Experiential Investments And Tactical Focus Set To Boost Revenue And Diversify Portfolio

Key Takeaways

• VICI Properties' strategic investments in unique experiential assets and Las Vegas properties indicate an expectation of significant revenue growth.
  
• The company's adjustment of its acquisition strategy and optimistic AFFO guidance reflect confidence in future earnings and portfolio diversity.
  
• Exposure to shifting consumer preferences, significant capital commitments, geographic concentration risks, and execution risks in strategic investments could impact VICI Properties' revenue and earnings.

Catalysts

An S&P 500 experiential real estate investment trust that owns one of the largest portfolios of market-leading gaming, hospitality and entertainment destinations, including Caesars Palace Las Vegas, MGM Grand and the Venetian Resort Las Vegas, three of the most iconic entertainment facilities on the Las Vegas Strip.

• The company is allocating capital to highly differentiated experiential buildings like the Venetian and Great Wolf Resorts with expected high investment yields, suggesting strong future revenue growth from these investments.
  
• VICI's decision not to exercise the call right to acquire Harrah's Hoosier Park and Horseshoe Indianapolis is based on its confidence in identifying and investing in better opportunities for AFFO growth and portfolio diversity.
  
• The company's focus on investments in Las Vegas, given the city's increasing visitation records and contemplation of a second airport, indicates expectations of continued strong performance from its Las Vegas assets, which should positively impact revenue.
  
• VICI's emphasis on securing investments with indispensable value to their occupants, particularly in the gaming sector both domestically and internationally, points to a strategic approach aimed at sustained revenue growth and diversification.
  
• The increase in AFFO guidance for 2024 reflects a positive outlook on the company's financial performance, suggesting management's confidence in its strategic investments and operational efficiency improving earnings.

Assumptions

• Analysts are assuming VICI Properties's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 70.4% today to 67.5% in 3 years time.
• Analysts expect earnings to reach $2.9 billion (and earnings per share of $2.8) by about September 2027, up from $2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2027 earnings, up from 13.2x today. This future PE is lower than the current PE for the US Specialized REITs industry at 29.7x.
• Analysts expect the number of shares outstanding to grow by 3.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.43%, as per the Simply Wall St company report.

Risks

• Concerns over rising competition in the experiential real estate sector, which could pressure revenue growth if consumer preferences shift or new, innovative experiences emerge that draw away from VICI's properties.
  
• Anxiety regarding the significant amount of capital commitments (up to $950 million) for the Venetian and Great Wolf Resorts projects, which could strain net margins if these investments do not yield anticipated returns or face delays.
  
• Worries about reliance on specific geographic locations like Las Vegas, where 45% of VICI's rent is collected, could impact revenue stability if there are any negative shifts in tourism or regulatory changes in the gaming industry.
  
• Risks associated with the execution of strategic investments in niche markets (e.g., gaming and nongaming opportunities both domestically and internationally), potentially affecting earnings if these ventures do not perform as expected or encounter regulatory hurdles.
  
• Concerns over potential shifts in the entertainment and consumer discretionary spending landscape, especially post-pandemic, that could alter the fundamental dynamics of experiential spending, potentially affecting revenue and earnings growth if VICI's properties fail to attract or retain guests.

Valuation

• The analysts have a consensus price target of $35.73 for VICI Properties based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.0, and the most bearish reporting a price target of just $31.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.3 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 6.4%.
• Given the current share price of $33.12, the analyst's price target of $35.73 is 7.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.