Value Investors Club / MGM GROWTH PROPERTIES LLC (MGP)

Description

MGP offers a compelling risk / reward at current levels featuring dividend yield of just under 6%,

consistent rent escalators, significant and highly probable lumpy growth opportunities and net rent

coverage of over 6x primarily with its main tenant, MGM Resorts.

Company Description: MGP is real estate investment trust which was spun out of MGM Resorts in 2016.

The company is engaged in the acquisition, ownership and leasing of large-scale destination

entertainment and leisure resorts, whose diverse amenities include casino gaming, hotel, convention,

dining, entertainment and retail offerings. MGP currently owns a portfolio of properties, consisting of 11

premier destination resorts in Las Vegas and elsewhere across the United States, MGM Northfield Park

in Northfield, OH, Empire Resort Casino in Yonkers, NY, as well as a retail and entertainment district, The

Park in Las Vegas. As of December 31, 2018, our destination resorts, the Park, and MGM Northfield Park

collectively comprise approximately 27,400 hotel rooms, 2.7 million convention square footage, 150

retail outlets, 300 food and beverage outlets and 20 entertainment venues.

Strong Dividend Yield: MGP offers a compelling dividend yield in both relative and absolute terms. At

current trading, the yield is 5.8%. This is nearly 200 bps higher than general triple net lease companies

like National Retail Properties and Realty Income. While those companies have far less asset and tenant

concentration they also have lower rent coverage and the financials into their tenants’ credit are

extremely opaque unlike with MGM Resorts which is an easy to follow and analyze public company. In

addition, it trades at a discount to VICI Properties which I believe has inferior gaming assets with

generally lower rent escalators.

Tenant Credit Profile Offers Downside Protection: I believe that MGP’s rent coverage of over 6x gives

an investment in the company significant downside protection. The company’s portfolio is currently 55%

regional properties and 45% Las Vegas. According to MGP, if Las Vegas specifically and the regional

economies generally experienced another recession like the 2008-2009 financial crisis, MGP would still

have underlying rent coverage of 3.9x. This is likely conservative even given that there was significant

supply coming on in Las Vegas when the previous recession hit. In short, absent a MUCH WORSE

recession than the one that began in 2008, it’s very difficult to see how the company’s rent payments or

dividends could be at risk. In addition, per the terms of the company’s master lease agreement with

MGM Resorts and it’s other tenants, the company has no tenant renewals to deal with for decades

which is also an important feature of the downside protection here.

Growth: The company has a large number of growth opportunities many of which feature ROFOs (rights

of first refusal). At some point MGM Resorts is likely to sell to MGP partial or full interests in a number

of the properties that MGP does not already own. These include attractive, fully owned assets such as

Bellagio, MGM Grand and Circus Circus in Las Vegas as well as JV interests in CityCenter and the T-

Mobile Arena. Given that MGP trades at 15x 2019 EBITDA and MGM Resorts trades at 10x 2019 EBITDA,

it is very easy to price the deals at valuations in between those two figures and make the “drop-down”

deals very accretive for both sides.

Rent Escalators: MGP enjoys rent escalators of 1.8% annually which translates into baked in FFO growth

of around 2.4%. By contrast VICI has escalators of around 1.5% and other triple net lease operators such

as O or NNN have escalators closer to 0%.

Overall: MGP has grown it’s dividend per share by over 30% since its IPO in 2016. I believe through a

combination of rent escalators, drop-down deals with MGM and acquisitions of non-MGM assets, the

company has the potential to continue to growth its dividend at a similar annualized rate in the future.

The company also features a solid balance sheet for a REIT with current net debt / EBITDA of 5.4x which

is conservative given the rent coverage at the tenant level. Given all of these factors—high rent

coverage, strong growth, good balance sheet, attractive relative valuation; I believe that MGP could

easily trade into the $40s per share over the next year or two with a 6% yield along the way.

MGM Concentration: The primary bear point I’ve heard on the company is that MGM Resorts, which

owns 69% of MGP, is likely to extract additional value from MGP that is not in the interests of MGP

shareholders. This is a risk but I am comforted by the fact that since the IPO, all deals between the two

companies have been positive and accretive to both shareholder bases. In addition, MGM has a strong

financial incentive to see continued appreciation in MGP shares given its large stake in the company. I

also think MGP has strong leadership in James Stewart and Andy Chien as well as an attractive master

lease structure with MGM which helps mitigate risk in this area.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Various drop-down acquisitions of propoties from MGM which not currently owned as well as non MGM acquisition opportunities

Also, potential for re-rating given attractive relative valuation and relatively new industry segment

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			2019	2020
Price:	32.33	EPS	0	0
Shares Out. (in M):	91	P/E	0	0
Market Cap (in $M):	9,233	P/FCF	14.9x	13.5x
Net Debt (in $M):	4,607	EBIT	0	0
TEV (in $M):	13,840	TEV/EBIT	0	0