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Land & Buildings praises, criticizes MGM Resorts' REIT plan

Land & BuildingsInvestment Management LLC gave muted praise to MGM Resorts International's plan to create a REIT but cautionedthat the IPO does not go far enough in unlocking the value of the casino company'sreal estate.

Chief among the activist investor's criticisms of the REIT, , is the factthat it will be controlled by MGM Resorts. It also cited MGM Resorts' failure toput all of its real estate into the REIT.

"MGM Resorts' Chairman and CEO Jim Murren has taken a half-stepto unlock the value of MGM, which is better than no step at all," Land andBuildings founder and Chief Investment Officer Jonathan Litt wrote in a letter toMGM Resorts shareholders. "However, it is perplexing why he would not go allthe way and decisively unlock the inherent value in MGM Resorts."

Litt has been a critic of MGM Resorts and pushed hard for itto create a REIT and make other changes,including spinning off its Macau unit.

Litt said MGM Growth is "fairly valued" at $19.50 pershare, the midpoint of its proposed IPO price range of $18 to $21. The offering is expected to price April19 and raise gross proceeds of approximately $1 billion.

While the assets MGM Growth will start out with are of superiorquality and better located than those owned by the only other gaming REIT, ,from a corporate governance perspective, Litt argued, MGM Growth is inferior toits competitor.

"MGM REIT is a 'trust me' story — investors in MGM REITmust rely on MGM Resorts' management and directors, who have seats on both the boardof MGM Resorts and MGM REIT, to make the best decisions for all MGM REIT investors,"Litt said, noting that MGM Resorts will own 76% of MGM Growth to shareholders' 24%stake, and MGM Resorts will retain majority-voting control of the company througha single class B share, at least until its economic interest falls from 76% to below30%.

While a conflicts committee populated with independent directorswill help oversee MGM Growth's business, thus alleviating some of Litt's corporategovernance concerns, "the governance of the committee appears to lack teeth,"Litt said.

For example, Litt said, the REIT could buy properties from MGMResorts at above-market prices. However, the fact that MGM Resorts is "on thehook" for rent, meaning if it steers customers to its wholly owned properties,it will still have to cover rent payments at the MGM Growth assets.

Litt also criticized the lease structure, which requires MGMResorts to invest 1% of revenue in the REIT's properties as recurring, non-revenueenhancing capital expenditures, approximately $40 million per year. This comparesto the $924 million MGM Resorts' invested in its properties since 2010, or about$185 million per year, Litt said.

"The risk for MGM REIT investors is that if MGM Resortsunder-invests in the assets, when the lease matures in 10 years, MGM Resorts refusesto renew the lease on the same terms, or requires MGM REIT to make a major investmentin the properties to induce them to renew," Litt said, adding that while itis likely a portion of the MGM Resorts' capital expenditures was made on a revenue-enhancingbasis, a minimum of 1% of revenues "seems too low and should be higher."