This management's discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. Please see "Forward-Looking Statements" for a discussion of the
uncertainties, risks, and assumptions that may cause our actual results to
differ materially from those discussed in the forward-looking statements.
This discussion should be read in conjunction with our historical financial
statements and related notes thereto and the other disclosures contained
elsewhere in this quarterly report on Form 10-Q, and the audited consolidated
financial statements and notes for the fiscal year ended December 31, 2021,
which were included in our annual report on Form 10-K, filed with the SEC on
February 16, 2022.
Executive Overview
MGP is one of the leading publicly traded REITs engaged in the acquisition,
ownership and leasing of large-scale destination entertainment and leisure
resorts, whose tenant generally offers diverse amenities including casino
gaming, hotel, convention, dining, entertainment and retail amenities.
MGP is a limited liability company that was formed in Delaware in October 2015.
MGP conducts its operations through the Operating Partnership, a Delaware
limited partnership formed by MGM in January 2016, that became a subsidiary of
MGP in April 2016. We elected to be taxed as a real estate investment trust
("REIT") for U.S. federal income tax purposes commencing with our taxable year
ended December 31, 2016.
As of March 31, 2022, we generate all of our revenues by leasing our real estate
properties through a wholly owned subsidiary of the Operating Partnership to a
subsidiary of MGM pursuant to the MGM-MGP Master Lease which requires the tenant
to pay substantially all costs associated with each property, including real
estate taxes, ground lease rent, insurance, utilities and routine maintenance,
in addition to the base rent and the percentage rent, each as described below.
The lease has an initial lease term of ten years that began on April 25, 2016
(other than with respect to MGM National Harbor, whose initial lease term ends
on August 31, 2024; refer to Note 5 for further detail of the lease term) with
the potential to extend the term for four additional five-year terms thereafter
at the option of the tenant. In addition to the four five-year renewal terms,
the term of the lease with respect to MGM Springfield may be extended for an
additional four five-year renewal terms. Also, the lease provides MGP with a
right of first offer with respect to any future gaming development by MGM on the
undeveloped land adjacent to Empire City, which MGP may exercise should MGM
elect to sell such property in the future.
MGP BREIT Venture, owned 50.1% by the Operating Partnership and 49.9% by a
subsidiary of BREIT, owns the real estate assets of MGM Grand Las Vegas and
Mandalay Bay and leases such real estate properties back to a wholly owned
subsidiary of MGM under the MGP BREIT Venture lease. The lease provides for a
term of thirty years with two ten-year renewal options.
As of March 31, 2022, our portfolio, including properties owned by the MGP BREIT
Venture, includes seven large-scale entertainment and gaming-related properties
in Las Vegas: Mandalay Bay, MGM Grand Las Vegas, The Mirage, Park MGM, New
York-New York, Luxor and Excalibur, and The Park, a dining and entertainment
district located between New York-New York and Park MGM. Outside of Las Vegas,
we also own six market-leading casino resort properties: MGM Grand Detroit in
Detroit, Michigan, Beau Rivage and Gold Strike Tunica, both of which are located
in Mississippi, Borgata in Atlantic City, New Jersey, MGM National Harbor in
Prince George's County, Maryland, and MGM Springfield in Springfield,
Massachusetts. We also own the casino properties of MGM Northfield Park in
Northfield, Ohio and Empire City in Yonkers, New York.
Additionally, if the VICI Transaction (as defined below) does not close, we
expect to grow our portfolio through acquisitions with third parties and with
MGM. In pursuing external growth initiatives, we will generally seek to acquire
properties that can generate stable rental revenue through long-term, triple-net
leases with tenants with established operating histories, and we will consider
various factors when evaluating acquisitions.
