VICI Properties Inc. (NYSE:VICI) announced this week that it will be acquiring the remaining 49.9% interest in the MGM Grand Las Vegas and Mandalay Bay joint venture from Blackstone Inc.’s (NYSE:BX) real estate investment trust (BREIT).
The two companies currently own the properties together in a joint venture, with VICI holding a 51.1% stake. VICI agreed to acquire the remaining interest for $1.27 billion cash and assumption of BREIT’s pro-rata share of the existing property-level debt.
The acquisition offers a unique opportunity for VICI to lock in significant growth for its investors in 2023 at a time when interest rates are hurting most companies in the REIT sector.
The Real Estate Select Sector SPDR Fund (NYSE:XLRE) is down 24.2% this year while VICI has posted gains of 13.19% and a total return of 16.75%.
Regarding the acquisition, VICI Properties CEO Ed Pitoniak told Benzinga, “We not only bought the remaining interest in two iconic Las Vegas properties, but we also bought an extremely valuable piece of paper. CMBS debt at a coupon of 3.558% is so below market in terms of what we would have to pay if we had to go out and get a loan to buy a property today.”
The existing loan was secured when the U.S. 3-Month Treasury rate was around 1.5%, compared to today’s rate of 4.27%. The current commercial mortgage-backed securities (CMBS) loan rate for hotel properties is between 6.04% to 7.04%.
What The Acquisition Means For VICI’s Bottom Line
Beginning in March 2023, VICI will be receiving an additional $155 million in annual rental income while only taking on roughly $54 million in additional debt service. This amount results in approximately $101 million in free cash flow for VICI and an impactful increase to the company’s adjusted funds from operations (AFFO).
J.P. Morgan’s REITs & Real Estate Services analysts increased VICI’s AFFO per share estimates for 2023 in light of the announcement about the acquisition.
“Our numbers go up. We put this deal in our model and our AFFO/share estimate in 2023 moves from $2.07 to $2.10, now reflecting y/y growth of 9.4%,” the analysts said in a note.
Evercore ISI analyst Steve Sakwa anticipates similar growth. “After we updated our model to incorporate the deal, our ’23 AFFO estimate rose to $2.11 which reflects an early 2023 close,” Sakwa mentioned in a note.
The lease also has 2% annual rent escalations built in for the first 15 years of the term, meaning VICI will be receiving almost $1.7 billion in additional rental income over the next 10 years.
Considering that the company targets a 75% AFFO dividend payout ratio, VICI should easily be able to continue growing its dividend, which currently has a yield of 4.61%.
To point out the value of dividends in today’s market, Pitoniak said, “If we’re looking at a period where stocks are somewhat stagnant, total return will be dependent on dividend yield or dividend growth. Our dividend growth is somewhere around 8%. If you believe the stock market will be trading sideways, you ought to be looking at companies that can grow their dividend.”
VICI’s three-year dividend growth rate is 8.21%, compared to the sector median of 1.04%. VICI increased its most recent quarterly dividend from $0.36 per share to $0.39 per share.
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