VICI Properties, Inc., the real estate investment trust formed in 2017 through a spinoff from Caesars Entertainment and owner of 28 properties including Caesars’ top Strip casinos, will acquire MGM Growth Properties from MGM Resorts International, creating the largest REIT in the U.S.
The transaction will add top MGM properties—like MGM Grand Las Vegas, Mandalay Bay, Excalibur and Luxor in Las Vegas, MGM National Harbor in Maryland, Borgata in Atlantic City—to a portfolio that already includes properties like Caesars Palace and Harrah’s Las Vegas.
Under the agreement, VICI Properties will acquire MGP for a total consideration of $17.2 billion, inclusive of the assumption of approximately $5.7 billion of debt. Upon completion of the merger, VICI will have an estimated enterprise value of $45 billion, solidifying VICI’s position as the largest experiential net lease REIT while also advancing VICI’s strategic goals of portfolio enhancement and diversification.
MGP Class A shareholders will receive 1.366 shares of newly issued VICI stock in exchange for each Class A share of MGP. The fixed exchange ratio represents an agreed upon price of $43 per share of MGP Class A shares based on VICI’s trailing five-day volume weighted average price of $31.47 as of July 30, and represents a 15.9 percent premium to MGP’s closing stock price on August 3.
MGM Resorts will receive $43 per unit in cash for the redemption of the majority of its MGP Operating Partnership units hat it holds for total cash consideration of approximately $4.4 billion, and will also retain approximately 12 million units in a newly formed operating partnership of VICI Properties. The MGP Class B share that is held by MGM Resorts will be canceled.
Simultaneous with the closing of the transaction, VICI Properties will enter into an amended and restated triple-net master lease with MGM Resorts. The lease will have an initial total annual rent of $860 million, inclusive of MGP’s pending acquisition of MGM Springfield, and an initial term of 25 years, with three 10-year tenant renewal options.
Rent under the amended and restated master lease will escalate at a rate of 2 percent per annum for the first 10 years and thereafter at the greater of 2 percent per annum or the consumer price index, subject to a 3 percent cap.
Additionally, VICI will retain MGP’s existing 50.1 percent ownership stake in the joint venture with Blackstone Real Estate Income Trust, Inc., which owns the real estate assets of MGM Grand Las Vegas and Mandalay Bay. The BREIT JV lease will remain unchanged and provides for current annual base rent of approximately $298 million and an initial term of 30 years, with two 10-year tenant renewal options.
“Through this transformative strategic acquisition, we are merging MGP’s best-in-class portfolio into VICI’s best-in-class management and governance platform, creating the premier gaming, entertainment and leisure REIT in America,” said Ed Pitoniak, CEO of VICI Properties. “We want to thank James Stewart, Andy Chien and the MGP Board for building and stewarding a portfolio of such exceptional quality, and going forward we are honored to become a key real estate and capital partner for Bill Hornbuckle and the MGM Resorts management team and board. We look forward to supporting their strategic growth objectives for decades to come.”
“After many years of growing both of our portfolios, combining them into one company will generate the best results for the shareholders of both companies,” said Stewart, CEO of MGP. “The combined company will create a superior platform for delivering exceptional returns to MGP’s existing shareholders, by improving diversification, increasing scale, lowering cost of capital and benefiting from future growth.”
Bill Hornbuckle, CEO and president of MGM Resorts, said, “This transaction unlocks the significant real estate value of our assets, enhances our financial flexibility and strengthens our ability to execute key growth initiatives. We look forward to our long-term partnership with VICI.
“In 2016, we started on our journey to become asset-light,” Hornbuckle continued, “and this announcement, together with our recently announced Springfield and CityCenter transactions, reflects the culmination of those efforts and a major step forward in simplifying our corporate structure. As a result of these actions, we are well positioned and remain focused on pursuing growth opportunities in our core business, with significant financial flexibility to continue to deploy capital to maximize shareholder value.”
The acquisition adds 15 properties comprising 33,000 hotel rooms and 3.6 million square feet of meeting and convention space to the VICI portfolio.
VICI also announced a 9.1 percent dividend increase with the payment of a 36-cent dividend on October 7 to shareholders as of September 24.
