MGM Resorts announced its intent to form a Real Estate Investment Trust or REIT to reduce debt and drive its stock price.
According to the Wall Street Journal, MGM got this idea by taking cues from some of its rival casino operators. The Las Vegas-based company declared the REIT plans along with its third-quarter results, which fortunately included better-than-expected earnings that helped cut costs.
The company also said that it would contribute to real estate tied to 10 of its properties to the REIT, to be named MGM Growth Properties LLC. Moreover, the new company will assume more or less $4 billion of debt, which the company expects to be refinanced with the proceeds of debt and equity offerings.
Furthermore, the casino operator also said that it confidentially submitted a filing to the U.S. Securities and Exchange Commission regarding a proposed initial public offering of MGM Growth Properties. MGM also plans to complete the transaction in the first quarter of 2016.
In a similar report by Reuters, MGM is currently under pressure from shareholder Land and Buildings earlier this year to convert its real estate assets into a REIT and spin off its business in China.
According to chief executive officer Jim Murren, "We wanted to create a vehicle and a financing platform by which we could lower our cost to capital and raise funds for future growth opportunities." He was quoted as saying at a conference call.
As reported by Bloomberg Business, Murren announced that the company's decision would materialize this year, adding: "We had the luxury of time, rather than react to kind-of, half-backed ideas that were thrown around earlier this year."
"The company has come up with a solution that's almost virtually friction-less. We're not calling or breaking bonds or purging profits. It's value accretive."
As noted by Murren, MGM will own about 70 percent of the REIT and the said 10 properties together have more than 24,000 hotel rooms. For the most part of the REIT MGM will not own, the company will offer the shares on the New York Stock Exchange.
Moreover, the REIT set-up by MGM will have a separate board and CEO, but Murren will be the chairman.
MGM's balance sheet has been over leveraged since the recession and this deal will help the company reduce some of its debt, which would be difficult to pay because of its high cash flow needs.
Lastly, MGM shares rose 4.5 percent to $22.74 at 11:35 a.m. in New York. The stock rose 1.8 percent this year on Wednesday. The company's largest individual shareholder, Kirk Kerkorian, who died in June, left instructions that his 16 percent stake be sold in an orderly fashion.
