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MGM Resorts forms REIT with 10 properties

30 Oct 2015

By Howard Stutz
MGM Resorts International said Thursday it will place 10 of its properties — including seven on the Strip — into a real estate investment trust that will be 70% owned by the casino giant, but will also offer the company "strategic and financial benefits."

The Las Vegas-based company announced the REIT transaction in conjunction with its third-quarter earnings, which were overshadowed by the much anticipated news.

MGM Resorts said in the last quarter it was completing a profit growth initiative to increase annual cash flow some $300 million by 2017. The REIT concept was one of the proposals that the company was said to be investigating.

MGM Resorts Chairman and CEO Jim Murren said in an interview "this is the value of not making a rash decision." Earlier this year, the company faced an aborted proxy fight from a small investor who wanted to force MGM into a REIT.

Under the plan announced Thursday, the 10 properties would become the basis of a separate publicly traded entity that MGM Resorts plans to bring to market by next spring.

Mandalay Bay Resort & Casino, The Mirage, Monte Carlo Las Vegas Resort & Casino, New York-New York Hotel & Casino, Luxor Hotel and Casino, Excalibur Hotel and Casino, and the nongaming Park development will be placed into the REIT, along with the MGM Grand Detroit Casino and the company's two Mississippi resorts, Beau Rivage Resort & Casino in Biloxi and the Gold Strike Casino Resort Tunica. The REIT could grow by acquiring other properties not part of the current MGM portfolio.

MGM Resorts will retain 100% ownership of Bellagio, MGM Grand Hotel & Casino Las Vegas and Circus Circus Hotel Casino - Las Vegas, as well as the company's undeveloped land holdings, and its equity interests in CityCenter, MGM China Holdings, the Borgata Hotel Casino and Spa Atlantic City, Grand Victoria Casino in Illinois, the under-construction MGM-AEG Arena and its nongaming hospitality division.

MGM Resorts filed paperwork with the Securities and Exchange Commission concerning the REIT on Thursday. The REIT will be named MGM Growth Properties (MGP) and MGM Resorts will continue to manage the assets under a 10-year lease agreement that includes five-year extension plans.

Murren is expect to remain chairman of both MGM and MGP, but a new CEO will be named for the REIT, which will also have its own executives and board members.

"We're looking for people with real estate experience," he said.

Murren said MGM's REIT concept will not require an Internal Revenue Service private letter ruling because the MGP is not being spun off as a separate entity. Murren compared the concept to the company's 51% ownership in MGM China, which controls its Macau holdings. The remaining shares are held by investors through the Hong Kong Stock Exchange.

Murren said the structure of the MGM REIT will keep the costs of developing the concept "far below what we've seen in the industry."

"All our interests are aligned here," Murren said. "We wanted MGM Growth to be healthy and strong right off the bat."

The MGM REIT will assume $4 billion of the company's overall $12.8 billion in debt. The REIT's debt is expected to be refinanced with proceeds from both debt and equity issues.

The benefits, however, remain the same.

REITs, by law, don't pay federal income taxes. With real estate as their primary source of income, REITs are required to distribute at least 90% of their taxable earnings to shareholders.

Murren said "tax reasons" and "other criteria" went into the investigative process and Bellagio, MGM Grand Las Vegas and Circus Circus were not included in the REIT. Bellagio and MGM Grand accounted for a combined 46% of the company's operating income in 2014.

"We wanted to make sure MGM Resorts was a large and strong company and we sized both companies based on the amount of cash flow," Murren said. "The structure allows both companies to grow their balance sheets."

Murren said employees and customers will not see any changes as the REIT moves forward. Employees will remain employees of MGM Resorts.

The master lease is expected to provide the REIT with a right of first offer with respect to MGM Resorts' developments in Maryland and Massachusetts. The master lease will be guaranteed by MGM Resorts.

The announcement, made before the stock markets opened Thursday, drove shares of MGM Resorts up more than 8% in pre-opening trading. Shares of MGM closed at $22.80 on the New York Stock Exchange, up $1.04 or 4.78%.

Wall Street was still analyzing the concept Thursday.

"If we had to use one word to describe investor feedback, it would be confused, and we share that sentiment," said Deutsche Bank gaming analyst Carlo Santarelli.

Murren said MGM Resorts "exhaustively and thoughtfully explored a wide range of opportunities to leverage our valuable real estate assets and are pleased that this transaction will further position MGM Resorts for sustained success."

REITs have found their way into the gaming industry. Penn National Gaming, in 2013, spun off 21 of its 29 race tracks and casinos into Gaming and Leisure Properties. The REIT is in the process of acquiring the casinos owned by Pinnacle Entertainment for $4.1 billion.

Caesars Entertainment Corp. is asking a federal bankruptcy judge to allow the company to split its bankrupt operating division into a REIT as part of a restructuring.

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said the MGM REIT announcement could be viewed as "greater in scope than what investors had been expecting, creating an incremental near-term upside opportunity."

In MGM Resort's third quarter, the company reported net income of $66.4 million, which reversed a net loss of $20 million from a year ago. The company's earnings per share in the quarter that ended Sept. 30 was 12 cents. Net revenue companywide declined 8% to $2.28 billion.

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