MGM Growth Properties (NYSE:MGP), a captive REIT of MGM Resorts International, debuted with the biggest IPO of the year on Tuesday. The company raised $1.05 billion according to the Wall Street Journal, selling 50 million shares at a price of $21 per share.
This is notable, as it's only the second company to IPO this year above $1 billion. That matters because of the paucity of IPOs we've seen in 2016, which makes this flotation paticularly lucrative.
But MGP had aimed for $21 as a high estimate, and its current success is both good news for the company and the current IPO market. But while a strong start is good, how will this REIT hold up as a stock over the long term? Is this a sign of investors' confidence in MGP's casinos, or is this a rush by investors interested in investing in the first stocks to come out after this long IPO drought?
A dependency on Las Vegas?
MGM split off MGP last year after pressure from activist funds, but MGM will own 76 percent of MGP even after the IPO. For now, MGP controls nine resorts and The Park, a Las Vegas outdoor dining and entertainment district which debuted this month.
The key point about these resorts is that MGM is extremely dependent on the health of its Las Vegas casinos. Its own SEC filing shows that 62 percent of the 2015 MGM resort revenue came from Las Vegas. 26 percent was from Macau, and the remaining 12 percent came from regional resorts located in Detroit and Mississippi.
So in order to evaluate MGP, we need to background check Las Vegas's future economic prospects, and how MGP might choose to diversify and expand its business.
Las Vegas's future economic prospects are pretty good. On one hand, Nevada's economy has stabilized since it was hit hard in the 2008 recession. Personal income is up and unemployment has declined to 5.8 percent over the past few months. Furthermore, the number of visitors to Vegas increased in 2015 by 900,000. This set new records and indicates that despite the development of potential regional gambling operations, Vegas continues to draw in tourists and gamblers from across the globe.
MGP's current plans for growth are more problematic. MGM is currently constructing two casinos, MGM National Harbor in Maryland and MGM Springfield in Massachusetts. National Harbor is expected to open before February 2017 and Springfield will open in 2018. These two casinos will fall under MGP purview upon completion.
But beyond these two casinos which will not be open for some time, MGP will just be waiting around for some time. And additional growth is absolutely crucial because MGP and MGM have a significant debt problem.
Handling a debt problem
While MGP did not exist in 2014, a look at the past financial numbers of the casinos which MGP now controls is very concerning. MGP would have had a net loss of $246 million in 2014 and $261 million in 2015.
And as a result, MGP plans to use the money raised by this IPO to pay off the debts of both MGP and MGM. According to the SEC filing, MGP will create an Operating Partnership which "will use the proceeds to repay $868.1 million of the approximately $4.0 billion of indebtedness under the Bridge Facilities it assumed from MGM."
Now as noted, MGM is in debt because it is constructing multiple casinos for the benefit of MGP. But it is going to need more growth than this, and I do not see a good answer to the question of where that growth is going to come from.
If MGP had debuted poorly, say to $15 to $18, I might suggest giving the company a shot in the hope that the stock would rise. But its impressive beginning is in fact a problem. With little growth potential for the foreseeable future and its dependence on the Las Vegas economy, it is difficult to see how this IPO will continue to rise over the long term.
And while MGP is the largest IPO of this year, there are other upcoming IPOs which should attract investors. Dell Secureworks will debut next week with an IPO which hopes to raise about $150 million, and American Renal Associates Holding Inc. hopes to raise more than $160 million. Either of those companies for now appear to have greater growth potential and should be targeted more heavily than MGP.
But MGP is not a bad stock. If the value falls off from its current strong start to the level mentioned above, then perhaps investors should take a second look at it.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.