MGM Resort’s ‘asset-light’ strategy is good for the company, but what about other casino operators

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Howard Stutz has over 30 years of experience reporting on the gaming industry.

Before the year is out, it’s possible MGM Resorts International won’t own any of the casinos the company operates in the U.S.

Following 12 months of intense internal discussion and activity, culminating with Tuesday’s sale/leaseback of MGM Grand Las Vegas to a new real estate investment trust joint venture, MGM’s ownership portfolio includes MGM Springfield in Massachusetts, a 50% stake in the CityCenter development on the Strip, and 56% of its two Macau casinos – and that’s all.

As a casino operator, however, MGM Resorts remains one of the largest in the country.

So far, the jury is out on this new corporate structure.

“MGM is shifting its focus from both an operator and real estate owner to an operator of gaming and leisure assets,” said Macquarie Securities gaming analyst Chad Beynon.

MGM is walking away with a combined $8.2 billion in cash from the sale/leaseback of Bellagio and the outright sale of Circus Circus Las Vegas in October, along with Tuesday’s deals, which includes $1.4 billion from real estate investment trust MGM Growth Properties. That part of the deal allows MGM Resorts to reduce its ownership stake in the REIT to 55 percent.

Not only will MGM Resorts have the ability to reduce a sizeable chunk of its $15 billion in long-term debt and provide some capital return to shareholders, but it sets the company up for its long-stated development target – winning the bidding process for an integrated resort license in Osaka, Japan, which could have a $10 billion to $12 billion price tag.

“MGM is amassing a mountain of cash,” Union Gaming Group analyst John DeCree told investors, adding that the figure could grow to $9.2 billion with addition of $1 billion of cash flow from the company’s U.S. operations.

DeCree expects at least $6 billion will go toward debt reduction. He thought stock repurchases could reduce the number of MGM Resorts shares on the market by 20%, making the remaining shares more valuable.

“We do believe the significance of the transaction is being underappreciated, given the magnitude of value (and cash) being unlocked that will ultimately result in meaningful deleveraging and substantial share repurchase potential,” DeCree said.

Japan may be the ultimate prize.

“Ultimately, we view MGM’s real estate monetization strategy as effectively pre-funding the balance sheet for a potential Japan win,” said SunTrust Bank gaming analyst Barry Jonas. “It could be some time before investors are able to gauge the success of the ongoing asset-light initiative and the ultimate return on an Osaka new-build.”

MGM Resorts Chairman and CEO Jim Murren said the company is not done. MGM Springfield is probably the next target, and he would like to sell the CityCenter stake. Those 76 acres includes the 4,000-room Aria resort, two non-gaming hotels, an all-residential building and a luxury shopping mall, and the land value has increased given the company’s redevelopment efforts on the Strip’s south end over the last few years.

The Strip’s land value played out in the Bellagio and MGM Grand deals. MGM Resorts is paying annual rent of $245 million to operate the Bellagio and $290 million to operate MGM Grand and Mandalay Bay, whose ownership was transferred by MGM Growth into its new joint venture partnership with New York-based Blackstone Group.

The sales equated to 17.3 times the Bellagio’s rent and 15.75 times the MGM Grand’s.

Murren said the company’s new “fortress balance sheet” not only helps in the Japan push, but strengthens the company’s position as it pursues other opportunities, such as sports betting through Roar Digital, its new partnership with UK-based GVC Holdings. On Wednesday, Roar Digital and the National Lacrosse League announced a gaming partnership.

“Our corporate objective remains crystal clear,” Murren said.

The question analysts ponder is if MGM’s “asset-light” strategy is good for other casino operators.

The majority of Penn National Gaming’s 41 gaming properties are in lease agreements with Gaming and Leisure Properties – which Penn spun off in 2013 – and the Caesars Entertainment-centric VICI Properties.

In 2018, Boyd Gaming Corp acquired the operations of four Pinnacle Entertainment casinos with GLPI, but the company hasn’t yet shown an interest in further REIT deals.

The $17.3 billion acquisition of Caesars Entertainment by Eldorado Resorts includes VICI.

Jonas said Blackstone’s involvement in the MGM deals piques interest and speculation about Las Vegas Strip real estate, such as the properties owned by Wynn Resorts and Las Vegas Sands. That interest is less clear in “lower end Strip assets” and the regional markets, however.

“It remains to be seen if (there is) ‘a rising tide lifts all boats’ here,” Jonas said.