MGM Growth Properties LLC (NYSE:MGP) priced their 50 million share IPO @ $21.00, the top of the anticipated range, raising $1.05 billion. The offering is led by joint bookrunning managers BofA Merrill Lynch, J.P. Morgan, Morgan Stanley, Evercore ISI, Barclays, Citigroup, and Deutsche Bank Securities. The proceeds of the offering will be used to purchase approximately 50,000,000 Operating Partnership Units, representing 24% of the economic interest in the Operating Partnership. The Operating Partnership will use the proceeds to repay a portion of the indebtedness under the Bridge Facilities it assumed from MGM and certain of its subsidiaries in connection with the Formation Transactions
This is an UPREIT spin out from MGM Resorts (NYSE:MGM). MGM resorts, through their wholly owned subsidiary, will own 76% of the operating partnership units. MGM believes that their properties are considerably undervalued by the market, and the formation of this REIT will unlock this valuation disparity, as well as provide growth capital for the parent through deleveraging. The company describes the gross book value of the assets to be $10 billion, with a total of $924 million of capital invested since the beginning of 2010.
MGP is designed as a triple net lease REIT, formed to own, operate and lease high quality leisure, entertainment and hospitality assets. The initial assets include 10 premier properties: 7 in Las Vegas, NV (Mandalay Bay, The Mirage, New York-New York, Luxor, Monte Carlo, Excalibur, and The Park) and 3 regional properties (MGM Grand Detroit, MI, Beau Rivage Biloxi, MS, and Gold Strike Tunica, MS). The leases are under a master lease agreement, all with one lessee, MGM Grand Resorts.
The company touts themselves as a growth REIT, both for the parent as well as stand alone. The initial structure has a couple built in growth engines, with 2% automatic rent escalators guaranteed for the 1st five years, generating over $50 million of rent growth, as well as two ROFO projects. The first is MGM National Harbor, a $1.3B development in Washington D.C., which will be opening later this year. The second is a $865M development in Springfield, MA expected to open in 2018. MGM retains a number of high profile properties, including Bellagio, MGM Grand Las Vegas and Circus Circus (to name a few), which could be potential drop downs in the future. As well, MGP has the opportunity to acquire additional properties from 3rd parties.
While oftentimes a single tenant can be considered a negative in this type structure, the company has gone out of their way to provide built in protection. The structure is that of a master lease, and as such all properties are cross defaulted/guaranteed. They also have a parent guarantee from MGM Resorts. This parent guarantee provides a 3.7x corporate rent coverage, which is well above any of the gaming peers as well as the triple net comps. Even at their low point in 2012, the guarantee would have provided a 2.2x coverage. There will be a minimum of 1% of adjusted net revenues spent on maintenance capex annually. But on top of this, MGM is responsible for all re-investment projects for all the properties.
At the high end of the range, MGP is coming at a forward dividend yield of 6.8% (based on an annualized dividend per share of $1.43), which is in line with the closest comp, Gaming and Leisure Properties, Inc. (NASDAQ:GLPI). The forward estimated TEV/ EBITDA are comparable as well with MGP at a slight premium. The assets in this REIT, however, can arguably be described as a premium product to that of GLPI. On a pro forma basis for 2015, MGP's total revenue was $600 million with AFFO of $403 million. Per the lease agreement the company will receive $550M total 1 year rent, comprised of a fixed rent component of $495 million and a 5 year adjustable rent component of $55 million.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MGP over the next 72 hours.
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