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The Cleaner

Land & Buildings Presentation On MGM: Updated NAV of $30 to $33

After a letter from MGM to shareholders earlier this week (seen here) rebutting the activist investor Land & Buildings claims, Land & Buildings has put out its own presentation. This comes as it's scheduled to hold a conference call today at 4p to talk about MGM.

The presentation can be found here.

Here's the quick and dirty of what L&B talks about.

  • Substantial stock underperformance: MGM’s total shareholder return has lagged its peers by 433% since Jim Murren became CEO on December 1, 2008, and has lagged over the trailing 1-, 3- and 5-year periods1.
  • Overleveraged balance sheet: MGM’s balance sheet management is déjà vu from the last economic cycle: free cash flow is going negative once again.
  • Lack of capital allocation discipline: The Company is embarking on $5 billion of development today, with parallels to the last cycle when the $9 billion CityCenter development resulted in impairments of over 50% of MGM’s investment. Since 2009, MGM has written down $4.5 billion, or over one-third of the equity market capitalization of the Company, including $2 billion of write downs unrelated to CityCenter.
  • Sub-optimal operations: MGM’s EBITDA margins are substantially below its operational peers2 and the company has been inconsistent in converting revenues into EBITDA.
  • Lack of accountability: MGM has a history of very poor capital allocation decisions in our view, has been a consistent underperformer and persistently trades at a depressed valuation – and yet we see no evidence that the Board has held management accountable.
  • Poor compensation practices: The Company has a history of poor compensation practices and its current bonus structure for executives is not fully aligned with shareholder interests. Proxy advisory firm Glass Lewis gave MGM a “D” in pay-for-performance over the last three years and in 2014 noted that “shareholders should be deeply concerned with the compensation committee’s sustained failure.”3

Land and Buildings has outlined several value creating recommendations to unlock the intrinsic value at MGM:

  • Evaluate a REIT: REITs have proven to be an effective corporate structure to create sustained shareholder value in a variety of types of real estate and should be seriously evaluated, in our view.
  • Divest non-core assets: MGM should sell non-core assets, such as Circus Circus or MGM Grand Detroit, given the Company trades at a discount to net asset value, in order to reduce debt and focus efforts on driving shareholder value at the marquee assets, such as Bellagio.
  • Deleverage balance sheet: MGM has, in our view, seemingly not learned from its past mistakes and continues to have an overleveraged balance sheet, while embarking on an aggressive debt-financed $5 billion development pipeline rather than paying down debt.
  • Margin Improvement: Expense reduction should be a priority and the Board and Management need to take an honest inquiry of the Company’s operations given how EBITDA margin expansion can dramatically improve MGM’s stock price.
  • Modernization of the CEO’s Incentive Compensation: Currently, MGM’s CEO’s annual incentive compensation is largely determined by achieving EBITDA targets, which we believe could create incentives for the management team to embark on ambitious developments at the expense of destroying shareholder value.

A recent Wall Street Journal article4 questions the coincidence of Roland Hernandez being the only link between the MGM and Vail Resorts boards at the time that one of the Land and Buildings nominees was given an ultimatum to withdraw as an MGM nominee or resign from the Vail board. While it is unclear what the exact circumstances were concerning the involvement of Mr. Hernandez, who serves as the lead independent director of both MGM and Vail, when Richard Kincaid was pressured to resign from the Vail Board, one thing appears clear to us: there are too many troubling questions surrounding the actions of the Vail board, led by Mr. Hernandez as lead independent director.

Land and Buildings updates its analysis to a range of $30-$33 per share net asset value

In consultation with Houlihan Lokey, Land and Buildings has updated its net asset value analysis for MGM to a range of $30-$33, from $33 per share previously, reflecting upside of 36% to 52% from the current share price5. The updated estimate reflects a reduced size of the proposed MGM China special dividend, possible taxes on such dividend and other asset sales, more conservative EBITDA multiples and an assumed higher rent coverage on the REIT.