MGM’s new real estate subsidiary prices IPO at high end of expectations

MGM Resorts International said today that the initial public offering of its new real estate subsidiary has been priced at $21 per share, raising gross proceeds of $1.05 billion on 50 million shares.

Accordingly, shares of MGM Growth Properties LLC will start trading publicly on the New York Stock Exchange on Wednesday under the symbol MGP. The pricing puts the IPO at the high end of expectations; the subsidiary had previously said in a Securities and Exchange Commission filing that it expected the offering to price between $18 and $21 per share.

MGM Growth Properties was formed as a real estate investment trust to acquire the real estate of 10 MGM Resorts properties, including seven on the Strip. MGM Resorts will lease back all of the properties and will hold a 76 percent economic interest in its operating partnership with the subsidiary.

An SEC filing said MGM Resorts created the subsidiary to “optimize (its) real estate holdings and establish a growth-oriented public real estate entity that will benefit from its relationship with MGM and is expected to generate reliable and growing quarterly cash distributions on a tax-efficient basis.”

MGM Resorts will still be responsible for all of the capital expenditures at the properties owned by MGM Growth Properties because the two have agreed to an arrangement known as a triple net lease. Additionally, all workers will remain employees of MGM Resorts, CEO Jim Murren has said.

The Las Vegas properties that will be owned by MGM Growth Properties are Mandalay Bay, the Mirage, New York-New York, Luxor, Monte Carlo, Excalibur and the Park. The subsidiary will also own the MGM Grand Detroit in Michigan and Beau Rivage and Gold Strike Tunica in Mississippi.

MGM Growth Properties will likely acquire more properties in the future.

“In addition to the gaming and gaming-related properties we may acquire from MGM from time to time in the future, we will also actively seek to identify additional entertainment and gaming-related properties for potential acquisition from non-MGM entities,” MGM Growth Properties said in an SEC filing. “We intend to selectively grow our portfolio of gaming properties through the acquisition of assets that contribute to our tenant and geographic diversification, can be leased subject to long-term leases with tenants with established operating histories, have low operating risks and provide stable cash flows, consistent with our Properties.”

In creating a real estate investment trust, also known as a REIT, MGM Resorts follows the lead of fellow casino operator Penn National Gaming Inc. That company spun off Gaming and Leisure Properties Inc. as a REIT a few years ago.

Jonathan Litt, the founder and chief investment officer of Land and Buildings Investment Management LLC, wrote in an April 12 letter to shareholders that the REIT plan from MGM Resorts was superior to Gaming and Leisure “from a strictly financial perspective.” Litt’s firm tried and failed to pressure MGM Resorts into adopting a different REIT plan last year.

Litt wrote that, on the corporate governance front, MGM Resorts’ vision was inferior to Gaming and Leisure and “problematic on numerous levels.” Litt mainly criticized MGM Growth Properties for being a controlled company that he said was insufficiently distanced from MGM Resorts. Though the MGM Growth Properties board will have two independent directors, it contains several other members with ties to MGM Resorts, including Murren.

Litt said Murren had taken a “half-step to unlock the value of MGM, which is better than no step at all.”

“However, it is perplexing why he would not go all the way and decisively unlock the inherent value in MGM Resorts,” Litt wrote. “In our view, full value can be unlocked by including all the properties in the REIT and eliminating any overlap on the board or management team of MGM Resorts and (MGM Growth Properties).”

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