Las Vegas Sun

March 18, 2024

Should MGM branch out into real estate?

Investment firm sees big potential in converting part of casino company into a REIT

Strip Properties

Real estate investment trusts could become a popular trend among local casino companies if MGM Resorts International, which owns MGM Grand (above), forms one. Already, Caesars Entertainment has asked a bankruptcy judge to allow the company to adopt the structure, and Penn National Gaming formed one for many of its properties, including the M Resort.

As big casino operators go, MGM Resorts International is performing relatively well right now. The company boosted revenue while narrowing losses last year, and it is building major projects on the Strip, around the country and abroad.

Still, an investment firm thinks MGM can do better. Land and Buildings is pushing the company to adopt a proposal the investors say could skyrocket shares as high as $55 — the price hovered closer to $22 in mid-April — and rid the company of billions of dollars of debt.

How? By transforming part of the company into a real estate investment trust. One branch of MGM would own real estate while another would manage the company’s resorts.

Land and Buildings also suggested MGM sell some of its property, including its stake in Crystals mall at CityCenter. Some of the profits could be used to pay down debt, the investors said.

MGM officials say they are flirting with the concept, but the company won’t adopt Land and Buildings’ entire vision, which the MGM board told shareholders is “seriously flawed.”

Click to enlarge photo

An exterior view of Caesars Palace.

Real estate investment trusts, or REITs, have become popular with casino companies. As business entities that own real estate, they allow individual investors to earn some income from commercial real estate ownership without buying commercial real estate themselves.

REITs are required by law to have the bulk of their assets and income tied to real estate investments, and they must distribute no less than 90 percent of their taxable income to shareholders. That makes them pretty attractive to investors.

Click to enlarge photo

A view of the M Resort in Henderson.

MGM isn’t alone in exploring such a setup. Caesars Entertainment has asked a bankruptcy judge to allow it to adopt a REIT structure for its largest operating division. If the court agrees, the division could see its debt slashed by about $10 billion. CEO Gary Loveman said a REIT would allow Caesars to “significantly reduce its leverage by creating two better capitalized companies with vastly improved cash flow generation.”

REITs are tax efficient because they don’t pay corporate income tax. As a result, more of the company’s earnings before interest, taxes and amortization goes to net income, improving the company’s bottom line.

In 2013, Penn National Gaming formed a publicly traded REIT for many of its properties, including the M Resort in Henderson. Pinnacle Entertainment said it would do the same last year, and Boyd Gaming has said it spent $3 million investigating the idea of forming a REIT.

Jim Murren, CEO of MGM, acknowledged the idea’s popularity in his company’s fourth-quarter earnings call, which came before Land and Buildings started publicly pushing its plan.

“We look at this all the time,” Murren said. “We’re pitched by every bank that is out there in terms of whether or not we should do that. And there’s some merit to it.”

The company hasn’t thrown its weight behind the Land and Buildings plan, however, and opted not to support the four nominees the hedge fund nominated for election to MGM’s board. MGM has its own four nominees it has encouraged shareholders to support at the company’s annual meeting May 28.

Some analysts and industry players say REITs can be risky for gaming companies because the people in charge of real estate might not always want the same as those running the casino. It also can be hard under a REIT to make capital investments ­— updating a casino, say, or building a new hotel tower — while still providing necessary shareholder returns.

If Land and Buildings’ nominees aren’t elected to the MGM board, the firm’s plan likely won’t move forward.

But some kind of REIT still could come to fruition for MGM — just with different details.

Union Gaming Group, for instance, suggested another REIT structure for MGM’s domestic casinos outside Las Vegas. Union Gaming analysts said their proposal is more realistic than the one advanced by Land and Buildings because it provides “additional financial flexibility without the disruption of a major reorganization that could limit longer-term growth prospects for the company.”

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