Land and Buildings Letter to MGM Shareholders
Land and Buildings Investment Management today issued the following letter to the shareholders of MGM Resorts (“MGM” or the "Company”):
Dear Fellow MGM Shareholders:
After we initiated our engagement with Jim Murren, the Chairman and CEO of MGM, in January of 2015 he stated that “there were no sacred cows” and “all options were on the table” to position MGM to generate substantial long-term returns for all shareholders. Given the muted stock price performance since then it is clear to us investors do not believe Mr. Murren’s rhetoric and continue to question why the Company has not taken the steps necessary to address the material undervaluation of MGM’s shares. See www.RestoreMGM.com for more details on our proposals.
Why, for example, has Mr. Murren apparently ruled out divesting MGM’s stake in CityCenter? The CityCenter project cost a remarkable $9 billion (more than 80% of the Company’s current market cap) and has been written-down by more than 50% of its cost. As the primary asset MGM owns with substantial net operating losses, selling MGM’s 50% stake in CityCenter would net billions of dollars in proceeds on a tax efficient basis that could be used to pay down debt and deleverage the Company. By selling CityCenter, not only would MGM finally address its long-standing leverage issue, it would also restore shareholders’ faith that Mr. Murren and the Board are indeed prioritizing shareholder value.
Despite an already over-leveraged balance sheet, Mr. Murren has continued to embark on risky and expensive development projects. With $5 billion in developments planned or underway, all with borrowed money, the Company has again started to go in the wrong direction with respect to its target leverage. As such, MGM should seek joint venture partners on its three development projects to ensure a strong balance sheet or delay projects until the balance sheet is deleveraged.
Mr. Murren ruled out a REIT many years ago, and now appears to be considering a partial REIT conversion that would exclude MGM’s crown jewel assets. There are potential new rulings from the IRS regarding REIT conversions and MGM should outline to investors steps it has taken to ensure the Company can move forward with the REIT and that luxury assets will be included in such a structure. We believe the recent IRS notice is unlikely to preclude MGM from being able to create a REIT that would include the crown jewel assets and thus maximize long term shareholder value.
Mr. Murren had refused to acknowledge the weakness in MGM’s operating performance until finally last month he announced a profit enhancement plan that will add $300 million in EBITDA or nearly 20% to MGM’s U.S. EBITDA over the next 18 months. The lackluster response from investors and analysts suggests they have little confidence in Mr. Murren’s plan. If Caesars Entertainment has been able to achieve meaningful improvements in operations after outlining a similar plan less than a year ago so too should MGM. MGM should provide a detailed schedule of expected cost savings and revenue improvements with a timeline and report on progress quarterly.
In our discussions with him back in January, Mr. Murren ruled out divesting the shares of MGM China that are owned by the MGM parent company. MGM China’s revenue fell by 33% in the first half of the year and MGM China is down more than 40% year to date. Had Mr. Murren considered this option in January when we first discussed the concept, MGM shareholder would have benefited. The fundamentals of MGM China have an undue influence on the share price of MGM given its modest 15% contribution to EBITDA. The combination of more than $20 billion of new projects being built in Macau, including MGM China’s $3 billion project, will double the hotel capacity of the market at the same time China’s slowing economy and corruption crackdown are weighing heavily on demand. The divestment of MGM’s stake in MGM China should be evaluated through a spin out, sale, or leveraging and a return of cash from MGM China to the parent company in the U.S.
Land and Buildings remains committed to ensuring that MGM undertakes and properly executes initiatives to realize the Company’s full potential. Land and Buildings continues to estimate the net asset value of MGM is $30 to $33 per share. We will continue to monitor the Company’s progress and remain engaged with the investment community.
MGM has premiere assets, a premiere brand in the fast growing Las Vegas market, and it is time to Restore MGM to its former glory.
Founder & CIO
Land and Buildings Investment Management, LLC