On August 4, 2021, we and the Operating Partnership entered into an agreement
with VICI Properties, Inc. ("VICI") and MGM whereby VICI will acquire us in a
stock-for-stock transaction (such transaction, the "VICI Transaction"). Pursuant
to the agreement, MGP Class A shareholders will have the right to receive 1.366
shares of newly issued VICI stock in exchange for each MGP Class A share
outstanding and MGM will have the right to receive 1.366 units of the new VICI
operating partnership ("VICI OP") in exchange for each Operating Partnership
unit held by MGM. The fixed exchange ratio represents an agreed upon price of
$43 per share of MGP Class A share to the five-day volume weighted average price
of VICI stock as of the close
18
--------------------------------------------------------------------------------
of business on July 30, 2021. In connection with the exchange, VICI OP will
redeem the majority of MGM's VICI OP units for cash consideration of $4.4
billion, with MGM retaining approximately 12.2 million VICI OP units. MGP's
Class B share that is held by MGM will be cancelled. As of April 15, 2022, all
closing conditions have been satisfied or waived (other than those that by their
nature or terms are to be satisfied at the closing or, with respect to certain
conditions, if the failure of such condition is as a result of an event,
circumstance, effect or development occurring on or after April 15, 2022), and,
accordingly, the VICI Transaction is expected to close on or about April 29,
2022, or otherwise within the marketing period pursuant to the master
transaction agreement.
COVID-19 Update
The COVID-19 pandemic has not had a material impact on our operations; however,
we cannot estimate the duration of the pandemic and potential impact on our
business if our properties will be required to close or become subject to
significant operating restrictions again, or if the tenant (or the guarantor) is
otherwise unable or unwilling to make rental payments. For further information
regarding the potential impact of COVID-19 on our operations, refer to
"Liquidity and Capital Resources" below.
Combined Results of Operations for MGP and the Operating Partnership
Overview
The following table summarizes our financial results for the three months ended
March 31, 2022 and March 31, 2021:
Three Months Ended March 31,
2022 2021
(in thousands)
Total Revenues $ 201,936 $ 194,342
Total Expenses 73,901 68,359
Net income 116,500 115,409
Net income attributable to Class A shareholders 69,428 59,598
Revenues
Rental revenue. Rental revenues, including ground lease and other, for the three
months ended March 31, 2022 and 2021 were $201.9 million and $194.3 million,
respectively. The $7.6 million, or 3.9%, increase for the quarterly period was
primarily due to the addition of MGM Springfield in October 2021.
Expenses
Depreciation. Depreciation expense was $62.8 million and $57.9 million for the
three months ended March 31, 2022 and 2021, respectively. The $4.9 million, or
8.4%, increase for the quarterly period was primarily due to the addition of MGM
Springfield in October 2021.
Property transactions, net. Property transactions, net for the three months
ended March 31, 2022 and 2021 were $1.5 million and $0.8 million, respectively.
Ground lease expense. Ground lease expense was $5.8 million and $5.9 million for
the three months ended March 31, 2022 and 2021, respectively.
Acquisition-related expenses. Acquisition-related expenses were $0.1 million for
the three months ended March 31, 2022, which related to the VICI Transaction.
There were no acquisition-related expenses for the three months ended March 31,
2021.
General and administrative expenses. General and administrative expenses were
$3.6 million and $3.7 million for the three months ended March 31, 2022 and
2021, respectively.
19
--------------------------------------------------------------------------------
Other Expenses
Income from unconsolidated affiliate. Income from unconsolidated affiliate was
$25.4 million and $25.5 million for the three months ended March 31, 2022 and
2021, respectively. Our income from unconsolidated affiliate is entirely
attributable to income from our investment in MGP BREIT Venture.
Other expenses, excluding income from unconsolidated affiliate, were $34.7
million and $33.3 million for the three months ended March 31, 2022 and 2021,
respectively. The $1.4 million, or 4.3%, increase for the quarterly period was
primarily related to the $29.2 million net gain on unhedged interest rate swaps,
net for the three months ended March 31, 2022 compared to the $35.1 million net
gain on unhedged interest rate swaps for the three months ended March 31, 2021,
partially offset by a decrease in interest expense.
