MGM Growth Properties Lauded as Defensive Play on Las Vegas Rebound

Posted on: June 5, 2020, 11:54h. 

Last updated on: June 5, 2020, 12:17h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

MGM Growth Properties (NYSE:MGP), the owner of some of the most famous integrated resorts in Las Vegas, is being hailed as a defensive idea for conservative investors seeking participation in a gaming industry rebound.

MGM Growth Properties Touted By Analysts
Mirage owner MGM Growth Properties is considered a safe way to invest in a casino recovery. (Image: Pinterest)

MGP is a gaming real estate investment trust (REIT), and with the exception of the Bellagio, the company owns all or part of the property assets of MGM Resorts International (NYSE:MGM) gaming venues on the Strip, and some others across the country. Though gaming stocks were under pressure in February and March, with many still residing in the red on a year-to-date basis, MGP is outperforming its former parent this year.

MGM Growth Properties, formed in 2015, sports an attractive and arguably safe yield of 6.6%,” reports Lawrence Strauss for Barron’s. “Its stock has held up reasonably well since the S&P 500 index peaked on Feb. 19, with a return of about minus 11%, versus minus 8% for the broader market. MGM Resorts is off more than 35%.”

In May, the real estate company raised its dividend for the eleventh time since its 2016 initial public offering (IPO), even as other gaming operators were slashing or suspending payouts. That increase and the aforementioned yield are relevant because the S&P 500 is awash in dividend cuts this year, and interest rates on government bonds are near rock-bottom levels, forcing investors to look elsewhere for income.

Rent Is Being Paid

During the darkest days of the coronavirus shutdown, the prevailing concern among investors regarding gaming REITs was the ability of operator tenants to pay rents. Real estate companies in this space said they collected close to or 100 percent of lease payments in April and May, and there have been only sporadic instances of landlords needing to work with operators on financing issues.

MGP rivals Gaming and Leisure Properties (NASDAQ:GLPI) and Vici Properties (NYSE:VICI) have multiple clients, but the Mirage owner has just one tenant: MGM.

Analysts don’t view that lack of client diversity as a problem, because MGM has $5.3 billion in cash – enough to last 18 months in a zero-revenue environment. Earlier this week, the operator reopened Bellagio, MGM Grand, and New York-New York, with Excalibur slated to join the fray next week and Aria expected to come back online in time for Fourth of July.

However, the MGP investment thesis doesn’t revolve around business and leisure travel. It centers on MGM’s ability to meet lease obligations.

“What makes MGM Growth Properties safe, however, is that its payout isn’t dependent on gamblers returning to Las Vegas, but rather, on MGM Resorts’ ability to pay its expenses,” according to Barron’s.

Participating in the Rebound

Although MGP is viewed as a safer play on a recovery by the domestic gaming industry, that doesn’t mean investors are being short-changed for upside. Up nearly 22 percent over the past month, the stock is higher by 158 percent off its March lows.

Another source of allure for MGP investors is that MGM has another $700 million worth of units in the property owner it can redeem. When that happens, the real estate company can retain more of its earnings and possibly increase its dividend with the added cash.