True Triple-Net Leases are More Valuable than the Heart of the Ocean
A few takeaways from my deep dive into Vici Properties, the REIT world's money-printing darling
Hi everyone,
Mark to Market is a newsletter on the intersection of real estate, finance and technology, and specifically how they work together to shape the world around us.
This week, I share takeaways from my conversations with executives at Vici Properties, the most profitable publicly traded REIT anywhere in the world.
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Who is Vici?
VICI Properties Inc. is a real estate investment trust (REIT) laser-focused on casino and entertainment properties. Born out of Caesars Entertainment Operating Company’s 2017 bankruptcy reorganization, VICI emerged as a strategic move to separate real estate ownership from operations, maximizing creditor value through REIT tax advantages.
At its inception, VICI held a portfolio of 19 casinos and racetracks, leased back to Caesars for an annual rent of $630 million, plus four golf courses. Its name is drawn from Julius Caesar’s famed phrase "Veni, vidi, vici," or “conquer”, and that’s what they have set out to do.
Key Milestones Since Inception:
2017: Acquired Harrah’s Las Vegas for $1.1 billion, leasing it back to Caesars for $87.4 million annually.
2018: Raised $1.2 billion in an IPO, establishing itself as a major player on the NYSE.
2022: Acquired The Venetian Resort Las Vegas, including The Venetian, The Palazzo, and the Venetian Expo, for $4 billion from Las Vegas Sands Corp. The operations were simultaneously sold to Apollo Global Management for $2.25 billion under a long-term triple-net lease agreement.
VICI has scaled aggressively, now one of the largest owners of gaming and entertainment destinations in the U.S. Its portfolio features iconic properties like Caesars Palace, MGM Grand, and The Venetian Resort & Expo.
Revenue Breakdown (Q3 2024):
MGM Resorts International: 38%
Caesars Entertainment: 36%
Apollo Global Management (e.g., Venetian/Palazzo): 26%
At risk of stating the obvious, Apollo Global, MGM Resorts and Caesars Entertainment are three of the largest and most profitable tenants anywhere in the world. The former two boast quarterly revenues of $7 billion and $4 billion respectively, while achieving net profit margins of 10.7% and 4.4% each. Caesars does ok too although I don’t think there’s a single soul on the planet except perhaps Thomas Reeg himself (their CEO) who would tell you they’re nearly as well operated or nimble as the other two. Regardless, if there were ever such a thing as a “long term lease with a credit tenant” — Vici’s leases with those massive public companies who have billions on their balance sheets and the ability to issue equity at will, would be it. But while we’re on the topic of profitability, let me segue into my next point.
Not All Triple Nets are Created Equal
The chart above highlights the largest REITs with $10 billion+ market caps. The x-axis represents 6-month stock price performance, green circles have appreciated, and red circles have depreciated. As a brief aside, watching companies like PLD and AMT depreciate during a period when the Federal Reserve was cutting rates is eye-popping by itself. But there are only two very clear outliers. The first is CBRE, whose stock price has appreciated by 45% because a majority of their income is derived from Property Management, followed by GWS Revenue (property management tools), and Facilities Management Revenue. These basically all mean the same thing: they lean heavily toward operating buildings, rather than invest in them or transact.
The other clear outlier on the chart is VICI, whose stock price appreciated slightly, but stands out for a different reason. The y-axis on the chart above represents net profit margin. VICI trounces everything else on the chart and more than doubles the net profit margin of any REIT at similar scale. The reason for this, similar to the example of CBRE above, boils down to where they derive their revenue. As we already covered, VICI exclusively derives its revenue from triple-net leases signed by some of the largest credit tenants in the world. But not all triple-net leases are created equal. The creditworthiness of the tenant is just one factor, the rest boils down to specific nuances in lease language that only experienced real estate lawyers could understand. Exclusivity clauses, ROFOs, ROFRs, expense-passthroughs; each of these points is generally carefully negotiated with each tenant. Traditionally, the only other asset types besides gaming and leisure that were suited for true triple-net leases to credit tenants were office and retail. Traditional office and retail doesn’t really exist anymore…
Realty Income (O on the chart above) and Simon Property Group (SPG) are your traditional retail and office REITs, respectively. But they do not own exclusively triple-net leases and the leases they do own, are not truly triple-net; meaning operating expenses at the property level are not fully passed through to the tenants. In an inflationary environment like the one we’ve had over the past 5 years, that makes all the difference. Harkening back to the wry quip I made about Caesars earlier, perhaps one of the reasons they’re not doing so hot is that they’re bearing the brunt of the operating expenses at their properties while VICI, excuse the colloquialism, laughs to the bank with rent checks negotiated by leases signed back in 2017.
Its perhaps also worth a mention that Realty Income, Prologis and many of the like also engage in a decent amount of development activity, which can have its advantages during expansions cycles, but doesn’t sound quite as melodic as “operating revenue exclusively derived from triple net leases” in a macro backdrop like todays.
A Lesson in AFFO and a Fat, Sustainable Dividend
To quickly summarize, VICI’s tremendous margin is a result of being exclusively triple-net leased. They do nearly $4 billion in annual revenue at a 75% net profit margin. With $3 billion in AFFO, VICI allocates approximately 75% to a 6% shareholder dividend, retaining the rest for corporate overhead. Their main business lies exclusively in keeping a keen eye on the health of their tenants within the overall consumer landscape and managing capital relationships; on that latter point they are one of the biggest capital raisers within the REIT world and this is perhaps justified. They have proven themselves to be perhaps the most effective fiduciary amongst publicly traded REIT vehicles.
