MGM Growth Properties (NYSE: MGP) is a hospitality real estate investment trust (REIT) that specializes in gaming properties. But not just any gaming properties. As the name implies, the company was formed for the specific purpose of owning gaming properties operated by MGM Resorts (NYSE: MGM).
There are currently 15 casinos in the company's portfolio. This includes eight Las Vegas Strip properties, such as Mandalay Bay, Mirage, and Park MGM, as well as seven regional casinos, most of which have the number one share in their respective markets. In all, the company has more than 27,000 hotel rooms, over 2.7 million square feet of meeting and convention space, and more than 1.3 million square feet of casino space. All of its assets are triple net leased to MGM Resorts, from which it generates about $960 million in annualized rental income.
Growth catalysts over the next decade
One key point to keep in mind is that legalized gaming is still in the early stages of spreading across the United States, but it's a clear growth trend that should continue to play out over the next decade. With some of the most recognizable properties and brands in the gaming industry, MGM Resorts' footprint could expand dramatically over the next 10 years as the industry grows. And because of its close relationship, MGM Growth Properties should grow right along with it.
This gives the company a key competitive advantage of now having to find investment opportunities. Many other REITs spend lots of time and money trying to analyze and source deals, and MGM doesn't have this burden to nearly the same extent. So, I'd expect a steady flow of acquisitions as MGM grows its gaming portfolio into new markets.
It's also fair to assume that MGM Growth Properties' dividend will grow significantly over the next decade. Its leases have built-in escalators that will keep rental income growing, and that's not including the impact of any new additions to the portfolio. MGM currently has a dividend yield of more than 6% and has increased the payout nine times in the less than five years since its IPO. And I'd expect at least annual increases going forward.
Isn't it risky to have only one tenant?
Obviously, having only one tenant adds an element of risk. If MGM Resorts were to run into financial trouble, it could be disastrous for MGM Growth Properties. Fortunately, that's not particularly likely -- MGM is one of the most financially sound casino operators. In fact, during the COVID-19 pandemic, MGM Growth Properties didn't really have to worry much about rent deferrals and missed payments -- through October, the company had collected 100% of its rent, something few other hospitality-focused REITs can claim. So, to put it mildly, I'm not terribly worried about MGM defaulting on its rent obligations anytime soon.
What's more, while MGM is the sole tenant now, that might not be the case in a decade. The company has more than 50 gaming properties from over 20 different owners on its investable radar and is looking to add other types of non-gaming net lease properties to the portfolio over time. So, not only could MGM growth properties diversify its tenant base, but it could become much more than a gaming REIT.
The Millionacres bottom line
Since its IPO in 2016, MGM Growth Properties has made six acquisitions and has increased its annualized cash rent by 74.4% (about 13% annualized growth). And its dividend has increased from $1.43 per share to an annual rate of $1.88.
With the clear trend toward legalized gaming in the United States, and a broad universe of potential property types to acquire, I wouldn't be surprised if these growth rates were maintained, or even accelerated, over the next 10 years.