To The Moon

$Vici Properties(VICI)$

Earnings Breakdown: More Than Meets the Eye

Vici Properties, a Real Estate Investment Trust (REIT), has just released its latest quarterly earnings. However, if you only focus on the key highlights, you may overlook some critical details—there’s more to the story than meets the eye.

For Q4, Funds from Operations (FFO) came in at $0.58 per share, missing expectations by about $0.09—a fairly significant shortfall. On the other hand, revenue was reported at approximately $976 million, marking a 4.7% year-over-year increase and exceeding estimates by $6.76 million. This resulted in mixed performance on both the top and bottom lines. Despite this, the stock is currently up 1.33%, and over the past month, it has gained about 4.64%.

Why Is the Stock Rising Despite the FFO Miss?

So why is the stock trending upward despite a notable miss on FFO? To understand this, we need a quick lesson on REITs.

Looking at other key metrics, adjusted Funds from Operations (AFFO) rose by 5.4% year-over-year to about $601 million, while on a per-share basis, it increased by 3.6%. This difference raises a question—why didn’t per-share AFFO grow as much as the overall amount?

By analyzing the stock data, we can see that Vici Properties has been issuing new shares almost every year. While this technically dilutes shareholders, it’s a common practice for REITs, which are legally required to distribute 90% of their earnings as dividends. This leaves them with two primary growth strategies: taking on debt or issuing new shares. When interest rates were low, they leaned on debt financing. However, as rates increased, they shifted to issuing new shares. Notably, from 2023 to 2024, share issuance slowed down, which explains why per-share AFFO growth lagged behind total AFFO growth.

On the positive side, Vici Properties recently received a credit rating upgrade from Moody’s with a stable outlook—an encouraging sign for investors.

Still, this doesn’t fully explain the significant FFO per-share miss. The Q4 adjusted FFO per share of $0.58 fell short of the consensus estimate of $0.67, leading to a year-over-year decline. However, this drop was largely driven by a non-cash accounting adjustment related to Current Expected Credit Loss (CECL) provisions.

Accounting vs. Reality: Understanding the CECL Adjustment

Under standard accounting rules, companies must estimate and record expected credit losses upfront, rather than waiting for actual losses to materialize. In Vici Properties' case, an increase in this reserve—potentially to account for higher tenant default risk—directly reduced reported earnings and AFFO. However, it’s important to note that no actual cash outflow occurred; this was merely a precautionary adjustment.

As a result, the decline in AFFO was mostly an accounting decision, rather than a reflection of any deterioration in the company’s core business. If Vici determines in future quarters that it has over-reserved for credit losses, it could reduce the provision, which would then boost AFFO.

From an accounting perspective, the company is simply managing risk, while its underlying business remains strong. Given that Vici Properties also recently received a credit rating upgrade, investors can take this as a sign of stability, rather than a red flag.

The Bigger Picture: Why REITs Are Attractive Right Now

At first glance, the headlines for Vici Properties don’t tell the whole story. In reality, this earnings report was even stronger than it initially appeared. On top of that, REITs are currently trading at some of the most attractive valuations we’ve seen in a long time. I recently covered this in my free newsletter (link in the description), but to put it into perspective—REITs are now at their lowest valuations since the Global Financial Crisis.

Historically, the last time REITs were this undervalued, they went on to significantly outperform the S&P 500 over the next three years. For example, VNQ, Vanguard’s Real Estate ETF, delivered an average annual return of nearly 22% during that period, compared to about 12.5% for the S&P 500. In a moment, we’ll dive into Vici Properties’ specific valuation, but first, let’s explore why this REIT stands out.

If you’re unfamiliar with Vici Properties, there are a few key factors that make it an exceptional REIT. To be clear, not all REITs are great investments—many have serious risks that would keep me from investing in them. However, Vici has a few unique strengths that set it apart.

Dividend Overview

Vici Properties (NYSE: VICI) is a top choice for income-focused investors, offering a reliable dividend with a yield of approximately 5.5%. Since its IPO in 2018, Vici has consistently raised its dividend, with the most recent increase of 6.4% in September 2023, bringing the annual payout to $1.66 per share. With a payout ratio of around 70-75% of AFFO, the dividend remains well-covered and sustainable. Vici’s triple-net lease model ensures steady cash flow, with 100% rent collection even during economic downturns like 2020. Additionally, 40% of its rent roll is CPI-linked, meaning rental income rises with inflation, further supporting dividend growth. As a REIT, Vici must distribute at least 90% of its taxable income as dividends, making future increases likely as earnings grow. With its strong financial foundation, inflation protection, and consistent dividend growth, Vici Properties remains a compelling option for investors seeking high-yield passive income.

Why Vici Properties Stands Out

Looking at their investor presentation, three key slides stand out:

Triple-Net Leases – 100% of Vici’s contracts are structured as triple-net leases. Under this arrangement, tenants cover property taxes, insurance, and maintenance costs, which makes Vici’s cash flows highly predictable. As an investor, I love stability, and these leases not only provide that but also contribute to higher profit margins.

Resilient Rent Collection – Many REITs struggled in 2020, with tenants unable to meet rent obligations. However, Vici collected 100% of its rent throughout that turbulent period. A REIT is only as strong as the tenants in its portfolio, and the fact that Vici’s tenants continued making payments in full—even in tough economic conditions—speaks volumes about the strength of this business.

Inflation Protection – One of my favorite aspects of Vici is its built-in inflation protection. Currently, 40% of its rent roll includes CPI-linked escalations, meaning rent automatically increases with inflation. By 2035, that figure is expected to reach 90%, making inflation much less of a concern for investors in this REIT.

Potential Risks: What Investors Should Watch

While Vici has several advantages, no investment is without risks. To get a deeper understanding of potential challenges, you can review the company’s 10-K annual report, which details key business risks. This report is typically hundreds of pages long, but one of the first sections highlights critical risk factors.

One notable risk is Vici’s dependence on its tenants, as the company relies on them for nearly all of its revenue. The 10-K explicitly states that if a major tenant faces financial difficulties, it could impact Vici’s performance as well. However, given the strength of Vici’s tenants and its consistent rent collection, this is not a major concern for me at this time.

Conclusion

Vici’s earnings report was stronger than it appeared at first glance. The FFO miss was largely an accounting move, not a fundamental issue. Meanwhile, the stock is rising, REIT valuations are historically low, and Vici remains a well-positioned, resilient REIT with strong inflation protection.

Would you invest in Vici Properties at current levels? Let me know in the comments!

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.