Fitch Ratings has maintained the Rating Watch Positive (RWP) on the ratings of MGM Growth Properties LLC, its subsidiary MGM Growth Properties Operating Partnership (collectively, MGP) and their debt instruments.

The RWP reflects the pending acquisition of MGP by VICI Properties Inc. (VICI), which is expected to close during first half of 2022. The combined company's strengthened credit profile and 5.0x-5.5x net leverage target will be consistent with a low investment-grade Issuer Default Rating (IDR). Fitch expects to resolve the Rating Watch around the time of the closing

Key Rating Drivers

'BBB-' IDR Expected Post-RWP: Fitch will resolve the RWP by upgrading MGP's IDR and all of its unsecured debt to 'BBB-' around the time of the acquisition closing, which is expected to occur sometime during second quarter 2022. Fitch expects pro forma VICI will reduce net leverage to 5.5x within 24 months of the transaction closing from an estimated pro forma 5.7x at closing. VICI has meaningfully reduced the risk of closing the transaction by having issued all previously contemplated equity financing. The level of equity proceeds should allow for leverage to decrease to levels appropriate for a 'BBB-'-rated U.S. equity REIT within the Rating Outlook horizon.

Fitch sees minimal risk to VICI closing its acquisition of MGP given the equity issuance and few remaining closing conditions (e.g. state gaming regulatory approvals). There are no antitrust concerns that Fitch is aware. In the event of capital market access volatility, VICI could temporarily fund the $4.4 billion remaining payment via the $5 billion in committed secured bridge financing, $1 billion unsecured delayed draw term loan (springing security if bridge remains outstanding for 90 days), and revolver availability. However, using these facilities could encumber all of VICI's assets thereby reducing financial flexibility. Fitch would assess the rating implications further in the event this occurred.

Fitch could also resolve the RWP prior to the acquisition closing if all regulatory approvals are received and Fitch views the execution risk of completing the financings via long-term unsecured debt to be low. While Fitch assumes pro forma VICI will be a fully unsecured investment-grade bond issuer, some execution risk exists what will be a sizable inaugural investment-grade issuance amid current volatility in the debt capital markets.

Strategically Sound Merger: Fitch views the merger to be strategically sound in that it alleviates some considerations that were previously restraining the two companies' standalone credit profiles such as tenant and asset diversification. The combination should also improve pro forma VICI's relative access to the capital markets and has limited integration risk given the triple-net leased nature of the portfolios.

Improved Capital Markets Access: Fitch expects the combined company will be one of the largest REITs in terms of enterprise value, EBITDA generation, and outstanding unsecured debt which should enhance the company's credit profile via improved capital access and pricing. Larger REITs are usually more important banking customers by virtue of their size. They are often able to negotiate lower credit facility fees as a result.

Greater Financial Flexibility: The combined company's portfolio will be fully unencumbered following the repayment of the secured debt at VICI and once MGP's existing senior secured revolver is terminated at transaction closing, assuming the bridge facility is not utilized. Pro forma, VICI will have significantly more financially flexibility given the sizeable pool of unencumbered assets, which includes a number of assets in Las Vegas (e.g. Mirage, Excalibur, Luxor)

Historically, gaming REIT's contingent liquidity in the form of mortgage debt or asset sales is not as robust as more traditional CRE property types, such as apartments, office, industrial and retail properties. Casinos are a specialty property type that appeals to a smaller, but growing, universe of institutional real estate investors and lenders.

Some gaming companies have accessed debt via public bonds that were secured by specific assets in a time of stress. There are also gaming assets in some CMBS transactions, but Fitch views the through-the-cycle availability of capital from this avenue as less reliable than secured mortgages from balance sheet lenders, including life insurance companies, and to a lesser extent, banks.

Positively, non-traditional owners have increasingly been purchasing Las Vegas real estate (e.g. private equity), which led to cap rate compression and is a longer term positive as it relates to attractiveness of Las Vegas gaming real estate. Regional gaming outperformed many of the other hard-hit sectors during the pandemic, which should also be a longer-term positive as it relates to the attractiveness of regional gaming real estate.

Tenant Concentration to Improve from Merger: The combined company's credit profile will benefit from more tenant diversification than each standalone profile. MGM is MGP's sole tenant, but this tenant concentration is partially offset by the diversification of assets within the lease (roughly 50/50 Las Vegas/regional EBITDAR split), the high-quality assets, the mission-critical nature of the master lease to the tenant and the healthy rent coverage.

Strong Cash Flow Stability: MGP generates 100% of its rental revenue under a master lease with MGM (excluding the rent paid to a joint-venture [JV] 50.1% owned by MGP). The master lease has a long initial term and is primarily fixed with 2% escalators, providing stability and visibility to MGP's cash flows. Roughly half of the rent is attributed to assets on the more cyclical Las Vegas Strip, but MGP's regional assets are diversified and help insulate the company from individual market-level underperformance. MGP's master lease structure should protect against adverse lease selection in a bankruptcy scenario of MGM. Although not anticipated, Fitch views rent concessions as a greater cash flow risk for triple-net lease REITs with master leases, rather than tenant rejections in bankruptcy.

Parent Subsidiary Linkage: Fitch rates the IDRs of the parent REIT and subsidiary operating partnership on a consolidated basis, using the weak parent/strong subsidiary approach under its Parent and Subsidiary Linkage Criteria (PSL Criteria). Fitch believes open access and control factors are strong, based on the entities operating as a single enterprise with strong legal and operational ties.

Fitch views MGP on a standalone basis relative to parent MGM Resorts International (BB-/RWN), using the strong subsidiary/weak parent approach under its PSL Criteria. Fitch believes MGP has insulated ring-fencing thanks to tight restricted payment covenants in MGP's existing long-dated unsecured notes.

Fitch also believes MGM's access and control of MGP is limited, despite its approximate 42% ownership of the OP and MGM's controlling class B share ownership, thanks to the independent conflicts committee that must approve related party transactions that exceed $25 million and MGP's separate management/treasury functions and balance sheet strategy.

Derivation Summary

MGP's main peers are gaming REITs including Gaming and Leisure Properties Inc. (GLPI; BBB-/Stable) and VICI Properties. All three REITs have comparable credit metrics and share a leverage target range of 5.0x-5.5x. GLPI's currently higher IDR reflects its all unsecured capital structure and more diversified tenant/asset base relative to MGP.

Key Assumptions

Annual master lease rent of $770 million following the amendments as part of the VICI transaction and Mirage transaction that will remove $90 million in rent from the MGP master lease.

VICI assumes MGP's existing debt.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Diversification of the tenant base;

An improvement in MGP's liquidity through moving towards a more unsecured capital structure and greater staggering of the maturity schedule;

A financial policy with a net leverage target of less than 5.0x may offset the lack of progress with respect to the above sensitivities;

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Net leverage sustaining above 5.5x. Fitch has tolerance for leverage to exceed 5.5x for larger acquisitions provided MGP deleverages below 5.5x within 12 months-24 months;

Fitch will update the combine company's rating sensitivities upon resolution of the RWP and there is greater clarity on the pro forma capital structure.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

MGP's standalone liquidity and liability management characteristics relative to investment-grade U.S. equity REITs has and is expected to improve further upon the combination. MGP repaid its senior secured term loan in early 2020 and its wholly owned recourse debt is mostly unsecured now except for a $1.35 billion senior secured revolver.

Issuer Profile

MGM Growth Properties is a gaming-oriented REIT with MGM Resorts International as its sole tenant.

Summary of Financial Adjustments

Fitch proportionally consolidates the BREIT JV's debt and equity into MGP's leverage metrics.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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