VICI Properties: The Potentially Huge Asset Hiding In Plain Sight (NYSE:VICI)

Let The Good Times Roll?

VICI Properties, Inc (NYSE:VICI) is a REIT that specializes in entertainment properties, primarily through sale-leaseback transactions with its tenants. Listed publicly in 2018, the company owns several household name properties, including multiple Las Vegas casinos including Caesar’s Palace, The Venetian, and the MGM Grand, in addition to four championship golf courses and other properties such as Great Wolf Lodge.

The stock has performed well in its public life, delivering a total return of almost 120% versus the S&P 500’s (SPY) return of 88%.

But of course, entertainment is a fickle thing, dependent on the spending ability of the consumer. In this regard, the picture has been deteriorating recently. We understand if the previous sentence induces eye-rolling given the fact that the financial media has been beating the drum about a pending recession for what feels like years at this point, but data is emerging that shows that the American consumer may be running out of steam as savings rates plummet to below pre-pandemic levels. From The Economist:

Research by Hamza Abdelrahman and Luiz Oliveira of the Federal Reserve Bank of San Francisco suggests that Americans have burned through more than 90% of the “excess savings” they amassed in 2020 and 2021. What little remains, the economists estimate, is likely to be gone by the end of September.

Of course, personal savings rates don’t dictate the final state of the economy, but it bodes poorly for discretionary spending that savings accounts (and rates) are dwindling.

The market also seems to be questioning the ability of consumers to continue spending money at VICI’s properties, as the stock has fallen 5% over the last twelve months on a total return basis and almost 10% on a price appreciation basis.

Despite the near-term concerns, boom and bust cycles for the entertainment space and Las Vegas in particular are nothing new–in fact, with the diversification of the city’s offerings away from gambling over the last few decades and into an adult play land with premium sports, music, and dining options, it seems all but certain that Vegas itself will come out of any non-Great-Depression-level downturn stronger.

Deal Making

VICI’s recent quarter printed a record $830 million in revenue, against which the company paid out $396 million in dividends (pictured below).

VICI’s management is acquisitive (which is the primary growth engine for the company), and management announced in its recent earnings call that it was taking steps to further diversify away from Las Vegas with a partnership with Canyon Ranch, a high-end, experience focused chain of wellness centers with locations in California, Nevada, Massachusetts, and Arizona and which plans to expand into new markets.

This investment into the high-end experience market is likely meant to serve two purposes–as a growth vehicle targeting high-earning clientele (as evidenced by VICI’s $150 million preferred equity investment), and to provide a bit of a hedge against the fluctuations in travel and spending of the Vegas middle-income tourist crowd given that recessions tend to impact the spending habits of high-earners less overall.

The Asset Hiding In Plain Sight

However, high-profile VICI’s properties and acquisitions may be, and however fearful markets are of an economic downturn in the near term, we think that the company has an incredibly valuable asset on its balance sheet that most investors have probably only given a passing thought–land.

In VICI’s case, this particular land is 27 acres of undeveloped land adjacent to the Las Vegas strip. While the company discloses this in virtually all of its filings, investors are likely to discount just how significant an asset this is for the company for an accounting reason we’ll discuss shortly.

The last mention of the land on a conference call took place in the first quarter, 2022, where CEO Ed Pitoniak stated during the Q&A portion of the call:

Just as a reminder, we have really 34 acres in Las Vegas that are underdeveloped, 7 are in front of Caesars Palace. Those — that sits inside the Las Vegas master lease, and then there are an incremental 27 acres that we own. Caesars also owns some acreage next to our 27 acres. As it pertains to development, as you can imagine, as you — and you are alluding to or as you mentioned, there have been some significant sales of real estate acreage on the Las Vegas Strip or near the Las Vegas Strip. It continues to make our land very valuable.

Now, readers of VICI’s balance sheet may be forgiven for not spending much time on its ‘Land’ line item–it fluctuates around the $150 million mark depending on acquisitions or dispositions, which pales in value when compared to the more than $40 billion in total assets the company owns.

However, we remind readers unfamiliar with land accounting conventions that undeveloped land assets are held on the balance sheet at cost–that is, companies cannot record depreciation (or appreciation, for that matter) of held land. This–for reasons we hope are obvious–matters.

VICI has had possession of the land since its public markets debut (as far as we can tell) since some of the companies earliest initial filings make reference to it, noting on page 76 that:

Finally, we believe the approximately 34 acres (after giving effect to the sale of approximately 18.4 acres to Caesars in December 2017) of undeveloped land adjacent to the Las Vegas Strip that we own will provide attractive opportunities for potential future expansion and development.

(For the reconciliation between 34 and 27 acres, remember that Pitoniak noted in the conference call that 7 of the acres are currently included under the Las Vegas Master Lease).

The cost basis of this undeveloped land to VICI (which is the recorded amount on the current balance sheet, hence why it’s significance may not be immediate to investors) appears to be quite low as well, especially in light of today’s market. In the same filing referenced above (page F-9), the company listed its land and non-depreciable land improvement assets at that time at $35.5 million.

Just how valuable is this land today? While it’s difficult to say, Pitoniak did go on in the first quarter 2022 earnings call to say “I think there was one [transaction] that just took place, small acreage of almost over $30 million an acre.”

Not knowing where this transaction took place obviously limits our ability to extrapolate, but a sale of 27 acres prime land against the strip at $30 million would be $810 million. Now, it’s unlikely that VICI would explore an outright sale of the land, but would rather seek to develop and lease it.

For reference, Caesar’s palace (including the Forum shops) sits on 85 acres, while The Venetian sits on 36. Adding a new hotel or entertainment district within this undeveloped land, then, is certainly feasible. If VICI were to do a deal with Caesar’s (which, recall, management says owns adjacent property), the resulting development could be significantly more impactful should it include Caesar’s land as well.

For additional context, The Venetian generated $64 million in revenue for VICI in the latest quarter, or roughly 13% of the total revenue generated for the period. An additional, new development would almost certainly have a substantial impact on VICI’s top and bottom line.

The market also appears to not be appreciating the future potential for this development, as evidenced by the company’s falling price-to-earnings [PEG] ratio of only 2.23–a discount to other experience-based and gaming REITs (pictured above). For those wondering why we are highlighting PEG, we do so because management has highlighted the company’s PEG ratio previously. While it may not be the greatest evaluator of a REIT, it is something management appears to watch and is therefore at least worth mentioning.

On a forward P/FFO basis, the stock currently trades hands at an estimated 12x FFO.

Given the historic gap in the stock’s price versus analyst targets (see chart below), we think that part of the rationale for the higher price targets may include a realization of value for VICI in the undeveloped land, which the market in turn may be ignoring.

The Bottom Line

VICI is a well-run entertainment REIT with several A-level properties and an expanding portfolio of high-end, experience based resorts that is likely to perform well in the long run on its own. However, with the existence of a large, undeveloped asset on its balance sheet, we think that investors may be surprised (in a good way), if and when management decides the time is right for a new development. Further, we believe that the current pessimism in the stock (evidenced by the falling share price amid renewed recession concerns) presents a potential opportunity for far-sighted investors.