Citi Thinks MGM Growth Properties Has An Attractive Yield

Citi has initiated coverage of MGM Growth Properties LLC (NYSE: MGP) with a Neutral rating and $22.50 price target, citing attractive and sustainable dividend yield. While the reasons cited sound more positive than a Neutral rating, the analysts justified it by stating that most of the positives are priced into the shares.

MGM Growth Properties offers a dividend yield of about 6.1 percent and the brokerage said only Las Vegas Sands Corp. (NYSE: LVS) and Sands China are expected to pay more than the company.

"We like the fact that most of its properties are located in Las Vegas, where we expect a recovery in both RevPAR and gaming revenue to continue," analyst Anil Daswani wrote in a note.

Daswani also favors the REIT's growth prospects, as it has a Right of First Offer (ROFO) to casino resorts MGM National Harbor and MGM Springfield, should MGM decides to sell them both after they open in late-2016 and late-2018, respectively.

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"Based on our analysis, we estimate the two potential acquisitions could enhance MGP's value by ~US$1.45/Class A share or ~6.5 percent on current share price," Daswani highlighted.

The analyst expects both properties to generate an EBITDA of "about $170 million and about $130 million respectively, after a ramp-up period of two years and assume(s) the rent to be set at 50 percent of EBITDA generated".

However, Daswani said single-tenant occupancy, geographic concentration, corporate governance and inherent conflicts of interest could limit valuation upside.

In Tuesday's pre-market, MGM Growth Properties was up 2.17 percent; the REIT closed Monday's regular trading session at $22.99.