After spending $1.075 billion in cash buying The Mirage’s operations from MGM Resorts International, Hard Rock International will invest $1.5 billion to upgrade the property. According to Wall Street analysts, that could lead to the redevelopment of older mid-market properties across the Strip, as well as set the stage for Caesars Entertainment to obtain a premium price for selling one of its properties in 2022.
Both MGM and Hard Rock, owned by the Seminole Tribe of Florida, announced the deal Monday. The Seminole, which will be the first tribe to operate on the Strip when the sale closes during the second half of 2022, plan to build a 1,000-room guitar-shaped hotel on the site; the company hasn’t said whether it will demolish the existing 3,000-room Mirage. Hard Rock has three years to rebrand the property, which is owned by VICI Properties and is being leased back to the tribe.
John Decree, a senior analyst at CBRE Equity Research, said the transaction “highlights the desirability of Las Vegas casinos and underpins our bullish outlook for the Las Vegas Strip” and the shares of MGM, VICI, Caesars, and Wynn Resorts.
“It was a winner-winner-chicken-dinner deal for all parties involved, plus some bystanders like Caesars and Wynn, both of which have significant Las Vegas exposure,” Decree said.
While not a surprise, given MGM’s public commentary from the third-quarter earnings call, David Katz, an analyst for Jefferies Equities Research, viewed the sale of The Mirage “favorably for MGM and neutral for VICI. For MGM, the 2021 transactions simplify the story and improve financial flexibility. As for the rest of their coverage, the transaction supports Strip asset valuations, with more deals likely forthcoming.”
Caesars Entertainment has publicly indicated plans to divest one Strip asset in 2022, which Katz said should see strong demand. “We (also) expect there could be further redevelopment activities around the older, mid-market properties across the Strip, some owned by MGM and other disparate owners.”
With The Mirage setting a new bar for valuation, Decree said that Caesars has to be excited about selling one of its resorts in 2022 and the same can be said of Wynn, which he said is sitting on what is “arguably the most valuable casino-resort” in Las Vegas, if not the country.
“For Caesars, we assumed its proposed Strip casino sale could generate $2.5 billion of gross proceeds; however, considering current Las Vegas real estate prices and this (operating-company) precedent, that figure could swell to $3 billion plus,” Decree said. “For Wynn, the impact could be even greater. The potential value that Wynn could unlock in Las Vegas alone could be transformative, especially for an asset that needs no (capital expenditure) and has plenty of excess land for development.”
Barry Jonas, an analyst with Truist Securities, said they view the transaction “as a modest positive for the larger MGM, while largely neutral to our VICI model with positives more around Strip tenant diversification and pipeline.” He added that the sale isn’t necessarily a fair-market valuation baseline” for a property that generated $154 million of adjusted earnings in 2019.
“Overall, we view the transaction as a positive for MGM as it rebalances its Las Vegas portfolio,” Jonas said. “MGM swaps the older Mirage operations with the newer Cosmopolitan. We also think there is a chance MGM can retain some of the lost Mirage (earnings) via its Mlife database, though we believe Mirage has a very loyal property-specific player base.”
Jonas said construction at The Mirage in a multi-year Hard Rock rebranding could also be a “temporary positive,” if there is reduced capacity in the market for some time. “That said, the Hard Rock database and brand could be a formidable player in the Vegas market once fully open,” Jonas said. “While there was likely strong interest in the Mirage, we expect the record 17-times (operating-company) multiple was likely meaningfully ahead of the next bid and reflects the wider Seminole redevelopment strategy, compared to replacement cost.”
Decree said the Hard Rock, which had long coveted a Strip asset, prevailed in what was likely another bidding war for a scarce opportunity to gain access to the Strip. At its peak in 2007, The Mirage generated about $250 million of adjusted earnings and held its own in the VIP segment, before MGM consolidated its top-tier gaming play across its newer assets, like Aria and Bellagio, he said.
“Hard Rock brings a vision to return The Mirage to its former glory with plans to invest up to $1.5 billion,” Decree said. “The beautiful thing about Native American capital is that it is generational and Hard Rock will be able to do this right without concern for short-term return-on-investment hurdles, which is a positive for all of Las Vegas.”
Katz pointed out that VICI’s MGM master lease was amended to account for MGM’s divestiture of the Mirage, which will result in a reduction in initial annual base rent by $90 million, making the transaction largely net neutral.
In connection with MGM’s deal, VICI announced a new separate lease with Hard Rock that will have initial annual base rent of $90 million, a base term of 25 years with three 10-year tenant-renewal options, and an escalation of 2% per annum (with escalation being the greater of 2% or Consumer Price Index, capped at 3% beginning in year 11 and minimum capital expenditures of 1% of annual net revenue), Katz said.
“Our impression is that Mirage required considerable (capital expenditures) as well,” Katz said. “The deal implies a trade up for MGM on the Strip, which should continue as properties change hands and evolve.”
VICI may finance an up to $1.5 billion Mirage redevelopment plan through VICI’s Partner Property Growth Fund. This loan is likely to be funded over an extended period through the next one to three years, as planning, approvals, and redevelopment evolve. The deal expands the preexisting partnership with Hard Rock, Katz said.
In September, MGM announced plans to acquire the operations of The Cosmopolitan at $1.625 billion, or 14 times adjusted earnings. Also by comparison, Las Vegas Sands sold the operations of its Venetian and Palazzo for 9.5 adjusted earnings.
Jonas said the sale removes about $100 million of near-term capital expenditures MGM would have spent on upgrades. The transaction should net MGM cash proceeds of $815 million and should be value accretive by roughly $150 million or $0.30 per share when netting cash proceeds with lost 2019 adjusted earnings of $154 million.
