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MGM's IPO REIT Debuts: Ante Up? Pass> Buy In? Fold?


The MGP's opening hand at around $21 a share seems pricey out of the gate.

It's lots of financial engineering piled atop a single assumption: Las Vegas is on a roll.

Best upside will come later if management can make savvy acquisitions.

"The poker player learns that sometimes both science and common sense are wrong; that the bumble bee can fly; that perhaps, one should never trust an expert; that there's more things in Heaven, and Earth than are dreamt by those with an academic bent…"

David Mamet, playwright

In an IPO-starved market, MGM's REIT, MGM Growth Properties, LLC (Pending:MGP) has debuted to a potentially full table of potentially hungry investors, many feeling lucky, ready to ante up now that MGM has started to deal. We've gone through the company's S-11 filing and found no surprises. The REIT is essentially a nifty piece of financial engineering, superior in concept to other hotel/gaming/REITs. Yet in our view, it doesn't go far enough in solving the fundamental longer-term strategic issues of MGM. We'd like to have seen moves to program sturdier action to deleverage the balance sheet, sell off regional assets, even lower its overly heavy Las Vegas asset portfolio (62%).

In effect, Las Vegas is to MGM (NYSE: MGM) what Macau is to Wynn (NASDAQ: WYNN). And reading through the S-11, it becomes clearer by the page that as Las Vegas goes, so goes MGM. Its regional casinos comprise 12% of its portfolio and current Macau property 26%. (This will change when its new Cotai project opens early in 2017). But two-thirds of the MGP future lies on the Las Vegas Strip - make no mistake about it.

We say this because while its regional casinos in Detroit and Mississippi are reasonably stable (Detroit has shown a little life lately while Mississippi languishes), their long-term growth potential remains minimal. They are currently about where they will be five years from now depending on macroeconomic factors. For a company whose stated strategic positioning is in lodging, retail, entertainment and gaming diversity aimed at Las Vegas tourists and conventioneers, it's tough to see where regional gaming properties really fit. However going forward, MGP may bring something to the regional party, as we will show later.

MGM's new development in Springfield, Massachusetts, due to open in 2018, will exacerbate the regional over-commitment into an area that from day one will be challenged by robust competition and questionable geography. Contrary-wise, its National Harbor development in Maryland, due to open at the end of this year, is a clear winner in the making. Yet, when all the shekels are gathered and counted, MGM's lifeblood is Las Vegas. And any hammer blows to the town possibly coming from an economic downturn could really shake up the assumptions of the MGP prospectus.

This is the Janus face of market jitters about the Macau downdraft that battered the shares of Las Vegas Sands (NYSE:LVS) and Wynn last year. Only until that storm began to subside in Q4 did analysts feel a bit better about Macau heavy shares. During the beating those shares were taking last year, many analysts cited MGM's strong Las Vegas presence vs. its 26% Macau dependency, as a better bet.

We didn't agree with that view but did and continue to like MGM's Vegas asset base. We believed that if the company moved to correct the distortions in its strategy, it was clearly a buy. There were stirrings that MGM would move in that direction and we liked the $20-ish shares at first to go to $35. Then when management announced its Profit Growth Plan, aimed at adding $300 million in EBITDA - we agreed it was fine. Yet, we didn't see that initiative as anything exciting enough to call a buy on the shares. Instead, we reduced our target to $30.

When the announcement came last August of the parent-controlled REIT, we again dropped our target to a hold. We wanted to see the mechanics and pricing of the deal before re-evaluating the shares. We aren't fans of gaming REITs at all, but did believe the MGP design was better than most when it was first announced.

Would-be investors in the MGP IPO above all need to feel highly confident that Las Vegas' recent recovery from its 2009 nadir will continue. If it doesn't, if the tourist/convention market takes a hit from a sagging economy, in the 2016-2018 FYs, MGP shares will wallow in the mid-teens or worse in our view.

Basics and Valuation

The company is offering 57,500,000 Class A common shares at $21, hoping to raise $1.207 billion. (The total includes a 5% of the issue reserved for insiders). The Class B shares will remain with the MGM parent controlling 51% of the subsidiary.

At the outset, the carve out portfolio will consist of: Mandalay Bay, The Mirage, New York New York, Luxor, Monte Carlo, Excalibur, The Park, MGM Detroit, Gold Strike and Beau Rivage (Mississippi).

The building boodle will contain 24,466 rooms, 2.5 million square feet of convention space, 100 retail outlets, 200 food and beverage outlets and 20...