MGM vs Land & Buildings

While public companies should welcome any input from shareholders, since it’s the shareholders who own the company, boards should be cognizant of balancing the interests of all shareholders in proportion to their ownership. In the case of the proposal made by Land & Buildings for MGM Resorts to convert to a REIT, Land & Buildings only owns 1 percent of outstanding shares, so the board should weigh the views of Land & Buildings in proportion to their ownership interest.

Regarding the slate of directors proposed by Land & Buildings, some of the directors would be valuable to have represented on the board. Although I think a good first step to improve governance at MGM should be to no longer have any executive of the company also serving as board member. A major responsibility of the board should be to hold management accountable, and it creates a conflict of interest to have management also serving on the board. Jim Murren should only serve as CEO of MGM.

The MGM REIT conversion is going to be a fun fight to watch, but I think Land & Buildings will need to recruit more shareholders to support their strategy, and ultimately, Kirk Kevorkian will need to provide an opinion.

MGM REIT speculation heats up

The dominoes are falling as MGM is now being pushed publicly by real estate fund manager Land and Buildings to spin off its real estate assets into a real estate investment trust. An MGM REIT would have a dramatic impact on the Las Vegas market as MGM is the largest hotelier in the city and dominates certain areas of the Las Vegas strip.  I believe if MGM converted to a REIT, it would focus the new REIT on ways to grow its assets, which would mean a greater investment in Las Vegas and a greater intensification of its properties on the strip.  If one considers the excess undeveloped land holdings that MGM owns and the parking space that is currently underutilized, with the value of that property in the hands of a REIT, I think it makes sense for those excess land holdings to be developed.  This would mean greater development at the south end of the strip including space at Mandalay Bay, Luxor, and Excalibur. At the north end of the strip, there is a lot of potential in Circus Circus and the festival lands on the corner of Sahara & the Strip.

As this process unfolds, I wonder about the role of Kirk Kerkorian who is age 97 and who owns about 20% of MGM Resorts International.

Pinnacle to form REIT

Big news for Casino watchers was announced by Pinnacle Entertainment, as they plan to create a Real Estate Investment Trust (REIT) to separate their real estate from the operating company. Shareholders will receive REIT units in a tax-free spin-off sometime in 2016.  The street seems a little disappointed by the earnings release, and it may also be a case of buy on the rumour sell on the news, as PNK shares are down almost 8% today.

A question that has been raised regarding casino REIT conversions is whether separation can cause more pressure on a casino operator in a recessionary period.  I think that would depend on how the leases are structured.  If leases are triple net with no accounting for revenue in the underlying property, rent would be fixed to the operator and cause stress in a low revenue environment. But if leases are structured so that the REIT shares some of the revenue gains/losses in the way rent is paid, some of the revenue risk can be shifted to the REIT.  Obviously there’s lots of scope for financial engineering with these transactions, and I’m sure management and its advisers are considering many options.  It will be fun to see how this transaction turns out.

Boyd Gaming REIT potential

How low have expectations for Boyd Gaming sunk when the CEO can claim on the latest earnings conference call that “This was a solid quarter for our operations” and “Growth resumed in our Nevada business, as our Las Vegas Locals and Downtown Las Vegas operations both achieved positive (cash flow) comparisons.”.  Really???  Revenue increased by 1% in both segments and the company posted a loss again.  Shareholders need to demand something more aggressive from Boyd Gaming.  The core problem is the Boyd family controls about 30 percent of the company’s stock, and the family doesn’t seem willing to do anything radical to shake this company out of its slump.

What about conversion into a Real Estate Investment Trust (REIT)?  Boyd’s CEO has told investors last week that the company will study the possibility of spinning off real estate into a REIT, but that the process seems long and complicated, and the company won’t provide shareholders with updates until the internal study is completed.  Management cites the capital structure (i.e. high debt levels) as one reason why REIT conversion might not be possible.  Well, why doesn’t Boyd clean up its balance sheet and then grow from a position of strength?  Borgata is a large part of Boyd’s revenues, and is doing better than the Atlantic City market as a whole.  Now that MGM has re-obtained a gaming license, now is a good time to sell Boyd’s 50% share of Borgata to MGM.  Boyd can use the cash to shore up its balance sheet.

What about the mid-western/Peninsula properties, can they be traded to GLPI, and Boyd can take back shares in return?  This would shore up Boyd’s balance sheet as well.  The nice thing about writing a blog about gambling is I can throw out wild and crazy ideas.

Freehold vs PrairieSky

Freehold and Prairie Sky are both royalty trusts that are traded on the TSX.  While both have similar structures and histories, they have exposure to different energy and different leverage, which should cause investors to be careful which one they choose and why.  Freehold has more exposure to crude oil than Prairie Sky.  Each has a fairly balanced mix though.  Freehold’s revenues come from 34% natural gas and 66% oil and liquids.  Prairie Sky gets 45% from natural gas and 55% of its revenues from oil.

The biggest difference between Freehold & Prairie Sky is their balance sheets.  Although Prairie Sky has a bigger market cap, Freehold is more leveraged with an LTV of 23% compared to Prairie Sky which has no debt. This difference shows up in their relative distribution yields.  Freehold currently pays out a distribution yield of 7.75% whereas Prairie Sky has a distribution yield of 3.83%.

Prairie Sky’s balance sheet won’t be impacted by rising interest rates, and their unit price will also be less sensitive to rising rates. Since Freehold has some debt on its balance sheet and it has a high distribution yield, it will be more sensitive to rising interest rates.  Investors should take these factors into consideration when deciding to add either of these trusts to their portfolio.  Freehold is probably riskier but carries a higher yield and could be more sensitive to rising interest rates.  But investors should also consider the relatively low cost of debt in this low interest rate environment and Freehold is better positioned to take advantage of this cheap financing.  Investors should also be cautious of the additional competition for royalty lands.  With more players in the market looking for deals, overall royalty yields could also be under pressure, offering investors lower returns.


PrairieSky & Freehold Royalties

Investors have been very enthusiastic about PrairieSky and other energy royalties lately.  After its IPO, PriarieSky has rallied to a high multiple.  But investors should be cautious and should not expect much organic (top line) growth, unless the price for oil & gas climbs significantly.  PrairieSky probably has some extra room to grow since its balance sheet carries almost no debt.