(Bloomberg) -- Born out of the casino industry’s biggest bankruptcy, Vici Properties Inc. has become one of the more surprising success stories in the gambling business.

The New York-based real estate investment trust owns 54 properties across the US and Canada, including such iconic resorts as Caesars Palace in Las Vegas and the Borgata in Atlantic City, New Jersey. It’s the largest owner of casinos on the Las Vegas Strip, with more than a quarter of the city’s hotel rooms. 

While the company owns the real estate, industry giants including Caesars Entertainment Inc., MGM Resorts International and Hard Rock International operate the properties and pay rent under long-term leases. Vici, which has just 26 employees, generated $2.2 billion in earnings before interest, taxes and depreciation on revenue of $2.6 billion last year. It’s market value exceeds $32 billion. 


The company has doubled in size over the past couple of years by gobbling up other properties, paying $4 billion for the Venetian in Las Vegas, for example, and adding others through the acquisition of rival MGM Growth Properties. Vici shares returned 130% since they began trading in October 2017, delivering almost fives times the return of the Bloomberg US 3000 Real Estate Index. 

But the tables have turned, and the stock has returned 1.6% this year, trailing industry averages. With interest rates up, investors have grown less enthusiastic about Vici’s 4.8% dividend. Some may also worry the company will have a difficult time finding new properties that allow it to grow at its historic rate.

“They’ve gotten so big now it’s going to be harder to move the needle,” said Chad Beynon, an analyst with Macquarie Capital who has an outperform rating on the stock.

Partly for that reason, Chief Executive Officer Ed Pitoniak is looking beyond casinos. Vici has bought golf courses and lent $80 million to Chelsea Piers, a sports complex in Manhattan. It’s helping to finance construction of Great Wolf Resorts Inc. water parks and a Canyon Ranch spa in Texas. It has an option to buy the high-end spa’s other properties in Arizona and Massachusetts.

Pitoniak, 67, is actively looking at other businesses, such as sports arenas and amusement parks, but hasn’t found a deal yet. His targets are unique destinations that don’t compete with the growing number of home entertainment options.

“Nobody’s building roller coasters and Harry Potter rides in their backyards,” he said in an interview.

Pitoniak, an Amherst College English major, has had a thrill-ride of a career. He started off in publishing, rising to editor-in-chief of Ski Magazine. After giving a particularly impressive presentation on the demographics of the industry, Pitoniak got hired to work for Intrawest Resorts Holdings, then the owner of Blackcomb, Stratton and other ski resorts. That ultimately led to his becoming CEO of two Canadian hotel REITs.

Pitoniak credits his days as an editor for his success in business. “I came to enjoy telling stories with numbers,” he said. After being contacted by an executive recruiter to help run Vici, Pitoniak worked on getting the company’s story straight.

Vici emerged from the troubled leveraged buyout of Caesars, a $30 billion deal completed just before the 2008 financial crisis. Unable to handle the debt, Caesars put its largest subsidiary in bankruptcy. Hedge funds and other creditors created Vici as a way to enhance their recovery.

REITs, which pay out 90% of their profit to shareholders and are exempt from corporate taxes, are a longtime fixture of real estate investing. But they’re relatively new to the casino business. Penn Entertainment Inc. launched the first when it spun off Gaming & Leisure Properties Inc. in 2013. 

The Covid-19 pandemic, which led casinos across the country to close for a few months, proved that the business could endure. Gamblers came roaring back when the resorts reopened. Vici’s tenants never missed a rent payment.

“That really struck a nerve with investors that this was one of the safest asset classes,” said Barry Jonas, an analyst with Truist Securities who recommends buying the stock.

Pitoniak renegotiated leases with Caesars so that Vici’s revenue would be steadier and less dependent on the performance of the properties. Vici began using the language of the REIT industry, including terms such as funds from operations and cap rates in its press releases to attract more real estate-focused investors. 

Privately, many casino executives doubt the long-term viability of the REIT model, which requires their companies to refurbish the properties and add new attractions to keep guests coming back, even though they don’t own the buildings. Operators typically work under 15-year leases that give them options to renew. Pitoniak says they have incentive to reinvest and capture most of the upside when they do.

“I came into this knowing zero about gambling,” Pitoniak said in an interview at the company’s Venetian resort in Las Vegas. But he’s learned to love it. “This may be the single most profitable building in American real estate,” he said.

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