MGM Growth Properties – Investment Recommendation
The following was adapted from the MGM Growth Properties investment recommendation presentation shared with the team on June 15, 2017. As always, this was only an internal recommendation to be deliberated by the group, and does not constitute financial advice or an endorsement of the stock. See full legal disclaimer.
Why Bet on Black When You Can Buy the Whole Damn Casino?
“Each year gaming revenues in the U.S. yield more profits than the theatrical movie industry ($10.9 billion) and the recorded music industry ($7 billion) combined. Even the $22.5 billion combined revenue of the four major U.S. sports leagues is dwarfed by earnings from the commercial casinos industry.” – The Science Behind Casino Profits
Given all of the energy related to our upcoming Sneaky Falcon Enterprises, LLC shareholders meeting in Vegas in July, I thought it might be interesting to determine if there were any opportunities to invest in a gambling related company. First, let’s take a look at the overall gaming market.
Despite downturns related to great recession in the US in 2008 and 2009, and regulatory issues in China a few years ago, the gaming industry is once again poised for growth. Gambling related revenues for casinos is expected to reach $130 B by 2019.
This return to growth has been fueled by increased tourism as well as continued deregulation across the globe. New casino markets have been opening up, meaning more profits for big casino operators.
So where in the world is all the gaming action at?
Although Vegas has been on the rebound, the growth of Asian markets has been immense. Macau is the largest single gaming market in the world, and Singapore has also seen impressive growth. Japan also hopes to increase tourism and boost spending by granting licenses for casino resort development starting in 2019.
US Gaming Market
The US is still a major force when it comes to gambling, making up 40% of the overall market in 2015. Surprisingly, not even a quarter of that is coming from Las Vegas.
Yes, apparently a few people still go to Atlantic City. However the growth is coming from regional markets, where relaxed state regulations are resulting in new casinos popping up all over the country.
That being said, these are all views of purely gambling revenue. While Americans may be gambling elsewhere, and Asians are taking their high stakes bets to closer resorts, Vegas is still big business.
And more and more of that business is coming from non-gaming revenues. This trend started in the early 1990’s, and non-gaming revenues now make up over two thirds of casino profits. Things like night clubs, high profile performers and stage shows, fine dining, and events are big $$$. As Vegas shifts from a seedy desert gambling hole to a extravagant and experiential get-away, this trend will continue.
Let’s Talk Stocks
Now that we are level set on overall casino business trends, how has this translated into stock market performance?
In 2017, gambling stocks, as represented by the VanEck Vectors Gaming ETF (Ticker NYSEARCA:BJK) are beating the S&P 500 by 14% at the time this was written.
However, gambling stocks do appear more volatile than the broader market over the long term. Similar to the overall Gross Gaming Revenue chart above, gaming stocks were hit particularly hard by losses in Macau.
Gambling stocks have performed quite well over the last year and a half, so are there any reasons to remain bullish on the industry? I think so:
- Asian markets continue to expand, and Japan is poised to become a huge player in the next 3-5 years
- Internet gambling (including fantasy sports) present another opportunity for gaming companies outside of traditional casinos
- As casino operators further diversify into entertainment attractions, non-gaming tourism revenue will continue to drive growth
- Regional US casinos, especially in the Northeast, are proving to be increasingly popular
With that all in mind, here are some of the publicly traded stocks available. I have categorized them based on size and type of operations they are involved in.
Now, I’m going to recommend none of them…
MGM Growth Properties (Ticker NYSE:MGP)
- REIT company that owns and leases destination entertainment & leisure resorts
- Spun off in April 2016 from MGM Resorts International (MGM owns 76% of MGP)
- MGP owns 11 properties
- Las Vegas Strip: Mandalay Bay, Mirage, Monte Carlo, New York-New York, Luxor, Excalibur, and The Park (a dining and entertainment complex)
- Detroit, Michigan: MGM Grand Detroit
- Atlantic City, New Jersey: Borgata Hotel Casino & Spa
- Mississippi: Beau Rivage and Gold Strike Tunica
- MGP has “Right of First Offer” on two new properties
- MGM National Harbor (opened December 2016 outside Washington, DC)
- MGM Springfield in Massachusetts (opening Spring 2018)
- Looking to acquire Sands high performing Bethlehem Casino (eastern PA)
MGM Growth Properties’ holdings are mainly concentrated on the Las Vegas strip. It controls a majority of the prized property on the south end of the Strip.
In addition with its regional sites, MGP operates approximately 27,330 hotel rooms, over 200 restaurants, approximately 100 retail outlets and over 20 entertainment venues.
Vegas as a whole is facing an increase in demand for hotel space, with a flat supply of rooms, which will benefit MGM Growth Properties and its parent company as well given their focus on LV strip real estate.
The stock is up 16% in 2017, at an all-time high. This is an increase of 38% from its IPO price of $21.
The increase over the last few months appears to be related to reporting strong YoY revenue growth.
There currently is only one other REIT focusing on the casino space, and that is Gaming & Leisure Properties (Ticker NASDAQ:GLPI). Similar to MGP, Gaming & Leisure Properties is also a spin off from a parent gaming company. GLPI is associated with Penn National Gaming.
The main difference between GLPI and MGP is geography. GLPI’s holdings are concentrated in mainly Midwestern regional casinos, as well as some horse racing tracks in the area as well.
The above chart show performance over the last 52 weeks of MGP vs GLPI. in the last few months, MGP has really started to outperform and widen the gap in price appreciation.
I have also included MGP’s parent company, MGM, in this chart as well. While closely tied at the hip, MGM has the added benefit of its exposure to the Asian markets (as well as other properties on the strip) that are driving performance.
Reasons to Buy
- Value tied to real estate holdings, not directly to gaming revenue
- MGP IPO brought in funds to pay down debt of MGM parent company, freeing up cash-flow for future growth
- Concentration on LV holdings (while a risk) will benefit from tourism boom
- National Harbor is already exceeding expectations, generating high revenues, and cannibalizing competitor revenue
- Just announced a dividend of $0.395/share (1.9% increase from previous quarter, 5.3% Yield)
- Add diversity to our portfolio with real estate & leisure industry exposure
- May have more upside playing blackjack (Stock at all-time high; no major near term catalysts of growth)
- Despite diversification away from just gambling, Vegas economy is still dependent on world and national political & economic landscape
- MGP’s business is currently 100% dependent on MGM’s success
While it may not have the higher growth potential of other casino stocks, or even its parent MGM, MGM Growth Properties does have the potential to add value to our portfolio. In the even of a downturn, its valuable real estate holdings should shelter it from an extreme price drop.
It also has a strong dividend yield, which can generate a little positive cash flow for us while we figure out where we want to deploy our money next.
Final MGM Growth Properties Investment Recommendation
Purchase 75 shares (~$2.2k worth) of MGM Growth Properties stock, collect dividend on July 14, and hold until cash is needed.
Vote: 5-0 in favor of the purchase