VICI Properties (NYSE: VICI) is a relatively young real estate investment trust (REIT) focused on owning casino assets. W.P. Carey (NYSE: WPC) is a much older REIT that actually helped to popularize the net-lease business model that backs VICI’s business approach. There’s a lot to like about VICI, but if you are looking for a diversified REIT, it doesn’t hold a candle to W.P. Carey. Here’s why.
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The net lease
W.P. Carey and VICI both make use of net leases. This means that the lessees of their largely single-tenant properties are responsible for most property-level operating costs. Often net-lease deals are akin to financing arrangements in which the seller turns around and signs a long-term lease with the REIT for the property. The end goal is really to raise capital via the sale but to retain as much control as possible over a vital business asset.
That’s good for the seller/new tenant and for the buyer. Clearly, the seller gets cash it can use for other purposes, like growth-oriented capital spending or debt reduction. The net-lease REIT, meanwhile, gets a long-term tenant and a property that doesn’t cost much to own. Today’s high inflation rates, for example, fall mostly onto the tenant, which has to handle the increasing property-level costs for things like maintenance. All in all, this is as close to a win/win as you can probably expect to get.
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VICI, with a 4.7% dividend yield, as noted, uses this approach with casinos. W.P. Carey, with a 5.8% yield, takes a much broader approach with its portfolio. For investors looking for a REIT that can be a foundational holding in their portfolio, W.P. Carey will likely be a better fit. And that has nothing to do with the REIT’s higher dividend yield.
Spreading things around
There’s nothing exactly wrong with VICI or its casino focus. It owns 50 casinos, with roughly 47% of its rent coming from Las Vegas, a premier destination gambling market. The rest of its rent largely comes from regional casinos. The average remaining lease term is downright incredible at roughly 42 years. It also counts some of the biggest casino operators as tenants. As far as the gambling business goes, VICI is a prime player.
The problem is that it only owns casinos. Some might argue that VICI’s properties house gambling, retail, restaurant, convention, entertainment, and hotel businesses, suggesting that the REIT is diversified well beyond casinos. That’s a very generous view, since without the gambling piece, the other businesses probably wouldn’t be very attractive to consumers. And then there’s the not-so-subtle fact that VICI only has 11 tenants. VICI is a perfectly fine casino REIT, but investors need to go in understanding that it is a niche and highly focused investment. That may change over time, but don’t underestimate the risk that poses.
At the other end of the spectrum is W.P. Carey. This net-lease REIT generates roughly 27% of rents from industrial assets, 24% from warehouses, 17% from offices, 17% from retail, and 4% from self-storage. A fairly large “other” category (11% of rents) rounds things up to 100% and includes assets like hotels. In addition to this, W.P. Carey gets about a third of its rents from Europe. It is easily one of the most diversified REITs you can buy.
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Meanwhile, it has over 1,440 properties with more than 390 tenants. The average remaining lease term is around 10.8 years, which is actually pretty solid in the net-lease world even though it falls woefully behind VICI’s figure. If you are looking for one REIT to add to your portfolio, W.P. Carey is likely to be a better risk/reward option than VICI.
Backing that up is the fact that W.P. Carey has increased its dividend every single year since its initial public offering (IPO). In fairness, VICI can claim that too. But W.P. Carey IPOed in 1998, and VICI came public in 2018. It is entirely possible, especially given the long remaining lease term, that VICI will eventually build a dividend record like that of W.P. Carey, but at this point, only W.P. Carey has proven itself through multiple business cycles.
Go ahead, but go in knowing
This isn’t meant to suggest that VICI is a bad REIT; that doesn’t appear to be true given the company’s performance so far. The problem is that it is a young REIT with a very limited property focus. That’s not a foundational type of investment. W.P. Carey’s portfolio, diversified by property type and geography, along with its long history of success, is the kind of REIT you can count on to provide a solid foundation. Buy VICI if you want, but make sure you understand what you are buying. For most dividend investors, W.P. Carey offers a much better balance between risk and reward.
