MGM in Lion-sized deal with Blackstone Group

MGM Resorts International has made no secret that it is a company in transition from owning and operating large casino-resorts to a developer, manager and operator as it seeks to make substantial investments in Japan and sports betting.

MGM chairman and CEO Jim Murren recently said the company’s strategy is to become an “asset-light business” that would involve recycling capital into high return-on-investment opportunities, including growing its plans to develop an integrated resort in Japan.

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A process that has seen MGM sell most of its properties to MGM Growth Properties, a real estate investment trust (REIT) it spun off in October 2015. MGM is leasing well-known properties such as the Luxor and Mirage in Las Vegas and Borgata in Atlantic City.

On Tuesday, a real estate joint venture between MGM Growth Properties and a Blackstone Group affiliate said it will take ownership of MGM Grand Las Vegas and Mandalay Bay in a deal valued at $4.6 billion.

MGM will continue to operate both resorts through a long-term lease agreement in which the company will pay $292 million in annual rent. The joint venture will be owned by MGM Growth Properties and Blackstone Real Estate Income Trust, which is owned by Blackstone. MGM Growth will own 50.1 percent and Blackstone 49.9 percent.

MGM announced in October that it was selling the real estate of Bellagio to a joint venture with Blackstone for about $4.25 billion. Blackstone also owns the Cosmopolitan of Las Vegas, which it purchased in 2015 from Deutsche Bank AG for $1.73 billion.

“This transaction reflects our continuing strong conviction in Las Vegas,” Jon Gray, Blackstone president and COO, said in a statement.

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

It also entered into a separate agreement to pay $1.4 billion for MGM’s existing operating partnership units. The casino company has 24 months to redeem the units, according to details of the transaction.

“MGM is shifting its focus from both an operator and real estate owner to an operator of gaming and leisure assets,” said Chad Beynon, an analyst with Macquarie Research. “That being said, we believe a sale-leaseback of MGM Springfield and CityCenter could be forthcoming.”

MGM owns 68 percent of the REIT and once the units are redeemed, MGM’s ownership stake will decline to 55 percent. Murren told analysts during a conference call in October the goal has been to reduce the company’s MGM Growth to below 50 percent.

Following a similar sale-leaseback for Bellagio and the sale of Circus Circus, MGM said the combined deals are expected to provide the company with net proceeds of $8.2 billion, allowing the company to reduce a portion of its $15 billion in long-term debt.

“These announcements represent a key milestone in executing the company’s previously communicated asset-light strategy, on that enables a best-in-class balance sheet and strong free cash flow generation to provide MGM Resorts with meaningful strategic flexibility to create continued value for our shareholders,” Murren said Tuesday.

The deal for MGM Grand and Mandalay Bay is expected to close by March.

Murren said the company remains “determined to prudently pursue accretive opportunities related to our remaining owned real estate assets.”

Those assets include MGM Springfield in Massachusetts, a 50 percent stake in CityCenter in Las Vegas and the company’s 50 percent ownership stake in MGM Growth Properties.

“Our corporate objective remains crystal clear, we will continue to monetize our owned real estate assets … to pursue visible growth initiatives, including Japan and sports betting,” Murren said.

The company plans to provide an update on its plans when it announces fourth quarter and 2019 earnings soon.

MGM Growth owns 11 properties in Las Vegas that are leased back to MGM Resorts, as well as MGM Northfield Park in Ohio, MGM National Harbor in Oxon Hill, MD, and Empire Resort Casino in Yonkers, NY, and several other properties.

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