Vici Properties (NYSE:VICI) And REP properties (NYSE:EPR) have one major similarity: these real estate investment trusts (REITs) own experiential assets. They also have high yields, with Vici offering 5.8% and EPR paying an even more attractive 8.4%.
However, before you jump into any of these REITs, you’ll want to get to know them a little better.
Vici focuses heavily on casinos
Although Vici management points out that it owns 39 non-gaming properties to balance its 54 casino assets, the REIT only generates about 2% of its rents from non-gaming properties. This makes sense, given that modern casinos are massive assets that encompass gaming, hotels, retail and entertainment in a single property. The company’s non-gaming assets are largely leased bowling alleys from Bowlero. Bowling alleys are relatively small properties.
Added to the concern linked to the concentration of the casino is the fact that two tenants from Vici, Caesars Entertainment And MGM Resorts, represent nearly 75% of the rent, and it becomes even more obvious that concentration is a major issue to consider with this park. The REIT is working on this issue and has a portfolio of non-casino assets that it could end up purchasing, which would effectively give it more leverage to use as it looks to grow its portfolio. Still, casinos are the key to gambling here.
EPR Properties is more diversified
In comparison, EPR Properties is considerably more diverse in the experiential space. It has movie theaters, amusement parks, ski resorts, fitness and wellness establishments, and experiential hotels (such as hotel/water park combinations). It is also slightly exposed to games of chance: these properties represent around 2% of rents. That said, the greatest exposure is to movie theaters, with 37% of rents, a percentage that has declined significantly in recent years. This is voluntary, as the REIT strives to become more diversified.
Bringing people together at a bad time
Given the lack of diversification in Vici’s portfolio, one might think that EPR is the better option. But EPR had to cut its dividend during the pandemic. The big culprit was its presence in movie theaters, as theater chains weren’t in particularly strong shape at the start of the global health crisis. Given this financial weakness, the EPR had to enter into agreements with cinema operators to help them survive periods of closure and social distancing.
Vici, on the other hand, continued to increase its dividend each year during the pandemic, largely because its casino tenants were financially strong enough to weather this difficult period.
In the first quarter, Vici’s adjusted funds from operations (FFO) payout ratio was approximately 74%. EPR’s adjusted FFO payout ratio was approximately 76%. So they’re both roughly in the same position currently on this metric.
That said, Vici’s business remains as strong as ever, while EPR is still trying to recover from a difficult period. But it is doing so, with rent coverage for its theater tenants returning to pre-pandemic levels. Its other tenant groups, meanwhile, enjoy rent coverage levels well above their pre-pandemic rates. Overall, EPR is stronger today than it was before pandemic conditions forced it to cut its dividend. This suggests that the current yield may present an opportunity for contrarian investors.
Neither REIT is a risk-free investment
Given the history here, investors looking to play it safe will likely prefer Vici as it builds on a solid foundation of casino assets. However, the risk/reward balance seems attractive at EPR, as it manages to overcome the difficulties of the film industry while diversifying outside of this struggling niche. Only those willing to take on a more aggressive investment will be interested in this story. But given EPR’s improving business trends and the stock’s high yield, the story looks increasingly compelling.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool posts and recommends Vici Properties. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
VICI Properties vs EPR Properties: Which High Yield Stock is Best for Dividend Investors? was originally published by The Motley Fool
