MGM Growth Properties (NYSE: MGP) owns hospitality properties in the gaming industry, but there's a lot more to the story. We'll take a closer look at MGM Growth Properties' portfolio, investment strategy, performance, and recent developments.
MGM Growth Properties company profile
MGM Growth Properties is a real estate investment trust, or REIT, that specializes in gaming properties, most of which have large numbers of hotel rooms. The company went public in April 2016, and as the name implies, the initial focus has been to build a portfolio of gaming assets operated by MGM Resorts (NYSE: MGM).
In a nutshell, MGM Growth Properties purchases the real estate assets of a property and leases it back to MGM Resorts (or whatever operator runs the business) on a net lease basis. This means that the tenant pays all of the capital expenditures of the property, as well as property taxes, insurance, and maintenance costs.
This is a big difference from most other REITs that own hotel properties. Most hotel REITs make their money from room revenue -- that is, when times are good and the hotel has high occupancy, revenue rises. But when times are tough and the hotels have lots of vacancies (like in 2020), revenue can fall dramatically. On the other hand, MGM Growth Properties collects the same amount of contractual rent, regardless of how the businesses that operate in its properties are performing.
As of June 2021, MGM Growth Properties' portfolio of 16 gaming assets (including a few owned as joint ventures). The company owns some of the most recognizable properties in Las Vegas, including The Mirage, Mandalay Bay, and the MGM Grand. It also owns a portfolio of high-quality regional gaming properties, such as the Borgata in Atlantic City and the MGM National Harbor in the D.C. area, just to name a couple.
Having MGM Resorts as a tenant certainly has several advantages, including a stable revenue source and a built-in growth engine. However, although its acquisitions to date have resulted in expanding its relationship with MGM Resorts, that's not to say that MGM Growth Properties won't ever branch out. In fact, that's exactly the company's long-term growth strategy.
MGM Growth Properties has identified $4 billion in net operating income (NOI) worth of gaming real estate opportunities, many of which are not MGM Resorts' properties. What's more, MGM Growth Properties doesn't want to limit its investable universe to gaming -- it has said it could add leisure, entertainment, or non-gaming hospitality assets to its portfolio and sees this side of its addressable market as an even larger opportunity.
With a currently untapped $1.35 billion revolving credit line and $143 million of cash, MGM Growth Properties has nearly $1.5 billion in available liquidity to go after investment opportunities as it sees fit and relatively low debt load on its balance sheet. So, MGM Growth Properties has a large addressable market opportunity and the financial flexibility to grow rather quickly.
MGM Growth Properties news
By far, the biggest news item affecting most REITs recently has been the COVID-19 pandemic. But MGM Growth Properties was barely impacted. In fact, MGM Growth Properties collected 100% of its rent in 2020, on time and in cash (as opposed to agreeing to defer any rent, like many REITs did). This is one of the big benefits to having most of your rent coming from a single, stable tenant like MGM Resorts -- especially since that tenant is the REIT's largest shareholder.
Although the pandemic remains an ongoing situation, especially outside of the U.S., most of MGM's properties are fully reopened at this point and full of customers, and even if revenue remains impacted, MGM Resorts has more than $6 billion in liquidity. In short, MGM Growth Properties has little to worry about at this point.
One recent news item worth noting is that MGM Growth Properties recently added another property to its portfolio, and it looks like it got quite a bargain. Specifically, the REIT is purchasing the real estate assets of the MGM Springfield property in western Massachusetts from MGM Resorts for $400 million in cash.
And while $400 million might sound like a large sum of money to pay for one property, consider that the top-quality casino property cost $960 million to develop just three years ago. This will help add geographic diversification to the portfolio, and with $30 million in annual rental income, gives MGM Growth Properties a 7.5% initial yield on cost, a pretty excellent return for an A-class property occupied by a financially solid tenant.
Another recent news item is that MGM Growth Properties recently decided to increase its quarterly dividend by about 4%. And it's worth noting that MGM Growth Properties was one of the few (if not the only) hospitality REITs to not only avoid cutting its dividend during the COVID-19 pandemic, but to continue its streak of dividend increases. MGM Growth Properties loves to grow its dividend and has now raised the payout 13 times in just over five years as a publicly traded company (there have only been eight quarters in more than five years where the company did not raise the dividend). In all, the quarterly dividend is now 38.5% higher than it was at the time of the IPO.
MGM Growth Properties stock price
Since going public in April 2016, MGM Growth Properties' stock price has increased by about 68% as of mid-June 2021. This is compared with a 102% gain in the S&P 500. But that comparison doesn't tell the whole story.
As mentioned in the previous section, MGM Growth Properties makes its dividend a priority. It increases the payout regularly and emphasizes steady income for its investors. And the stock is also a high-yielding dividend stock, meaning that gains in the share price are not the most important part of the return. As of June 2021, MGM Growth Properties has an annual dividend yield of about 5.6%, and this is actually on the lower end historically for the company.
With that in mind, it's important to consider total returns when assessing the performance of REITs, especially true with a stable, high-yielding REIT like MGM Growth Properties. And with that in mind, here's how MGM Growth Properties has performed, compared with the S&P 500, over certain time periods.