This dividend-paying stock opens up a new investment direction

VICI properties (NYSE: VICI) offers investors a generous dividend yield of 4.2% at a time when S&P500 Index funds will only earn you 1.5%. The real estate investment trust (REIT), however, is relatively young and still has a very focused portfolio. But management is already taking steps to change the issue of diversification as it seeks to broaden its appeal to investors.

Play games from the start

VICI Properties was created at the end of 2017 after being separated from Entertainment Caesars. The move was really a way for Caesars to raise capital, as it effectively sold its properties to VICI. At the time, casino-focused REITs were rare. They still are, noting that VICI has completed its acquisition of peers MGM growth properties end of April. The only other major contender at this point is Games and leisure properties.

There are a few issues with the casino niche. First of all, there are only a limited number of desirable gambling properties to buy. This is not to say that the investment opportunity has been exhausted, but there is no huge growth avenue if these REITs want to focus on owning the best casinos. Second, the most attractive casinos are massive assets that typically encompass the casino itself, hotels, restaurants, shops, and entertainment spaces. This all takes a hit when casino demand drops during tough times, such as recessions.

That’s not to say that casinos aren’t desirable assets. Just that a little more diversification wouldn’t hurt the company’s growth prospects.

Where to go from here?

At this point, VICI owns 43 properties with eight tenants spread across the United States. It has notable exposure to Las Vegas-based destination assets (45% of rents) and smaller regional gaming areas. The average remaining term of its leases is 43 years, with 96% of its leases including regular rent increases. These are quite impressive numbers compared to other REITs that use the net lease structure. With a net lease, the lessee is responsible for most of the operating costs of the asset they occupy.

Casinos are therefore a solid base, but where does the growth come from? The answer is either more casinos or diversification outside of the casino space. The latter offers many more opportunities, even assuming that VICI continues to focus on experiential assets. For example, he has a relationship with Great Wolf Lodge, a company that operates water park resorts.

This investment is currently taking the form of two loans, one of which was concluded in July. But VICI also recently signed a loan deal with Cabot, a company that builds golf resorts. This particular deal has a sale-leaseback element, allowing VICI to expand its property portfolio in what it describes as the “pilgrimage experience sector”.

The most important thing here, however, is that it gives the casino owner a chance to try their hand at a different type of property. And thus, adding valuable diversification to its portfolio over time via a new growth platform. It’s unclear where these non-casino investments will eventually take the REIT, as success here could prompt it to buy everything from movie theaters to amusement parks.

Bigger, better, more opportunities

If you looked at VICI and fell back due to the highly concentrated casino portfolio, it might be time to start looking at this REIT again. As it seeks to thoughtfully expand beyond gambling, it looks like it will slowly become more and more attractive to conservative investors. There’s no reason to jump right in yet as gaming will remain a huge business for years to come, but it’s definitely a name worth putting on your watch list as it begins to take the steps necessary to become a much larger company.

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Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool recommends Gaming and Leisure Properties and VICI Properties Inc. The Motley Fool has a Disclosure Policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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