A lot of important developments get lost in the rush of first quarter earnings season and now is a time to look at one of them.
MGM Resorts has brought the gaming industry’s second publicly traded REIT into the world, joining Penn National’s spin off, Gaming & Leisure Properties.
MGM Growth Properties is a variation of the GLPI theme of an entirely independent REIT.
MGP will remain closely associated with MGM, which owns 27 percent of the stock. And it will own only 10 of MGM-managed properties, but it will grow, likely acquiring the real state of MGM’s under-construction casinos in National Harbor outside Washington, DC and in Springfield, MA, and possibly adding other MGM properties along the way.
The attractions of the REIT set up are widely known by now.
REITs:
• Unlock value as they are valued at more like 15 times EBITDA rather than the seven or eight times for regional casino companies, or the 10 or 12 times for destination resort companies.
• Reward shareholders with hefty dividends as they are required by law to pay out almost all of their profit in dividends.
And in an era of flat interest rates and volatile bond markets, the dividends from REITs, are safe and reliable thanks to rental payments from tenants.
• Provide the potential for business diversification as the new REITs are free to acquire non-casino assets, such as hotels.
• Provide shareholders in the remaining operating company with what is called an asset-light model where management can focus on operations without the drag of heavy debt.
• Provide operating companies with more growth opportunities as their light debt load creates flexibility for their own acquisitions.
So far, REITs have been a good bet for investors. PENN and GLPI appear to have bright futures in their respective businesses.
GLPI also has enriched shareholders of Pinnacle when it bought PNK’s real estate and, in the process, provides PNK shareholders with dividends as investors got 0.85 percent of a share of GLPI for each Pinnacle share they owned.
Optimism about MGP’s future seems as bright.
Below is a sampling of what equity analysts say about the new company.
• Felicia Hendrix of Barclays put a $26 target and overweight rating on the stock.
MGP has strong rent payments coming from MGM Resorts but also growth ahead as it has first right to acquire the real estate of National Harbor and Springfield projects and could acquire other MGM properties and growth opportunities, Hendrix said.
National Harbor could add 6.4 percent to MGP’s 2018 adjusted funds from operations and Springfield could add 3.4 percent, she said.
MGP also gets strong rental payments with a 2 percent escalator lease, she noted. MGM is a strong tenant with rent coverage of three times vs. 1.9 that Penn National provides for Gaming & Leisure Properties. Even in the recession, MGM’s coverage would have bottomed at 2.1 times, Hendrix said.
Hendrix forecasts MGP to generate $1.38 a share in funds from operations this year and $1.21 next. Her EBITDA forecasts are $450 million this year, $542 million next and $640 million in 2018.
Her target is 15 times 2017 EBITDA. She sees upside in the stock to $30 and downside to $21.
• Joe Greff of JP Morgan likewise puts a $26 target and overweight rating on MGP.
He also cited MGP’s attractive lease, growth model and dividend, and noted the stock’s valuation as more attractive than REIT peers, said its debt-to-EBITDA ratio of 5.4 times is both better than peer average and the company will generate excess cash with which to pay down debt.
Greff expects adjusted funds from operations of $1.83 a share this year with an implied $1.43 dividend, and $1.87 next year with a $1.50 dividend.
• Thomas Allen of Morgan Stanley has MGP at overweight with a $24 target, which is 14 times his 2017 EBITDA forecast of $541 million plus $2 for the to-be-acquired National Harbor and Springfield locations.
Allen has MGP earning at 58 cents a share this year, and 86 cents each for 2017 and 2018.
In addition to the growth model built in with MGM, there is $1.78 billion in EBITDA elsewhere in gaming that can be acquired, though MGP will focus on quality properties, Allen said.
• Carlo Santarelli of Deutsche Bank rates MGP a buy with a $26 target seeing earnings of 68 cents a share this year and $1.06 next.
Besides MGP’s strong lease and growth model, Santarelli also cites the value of Las Vegas Strip acreage supporting the stock, low cost of funds and a dividend yield he puts at 4.3 percent this year and 6.4 percent next.
