an incredibly high $1.4 billion with a 93% gross margin, which is testament to the business model of a high quality REIT.

Operating income came in at approximately $1.4 billion for fiscal 2021, with normalized Ebitda of $1.4 billion. The operating margin was nearly as high as the gross margin.

On the balance sheet, the company has total debt of $4.9 billion and $12 billion in net tangible assets.

Valuation

In terms of valuation, VICI trades at a price-earnings ratio of just 17, which is cheaper than many industry peers. It seems as though the market is pricing in the risks casinos face with the rise of online gaming and more states in the U.S. legalizing casino gaming.

The GF Value chart, a unique intrinsic value calculation from GuruFoucs, rates the stock as fairly valued at the current levels.

Overall, I believe VICI's strategy of focusing on experential properties helps them to maintain their competitive edge. As a REIT, it operates with extremely high margins, and as the dominant company on the Las Vegas strip, their moat cannot be underestimated. A bet on VICI is a bet on the future of Las Vegas, which is why I believe it could present an attractive inflation hedge.

This article first appeared on GuruFocus.