Provision for Income Taxes
Our effective tax rate was 1.9% and 2.4% for the three months ended March 31,
2022 and 2021, respectively. The effective rate decreased slightly for the three
months ended March 31, 2022 compared to the prior year quarter primarily as a
result of the addition of MGM Springfield, for which the net rental income is
not taxable in New Jersey. Refer to Note 2 of the accompanying financial
statements for additional discussion regarding income taxes.
Non-GAAP Measures
Funds From Operations ("FFO") is net income (computed in accordance with U.S.
GAAP), excluding gains and losses from sales or disposals of property (presented
as property transactions, net), plus depreciation, as defined by the National
Association of Real Estate Investment Trusts, plus our share of depreciation of
our unconsolidated affiliate.
Adjusted Funds From Operations ("AFFO") is FFO as adjusted for amortization of
financing costs and cash flow hedges; our share of amortization of financing
costs of our unconsolidated affiliate; non-cash compensation expense;
straight-line rental revenue (which is defined as the difference between
contractual rent and cash rent payments, excluding lease incentive asset
amortization); our share of straight-line rental revenues of our unconsolidated
affiliate; amortization of lease incentive asset and deferred revenue relating
to non-normal tenant improvements; acquisition-related expenses; non-cash ground
lease rent, net; other expenses; gain on unhedged interest rate swaps, net; and
provision for income taxes.
Adjusted EBITDA is net income (computed in accordance with U.S. GAAP) as
adjusted for gains and losses from sales or disposals of property (presented as
property transactions, net); depreciation; our share of depreciation of our
unconsolidated affiliate; amortization of financing costs and cash flow hedges;
our share of amortization of financing costs of our unconsolidated affiliate;
non-cash compensation expense; straight-line rental revenue; our share of
straight-line rental revenues of our unconsolidated affiliate; amortization of
lease incentive asset and deferred revenue relating to non-normal tenant
improvements; acquisition-related expenses; non-cash ground lease rent, net;
other expenses; gain on unhedged interest rate swaps, net; interest income;
interest expense (including amortization of financing costs and cash flow
hedges); our share of interest expense (including amortization of financing
costs) of our unconsolidated affiliate; and provision for income taxes.
FFO, FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA are supplemental
performance measures that have not been prepared in conformity with accounting
principles generally accepted in the United States ("U.S. GAAP") that management
believes are useful to investors in comparing operating and financial results
between periods. Management believes that this is especially true since these
measures exclude depreciation expense and management believes that real estate
values fluctuate based on market conditions rather than depreciating in value
ratably on a straight-line basis over time. The Company believes such a
presentation also provides investors with a meaningful measure of the Company's
operating results in comparison to the operating results of other REITs.
Adjusted EBITDA is useful to investors to further supplement AFFO and FFO and to
provide investors a performance metric which excludes interest expense. In
addition to non-cash items, the Company adjusts AFFO and Adjusted EBITDA for
acquisition-related expenses. While we do not label these expenses
as non-recurring, infrequent or unusual, management believes that it is helpful
to adjust for these expenses when they do occur to allow for comparability of
results between periods because each acquisition is (and will be) of varying
size and complexity and may involve different types of expenses depending on
the type of property being acquired and from whom.
FFO, FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA do not represent cash
flow from operations as defined by U.S. GAAP, should not be considered as an
alternative to net income as defined by U.S. GAAP and are not indicative of cash
available to fund all cash flow needs. Investors are also cautioned that FFO,
FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA as presented, may not be
comparable to similarly titled measures reported by other REITs due to the fact
that not all real estate companies use the same definitions.
20
--------------------------------------------------------------------------------
The following table provides a reconciliation of the Company's consolidated net
income to FFO, AFFO and Adjusted EBITDA:
© Edgar Online, source Glimpses
MGM GROWTH PROPERTIES LLC 
