Description
MGM Growth Properties is a triple-net-lease REIT focused on owning, acquiring and leasing high-quality real estate assets in the gaming and leisure space.
Their property portfolio consists of 15 high-quality, mixed-use Las Vegas resorts and regional assets (48% Las Vegas / 52% regional) and includes trophy assets such as the Mirage, MGM Grand, Luxor and Mandalay Bay properties.
MGM offers a compelling combination of undervaluation, high yield, growth and security at current prices, characterized by a:
- ~7% current dividend yield
- ~14x EBITDA multiple (with no associated capex or taxes)
- ~11x P/AFFO multiple
- ~9% discount to the gross book value of its assets
Furthermore, MGP has growth for years to come with contractual ~2% annual rent increases through 2020 and a pipeline of value accretive acquisitions through right-of-first-refusal drop-downs from MGM and a broader M&A opportunity set of gaming sale-leaseback transactions. The Company is reasonably capitalized (5.5x EBITDA) and has no significant near-term debt maturities. Management is competent.
While MGP operates in the gaming sector and has been unfairly caught up in the broader market dynamics within the sector around coronavirus, they are a landlord, not an operator, and the contractual rents they receive are structured financially and legally to comfortably withstand a range of worst case scenarios due to a variety of attractive lease attributes:
- Long-term 30-50 year leases under an attractive triple-net structure
- An impenetratable 100% master lease structure
- Very robust rent coverage:
- ~3x rent coverage, one of the strongest in the broader triple-net REIT universe, which are typically ~2-2.5x
- ~2x rent coverage even in a repeat of a 2009 recession. Las Vegas also experienced a significant supply increase in the last recession, a dynamic that is currently not present
- High-quality tenant credit: MGM is a blue-chip investment grade tenant with leverage approaching 1x net debt / EBITDA by the end of 2020
- Superior priority versus unsecured bonds
With interest rates in this cycle now approaching 0%, I think a high-quality, well-managed, secure, growing YieldCo like MGP should likely trade at 5%-6% cap rate, yielding a $40-$45 share price for 60% upside, with ~7% dividend yield along the way.
MGM's ownership stake has been a multi-year overhang on the stock. However, MGP recently entered into an agreement to redeem $1.4bn of operating partnership units, which should help clean up the overhang.
Blackstone also recently acquired the Bellagio property at 18x EBITDA and invested $150M directly into MGP at $31 per share as part of a JV with MGP to acquire the real estate assets of MGM Grand and Mandalay Bay. Blackstone's involvement at these levels, and the valuation of these comparable transactions, further highlights the valuation of MGP's portfolio at current levels.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Interest rates
Coronavirus
MGM overhang