MGM Wins in Sales of Bellagio, Grand, But MGP Could be Pinched, Says Analyst

Posted on: September 18, 2019, 10:45h. 

Last updated on: September 18, 2019, 11:42h.

News broke Monday that MGM Resorts International (NYSE:MGM) is reportedly in talks with private equity firm Blackstone Group (NYSE:BX) about selling the Bellagio and MGM Grand, two of the most prized assets on the Las Vegas Strip, and then leasing back those venues.

Selling Bellagio and MGM Grand benefits MGM, but not so much for MGP. (Image: PRNewswire)

Some analysts are chiming in on the speculation, noting that if MGM can fetch $7 billion, as has been previously rumored, for those two properties, it would be a major coup for the gaming company. Conversely, if MGM proceeds with divesting those venues to a company “outside the family,” MGM Growth Properties (NYSE:MGP) could be crimped.

MGP is the gaming real estate investment trust (REIT) separated from MGM nearly three and a half years ago. The owner of the Bellagio currently retains a stake of 68 percent in the real estate firm.

We think there is substantial value in MGM that would be highlighted by a potential deal for Bellagio/MGM Grand,” said Bank of America Merrill Lynch (BAML) analyst Shaun Kelley in a note provided to “Seven billion dollars is ~$12-14/MGM share alone, which is ~40% of the stock’s $30 price today.”

That $7 billion estimate is before taxes. On an after-tax basis, that gets MGM to netting $6 billion for those sought-after Strip venues. A $6 billion haul is a significant percentage of the gaming company’s market value ($15.49 billion at this writing) and could go a long way toward helping the operator reduce debt and boost shareholder rewards (buybacks and dividends), two things analysts are pressing MGM to do.

How MGP Is Affected

MGP counts on its former parent company as its primary tenant and already owns several Strip assets operated by MGM, including Mandalay Bay and the Mirage, among others. One issue for the real estate firm in a potential sale of the Bellagio and MGM Grand to an outside company is that those two properties provide MGP with significant rent coverage, even though it’s not the owner.

“MGP benefits from a high 6.2x trailing corporate rent coverage, given MGM’s ownership of Bellagio and the Grand,” said Kelley. “We estimate removing these two assets would drop the figure down to 3.5x.”

The analyst estimates that MGP trailing rent coverage would further dwindle to 3.3x if MGM sold Circus Circus, the other Las Vegas property the gaming company owns. MGP currently has rights of first refusal for just one MGM asset – MGM Springfield.

“The loss of these marquee assets would also likely hurt MGP’s perceived growth profile,” said Keely “As a 68% owner of MGP, we imagine MGM is aware of this trade-off and might look to substitute some value in to MGP. It’s unclear how and exactly what levers they could or would pull.”

MGP is a cash cow for MGM, something the latter certainly knows and would not want to imperil. Last year, the gaming company collected $333 million in dividends from the real estate firm, and that payout is steadily climbing.

Hopefully A Start, Not A Finish

Kelley noted that if MGM’s sales of the Bellagio and MGM Grand are the start of more deals, that would be beneficial to the company and investors. The gaming operator could take steps to streamline and monetize its stakes in MGP, MGM China, and CityCenter. But if selling the two Strip casinos is the end of MGM’s deal-making for now, investors’ enthusiasm could wane.

“If a Bellagio/Grand deal is the start of a larger set of deals, it could be very attractive,” said the analyst. Without this, a transaction might simply be swapping financial leverage for lease and operating leverage – in our view, not much of a panacea after a 10-year upcycle.”