Real estate joint venture acquires ownership in MGM Grand LV and Mandalay Bay in $4.6B deal

January 14, 2020 8:31 PM
  • Howard Stutz, CDC Gaming Reports
January 14, 2020 8:31 PM
  • Howard Stutz, CDC Gaming Reports

A joint venture between real estate investment trusts MGM Growth Properties and an affiliate of the Blackstone Group said Tuesday it will take ownership of two Las Vegas Strip resorts – MGM Grand Las Vegas and Mandalay Bay – in a transaction valued at $4.6 billion.

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Casino giant MGM Resorts International will continue to operate and oversee the day-to-day operations of the two hotel-casinos through a long-term lease agreement in which the company will pay $292 million annually in rent to the joint venture.

The joint venture will be owned by MGM Growth and Blackstone Real Estate Income Trust, which is owned by New York-based Blackstone, a private-equity and real estate firm. MGM Growth will control 50.1% of the company and Blackstone will own 49.9%.

MGM Resorts will sell the MGM Grand Las Vegas to the joint venture for $2.5 billion, which includes cash of $2.4 billion and $85 million in MGM Growth partnership units. In a statement, MGM Resorts valued the transaction at 15.75-times the rent it will pay to lease the property.

MGM Growth has owned Mandalay Bay since the REIT was formed in 2015 and leases the property to MGM Resorts.

MGM Growth entered into a separate agreement to pay $1.4 billion for MGM Resorts’ existing operating partnership units. The casino company has 24 months to redeem the units. MGM Resorts owns almost 70% of the REIT and once the units are redeemed, the stake will drop to 55%. MGM has stated its desire to reduce its ownership in MGM Growth.

Following a similar sale/leaseback in October for Bellagio and the outright sale of Circus Circus Las Vegas, MGM Resorts said combined transactions are expected to provide the company with net proceeds of $8.2 billion, allowing MGM to create a “fortress balance sheet” and allows the casino giant to reduce a portion of its $15 billion in long-term debt.

MGM CEO Jim Murren

MGM Chairman and CEO Jim Murren said the company will continue to explore sales/leasebacks of other properties, including MGM Springfield in Massachusetts, its 50% stake in CityCenter Las Vegas, and a continued reduction of its ownership in MGM Growth.

“These announcements represent a key milestone in executing the company’s previously communicated asset-light strategy,” Murren said in a statement. He said the effort would create “a best-in-class balance sheet” and strong free cash flow.

“Our corporate objective remains crystal clear,” Murren said. “We will continue to monetize our owned real estate assets, which facilitates our strong focus on returning capital to our shareholders, while also retaining significant flexibility to pursue our visible growth initiatives, including Japan and sports betting.”

MGM Resorts said a “substantial portion” of the proceeds from the transactions will be used to return capital to shareholders “through share repurchases and dividends.” The company said it will provide a specific update on the plan when it announces fourth quarter earnings next month.

A year ago, MGM Resorts formed an ad-hoc committee of its board to explore options with the company’s real estate.

Board member Paul Salem, who chaired the real estate committee, said the deal for MGM Grand and Mandalay Bay “represents another key phase of our ongoing review of the company’s assets and is in-line with all of the committee’s principal objectives.”

The transaction was long been expected.

“The announcement was consistent with the plan MGM laid out at the end of 2019,” Jefferies gaming analyst David Katz told investors. “We view the near 16-times multiple, the prospect of shareholder returns, the removal of maturities and refinancing needs as short-term tailwinds for MGM shares.”

In October, MGM Resorts sold Bellagio for $4.25 billion to joint venture controlled by Blackstone. MGM is leasing the property back from Blackstone for $245 million annually and the company also owns 5% of the joint venture. That same day, MGM Resorts sold Circus Circus to TI owner Phil Ruffin for $825 million. Both transactions have since closed. At the time, Murren said would pursue a sale/leaseback of MGM Grand.

The transaction for MGM Grand Las Vegas and Mandalay Bay was expected to close by the end of March.

MGM Growth currently owns 13 properties that are leased back to MGM Resorts, including 11 on the Strip, MGM Northfield Park in Ohio and Empire Resort Casino in Yonkers, New York. The deal for MGM Grand and Mandalay Bay covers 9,743 rooms, nearly 3 million square feet of meeting space and some 300,000 square feet of casino space across 226 acres on the Strip.

“This partnership with (Blackstone)… illustrates the numerous opportunities available to grow our business and emphasizes the strong institutional demand for gaming real estate assets,” MGM Growth CEO James Stewart said in a statement.

By law, REITs don’t pay federal income taxes. With real estate as their primary source of income, REITs are required to distribute at least 90 percent of their taxable earnings to shareholders. Investors are taxed at their individual tax rate for the ordinary income portion of the dividend.

Blackstone also owns the Cosmopolitan of Las Vegas.

“This transaction reflects our continuing strong conviction in Las Vegas,” Blackstone President Jon Gray said in a statement. “We are pleased to once again partner with MGM Resorts, a world-class operator, as well as MGM Growth Properties.”

Shares of MGM Resorts, traded on the New York Stock Exchange, closed at $33.29 on Tuesday, down 8 cents or 0.24%. Shares of MGM Growth, also traded on the New York Stock Exchange, closed at $30.97, up 12 cents or 0.39%

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