Deutsche Bank Says MGM Shares Are 'Undervalued,' Notes Consummation Of REIT Conversion Is A 'Low Probability'

In a report published Tuesday, Deutsche Bank Analyst Carlo Santarelli commented on Land & Buildings proposal to split

into a REIT and C-Corp. "While we believe MGM shares are fundamentally undervalued and believe price discovery on the Strip would serve as a meaningful catalyst, we struggle with some of the assumptions of the current proposal," Santarelli wrote. The analyst expanded: "L&B assumes the REIT would trade at 15.0x 2016 EBITDA with the C-Corp trading at 11.9x 2016 EBITDA, producing respective values of $25 and $9, less $1 for transaction fees. While the 15.0x multiple applied to the REIT cash flow stream of $1,313 mm implies a value of $21.0 billion in the presentation, we calculate 15.0x this stream actually equates to approximately $19.7 billion, or, over $2 per share less than the $25 value. We note that every turn of the REIT multiple equates to approximately $2.30 in equity value while every turn on the C-Corp multiples equates to approximately $1 in equity value." Santarelli noted that shares of MGM would be worth $31 under a restructuring – not the $33 per share Land & Buildings estimates given the fact that a 15.0x multiple is "aggressive." Bottom line, the analyst stated that the proposal has some strategic advantage and could create "meaningful" equity value but there is a "low probability" of such a transaction occurring. Shares are Buy rated with a $29 price target.