Land and Buildings, a hedge fund led by Jonathan Litt, has opined that MGM Resorts is massively undervalued and that it can improve its valuation and reduces its debt by converting its land holdings and casinos into real estate investment trust (REIT). The hedge fund has a stake of 0.8 percent in MGM.
Sell parts of company
According to Land and Buildings, MGM’s is currently valued at $33 per share when it could be as high as $55 a share; MGM also has a long-term debt of over $14 billion. The hedge fund has proposed a plan involving sale of various parts of the company, including their overseas operations like MGM China, and converting their holding to REIT. The fund believes, doing so will enable MGM to pay off a good portion of its debt and help minimize taxes.
Will it work?
However, not everyone is sure that the proposed solution will be effective. Some analysts believe that this will only be a short-term solution and may lead to adverse effects in the long term. The chairman, Jim Murren, of MGM Resorts, too, is not sure; the talks they have conducted with various banks has not yielded any definite conclusions. However, Murren did state that they were not discounting any available option.
The concept of REIT involves running the business as two separately traded companies: one would manage the casinos and the other would oversee all land holdings. Gaming companies have already taken to this concept; for example, in 2014, Penn National Gaming converted its real estate into an REIT that goes by the name of Gaming and Leisure Properties. Other businesses in the industry, including some of its big names, too are considering the idea. An MGM spokesperson did say that they agreed with Land and Holdings assessment regarding their company’s valuation and that they would look into the proposed measures.