Hedge Fund Land and Buildings Investment Management has recently proposed MGM Resorts International form a Real Estate Investment Trust. The REIT would see MGM split off its property and casino management into two separate companies.
In business, much like most things, people are always looking for the hot, new thing. While it may not be as glamorous, or hot as other things in the world, it seems in the casino industry, that trendy thing happens to be Real Estate Investment Trusts (or REIT). The latest company looking to join the ranks is MGM Resorts International, which follows gaming giant Penn National Gaming.
New York hedge fund Land and Buildings Investment Management, which has big plans for the gaming company, proposed the move earlier last week. In a statement, head of the investment firm Jonathan Litt said, “We have been attempting to work collaboratively with MGM management to find an optimal corporate structure for the company and believe the proposed REIT conversion will maximize shareholder value while minimizing costs.”
The idea is rather simple behind an REIT, which is to create two publically traded companies. One company would own the real estate, while another would manage the casinos. Litt pointed out the value of the company currently sits at $33 a share, and could be nearly $55 a share. MGM Resorts is also sitting on $14.17 billion in long-term debt, which has been deemed “manageable.”
An REIT would reduce MGM’s debt greatly with the sale of a few pieces of the company, including the Crystals high-end retail mall, which is part of CityCenter. MGM Resorts Chairman Jim Murren, in a conference call last month said, “We look at this all the time. We’re pitched by every bank that is out there in terms of whether or not we should do that.”
REITs have been welcomed by the gaming industry, as they provide a way for companies to avoid paying federal income taxes. By making real estate their main source of revenue, REITs simply disperse 90 percent of taxable earnings to shareholders. Land and Buildings Investment Management currently owns a share in MGM Resorts of less than 1 percent.
Land and Buildings also proposed four board nominees to oversee the project. Joining Litt are Matthew Hart, former CFO of Hilton and Host Marriott, Richard Kincaid, former CEO of Equity Office Properties, and Marc Weisman, former CFO of Oppenheimer & Co.
More than 85 percent of MGM’s 2014 EBITDA was from the domestic market, while offshore casinos, such as MGM Macau, contributed only a small fraction of revenue. Land and Buildings proposed MGM sell or spin its offshore operations, which would in turn provide them with cash to pay off up to half of its outstanding debt.
Land and Buildings predict the EBITDA of MGM in Las Vegas to rise 10 percent in 2015, as the Strip continues to strongly bounce back from lowly recession numbers. Another angle the firm likes, is how Las Vegas properties as a whole continue to diversify their revenue streams. Nearly 70 percent of revenue is predicted to come from non-gaming this year.
Skeptics do exist on this idea, which might explain why Boyd Gaming, after spending $3 million on research, decided not to form a REIT. Jason Ader, co-head of long-short activist fund SpringOwl Asset Management, holds the view that Land and Buildings’ proposal is nothing more than slick, short-term financial engineering.
Ader said, “I think it’s short term-financial alchemy that can create long-term problems.” He also pointed out to Forbes that casinos should be careful, and as notoriously capital-intensive businesses, they might not be the best fit for REIT structures. Casinos often find themselves re-branding, and spending big to shift alongside consumer trends.
Ader also pointed out that Land and Buildings’ proposed REIT would leave them, to an extent, as a back seat driver, which could cause some friction between MGM and the firm. A business such as Wynn Resorts or Las Vegas Sands might be better suited to a REIT as they are owner operated, and could finance upgrades or expansions much more easily. Speculation on the REIT has helped MGM stock to soar 11 percent recently.
