After much planning and discussion, MGM Resorts International last week said it would spin off the real estate of 10 of its properties into a real estate investment trust (REIT) and then lease back those properties to manage. A REIT has favorable tax advantages and allows MGM Resorts to reduce its debt and potentially raise its shareholder value.
The proposal follows other similar moves in the gaming industry by companies like Penn National Gaming, Pinnacle Entertainment, and Caesars Entertainment, which wants to establish a REIT to help it emerge from bankruptcy.
Into the new entity, MGM Growth Properties, MGM will contribute seven properties in Las Vegas— Mandalay Bay, The Mirage, Monte Carlo, New York-New York, Luxor, Excalibur, and The Park—and MGM Grand in Detroit, Michigan and two Mississippi casino, Gold Strike in Tunica and Beau Rivage in Biloxi. MGM Resorts will continue to own MGM Grand, the Bellagio, and Circus Circus in Las Vegas, as well as its interest in CityCenter and Aria. Its other joint venture arrangements in Atlantic City’s Borgata, and in Macau, will remain unchanged as well. In addition, MGM Growth will have the right of first offer for MGM properties in Maryland and Massachusetts slated to open within two years.
MGM Growth Properties will assume $4 billion in debt that the company expects to be refinanced with a combination of debt and equity offerings. MGM Resorts will own about 70 percent of MGM Growth Properties, so the deal isn’t actually a spin-off. While the deal will require FTC and regulatory approvals, it will not need IRS approval since MGM Resorts owns a majority stake.
MGM Resorts will lease the properties under a long-term, triple-net master lease with an initial 10-year term and four five-year extensions possible.
Although a small equity owner of MGM Resorts had demanded that MGM consider a REIT, Murren said the process was too complicated to be completed at that time. Now, he says, is the right time.
“This transaction provides MGM Resorts’ shareholders numerous strategic and financial benefits, including delevering our balance sheet and enhancing long-term shareholder value,” he said in a statement. “MGM Resorts is creating a new growth platform to allow it to more effectively execute its strategic initiatives, including portfolio diversification.”
Analysts were generally positive about the news.
“If owning and leasing properties is not the company’s core business,” commented Keven Lindemann, director of real estate for S&P Capital IQ and SNL Financial, “but the company owns a lot of valuable real estate, a spinoff like this can make a lot of sense. In terms of judging the long-term prospects for the REIT spinoff, I think investors will look at a few things: whether the company putting high quality assets into the REIT; whether the REIT has a path to growth, which usually entails acquiring assets not related to the original parent company; and whether the spinoff company has a sustainable capital structure, meaning not too much debt. Initial reaction to the MGM announcement seems positive.”
Union Gaming Group’s Chris Jones called the deal “transformational.”
“We believe the transaction will be value accretive, as MGM captures the arbitrage between the value currently ascribed to its assets and the average trading multiples of triple-net lease REITs,” he said. “Further, and perhaps more important, MGM will control and retain a 70 percent-80 percent economic interest in the new REIT and receive dividends accordingly. In our view, this dividend stream makes the OpCo portion of the REIT deal more attractive than other OpCo peers as the dividends received will effectively offset a portion of the rent payments and further accelerate deleveraging at the parent entity. The REIT will also provide MGM with a strategic capital partner and unique access to both the debt and equity markets. This will allow the company to pursue growth more aggressively while reducing the cash capex requirements of the parent entity.”
