Sunday, 18 August 2019

US IPO: MGM Growth Properties’ US$1.2bn IPO

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Betting the house

Casino gamblers might not have much in common with the staid types who tend to invest in REITs, but MGM Resorts International brought the two sides together in 2016.

Investors who favour more predictability than might be found on the gaming floor jumped on the US$1.2bn IPO of its casino real-estate carve-out MGM Growth Properties.

A breakthrough for what had been a struggling IPO market, the deal was 11 times oversubscribed and priced at the top end of its range after generating some 350 orders.

Moreover, it produced a 4.8% day-one gain and, through to mid-November, had returned some 14% in the aftermarket.

But that success belied the deal’s numerous challenges.

Most REITs have a diverse pool of tenants and locations, but MGM Growth was exposed to just a single tenant – its corporate parent – and seven of its 10 casinos are on the Las Vegas Strip.

And the parent insisted on being the controlling shareholder in the new REIT, raising some questions about corporate governance.

But structuring agents Bank of America Merrill Lynch and JP Morgan helped MGM Resorts put together a trust that addressed these concerns and offered investment characteristics distinct from the parent itself.

They created a “triple-net-lease” REIT in which MGM Resorts pays all property costs, such as maintenance and capex, in addition to rent.

This makes the REIT’s profile more bond-like and means investors are less exposed to the vagaries of the gaming sector.

MGM Resorts rents the properties under a master lease – meaning there is essentially one rent cheque that covers all of the REIT’s assets.

That puts less emphasis on individual properties and more emphasis on the ability of MGM Resorts to cover the annual rent bill – currently US$550m and rising by 2% annually.

Even some credit investors bought into the stock, attracted by the spread between the dividend yield (6.8% at final pricing) and MGM’s bonds.

At the heart of the governance concerns was MGM Resorts’ ability to sell more casinos to the REIT at higher-than-market prices, and its ability to direct customers to other popular casinos such as the Bellagio that are not part of the REIT.

MGM Growth partly addressed these concerns by appointing independent directors that can evaluate deals at arms-length, though the best protection is that MGM Resorts holds 76% of the new MGP stock. So if it does something to hurt the REIT, it hurts itself too.

“Stock in MGP is the biggest asset MGM has,” said MGM Growth CEO James Stewart, a former Greenhill & Co banker. “So the last thing they want to do is to do anything to hamper the growth and success of MGP through any perception of exercising unfair control.”

That growth and success has continued, as the new MGP stock has handily outperformed triple-net peers such as Realty Income and National Retail Properties.

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