LAS VEGAS—Executives at MGM Resorts International left no stone unturned as they explored ways to create value for shareholders.
“We looked at every single iteration and idea,” said Jim Murren, the company’s chairman and CEO. “We chased down every thought that might lead to an increase in shareholder value.”
That exercise led to Thursday’s announcement that MGM Resorts will create a controlled real estate investment trust called MGM Growth Properties LLC, to be launched during the first quarter of 2016.
Shares of MGM (NYSE: MGM) increased 8.9% on Thursday with the announcement. The Baird/STR Hotel Stock Index was up 0.6% during that same period.
The move accomplished a number of goals, Murren said during a call with analysts.
Chief among them: Reconciling the disparity between the underlying value between the company’s real estate portfolio and how it was being priced in the market.
“We recognized that the company was blessed with significant real estate value,” Murren said. “We also understood that we did not want to jeopardize near-term value for the sake of a one-time gain.”
“We have long identified and understood that our assets were significantly undervalued in the marketplace. For years we were searching for ways to create better connectivity between the assets we own and the values that are presently prescribed to them. Our main objective was clear,” he later added.
To get the REIT up and running, MGM Resorts will contribute the following seven Las Vegas resorts and entertainment complexes:
- Mandalay Bay
- The Mirage
- Monte Carlo
- New York-New York
- Luxor
- Excalibur
- The Park
Also in the mix are three of MGM Resort’s regional casino resort properties:
- MGM Grand Detroit in Michigan
- Beau Rivage and Gold Strike Tunica, both of which are located in Mississippi
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.
“MGM Growth Properties will also have a right of first offer for our development properties in Maryland and Massachusetts, thereby presenting a growth path and trajectory that is superior than any that is in the space,” Murren said.
Its portfolio will not be limited to the casino-resort space, but more broadly the hospitality sector, which might include standalone hotels or portfolios of hotels, Murren said. The REIT could then reach out to MGM Resorts to manage those assets.
Not pushed into the REIT portfolio is Crystals, a luxury-retail complex within MGM’s CityCenter mixed-use complex in Las Vegas. Murren said executives are fielding a number of enquiries about the asset, which he valued at approximately $1 billion.
MGM Growth Properties will assume approximately $4 billion of debt, which is expected to be refinanced with the proceeds of debt and equity issuances via an initial public offering that will take place in Q1 2016.
Skin in the game
MGM Resorts will maintain a “substantial equity interest” in MGM Growth Properties. That was a crucial element of the transaction, as it creates alignment between the two entities, Murren said.
“We’re in it together,” he said. “We want to see MGP grow, and grow rapidly.”
Murren was pushed by an analyst to lend clarity about that ownership interest.
“Initially MGM Resorts will probably own around 70-odd-percent of MGM Growth Properties … with the balance being held by the public,” he said.
Executives at MGM Resorts see a substantial upside in ownership of the REIT. “It sets up a tremendous amount of optionality going forward,” Murren added.
MGM Growth Properties will operate independently of MGM Resorts, although some executives, Murren himself being one example, likely will serve on both company’s boards. Executives have engaged a search firm to fill out the board and also hire a CEO, CFO and other key executive-level positions.
“We want to set that company up to independently forge its own path and grow as rapidly as it sees fit,” Murren said.
One thing that will not change: daily operations within each asset. MGM Resorts’ executive team will not change; neither will employees on the property level, Murren reiterated.
“The daily operations will continue as usual,” he said. “We do not expect any impact on our employee, all of which will be MGM Resort employees as they are today, our guests and our business partners.”