Share price of MGM Resorts International MGM soared approximately 10.6% on Tuesday after activist investor Jonathan Litt reportedly urged this leading casino operator to convert its real estate assets into a real estate investment trust (REIT) and spin off its lodging and entertainment business in a tax free manner that would manage its U.S. assets and lease from the REIT. The company has therefore been asked to split into a separate real-estate investment trust and hotel-management company.
Jonathan Litt is an activist fund investor associated with Connecticut-based investment management group, Land and Buildings. He believes that MGM’s real estate holdings are undervalued in public markets. He also believes that the company’s stock price has the potential to rise as high as $55 per share, if it agrees to his proposal. He stated that the company could prepay its debt and pay a special dividend funded by the sale or spin off of its operations. The investor plans to nominate four directors to the board of MGM Resorts, including himself at MGM Resorts’ 2015 annual shareholder meeting.
A real estate investment trust is a corporate structure that is permitted to pay at least 90% of its taxable income in the form of dividends to shareholders, which lowers income tax liability. Therefore, MGM Resorts is expected to capitalize on a seemingly more favorable tax environment through this move.
This investor plan comes in the wake of weak performance by this Zacks Rank #3 (Hold) company over the past few months, amid a slowing Macau gaming market. The company’s earnings have declined year over year and also missed the Zacks Consensus Estimate over the past two quarters. Revenues have also remained sluggish owing to the anti-graft corruption drive carried out by the government.
At its fourth quarter conference call, MGM Resorts stated that it believes that the concept of converting gaming assets to REITs is not a new one. Companies have announced spin-offs in the recent past often under pressure from shareholders. Some other companies that are treading the same path include Penn National Gaming Inc. PENN, Pinnacle Entertainment Inc. PNK and Caesars Entertainment Corporation CZR.
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