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MGM Growth Properties: Good Odds Growth and Income

02/07/2020 5:00 am EST

Focus: REITS

Tim Plaehn

Investment Research Analyst, Investors Alley

MGM Growth Properties LLC (MGP) was spun out in 2016 by MGM Resorts International (MGM); the initial REIT portfolio consisted of 10 MGM run properties, including seven on the Las Vegas strip, explains growth and income expert Tim Plaehn, editor of The Dividend Hunter.

MGM Growth Properties has a triple-net master lease agreement with MGM Resorts, which means all the REIT properties are on a single lease, and the gaming company cannot single out one to close or not pay rent. MGP now owns 14 properties, and all leased to MGM.

EBITDA from MGM coverage of the master lease payment is 6.2 times. The lease as a built-in 1.8% rent escalator and MGP will also share profit growth at the casinos.

In January 2020, the company announced a joint venture with Blackstone Real Estate to acquire the Las Vegas real estate assets of the MGM Grand and Mandalay Bay for $4.6 billion. The MGP dividend has grown by 30% since the IPO, and the shares yield 5.9%. MGP has a $10.1 billion market cap.

In November the share price of MGM Growth Properties dropped from an early in the week high of just over $33 to close the week at $30.81. They have since recovered. The reason for the drop was the sale of 30 million new shares at $31.25 per share. Secondary offerings like this always go out at a discount to the recent share price. MGP raised $540 million with the share offering.

Pass through entities like MGM Growth Properties issue new shares to fund future acquisitions. Asset purchases cannot be entirely funded with debt, so companies will go into the stock markets to raise capital. This type of stock issuance is a very good indicator the company will soon be making more acquisitions and continue its history of dividend increases.

For growth focused, dividend paying stocks, share price drops due to secondary offerings are a good opportunity to pick up shares on sale. The secondary is also a sign that future growth is coming soon. MGP offers a 5.9% yield with the next dividend payout expected to come in April.

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