It looks like MGM Resorts International and MGM Growth Properties are closing in on a sale-leaseback of the MGM Grand on the Las Vegas Strip in partnership with a third party.
MGM Growth announced the news in a November 19 filing with the Securities and Exchange Commission. It added that Mandalay Bay, which it already owns, could be part of the deal, underscoring its desire to structure the transaction around a joint venture. It could be similar, perhaps, to MGM’s recent sale of Bellagio to a real estate investment trust (REIT) created by Blackstone Group in which MGM owns 5 percent.
The inclusion of Mandalay Bay, which of course enhances the value for a prospective outsider sizably further supports the likelihood that a joint venture is the way this will go.
The other key is MGM Growth’s close, just days after the SEC filing, on a sale of 24 million new shares at $31.25 each𑁋half to a quartet of investment banks underwriting the sale, half on the open market. This will net some $700 million-plus to help fund the purchase and finance future acquisitions.
This furthers MGM’s desire to reduce its current 68 percent stake in MGM Growth, which has purchased 13 MGM properties to date since the casino giant spun it off for that purpose back in 2015. MGM wants its ownership below 50 percent.
Jefferies gaming analyst David Katz is among those who see the share sale in this respect as “conceptually positive for MGM Resorts,” and he’s told investors he believes the intent of the joint venture is to get it below 30 percent. This, in turn, implies a significant buy-in on the part of this as yet-unidentified third party, as does the intention stated in the filing to have the JV assume some of MGM Growth’s debt.
For its part, MGM has made no secret of its desire to unload the Grand by the end of the year. Antsy investors have been after the gaming giant to do something about the stock, which has languished in recent years relative to the size and diversity and obvious quality of the portfolio as meaningful growth opportunities continue to shrink both in the U.S. and abroad.
Somewhere down the road there’s New York City, which is why the company in partnership with MGM Growth paid $850 for the Empire City racino in Yonkers.
But the big prize is Japan. MGM is vying for a license to develop a megaresort in Osaka that could cost in the range of $10 billion. There will be a Japanese partner or partners assuming a chunk of this.
Still, even $5 billion is a lot of money for a company that’s already leveraged to the tune of some $15 billion. And so back in January, MGM announced the formation of a special committee of independent directors to assess the potential value of the company’s remaining Las Vegas real estate and figure out how best to realize it. Leading this group is Keith Meister, managing partner and chief investment officer for Corvex Management, which owns around 4 percent of MGM.
“(Meister) approaches things from a real estate perspective,” Bloomberg Intelligence senior gaming analyst Brian Egger told GGB News, “and he’s taken an activist role.”
If MGM Growth did bid on Bellagio𑁋and it’s not saying either way, according to statements by CEO James Stewart on the last earnings call𑁋this is why they didn’t get it.
Blackstone, which gobbled up Hilton in 2007 and didn’t blink five years ago at paying $1.73 billion for the Cosmopolitan Las Vegas, offered more, a lot more: almost as much as MGM Growth paid for the Borgata, MGM National Harbor, Empire City and Northfield Park combined, according to research Bloomberg shared with GGB News.
Of course, it’s the Strip, and it’s Bellagio𑁋”superior location, margins and amenities,” as Egger and BI gaming analyst Caitlin Noselli note.
But that’s not all: Bellagio’s $4.25 billion price tag works out to 17.3 times the $245 million MGM will pay in annual rent to continue to operate the resort, way above the 12.7 times BI expected based on past deals with MGM Growth.
In dollar terms, the $245 million is more than double what any four of the properties above are fetching. Which is not surprising. What may be surprising is that, as a multiple of EBITDA, it’s in fact lower: 53 percent versus the 66 percent MGM generally is paying to MGM Growth.
Arguably, this allowed Meister & Co. to be a little generous in their $825 million sale of Circus Circus to Phil Ruffin, which coincided with the Bellagio sale. Ruffin paid an estimated 9.5 times EBITDA, by BI’s estimate, an eminently reasonable valuation viewed against comparable transactions. Admittedly, it’s a very old casino hotel. But it’s still a very profitable one. And, again, it’s the Strip, albeit the remote north end of it.
Then there’s the value behind the value𑁋Circus Circus’ land bank, 102 acres in all, 34 of them idle and developable. The 9.5 times Ruffin paid assumes MGM let Circus Circus go for $238 million for the unoccupied land: $7 million an acre. Two years ago, when Wynn Resorts bought the 38-acre site of the old Frontier Hotel, which isn’t all that far away, they paid Crown Resorts $8.8 million per acre, $336 million in all.
MGM expects to net around $4.3 billion from both sales.
Is it that MGM could afford to be flexible in its dealings with MGM Growth up to now, because it owns most of it? If so, the problem with such self-dealing—if it can be called that—is that it gets in the way of top-shelf prices, Bellagio prices. And the Grand Meister’s committee is going to want something in that ballpark in terms of a higher sale price to rent and lower rent to EBITDA. It’s why MGM wants to get out from under its REIT.
It also makes a compelling case for MGM Growth’s pursuit of a joint venture with outside money. It doesn’t want to miss out on the last bricks-and-mortar MGM wholly owns on the Las Vegas Strip. To avoid that, it appears it will get creative.
