MGM: The Murren roars

In one of the year’s least surprising surprises, MGM Resorts International announced that it is spinning 10 of its casinos off into a REIT and is in a hurry to do so, expecting the transaction to close in the first quarter of next year. Newly constituted MGM Growth Properties will embrace Mandalay Bay, The Mirage, Monte Carlo, New York-New York, Luxor, Excalibur and The Park, along with Beau Rivage, MGM Grand Detroit and little Gold Strike Tunica. The company will also shift $4 billion of its long-term debt onto the new entity, which will have right of first refusal on MGM Springfield and MGM National Harbor.

None of MGM’s jointly owned properties, such as CityCenter, is to be included. Ditto MGM’s Macao properties. MGM Grand, Bellagio and Circus Circus will also remain under the MGM Resorts umbrella. Bellagio and the Green Monster were responsible for 46% of MGM’s domestic cash flow last year. Their property-tax base (and Circus’) is also lower, so retaining them is an appealing proposition. The company will retain 70% of the stock, releasing 30% in an IPO, which could create the opportunity for further deleveraging.

Said one analyst, “investors will look at a few things: whether the company putting high quality assets into the REIT; whether the REIT has a path to growth, which usually entails acquiring assets not related to the original parent company; and whether the spinoff company has a sustainable capital structure, meaning not too much debt. Initial reaction to the MGM announcement seems positive.” Others were still unimpressed. James Cramer, however, gave the decision a rave review: “Brilliant move by Jim Murren who has figured out how to make things work while Macao slips. It makes so much sense. I have known Jim for 25 years-when he was an analyst at a terrific Wall Street firm covering this group and this is a very wise maneuver.”

“We had the luxury of time, rather than react to kind-of, half-baked ideas that were thrown around earlier this year,” CEO Jim Murren
told Bloomberg Business, getting in a dig at dissident investor Land & Buildings Investment Management. He also called Jonathan Litt‘s demand that MGM spin off its assets “ill-conceived on almost every front.” The news overshadowed the announcement that MGM’s third-quarter profits were triple what Wall Street expected and cash flow was at a seven-year high. Murren also told Bloomberg that the REIT would be shopping for gaming assets “that will shake out” from other companies (Caesars Entertainment, anyone?) and that bids for Crystals were being actively reviewed, with a $1 billion price tag attached. Company stock soared on today’s announcement and the company said it expected to see dividends from the division by late 2016.

Murren was abuzz with news, announcing sidewalk retail in front of Excalibur, more convention space at Luxor and a fully booked calendar of events for the new Mandalay Bay convention space. “These properties were designed in a different era when land was literally dirt cheap,” he said of his move to corral sprawl and create more pedestrian-friendly spaces. MGM also expects Strip room revenues to rise 8% in the fourth quarter.

Analyst Carlo Santarelli, for one, was perplexed by the REIT move, writing, “If we had to use one word to describe investor feedback, it would be confused, and we share that sentiment. Those with bullish views have focused on a value unlocking, multiple arbitrage, deal that provides LV Strip REIT exposure to investors and de-levers the parent. Others have opined that the numerous ambiguities, at present, make assessing the true value of the pro-forma entities difficult.”

The only blemishes on MGM’s quarterly earnings report were declines in “Other resort operations” (read: Illinois) and a $265 million declivity in Macao revenues. MGM Macau still managed to bring home $529 million, despite the hard hit, and cash flow was $10 million above Santarelli’s estimate.

* Station Casinos minority owner Deutsche Bank revealed some seriously bad news yesterday, announcing a retrenchment that would eliminate its presence in 10 countries, a loss of $6.6 billion and 35,000 firings over a two-year period. With DB in the crapper, it’s no wonder Station is looking to the public markets for liquidity.