In a major corporate restructuring move aimed at strengthening its business and giving it more room to grow, MGM Resorts International today announced plans to move 10 of its properties into a new real estate investment trust.
The trust will be its own publicly traded company, MGM Resorts Growth Properties LLC, in which MGM Resorts International will maintain a majority economic interest. The company expects an initial public offering for the trust to occur early next year.
Commonly known as a REIT, the trust will include seven big properties on the Strip: Mandalay Bay, the Mirage, Monte Carlo, New York-New York, Luxor, Excalibur and the Park development.
MGM Grand, Bellagio and Circus Circus are not included; neither are the properties jointly owned by MGM Resorts, such as CityCenter and the Las Vegas Arena.
Beyond the Strip businesses, the REIT will also include three regional casinos: Michigan’s MGM Grand Detroit as well as Mississippi’s Beau Rivage and the Gold Strike Tunica. MGM Resorts will lease back the REIT’s casinos and continue to manage them.
Creating the REIT will allow MGM Resorts to showcase the value of its real estate, reduce its leverage and improve its financial profile, the company said in a statement. The REIT will assume about $4 billion of company debt.
In a conference call with analysts, CEO Jim Murren explained that the company has long thought its real estate was undervalued and that this transaction was a way to address that while making the company stronger.
As significant as the move was from a business perspective, however, Murren stressed that casino operations will continue unchanged.
“In short, we believe we’ve found the mechanism to create two strong, rapidly growing, healthy companies with different investment profiles,” he said on the conference call. “Daily operations will continue as usual. We do not expect any impact on our employees — all of which will be MGM Resorts employees as they are today — our guests and our business partners.”
Murren said he will likely be chairman of the REIT, but that it will also have its own executives and board of directors. MGM Resorts will likely own about 70 percent of the REIT, Murren said.
The REIT will also have room to grow beyond the initial 10 properties.
“It could go out and acquire other gaming assets that MGM has not developed or owned today; it could go out and buy other hotel assets or other hospitality assets,” Murren said in an interview. “It basically has its own path.”
REITs offer attractive tax advantages and have been created or considered by several other casino companies. For example, Penn National Gaming Inc., which controls the Tropicana and M Resort, spun off many of its properties into a REIT in 2013.
Caesars Entertainment Corp. wants to convert its bankrupt operating unit into a REIT as part of its financial restructuring plan.
Earlier this year, the firm Land and Buildings pushed MGM Resorts to adopt a REIT structure, but the company rejected that specific proposal. Murren said that plan contained “a bunch of really half-baked ideas” which, if enacted, “would have destroyed a ton of value” for the company.
Today’s REIT announcement came in tandem with the company reporting its third-quarter earnings results, highlighted below.
Revenue: $2.28 billion, down 8.2 percent from the third quarter of 2014.
Earnings: $66.4 million, compared to a loss of $20.3 million in the third quarter last year.
Earnings per share: 12 cents, compared to a loss of 4 cents in last year’s third quarter.
What it means: The company pointed to some strong financial figures from its United States operations but struggled in China.
Casino revenue from the United States resorts wholly owned by the company rose 4 percent year over year, which the company attributed largely to a 2 percent boost in slot volume. Room revenue, meanwhile, grew 8 percent and on the Strip, revenue per available room also increased 8 percent.
However, net revenue from the company’s China subsidiary dropped 33 percent from last year. Main floor table game revenue there declined 30 percent, and VIP table game revenue dropped 39 percent. The Chinese gambling hub of Macau has been hit hard by the country’s economic struggles and a government-led corruption crackdown, which has negatively affected business from high rollers.
MGM Resorts also noted that its corporate expenses rose by $12 million from last year, which it said reflected costs associated with its profit growth plan, a new company initiative aimed at improving efficiency, lowering costs and growing revenue. It’s expected to produce an extra $300 million annually in earnings before certain costs.
Shares of MGM Resorts were up about 4 percent during afternoon trading.