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US – Analysts confused by MGM’s move towards REIT

By - 30 October 2015

In a move that has confused analysts, MGM Resorts International is transferring 10 of its properties, including seven on the Las Vegas Strip, into a real estate investment trust that will be 70 per cent owned by MGM, but will allow for ‘strategic and financial benefits.’

MGM will maintain 100 per cent ownership of Bellagio, MGM Grand Las Vegas, and Circus Circus Las Vegas, as well as its share of CityCenter, MGM China, Borgata Atlantic City, Grand Victoria in Illinois and its non-gaming division.

As it looks to cut its debt, Mandalay Bay, The Mirage, Monte Carlo, New York-New York, Luxor, Excalibur, and the non-gaming Park development will be transferred into the REIT, along with the MGM Grand Detroit, Beau Rivage in Biloxi and the Gold Strike Tunica.

“This transaction provides MGM Resorts’ shareholders numerous strategic and financial benefits, including delivering our balance sheet and enhancing long-term shareholder value,” said Jim Murren, Chairman and CEO of MGM Resorts. “MGM Resorts is creating a new growth platform to allow it to more effectively execute its strategic initiatives, including portfolio diversification.”

Earlier this year, MGM Resorts fought off attempts by a small investor to force it into a REIT. The MGM REIT will take on $4bn of the company’s$12.8bn debt. REITs have only recently been utilised by the gaming industry. In 2013, Penn National Gaming placed 21 of its 29 race tracks and casinos into Gaming and Leisure Properties. The REIT is currently buying casinos owned by Pinnacle Entertainment for $4.1bn.

Caesars Entertainment meanwhile wants a federal bankruptcy judge to allow it to separate its bankrupt operating division into a REIT.

The news came as MGM Resort reported a third quarter up swing with net income of $66.4 million, reversing a net loss of $20m for the quarter a year ago.

Mr. Murren commented: “This is the value of not making a rash decision.”

MGM Resorts will lease the Properties under a long-term, triple-net master lease with an initial 10-year term and four five-year extensions at MGM Resorts’ option. The master lease is expected to provide MGP with a right of first offer with respect to MGM Resorts’ development properties in Maryland and Massachusetts. The master lease will be guaranteed by MGM Resorts.

Murren added, “We have 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. Since its founding, MGM Resorts has grown to become one of the leading hospitality companies in the world, and under this new structure we look forward to an even stronger future.”

Wall Street thought was confused by the deal.

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

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said the MGM REIT was ‘greater in scope than what investors had been expecting, creating an incremental near-term upside opportunity.’

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