MGM Resorts International (NYSE:MGM) continues drawing praise for its recently announced sales of the Bellagio and Circus Circus on the Las Vegas Strip with analysts extolling the advantages of those deals while making bullish comments on the company’s Macau business.
Last week, MGM said it will sell the Bellagio to a real estate entity controlled by Blackstone. As part of that deal, the gaming company will take a five percent stake in the real estate partnership and lease back the integrated resort with a 30-year contract calling for initial annual rent payments of $245 million. Separately, the company said it’s selling Circus Circus to Phil Ruffin for $825 million.
On an after tax basis, those transactions, both of which are expected to be completed in the current quarter, will net MGM about $4.3 billion in proceeds. The company is widely expected to use that cash to reduce debt and boost dividends and share repurchases.
The benefits of the potentially reduced leverage profile and the increase in the near-term liquidity from the sale proceeds are in part offset by MGM’s reduced longer-term financial flexibility related to the further monetization of its Las Vegas Strip assets, the real assets of its marquee Bellagio in particular,” said Fitch Ratings in a recent note.
The research firm affirmed its rating of “BB” on MGM. While that’s high-yield territory, Fitch is the second ratings agency this week to make bullish comments on MGM’s Las Vegas divestments.
With some newer properties, including MGM Cotai and MGM Springfield still in the ramping up phase, the operator can potentially boost earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) and free cash flow as soon as next year.
“MGM’s EBITDAR is set to grow as MGM Cotai and Springfield ramp-up, Empire City’s (acquired January 2019) EBITDAR starts to flow through and returns on the Park MGM investment are realized,” said Fitch.
Empire City is MGM’s venue in Yonkers, N.Y. Currently, that property only features slots and horse racing, but the company is hoping New York regulators will allow table games and sports wagering to be offered there as soon as 2021 instead of 2023. Fitch likes the geographic diversity in MGM’s domestic gaming portfolio.
“MGM’s portfolio of Las Vegas Strip assets are mostly high quality and its regional assets are typically market leaders,” said the research firm. “The regional portfolio’s diversification partially offsets the more cyclical nature of Las Vegas Strip properties.”
Upbeat On Macau
At a time when many industry analysts are concerned about gaming revenue trends in Macau, Fitch is enthusiastic about MGM Cotai’s prospects, noting that property will account for $250 million in annual EBITDA once it’s fully ramped up.
“Fitch’s favorable long-term view on Macau is supported by an expanding middle class in China and infrastructure development in and around Macau,” said the credit evaluator.
Macau gaming licenses come due in 2022 and as is the case with rival gaming companies, MGM is likely to encounter little concession renewal risk, according to Fitch.