Should MGM Spin Off a REIT?

Citing the conversion of Penn National Gaming Inc.’s (NYSE: PENN) real-estate holdings into a separately traded REIT, Gaming and Leisure Properties Inc. (NASDAQ: GLPI), Land and Buildings suggests a base case net asset value of $33 per MGM share — a 70% bump to today’s starting price — in a REIT conversion and a potential upside of 180% (to around $55 a share) if MGM were to hold a tax-free spin-off its lodging assets, reduce its leverage through asset sales and pay a special dividend at MGM China.

Land and Buildings noted that from the time Penn National announced the spin-off and Monday, the casino operator’s stock had risen 77%. In that deal, Penn National shareholders received 1.35 shares in GLPI plus a special dividend of $3.33 per share. Land and Buildings also said that it has built its base case at an EBITDA multiple of about 15-times, the same as the GLPI multiple at the time its spin-off was completed in November 2013.

Banking on getting a premium for MGM’s Macau properties may be a bit of a stretch these days, given the mainland Chinese government’s crackdown on corruption and its cut in the duration of transit visas through Macau. The 35% drop in Macau’s gambling revenues in the first two months of this year continue a monthly revenue losing streak that began last June. In 2014 gambling revenues in Macau fell 2.6% over the full year, and 2015 looks to be much worse.

MGM has not dismissed Land and Buildings’ proposal out of hand, but the hedge fund’s valuation is based on a recovery in Las Vegas that the fund believes can achieve approximately 50% upside in 2015 and reach the lofty peaks of 2007. The fund was to hold a conference call Tuesday afternoon to present its case.

MGM’s stock got a nice boost from all the attention however. Shares traded up more than 9% Tuesday afternoon, at $21.52 in a 52-week range of $17.25 to $27.64.

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