Wall Street returned positive reviews of the transaction.
“VICI’s announcement of an agreement to acquire MGP is generally positive for both VICI and MGM, in our view,” wrote David Katz of Jefferies, “given that the former continues to grow accretively and the latter simplifies its structure and builds its already flush resources. In this regard, we expect a positive reaction in both stocks.”
Luis Chinchilla of Deutsche Bank noted that the transaction provides VICI with an opportunity to refinance its existing term loan, “which should facilitate the company’s path toward an investment grade rating,” observed Frank Fantini, president of Fantini Research.
Carlo Santarelli, a Deutsche Bank research analyst, noted that the transaction grows MGM’s balance sheet to more than $10 billion in cash.
“We have long believed that (mergers and acquisitions) among the gaming triple-net REITs was a likely outcome,” Santarelli said in a statement. “We have also noted, over time, that the true driver of M&A in the sector was cost of capital, and with VICI having traded at a healthy equity premium to the group for some time, with access to inexpensive debt financing, the transaction makes both intuitive and financial sense.”
According to Jeffries Equity Analyst David Katz, VICI’s announcement of an agreement to acquire MGP “is generally positive for both VICI and MGM in our view,” he said in an email to CDC Gaming Reports, “given that the former continues to grow accretively and the latter simplifies its structure and builds its already flush resources. In this regard, we expect a positive reaction in both stocks, pending VICI management commentary this (morning) and MGM management commentary along with 2Q21 earnings on 8/4.”
The deal grows the sheer square footage under VICI’s ownership to new heights. Pitoniak said in an investor conference call last week that the sheer square footage marshaled in what was then 28 properties—which include, most recently, the Venetian and Sands Expo Center—is the reason the company logged net income of $300.7 million, or 54 cents per share, for the second quarter, up from $229.4 million or 47 cents per share for the same period last year.
“With 28 properties, our average property measures 2.3 million square feet,” Pitoniak said. “Compare that with the largest conventional triple-net REIT where the average-owned store measures 17,000 square feet. Why does scale matter? Because large scale tends to correlate to spatial complexity, multi-functionality, abundant reprogramming capacity, and higher replacement cost. All of which add to mission criticality.”
In addition to the casino properties, the REIT has diversified, most recently investing $80 million in the Great Wolf Lodge, a project in Perryville, Maryland that includes a $250 million resort with a 126,000-square-foot indoor water park.
“We would rather have value concentrated in high-quality non-commodity assets than dispersed across conventional commodity triple-net boxes,” Pitoniak said. “These big buildings and the ample land parcels around them also create an opportunity for incremental capital investment for our tenants and potentially for us. And that kind of incremental same-store capital-investment opportunity isn’t likely to be available in the typical smaller box owned by a triple-net REIT.”
The deal leaves only the original gaming REIT, Gaming and Leisure Properties, as the only other REIT with gaming investments.
GLPI, the real estate investment trust that owns properties operated largely by Penn National Gaming reported a strong second quarter, with net income of $138.2 million on total revenue of $317.8 million, up from $112.4 million and $262 million, respectively, a year ago.
Company officials cited a $22 million year-to-year jump in rental income as contributing to the strong results.
“GLPI’s record second-quarter results and our financial performance over the last year highlight the value of resilient regional gaming markets and our high quality tenant roster,” said Peter Carlino, chairman and CEO of GLPI, “that has been further diversified while maintaining a close watch on our capital structure and cost of capital.
“As a result, we have established sustained financial stability, capitalized on new growth opportunities with existing and new tenants, and returned capital to shareholders in the form of stock and cash dividends on an uninterrupted basis, despite the challenges presented by the pandemic.
“As we look to the second half of 2021, GLPI remains well positioned to deliver record results as we further expand and diversify our portfolio and benefit from the continued strength in regional gaming markets, with many of the operations at GLPI’s properties recording both record bottom-line results and margins, as well as growth in top-line performance compared to 2019 (prior to the Covid-19 outbreak). As a result, on May 1, 2021, full rent escalators were achieved with respect to the Amended Pinnacle Master Lease, the Boyd Master Lease and the Belterra Park Lease, which increased annualized rent by $6.1 million.”
