VICI's sell-off is overstated; current valuation offers 11-20% upside despite potential slower dividend growth.

Now, we come to the dividend hike that shocked a lot of people. We have Vichy Properties with a dividend increase of 2.2%. Why is this such an interesting dividend increase? Well, it's below what management had been previously guiding towards.

Now, what's interesting about this is the dividend is very well covered. It's right at management's target payout ratio. So, we do need to ask the question, why was this dividend hike lower than we expected? It's a very important question that we address.

Well, to start, let's take a couple of things into consideration. The starting yield for Vichi is now sitting at 7.41%. Basically, one of the highest yields I've ever had with the exception of the 2020 crash.

In the last year now, the stock is down by 24.26%. It's trading right at a 52- week low. And at these prices, we can see Vichy Properties is trading at its lowest valuation multiple, lowest price to AFO multiple again in the last 5 years at about 9.98X.

So, what's going on with Vichi? Well, to start again, let's address why would they only hike the dividend by 2.2%. I was talking about this on X the other day and I also did a deep dive video, but really it could only mean a few different things.

One, AFO per share guidance will be revised lower. To be honest, I don't think this is the case. I think it'll be either number two or number three.

Number two would be that they're lowering their target AFO payout ratio, which is not necessarily a bad thing. So basically we need to understand this from a numbers perspective.

If Vichi is targeting a roughly 70 to 75% payout ratio, they're growing AFF over per share at around 3.3% and they raise the dividend by a rate below that. Then that's going to lower the payout ratio.

Why would they do this? Well, there's a few different things we could take into consideration. But number one, we have to understand that interest rates are going higher. Why is that important for REITs?

Well, REITs have two ways that they can primarily raise capital. They can issue debt, which means they'll take on more interest rate expense. Or number two, they can also issue stock.

Now, here's why this is interesting for Vichi. Vich's issued a lot of stock, as a lot of REITs have over the last few years with interest rates higher, making debt less attractive.

But because Vichi's stock price has fallen so much really in the last year, all of a sudden, issuing stock isn't attractive and taking on debt isn't really that attractive either.

So, what can they do? Well, what they can do is retain more capital so that they can fund growth internally, so they don't have to take on debt, so they don't have to issue stock.

That would make a lot of sense as to why they only raise the dividend by about 2.2%. Again, I don't think that's a bad thing at all. I think it's actually very wise.

However, number three would be that management expects AFO share growth to slow after 2026 and is setting dividend growth based on its longerterm outlook. Now, there's a few different reasons as to why this could be the case, but ultimately when we look at analyst projections, AFO per share is projected to continue to grow at a healthy rate, easily covering those large dividend payments.

But the caveat to this is what does the balance sheet look like? Why are we talking about the balance sheet? Because Vichy actually has a in investment grade quality balance sheet.

They're within their target leverage ratio. However, 99% of debt is fixed rate. Yes, that's a very good thing. But we can see debt starting to become mature. It is well laded, but as we have higher rates, they're going to have to refinance this debt at higher rates, which will ultimately increase their interest expense.

And if we see that continue, it'll pull back AFO per share over the long term. And if that happens, again, we'll likely see slower dividend growth over the long term. So again, maybe this is dividend growth based on its longerterm outlook.

But again, it's a scenario where if we simply look at Vichi through the lens of a dividend discount model, we'll jump down to our valuation sheet and let's just assume that Vichi's dividend growth does slow down substantially.

Maybe they only grow the dividend moving forward at 2.5%. There's still 20% upside from current prices. If it's all the way down to 2%, you're still looking at about 11% upside.

So, the reality with Vichy is this sell-off does look overstated. I would watch closely what happens with the dividend moving forward, but right now AFO per share continues to grow at a healthy rate.

Be sure to check out my video from a few days ago if you want a deeper dive into Vichi in particular with its tenants.