How To Look At MGM Growth Properties LLC (NYSE:MGP)

MGM Growth Properties LLC is a US$7.8b mid-cap, real estate investment trust (REIT) based in Las Vegas, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. In this commentary, I'll take you through some of the things I look at when assessing MGP.

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Funds from Operations (FFO) is a higher quality measure of MGP's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For MGP, its FFO of US$483m makes up 75% of its gross profit, which means the majority of its earnings are high-quality and recurring.

In order to understand whether MGP has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take MGP to pay off its debt using its income from its main business activities, and gives us an insight into MGP’s ability to service its borrowings. With a ratio of 12%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take MGP 8.15 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

Next, interest coverage ratio shows how many times MGP’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 2.62x, MGP is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at MGP's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. MGP's price-to-FFO is 16.22x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. MGM Growth Properties can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

1. Future Outlook: What are well-informed industry analysts predicting for MGP’s future growth? Take a look at our free research report of analyst consensus for MGP’s outlook.
2. Valuation: What is MGP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MGP is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.