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MGM asset sales “dry powder” for Japan

MGM Resorts’ accord to divest two major assets will raise $4.3 billion in net proceeds and potentially raise funds for a development in Japan, according to analysts at Bernstein.

The company announced late Tuesday that it would sell its Bellagio property in a sale and leaseback transaction. The property will go to a joint venture between MGM and Blackstone Real Estate Income Trust, with the operator receiving $4.2 billion in cash and a 5 percent stake. 

MGM will enter into a lease for Bellagio with an initial annual rent of $245 million. 

“The Bellagio transaction is 17.3x (initial) rent, which is a significant premium compared to other recent casino transactions on the Strip,” Bernstein said, though it added the initial rent as a percent of EBITDA is low compared to prior sale and leaseback transactions.

The second transaction is a sale of Circus Circus and adjoining land to an affiliate of Phil Ruffin for $825 million. 

“Our initial reaction to the transactions is positive as it continues the deleveraging story for MGM, divests a non-core asset (Circus Circus) and potentially creates dry powder for the Japan bid,” it said. 

MGM is focusing on Osaka for its IR bid in Japan and is widely viewed to be a front runner after Las Vegas Sands, Melco Resorts & Entertainment and Wynn Resorts pulled out to focus on Yokohama. 

Analysts estimate that operators are likely to invest about $10 billion to develop an IR in one of Japan’s coveted urban locations. 

Nomura analyst Harry Curtis also pointed to the deleveraging value of the transactions.

"We think that value creation stems from de-levering faster, especially this late in the economic cycle. As a result, MGM frees up more of its FCF to buy back its own stock today at ~8x our 2020 estimate vs. the 17x multiple it sold Bellagio real estate for, without increasing leverage."

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