Morgan Stanley's 'Realistic REIT Bull Case' For MGM

In a report published Wednesday, Morgan Stanley analysts Thomas Allen and Mark Savino commented on Land & Buildings' proposal to split MGM Resorts International MGM into a REIT and C-Corp. The analysts provide a "realistic REIT bull case," reiterating an Overweight rating and $25 price target on the stock.

The firm's analysis suggests that a REIT conversion would unlock incremental value in the company, even though the proposal is somewhat ambitious. This could result in a pro forma value of $31, which implies an upside of more than 40 percent.

The analysts said they liked MGM before as there was "saw downside protection against a weak Macauat $17-18," while the analysts are "bullish about Vegas fundamentals" for their base and fundamental bull case. "While MGM may not fully follow L&B's proposal, at least it could lead to increased corporate actions on MGM's part, such as monetizing its retail (Crystals) or other parts of CityCenter, and potentially selling real estate to REITs," the report explained.

Assuming MGM follows L&B's proposal, Morgan Stanley arrives at the $31 per share pro forma value based on the following premises:

• 1) "Assume MGM issues equity rather than does a leverage recap at MGM China."
• 2) "Assume MGM C-Corp cannot achieve a similar multiple to Lodging peers as it would not have the same asset-light growth trajectory."
• 3) "Assume slightly higher corporate expense based on our existing expectations for future corporate expenses (including stock-based comp) which is higher than L&B's estimates."

Shares of MGM were tup almost 2 percent on Wednesday morning.