MGM Resorts International (MGM) recently decided to spin off part of its real estate portfolio into a REIT known as MGM Growth Properties LLC (MGP). On April 20, MGM Growth Properties’ IPO priced at $21 and closed the day at $22.01. The IPO raised about $1 billion while MGM shareholders retain 76% of MGP and its portfolio. MGM’s Board says that MGM’s properties are undervalued and the formation of the REIT is aimed at eliminating this valuation disparity that exists in the market.
MGM Growth Properties LLC (the spinoff) is now one of the leading publicly traded REITs engaged in the acquisition, ownership and leasing of large-scale destination entertainment and leisure resorts, whose amenities include casino gaming, hotel, convention, dining, entertainment and retail offerings. MGP holds a 24% economic interest in the operating partnership, which owns assets in nine premier destination resorts in Las Vegas and elsewhere across the United States. These properties comprise 24,466 hotel rooms, 2.5 million convention square footage, over 100 retail outlets, over 200 food and beverage outlets and 20 entertainment venues. In connection with the offering, the REIT (MGP) will assume about $4 billion in debt from MGM.
MGM Resorts International (the parent) is one of the world’s largest gaming firms. The company’s properties include some of the biggest names on the Las Vegas Strip, including MGM Grand, The Mirage and the Monte Carlo, as well as Luxor, Bellagio, Mandalay Bay and the new T-Mobile Arena. MGM Resorts also owns or has a stake in other casinos in Nevada, as well as in Michigan (MGM Grand Detroit) and Mississippi (Beau Rivage). Internationally, it operates in China and Dubai. The Parent (MGM) stake in the REIT translates into an ownership ratio of 0.28. This suggests that each share of MGM has about $6 worth of MGP embedded.
We value MGM Resorts (the parent) at $15.2 billion or $27 per share using a 9.7x EV/FY2016 estimated EBITDA. MGM Resorts is currently trading at $22.29 a share. This suggests that MGM Resorts is 21% undervalued. We value MGM Growth Properties (the spinoff) at $1.2 billion or $24.50 per share. This is based on a peer group median multiple of 12.2x Price/FY16 estimated FFO. This suggests that the REIT (MGP) is about 11% undervalued to our fair value. We think the IPO will help unlock value for MGM Resorts.
We believe that MGP’s shares are conservatively priced for the offering. On a sectoral level, Lodging/ Gaming currently trades at a discount to most other REIT categories and we expect gaming REITs to garner higher valuations in FY16, partially driven by deal activity. When valued at REIT industry average of 16.2x P/FY16e FFO, MGP’s intrinsic value works out to
~$57 per share.