With casinos heating up, is VICI a buy?

VICI Properties (VICI) may have just hit its share-price turning point.

Regardless of whether you follow real estate investment trusts (REITs) like I do, you probably saw that Caesars Entertainment (CZR) – owner of iconic casinos like Caesars Palace in Las Vegas and Caesars Atlantic City Resort – agreed to be acquired by Tilman Fertitta’s privately owned Fertitta Entertainment.

That alone set the markets astir. But then another major headline hit the ticker tape this morning: Investment and holding company People Inc. (IAC) has submitted its own proposal to acquire all of MGM Resorts International (MGM) after previously building up a 26% position.

The offer is for $48.30 per share in cash, which values the casino company at around $18 billion.

This back-to-back news is a very big deal for VICI, since Caesars and MGM are its two largest tenants. Together, they account for roughly 70% of annualized base rent.

Now, there are typically two reasons a company becomes a buyout target. Either it's strong and growing in ways that will complement the acquirer. Or someone else thinks they can do a better job unlocking value.

Both casino cases fall into the latter, and both need to be explored in order to properly evaluate where its landlord is now… and where it could be going forward.

I know what the naysayers are saying about Caesars, at least. (Analysts and investors alike seem much more bullish on the MGM takeover.) But there’s a lot of very interesting data to consider.

And I believe it ultimately makes an optimistic case for VICI.

I write about VICI quite a bit here at Wide Moat Research. In fact, I mentioned it not once but twice just last week.

In "Not all net-lease REITs are created equal," for instance, I noted how – even though I really like the REIT – "it's hard not to see how undiversified it is."

On the one hand, “VICI owns some of the world’s most iconic gaming real estate,” including “Vegas’ MGM Grand and Venetian.” And there’s no mistaking how valuable those and the Caesars properties are.

And right now, Caesars is struggling as inflation takes a toll on middle-income consumers.

You might think that VICI investors would therefore be happy another company is coming in to rescue its “troublesome” tenant. But many are not. They see a privately controlled Caesars as an ultimate negative, and they’re more than willing to say so.

Take Haendel St. Juste, managing director and senior REITs analyst at Mizuho Americas. He just downgraded VICI from Outperform to Neutral.

There’s nothing to suggest “Fertitta’s offer is contingent on lease modifications,” he wrote, so VICI’s cash flows should be safe… “for now.” Though, going forward, he’s concerned that “Fertitta brings higher leverage and less transparency as a private entity. With Caesars already carrying a relatively weak credit rating (B+), we believe the acquisition negatively impacts the tenant credit of the entity.”

That’s certainly one way to look at it. And VICI investors should be fully aware of the risks involved in this turn of events.

However, when I look at the Fertitta deal, I see much more reason for optimism than despair.

Back in March, The Wall Street Journal reported that Fertitta Entertainment had offered Caesars roughly $7 billion to buy it out. That’s about $34 per share.

But it appears the final – and accepted – offer is for $31 per share, valuing Caesars’ total equity at about $5.7 billion. Fertitta will also assume about $11.9 billion of debt, which puts the deal’s enterprise value closer to $17.6 billion.

While Caesars does have a go-shop option through July 11 to find a more attractive bid, that likely won’t lead to anything. To quote St. Juste again, “given that the deal price was below initial expectations,” any other suitors likely dropped out.

So Fertitta Entertainment will almost certainly get to add Caesars’ name, hard assets, and customer database to its current holdings… which already include casinos, upscale dining establishments, and the NBA’s Houston Rockets.

As such, this isn’t a presumptuous purchase. Private though it be, Fertitta knows how to entertain.

According to Forbes, Tilman himself is worth $10.9 billion and has ample experience in tackling the tasks at hand. He bought the Golden Nugget Casinos in 2005, took Landry’s private in 2010, and also opened casinos in Atlantic City; Biloxi, Mississippi; and Lake Charles, Louisiana.

In November 2024, he acquired 9.9% of Las Vegas Wynn Resorts, which made him its largest stockholder. And he increased that stake further to 12.3% the following April.

Considering those previous and ongoing success stories, I’m confident Fertitta has a very viable plan to turn Caesars’ fortunes around as well.

Hopefully that helps ease VICI investors’ minds somewhat. But there’s more good news according to my calculations.

For instance, VICI has two primary Caesars master leases: one that covers its major Las Vegas Strip assets and one that covers regional casinos across the U.S. There’s also a separate rental contract for Harrah’s Joliet that’s often discussed separately in company filings.

The 18 Caesar’s properties it leases bring in $1.246 million in rent per year with a weighted average lease term (WALT) of 29.1 years. That’s one of the reasons I like VICI in the first place. Its underlying business model involves long-term contractual leases, with an average 40 years for its top 15 tenants.

Plus, 87% of its rent roll includes CPI-linked rent escalations that keep it protected from inflationary forces.

Now, its Regional Master Lease has seen rent coverage become much tighter. As I said before, middle-income customers are struggling more right now; so there is greater risk that comes with that contract.

However, I would argue the market has already driven VICI’s shares down more than enough to account for that concern.

And, again, Fertitta – both the man and the company – seem well-equipped to enhance Caesars, regionally and otherwise.

As for People’s proposal for MGM Resorts, there appears to be no reason to assure anyone there. Investors seem quite content with that deal-in-the-making, probably in part because it’s a public company.

That does make a difference, I admit. But only to so much of a degree. To me, here’s the bottom line…

There was tenant-credit risk in both cases, and there still will be once everything is said and done. So investors should continue monitoring leverage levels and operating performance at both companies.

Even so, it appears that some of the smartest capital allocators in gaming and entertainment believe these businesses – and the real estate supporting them – are worth substantially more than public markets currently imply.

In which case, VICI’s shares should more than bounce back from here. If anything, maybe it’s time to double down on them.

Happy SWAN investing,

Brad Thomas
Editor, The Wide Moat Daily

The markets may be up, but that doesn’t mean every single stock is. In fact, there are 10 previous market “darlings” that now trade at a steep discount.

Cell tower giants… specialized real estate… tech consulting firms… These out-of-favor companies may span the sectors, but they all beg the same question.

Are they bargains or value traps?

That’s what Nick Ward and I discussed in last week’s Wide Moat Show, with some interesting conclusions all around.

Catch the full episode right here.