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2020 was a rough year for the gaming industry, but not their landlords

2020 was a challenging year, but MGM Resorts International’s affiliated real estate investment trust was able to weather the storm and then some.

MGM Growth Properties, which owns the land under Park MGM, New York-New York and other MGM casinos, collected 100 percent of its rent payments last year and year-to-date, despite U.S. casinos being in the dark for months. The company also increased its annual dividend.

“Few, if any, businesses were prepared for a complete multi-month shut down and over a year of significant capacity restrictions and reduced demand,” Union Gaming analyst John DeCree said in a Tuesday note to investors. “Yet, the Casino REIT (real estate investment trust) industry endured and at times even thrived.”

On Tuesday, MGM Growth reported $91.3 million in net income in the fourth quarter of 2020, up 25 percent year-over-year. Net income for the year was $160.4 million, with a total revenue of $792.6 million, down 10 percent from the year prior.

‘Light at the end of the tunnel’

“Stability is the beauty of (MGM Growth’s) business model,” J.P. Morgan analyst Joseph Greff said in a Tuesday note. He pointed to the company’s “steady and predictable” cash collection of rent from tenant MGM, and noted that there are built-in rent escalators for 2021.

This “generates an attractive dividend and a balance sheet position that can be utilized for external and episodic acquisition-related growth,” Greff said.

Part of the MGM Growth’s success in 2020 could be attributed to the company’s joint venture with Blackstone to acquire MGM Grand’s and Mandalay Bay’s real estate assets, a deal that closed in January 2020. Last year also saw MGM Resorts exchange operating partnership units with MGM Growth for $1.4 billion, bringing the operating company’s ownership stake in MGM Growth down to 53 percent.

MGM Growth CEO James Stewart said he’s optimistic for 2021, especially after MGM Resorts International said in its earnings call last week that gross bookings in January were the strongest since the pandemic, with guests increasingly booking 90-plus days ahead.

“Despite the many challenges caused by the pandemic, there’s light at the end of the tunnel,” Stewart said during MGM Growth’s Tuesday earnings call. “There are significant rooms (at MGM) booked for the third quarter, and currently there are more rooms on the books for fourth quarter this year than there were last year at the same time.”

iGaming expansion

Some worry that the growing online gaming industry, also known as iGaming or iCasinos, could pose a threat to the brick-and-mortar casino industry’s recovery by stealing away clients who find it easier to place bets from the comfort of their own home. The pandemic has led to record numbers iGaming, which is currently offered in six states: Nevada, New Jersey, Pennsylvania, Delaware, West Virginia and Michigan.

But the heads of MGM Growth — which relies on the success of brick-and-mortar casinos — say they aren’t concerned.

“That is like number 28 on the list of our concerns. It really isn’t one,” Stewart said.

Instead, Chief Financial Officer Andy Chien said he views these two sectors in working hand in glove.

“Each are benefiting the other,” he said. “That live experience (at hotel-casinos), it is being replaced by digital currently, but I think there’s going to be a pent-up demand for those people who want to come back and gather.”

Stewart added that he believes some one-trick pony gaming establishments that just offer slots could take a hit from iGaming, but MGM Growth has made sure to invest solely in gaming assets with a variety of offerings such as sporting events, concerts and fine dining.

“They’re not happening right now, but they’ll come back,” Stewart said. “(There’s) really significant pent-up demand for people who want to get out and have a little fun, and that is going to burst out onto the scene very significantly once we get to the other side. That just isn’t something that goes away just because you have access (to gaming) on your phone.”

‘Fantastic’ M&A opportunities on horizon

MGM Growth’s portfolio, together with its joint venture, includes 12 resorts in Las Vegas and other U.S. markets.

With nearly $2 billion of total liquidity, Stewart said the company is looking for more acquisition opportunities, whether that’s with an MGM Resorts property or a new tenant.

“We think there’s going to be some fantastic transaction opportunities coming up, and we want to be ready,” he said. “We’re sitting in a position where we can deploy a significant amount of capital very, very quickly to the extent that the right thing comes along.”

DeCree said he’s optimistic MGM Growth could identify its next growth target later this year.

The company is open to a variety of deals, including more joint ventures like the one it has with Blackstone. Stewart said there could be opportunities with non-gaming venues, but he views gaming assets as “the best bang for the buck” since the industry’s licensing process and restrictions limits competition.

At this point, Stewart said MGM Growth continues to explore real estate transactions and communicates “frequently” with a number of operators in the gaming, hospitality and leisure industries.

“As we do get to a point where we’re really on the other side of pandemic … I wouldn’t be surprised to see a fair amount (of deals) go on,” Stewart said. “Throughout this whole period of time, the lease model has really shown itself to be very attractive for not just the landlords but for the tenants and that hasn’t been lost on people.”

MGM’s stake

MGM Resorts is expected to scale down its 53 percent stake in MGM Growth further, but it’s unclear when that will happen or to what degree.

During MGM Resorts’ earnings call on Feb. 10, CEO Bill Hornbuckle said the company eventually wants to sell some, if not all, of its ownership in MGM Growth in its move to become an asset-light company.

MGM Resorts Chief Financial Officer Jonathan Halkyard said the divestment would help the company simplify its corporate structure, but “it’s a high yield on the investment that we have in (MGM Growth) right now … so we certainly need to balance our moves with that.”

Stewart said Tuesday that the sale of MGM Resorts’ stake in the company is ultimately up to the operating company.

MGM Growth shares closed up 0.1 percent Tuesday to $33.21 on the New York Stock Exchange.

Contact Bailey Schulz at bschulz@reviewjournal.com. Follow @bailey_schulz on Twitter.

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