MGM Resorts CEO Jim Murren has always been effective on his company’s quarterly investor conference calls.
Explaining MGM’s position and outlook apparently comes easily for Murren, who clearly is articulate, even eloquent, by nature.
But on the company’s third-quarter call, Murren rose to a new level and gave what might be described as a virtuoso performance.
The theme of the call wasn’t so much MGM’s third-quarter performance and immediate financial outlook as it was the company’s evolution to an asset-light business model.
The trend of casino companies selling their properties and leasing them back started several years ago and has accelerated with the creation and maturing of the three gaming real estate investment trusts (REITs)—Gaming and Leisure Properties spun out of Penn National, VICI Properties born of Caesars and MGM Growth Properties, the offspring of MGM Resorts.
The REITS have changed the valuation of casinos for sellers by paying higher purchase prices based on revenues derived from companies that buy the rights to operate the casinos and from the rents to be charged to those operators, often, but not always, the selling company.
What Murren described, however, was more than a structure that gives sellers a good price and gives the REITs steady rental income that allows them to pay significant dividends to shareholders.
He described a holistic approach in which MGM evolves into a developer-manager-operator with the financial flexibility to invest into being an ever more profitable entertainment company.
Proceeds from sales can be directed into high return investments as opposed to being locked up in static real estate, Murren said.
MGM is approaching the asset-light model rapidly and in big ways. The sale-leaseback of Bellagio and outright sale of Circus Circus will net MGM more than $4.2 billion. The Bellagio sale to real estate giant Blackstone set the standard for the sale of MGM Grand, which will likely be announced later this year, Murren said.
Proceeds will allow for significant debt reduction and for return of capital to shareholders in share repurchases and dividends, Murren said.
The model and use of proceeds are especially important. Executing the asset-light model and investing in entertainment—whether an arena that can host sports events, or restaurant conference facilities that attract conventions—broadens the company beyond just the casino floor.
Creating and returning value to shareholders is, after all, the purpose of a business, and a lesson Murren has learned progressively in his tenure as CEO.
Below are the keys to MGM’s strategy as outlined in its third quarter investor presentation on the company’s website, which can be found at https://investors.mgmresorts.com/investors/events-and-presentations/default.aspx.
- Pursuing asset-light strategy to unlock significant unrealized value of our real estate assets.
- Evolving our business model away from a capital intensive real estate business to developer, manager and operator of leading gaming hospitality and entertainment properties.
- Use proceeds to fortify the balance sheet and increase returns to shareholders.
º Have already repurchased over $600 million of shares since the beginning of the year, which we expect to be significantly accelerated with future asset sales.
- Redeploy capital from mature markets at high multiples and re-invest in high growth, ROI opportunities.
- Proactively seeking solutions to monetize and/or unlock value from retained real estate assets e.g., MGM Grand, MGM Springfield, CityCenter, MGP OP units.
If successful in executing this strategy MGM might also become a model for an otherwise maturing industry.
• Targeting domestic net financial leverage of one time, by the end of 2020 (excluding MGP), and consolidated net financial leverage of three to four times.
