MGM Continues Paring MGP Stake, Sells $700 Million of REIT Equity

Austen


Posted on: December 2, 2020, 06:21h. 

Last updated on: December 3, 2020, 11:22h.

MGM Resorts International (NYSE:MGM) raised $700 million in the second sale of units in gaming real estate investment trust (REIT) MGM Growth Properties (NYSE:MGP).

Mirage Las Vegas
The Mirage on the Las Vegas Strip. Operator MGM Resorts said it redeemed more shares of REIT MGM Growth. (Image: Pinterest)

The Mandalay Bay operator made the announcement after the close of US markets Wednesday, noting it plans to use the $700 million influx of capital “for general corporate purposes.” The REIT and the gaming company had a previous deal in place in which the latter could redeem $1.4 billion of the equity it owns in the former. The first $700 million tranche on that agreement was executed in May.

Today’s announcement reflects our continued focus on enhancing our balance sheet to strengthen our financial flexibility,” said MGM CEO Bill Hornbuckle in a statement.

With the second $700 million divestment of MGP equity in the books, MGM Resorts has $5.9 billion worth of liquidity, giving it one of the industry’s tidiest balance sheets and likely the company’s strongest financial positions in decades.

Good News for the REIT, Too

While the benefits for MGM in the transaction are obvious – it’s raising cash at a time when the industry continues grappling with COVID-19 – MGP isn’t being left out in the cold.

The transaction will allows the casino landlord to boost its acquired funds from operations (AFFO), a critical metric in valuing REITs, on a single-digit basis. That’s while allowing it to keep pro rata net leverage at 5.3x, within the company’s stated goal of 5x to 5.5x. MGP funded the transaction with proceeds in an $800 million June debt sale.

With the $1.4 billion agreement complete, MGM’s interest in the real estate company falls to 53 percent from 56.7 percent following the May $700 million sale.

That’s actually a positive for MGP. Broadly speaking, Wall Street likes the REIT. But some analysts and investors speculate the company could be better off with more independence and less oversight from MGM.

The Mirage operator is MGP’s only tenant, while rival gaming REITs have multiple clients, giving those competitors more rental income diversification. By virtue of its relationship with MGM, the REIT is levered to trends in Las Vegas, where it owns the real estate of all MGM-operated venues aside from Bellagio.

Other Ways to Raise Cash, if Needed

Should MGM need to raise more capital, it has other avenues in addition to its remaining 53 percent interest in MGP.

The Excalibur operator owns all assets associated with MGM Springfield in Massachusetts, half of CityCenter in Las Vegas, and 56 percent of MGM China. Bellagio and the Bay State venue are the only real estate pieces in MGM’s domestic portfolio not owned by MGP.

As for the REIT, it remains to be seen what its next corporate move is. But last month, reports surfaced that MGP could make a run at buying the Venetian, Palazzo, and Sands Convention Center from Las Vegas Sands if the landlord can find a credible operator partner.

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