MGM Growth Properties Luring Professional Investors With Rising Rents, Higher Dividends

Posted on: July 7, 2019, 02:20h. 

Last updated on: July 8, 2019, 02:17h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

MGM Growth Properties LLC (NYSE:MGP), a gaming and leisure real estate investment trust (REIT), is becoming a favorite of professional investors, including hedge funds.

The New York New York in Las Vegas, owned by MGM Growth Properties. (Image: Trip Advisor)

The company owns 13 integrated resorts across the US, including the Luxor, Mandalay Bay, Mirage, and New York New York on the Las Vegas Strip. Other well-known gaming properties in MGM Growth’s portfolio include the Borgata in Atlantic City and MGM Springfield in Massachusetts.

In other words, MGM Growth’s marquee tenant is MGM Resorts International (NYSE: MGM), the company from which the REIT was spun off in 2016.

Many investors like the gaming REIT business model because it offers predictability without significant financial risk to the real estate company itself. Casino operators typically sign long leases with their landlords, providing the property owner with a steady revenue stream. Responsibility for enhancing the property and luring gamblers and guests falls to the operator.

Hedge Funds Seek Occupancy With MGM Growth

As is the case with several other gaming-related stocks, hedge fund ownership of MGM Growth Properties is increasing. At the end of the first quarter, 17 hedge funds held stakes in the real estate company, up from 12 when 2018 ended.

Based on the most recent 13F filings with the Securities and Exchange Commission (SEC), Zimmer Partners owns more than 3.2 million shares of MGM Growth Properties, making that firm the largest hedge fund owner of the stock and the only hedge fund among MGP’s top 10 institutional investors.

Other well-known “hedgies” with MGP stakes include Israel Englander’s Millennium Management, Ken Griffin’s Citadel Capital, and Carlson Capital.

In addition to revenue predictability, another reason professional investors are warming to MGP could be the stock’s above-average dividend yield. The shares have a trailing 12-month dividend yield of 5.84 percent, or nearly 200 basis points above the yield on the MSCI US Investable Market Real Estate 25/50 Index, a widely followed gauge of real estate equities.

MGP’s dividend yield is also more than triple that of the S&P 500 and 380 basis points above the yield found on 10-year US Treasuries.

Last month, MGM Growth Properties announced a modest increase to its annual payout, boosting it to $1.87 per share from $1.86, marking the eighth dividend hike since the company’s 2016 initial public offering (IPO). Since that IPO, MGP’s dividend has increased 30.1 percent, according to the company.

For Long-Term Investors, Too

Increased hedge fund ownership is a positive sign for shares of MGP, but there are other factors to consider, too. Real estate stocks, gaming names and otherwise, are capital intensive. That traits leads to inverse correlations to US interest rates, but it is widely expected that the Federal Reserve will lower borrowing costs this year, potentially providing an assist to REITs of all stripes.

Plus, REITs are often as viewed as an inflation-fighting asset class. In the case of MGM Growth Properties, the company has average annual rent increases of 1.8 percent, the same percentage US core inflation is expected to increase by this year.

The ability to consistently raise rents coupled with strong dividend growth could make MGP appealing to long-term investors, particularly those that take into account broader REIT payout increases have outpaced US inflation in 18 of the past 20 years, according to Nareit.