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MGM Spins Off 10 Properties Into Real Estate Investment Trust

By Chuckmonster on Thursday, 29th October 2015 8:01am
  » filed under Las Vegas  comments: 13


MGM Resorts International has spun 10 of its properties off into a publicly traded real estate investment trust (REIT) to be called MGM Growth Properties LLC, or MGP.

MGM is giving the new subsidiary MGP the real estate upon which Mandalay Bay, Luxor, Excalibur, New York New York, The Park, Monte Carlo, The Mirage, MGM Grand Detroit, Beau Rivage and Gold Strike Tunica sit PLUS the added bonus of absorbing $4 billion dollars worth of MGM's debt.

The properties that sit on the real estate will still be owned by MGM Resorts and operate normally. MGM will pay the new subsidiary rent for the usage of the real estate under a long term lease agreement.

Profits realized by real estate gains (the rent) are taxed differently than standard earnings (the drop). MGM funnels the profits from dining, hotel rooms, casino win etc, out of the properties as an expense (rent) to their "landlord" MGP. The landlord realizes this cash as real estate investment gains which are taxed at lower rates.

In the end, the entirety of MGM/MGP stands to make more profit on the same amount of income due to tax savings. The savings is then used to pay down the $4b in debt absorbed from MGM at a quicker pace. Additionally, MGM plans to refinance this debt with new debt, at better terms.

This agreement does not include Bellagio, MGM Grand, Circus Circus, City Center, Borgata, Grand Victoria, the Las Vegas Arena, the undeveloped parcels (the concert parking lots at either end of The Strip) or either of the Macau properties. Some of these properties could be holstered for future infusions and additions.

MGM says that the REIT split will take place in Q1 2016.

I find it fascinating that The Park is listed as an individual property asset. Perhaps MGM sees The Park as a potential development opportunity, beyond the benches, trees, shops and food trucks that it currently aspires to be.

Also interesting to note that Circus Circus is excluded. Circus Circus has been MGM's bastard child since the Mandalay acquisition in 2005. Do they see the big top's real estate as undervalued and worthless addition, non-core asset, or is it a long shot future bet being holstered along side sure bets Bellagio, Aria and MGM Grand.

I don't foresee the REIT having any direct implications to tourists. Ideally it gets the debt monkey off of MGM's back (a little) and unlocks some hidden values in tax savings. The windfalls could go into capital expenditures - the rebrand/renovation of Monte Carlo for example.

Tagged: mgm resorts international   reit   finance   


Comments & Discussion:

I agree with your initial thought on Circus Circus. They don't seem too confident in its value. This is an interesting move for investors. For most REITS, in order to truly have a tax advantage to the company, they need to pay 90% of their taxable income to shareholders. This basically allows them to pay no federal income tax.

A blog that doesn't get along well with this one thinks that MGM/Bellagio/Circus have lower property taxes. The first two may be because they were built on land already purchased and zibed for resort purposes years before their current occupants? Thinking of the Marina and Dunes here.

I dunno, since I still have a uniquely Californian understanding of property taxes and rent out here.

Zibed(???) = Zoned.

Damn you, auto correct. Or the lack of it. Or, whatever.

This is not the first gaming company that made this financial move...I am not a finance guy and have not researched this (being lazy), so why would the government allow this type of program if the govt looses tax money...yes, investors make money and get taxed, but sounds as though still a loss in tax revenue.

@chuckmonter....I assume Aria is in the same category as Bellagio, MGM Grand, etc. Aria was not listed in either section.

Aria is part of City Center, not part of the deal, Also worth noting that Murren reiterated that they're selling Crystals when the right offer comes in. Very different answer compared to the Mirage sale rumors.

^duh on my part....for some reason I have always categorized Aria outside of City Center...the condos and shopping center to me is City Center.

Penn National is the one that got the REIT train going a few years ago when they spun off Gaming & Leisure Properties and put their properties under it. Gaming & Leisure is currently in the process of acquiring Pinnacle Entertainment's properties and adding them to their portfolio (Pinnacle originally planned to create their own REIT, but Gaming & Leisure made them a really good offer to sell to them.). Caesars is wanting to do the same thing as part of their bankruptcy reorganization plan, but considering the tangled web the entire house of cards there, how knows if it will happen.

Would MGM even be doing this if it wasn't for that group of shareholders earlier this year trying to gain a spot on the board? That group was wanting to do this same exact thing.

@wpsteel66, there's been some contention over the formation of REITs because of the tax shifts. Some states have established combined reporting standards to ensure that appropriate tax income is collected. Nevada, however, has no such standard. Considering Nevada does not collect corporate income tax anyway, it doesn't seem like much changes in terms of government revenue, as they get much of their income from the gaming tax. Though, this is based on a very basic understanding of REITs and their tax implications, so don't hold me to this.

This is the problem with modern capitalism... too many people moving numbers around on spreadsheets and looking for a different answer to 1+1=2.

Who, be it a single person or large corporate entity, doesn't move number's around to keep try and keep as much of the money they earn from being confiscated.
This is all done to circumvent the never ending constant manipulation of the tax code to pick and choose winners and losers.
This is mainly of consequence to shareholders. Hopefully the public will see some upgrades and improvements.

Had the same thoughts about circus, circus...

Perhaps the thought is that it's a possible growth property with all the development going on up there and without it, MGM doesn't really have a presence. (Yeah there's the venue plot of land but that's not quite the same...)

I have to wonder if Circus Circus is long for this Earth. MGM recently made a deal to Circus Circus Reno (as well as their stake in the Silver Legacy) to their partner in the Silver Legacy, Eldorado Resorts. When they acquired land adjacent to Circus Circus (One parcel was where Maxim Magazine had announced a casino resort and another was the parcel that the longtime owners of the Sahara had been holding onto for a number of years. I could see a phased redevelopment of Circus Circus into a resort that incorporates not only Adventuredome but also the City of Rock Venue into the new resort.

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