MGM Resorts Creates REIT for Hotels to Help Boost Value

Updated on
  • MGM Growth Partners will go public, have $4 billion of debt
  • Parent joins Caesars, Pinnacle, Penn National in creating REIT

MGM Resorts International, the Las Vegas casino owner that’s been under pressure from an activist investor, plans to put many of its hotel-casinos into a real estate investment trust to cut debt and boost its stock.

MGM Resorts will put 10 properties with 24,000 hotel rooms -- including Mandalay Bay, The Mirage, New York-New York and Luxor in Las Vegas -- into a REIT that will be called MGM Growth Partners LLC, the company said Thursday in a statement. The new business will assume approximately $4 billion of debt. The shares rose as much as 7.6 percent.

The casino owner is joining companies including Penn National Gaming Inc., Caesars Entertainment Corp. and Pinnacle Entertainment Inc. in turning to a REIT. Land & Buildings Investment Management LLC, an activist investor, has been pushing MGM Resorts to restructure, and Chairman and Chief Executive Officer Jim Murren had said a decision would come this year.

“We had the luxury of time, rather than react to kind-of, half-backed ideas that were thrown around earlier this year,” Murren said in a telephone interview Thursday. “The company has come up with a solution that’s almost virtually friction-less. We’re not calling or breaking bonds or purging profits. It’s value accretive.”

MGM Resorts is in the middle of a separate effort to boost profit by $300 million annually through a combination of cost-cutting and steps to increase revenue. The company has had to cope with a steep drop in business from the Chinese enclave of Macau, one of its largest markets, as well as weak betting at home.

MGM rose 4.5 percent to $22.74 at 11:35 a.m. in New York. The stock had risen 1.8 percent this year through Wednesday. The company’s largest individual shareholder, Kirk Kerkorian, died in June, leaving instructions that his 16 percent stake be sold in an orderly fashion.

MGM Resorts also reported third-quarter earnings that beat analysts’ estimates after reducing expenses. Profit totaled 12 cents a share, excluding items, compared with a loss of 4 cents a year earlier. Analysts were forecasting profit of 4 cents, the average of 17 estimates compiled by Bloomberg. The company’s wholly-owned domestic resorts reported their highest earnings before interest, taxes, depreciation and amortization in seven years, Murren said.

REITs have become a popular tool to lower taxes and improve returns for investors. They don’t pay federal income taxes and are required to distribute at least 90 percent of taxable earnings as dividends.

MGM Resorts will lease the 10 properties from the REIT -- which will also own the MGM Grand Detroit in Michigan, and the Beau Rivage and Gold Strike Tunica in Mississippi -- under a deal with an initial 10-year term and options for four, five-year extensions. The company will keep full ownership of the Bellagio and MGM Grand Las Vegas.

The transaction is expected to be completed in the first quarter. MGM Resorts will sell approximately 30 percent of MGM Growth Partners to the public, retaining the rest, Murren said.

Such a structure will allow MGM Resorts to avoid some of the stumbling blocks associated with distributing the REIT’s stock to current shareholders. They include acquiring approval for a spinoff from the Internal Revenue Service, as well as limits on individual ownership of the entities, Murren said.

Jonathan Litt, co-founder of Land & Buildings, didn’t respond to a request for comment.

An executive search firm is seeking CEO candidates for the REIT, as well as potential board members, Murren said. The impact of $4 billion less debt on MGM Resorts’ balance sheet should lead to higher credit ratings, he said.

MGM Growth Partners will have an option to buy two new casinos that MGM Resorts is building in Massachusetts and Maryland. It will also look to buy additional resorts.

“There will be gaming assets that will shake out over next few years,” Murren said.

On a conference call with investors Thursday, Murren said the board was reviewing several potential bidders for its Crystals mall in Las Vegas, which he said is worth more than $1 billion.