Now REIT fever has struck MGM Resorts.
Previously, it was regional casino companies Penn National, Pinnacle and Boyd that spun off their properties into a real estate investment trust, intend to do so, or are studying it.
MGM is the first of the big cap casino operators to be targeted for such a conversion.
The flare up was sparked by activist investor Land and Buildings Investment Management, which said that MGM’s stock would be worth at least $33 in a REIT spin off, and could be worth $55.
Their rationale is pretty simple: MGM is selling at 10 times projected EBITDA and comparable REITs and hotel companies both sell at 15 times. Further, luxury hotels have been selling at 17 times, Land and Buildings pointed out.
That gets the stock to $33 from the $19.66 MGM traded at before B&L’s announcement. (Note: It shot up 10.58 percent on the day of L&Bs news release to $21.74, though that was still well below MGM’s 52-week high of $27.64.)
Getting to $55 is a little trickier, and includes $10 in value for Japan, which hasn’t yet decided to legalize casinos and where MGM wouldn’t be guaranteed a property even if it does.
Still, it’s a significant appreciation, and not unusual. As L&B pointed out, Penn National shareholders have enjoyed a 70 percent price appreciation since the company announced its REIT spin off in November of 2012, and Pinnacle shareholders are up 34 percent in the short time since PNK made its REIT announcement.
PENN’s REIT spin off, Gaming & Leisure Properties, is selling at 15 times EBITDA for a lesser quality portfolio of properties, L&B noted, and said its valuation case for MGM selling at $33 is conservative.
L&B made a couple of other observations, such as MGM has a window of opportunity to refinance about half of its considerable debt without penalty, and its Macau operations can be spun off into a separate company or sold.
It also noted that the lodging industry has recovered with RevPAR up 8 percent in the past year, and that Las Vegas is recovering, too.
L&B also made the point that MGM has a collection of high-quality and luxury properties, such as CityCenter, Mandalay Bay, Mirage and Bellagio.
The idea that MGM might spin off its real estate into a REIT is not new. It is natural for such speculation after the PENN spin off of GLPI given MGM’s diverse and high quality properties.
CEO Jim Murren mentioned in MGM’s fourth quarter earnings investor conference call that the company has looked at the REIT possibility.
Further, MGM is much more like the big hotel companies such as Marriott than any other casino company. It gets a very high share of its revenues from hotel rooms, conventions, and non-gaming sources. Indeed, MGM has a non-gaming division developing resort hotels internationally.
And the likes of Marriott and Starwood have been through this process before, shedding ownership of hotels to adopt what has become known as the asset-light model where they own few of the hotels that carry their names.
So the pioneering work has been done by gaming’s sister industry, lodging.
It’s also interesting to note that, REIT or not, MGM shares have sold off over concerns about Macau, yet Macau is really all about opportunity for MGM.
If Macau continues to decline, it is a relatively small part of Las Vegas-centric MGM.
And if Macau rebounds even partly, MGM will benefit disproportionately as its new MGM Cotai will basically quadruple capacity there.
L&B, by the way, is bullish on Macau long-term, noting:
• just 1.5 percent of Chinese visit there compared to 10 percent of Americans who have visited Las Vegas;
• all the transportation infrastructure in the works to deliver people to Macau;
• that visitors typically stay just two nights compared to three for Las Vegas;
• the big hotel projects under way by all Macau casino operators to accommodate the resultant visitation increase;
To sum up, L&B might be pointing out the significant potential for MGM stock, even without a REIT spin off.
