MGM Resorts Plans To Create A REIT; Shares Spike Higher

Shares of MGM Resorts spiked higher by nearly 10 percent early Thursday morning after the company announced it will create a controlled real estate investment trust (REIT) which will be named MGM Growth Properties LLC. As part of the structure, MGM Resorts will contribute the real estate associated with 10 of its properties. MGM Growth Properties will also assume $4 billion of debt, which is expected to be refinanced with the proceeds of debt and equity issuances. Activist investor Land and Buildings Investment Management acquired a stake in MGM and

to create a REIT structure. The firm pointed out that MGM's stock has lagged its peers since James Murren was named CEO of the firm. The investment firm argued that the net asset value of MGM was in the range of $30 to $33 per share under an REIT structure. However, a change in corporate structure wouldn't be sufficient to unlock value as the company's Board of Directors would need to add "new voices and skill sets." "This transaction provides MGM Resorts' shareholders numerous strategic and financial benefits, including delevering our balance sheet and enhancing long-term shareholder value," said Jim Murren, Chairman and CEO of MGM Resorts in a

on Thursday. "MGM Resorts is creating a new growth platform to allow it to more effectively execute its strategic initiatives, including portfolio diversification."

Land and Buildings proposed offer of created a REIT was initially greeted with skepticism from Wall Street analysts. Deutsche Bank's Carlo Santarelli

that there was a "low probability" of MGM creating an REIT structure. While the analyst did agree that shares of MGM were "fundamentally undervalued," he questioned the valuation assumptions presented by the activist firm in justifying their upside case to $33 per share. Morgan Stanley's Thomas Allen also

over the proposed REIT structure, suggesting the activist investor's proposal was somewhat ambitious. Allen suggested that MGM should consider monetizing its retail (Crystals) or other parts of CityCenter and consider selling some of its real estate assets to outside REIT firms which could create upside to $31 per share.