MGM: Spin-Off for Growth and Income

07/21/2016 8:00 am EST

Focus: STOCKS

Tim Plaehn

Investment Research Analyst, Investors Alley

Tim Plaehn is a leading expert on income generating investment opportunities. Here, the editor of The Dividend Hunter looks to a new REIT that is the result of a spin-off from a larger gaming and hotel company.

In April 2016, hotel and gaming company MGM Resorts International (MGM) spun-off about two-thirds of its hotel properties into a new real estate investment trust (REIT) IPO.

MGM structured the new company, called MGM Growth Properties (MGP), to have a high level of cash flow safety to pay the planned dividend and with the potential for future growth.

At the IPO, MGM Growth Properties received seven properties on the Las Vegas Strip including Mandalay Bay, The Mirage, Monte Carlo, New York-New York, Luxor, and Excalibur.

Outside of Nevada, the REIT will own the MGM Grand in Detroit, the Gold Strike in Tunica, Mississippi and the Beau Rivage in Mississippi.

The net proceeds of $4 billion to the parent company was used by MGM Resorts to pay down outstanding debt.

All the properties will be leased by subsidiaries of MGM under a single, triple net Master Lease; MGM will pay MGP a starting annual rent of $550 million per year.

Out of the $550 million in annual rent, MGP expects to generate $403 million in adjusted funds from operations (AFFO). This is the free cash flow available to
pay dividends.

The initial planned dividend rate is $0.3575 per share per quarter, or $1.43 per year. The annual dividend payments will be 80% of the projected AFFO.

The IPO prospectus states the initial dividend rate will be in effect for the first year after the public launch of the REIT.

At the end of May, MGM Resorts announced it will purchase a 50% interest in the Borgata Hotel Casino & Spa in Atlantic City, New Jersey from Boyd Gaming (BYD).

After the transaction closes, the real estate portion of MGM's interest will be sold to MGP and added to the Master Lease. Importantly, the acquisition confirms that MGM is committed to using the REIT as a growth vehicle.

With the early move into acquisitions to generate growth, I am confident that MGM Growth Properties will be an attractive growing income producer. Buy and accumulate MGP shares as long as the forward yield stays above 5%.

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By Tim Plaehn, Editor of The Dividend Hunter

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