MGM Placing New Bets - TheStreet

Updated from 11:41 a.m. EST

MGM Mirage

(MGM) - Get Report

reported Wednesday that its fourth-quarter earnings more than doubled, helped by the reopening of its casino in Mississippi and strong profit growth on the Las Vegas Strip.

The casino operator also stressed that it plans to continue to focus on nongaming hotel developments and joint ventures internationally to diversify its operations and leverage its brand. In addition, the company said it could sell pieces of assets to maximize real estate value.

MGM's fourth-quarter net income rose to $201.6 million, or 69 cents a share, from $97.8 million, or 33 cents a share, a year earlier.

Net revenue, which excludes promotional allowances, rose 11% to $1.85 billion. The company's operating margins increased to 28%, from 20% a year earlier.

Results were helped by the reopening of the Beau Rivage casino in Biloxi, Miss., which was closed a year earlier due to Hurricane Katrina-related damages. MGM's revenue included $190 million in insurance recoveries related to Katrina's impact on the casino.

Adjusting for certain one-time benefits and expenses, MGM's earnings per share totaled 52 cents, according to a research note from Bear Stearns' Joseph Greff. That number beat Thomson Financial's mean analyst estimate of 48 cents.

Property cash flow rose 9% at MGM's Las Vegas Strip properties, which include the Bellagio, MGM Grand and Mandalay Bay.

Higher room rates and occupancy levels led to an 8% increase in hotel revpar, or revenue per available room, at the Vegas resorts.

On its conference call, MGM said its board has given management the green light to work on development plans for the 71 acres of land the company owns next to the successful Borgata Casino in Atlantic City.

MGM owns the Borgata jointly with

Boyd Gaming

(BYD) - Get Report

, but it is planning to develop the adjacent site by itself, possibly building a residential and casino complex patterned after the company's ongoing $7 billion CityCenter development on the Las Vegas Strip.

So long as the company receives local approval for the Atlantic City project, construction could begin as early as two years, management said on the call.

MGM President Jim Murren also confirmed on the call that the company has been looking at ways to explore unlocking the real estate value at the company.

TheStreet.com

reported two weeks ago that MGM was exploring creating the

first major gaming REIT.

"We have looked at a variety of capital structures," Murren told investors on the call, adding that he was not at liberty to specify exactly what is being planned. "But I will say the options available to MGM today are far greater than they've ever been as it relates to partnerships, joint ventures and other recapitalizations or capital structures."

In an interview last week with

TheStreet.com

, Murren confirmed that the company has looked at the REIT structure.

"There is an enormous amount of interest from bankers to try to stimulate a dialogue on gaming companies by exploring a REIT structure in at least part of their companies," Murren said at the time.

"I'm not as focused on REITs frankly as a way of creating more value as I am many other forms of structuring of capitalization," he said. "I don't find it as appealing as staying a C-Corp."

Part of the issue with a REIT transformation is the complexity and tax issues of transferring assets, he said.

MGM has a variety of options available besides splitting the company's real estate and gaming operations into two separate companies.

The market for CMBS, or commercial mortgage backed securities, which represents a cheaper form of debt for commercial real estate properties, provides a new source of capital for gaming that is only beginning to be tapped. It also represents a new pool of capital that private equity players can turn to in order to finance acquisitions of gaming assets, thus effecting valuations in the sector.

The buyers of

Harrah's Entertainment

( HET) are tapping the CMBS market to fund part of the buyout.

MGM also said that it is likely to bring in partners in the future to purchase stakes in its existing properties in an effort to maximize the value of its real estate. The company said one of its existing joint venture partners has already expressed such interest.

The company has yet to meaningfully explore this option. Rather than partnering on existing properties, MGM's current joint ventures have been created for ground-up developments, such as the recently announced partnership to build a mixed-use property in Jean, Nev.

MGM also has the option of partnering with private equity players to create "asset light" joint ventures, in which the company helps develop properties on vacant land parcels it owns in Vegas and elsewhere while retaining development and management fees but not owning the properties.

On the call, MGM CEO Terrence Lanni emphasized that MGM's principal business remains gaming and resorts but said the company is planning to expand its development and management of non-gaming hotels worldwide.

The fact that

Four Seasons

( FS) has agreed to be bought out at 30 times cash flow and Fairmont Hotels was purchased at 18 times cash flow is "not lost on us," he said.

In comparison, MGM's stock trades at about 12.5 times cash flow. Gaming companies have always traded at lower multiples than hotel stocks because they are viewed as higher risk, but MGM continues to look at ways to narrow that gap.

In December, MGM announced a joint venture with Mubadal Development Company, of the United Arab Emirates, to develop luxury nongaming hotels and resorts globally utilizing the MGM brand, with initial target locations in Abu Dhabi, Las Vegas and the U.K.