MGM Resorts International (NYSE:MGM) said Tuesday that it is selling the MGM Grand and Mandalay Bay on the Las Vegas Strip to a joint venture regulated by MGM Growth Properties (NYSE:MGP) and Blackstone Real Estate Income Trust (BREIT) for $4.6 billion.
For an initial rent term of $292 million per year, MGM will leaseback those properties from the MGP/BREIT partnership. BREIT, a real estate entity regulated by private equity firm Blackstone Group Inc. (NYSE:BX), is the same group which bought the Bellagio from MGM for $4.25 billion last year. The gaming company took a five percent share in the real estate firm as part of that deal.
As reported by casino.org, for the Grand, MGM is bringing $2.5 billion, representing a multiple of 15.75x rent, below the 17.3x it gathered for Bellagio. Tied to the sale of that property, MGM will gain cash proceeds of $2.4 billion and $85 million worth of MGP units. Already the integrated resort operator controls about two-thirds of the gaming real estate investment trust (REIT). That percentage will drop to 55 percent as part of a new deal if MGM wants to redeem units in the real estate company.
In a statement, MGM CEO Jim Murren said, “These announcements represent a key milestone in executing the Company’s previously communicated asset-light strategy, one 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.”
Also, MGP made a deal with MGM to deliver up to $1.4 billion in cash for the latter’s current units in the partnership. MGM will have accumulated a combined $8.2 billion in cash out of Strip assets in just months when combining the transactions announced today with the sales of Bellagio and Circus Circus, completed late last year.
MGM can redeem units in the MGP contract for up to two years after closing. However, the company said it hopes to do so “within the early part of that window.”
MGM and MGP
In April 2016, MGP was spun off by MGM, and the two entities have been closely linked since then. MGM is the real estate firm’s major tenant, leasing renowned venues like the Luxor and Mirage on the Strip and the Borgata in Atlantic City, N.J. from the company.
MGP is also a major cash generator for its former parent, having delivered more than $335 million in dividends to the gaming company last year alone. When the sale of Bellagio to BREIT was confirmed last year, analysts speculated that MGP could be left out in the cold in MGM’s future Strip asset monetization efforts, as the operator looked to go “out of the family” in search of higher multiples.
Last November, MGP alleviated those concern, announcing a huge share offering aimed at raising cash for possible deals with MGM.
Under the terms of the transactions announced today, MGP will control 50.1 percent of the joint venture with BREIT, with the Blackstone entity controlling the rest. It’s expected that the MGM Grand and Mandalay sales will be finalized in the current quarter.
Quest For Cash
In Murren’s mission to build a “fortress balance sheet,” MGM could look into other cash-raising opportunities, such as sales of the MGM Springfield and its 50 percent interest in CityCenter, or pruning of its MGP position further.
The MGM CEO said, “Our corporate objective remains crystal clear: we will continue to monetize our owned real estate assets, which facilitates our strong focus on returning capital to our shareholders, while also retaining significant flexibility to pursue our visible growth initiatives, including Japan and sports betting.”
MGM is looking to decrease domestic debt to 1x by the end of this year with the earnings from the aforementioned sales, and boost shareholder returns in the form of increased buybacks and higher dividends.