Through its REIT, MGM Resorts finds its way into New York’s gaming market

Through its REIT, MGM Resorts finds its way into New York’s gaming market

  • Howard Stutz
June 7, 2018 12:00 AM

Most analysts believe MGM Resorts International’s planned $850 million acquisition of a New York casino and racetrack is all about tapping into the state’s potentially lucrative sports wagering business.

But the transaction lends additional credibility to MGM Growth Properties, the casino operator’s three-year-old real estate investment trust.

MGM Growth will pay MGM Resorts $625 million to acquire the real estate associated with the Empire City Casino and Racetrack in Yonkers. In turn, the casino operator will pay the landlord $50 million annually in rent.

It’s a sweet deal since MGM Resorts owns 70 percent of MGM Growth.

When the Empire City purchase closes early next year, the REIT will own 14 properties all operated by MGM Resorts.

“The deal, from MGM Growth’s perspective, is fairly straightforward,” said Deutsche Bank gaming analyst Carlo Santarelli.

MGM Growth CEO James Stewart said buying Empire City “further illustrates our ability” for the casino operator and the REIT to partner in gaming acquisitions. It also “will further increase our regional geographic footprint.”

The REIT owns the land associated with six of MGM’s Las Vegas properties and The Park dining and entertainment complex. But MGM Growth also owns the company’s regional properties: Beau Rivage and Gold Strike, in Mississippi; MGM Grand Detroit; Borgata, in Atlantic City; and MGM National Harbor, in Maryland. MGM Growth is further expected to acquire MGM Springfield after the Massachusetts casino opens in August.

The question is when MGM Growth will move beyond MGM Resorts and begin to acquire properties managed by other casino operators.

In January, MGM Growth made a run at Vici Properties, a REIT that was spun-off from the Caesars Entertainment Corp. bankruptcy resolution. Vici ultimately rejected a $5.85 billion acquisition offer that would have put the ownership of 20 resorts, including Caesars Palace, under MGM Growth.

For the most part, the gaming industry has embraced REITs. By law, REITs don’t pay federal income taxes, and, with real estate as their primary source of income, are required to distribute at least 90 percent of their taxable earnings to shareholders.

MGM Growth and VICI are relatively new to the game.

Gaming and Leisure Properties, which spun off from Penn National Gaming in 2013, was the industry’s first REIT. It began with 21 casinos and racetracks but has steadily grown. In 2016, GLPI spent $4.75 billion to acquire 14 casinos owned by Pinnacle Entertainment. The gaming and resorts operations were leased back to Pinnacle.

Now, through Penn National’s pending $2.8 billion acquisition of Pinnacle, everything will come full-circle.

Meanwhile, GLPI will have two outside partners.

Boyd Gaming Corp., which is acquiring four of the Pinnacle operations in three states from Penn, will sign lease agreements with the REIT. GLPI is acquiring ownership of six Tropicana Entertainment properties in six states through a purchase-leaseback agreement with Eldorado Resorts.

Several analysts have questioned the gaming industry’s suitability for the operating company/property company structure found in REITs. Long-term lease agreements can often get in the way of the capital expenditure needs associated with the operation of hotel-casino resorts.

The MGM Growth/MGM Resorts structure doesn’t have that concern.

MGM Growth won’t stand in the way of any heavy maintenance expenditures MGM Resorts runs into as it looks to operate Empire City casino and racetrack. The raceway opened in 1899 and has a half-mile harness racing dirt track and a facility for horse race simulcasts. The casino has 5,200 gaming devices and several restaurants.

The 2011 opening of Resorts World New York at Aqueduct Racetrack in Queens caused Empire City’s revenues to decline 13 percent over the next year.

That’s where sports betting comes into the picture. MGM wants its slice of the New York pie should the state legalize and establish the regulations for sports betting.

Lawmakers, however, are running out of time. A new bill has been introduced, but the Legislature adjourns June 20.

The pace, though, is picking up. Sports betting proponents brought former New York Yankee managers Joe Girardi and Joe Torre to Albany to make the case for sports betting, as well as a royalty fee. Backers would conjure up the ghost of Casey Stengel if they thought it would help.

The effort seems apropos. Yonkers is less than eight miles north of Yankee Stadium in the Bronx, and MGM Resorts Chairman and CEO Jim Murren is a passionate Yankees fan.

The 97-acre Empire City facility gives the company an entry into the high-density New York market, which has eight teams in the four major sports (even though the NFL’s Jets and Giants play across the river in New Jersey).

MGM believes the REIT ownership structure is a valuable tool.

MGM Resorts CFO Dan D’Arrigo said Empire City has roughly 40 percent of the gaming market. “We believe there are significant opportunities to further drive growth.”

Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.