10-Q 1 mgp09302018q310-q.htm 10-Q Document


UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to           
Commission File No. 001-37733 (MGM Growth Properties LLC)
Commission File No. 333-215571 (MGM Growth Properties Operating Properties LP)

MGM Growth Properties LLC
MGM Growth Properties Operating Partnership LP
(Exact name of registrant as specified in its charter)

DELAWARE (MGM Growth Properties LLC)
DELAWARE (MGM Growth Properties Operating Partnership LP)

47-5513237
81-1162318

(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1980 Festival Plaza Drive, Suite #750, Las Vegas, NV 89135
(Address of principal executive offices)
(702) 669-1480
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    

MGM Growth Properties LLC     Yes    X      No         
MGM Growth Properties Operating Partnership LP     Yes     X       No     
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):    

MGM Growth Properties LLC     Yes    X      No          
MGM Growth Properties Operating Partnership LP     Yes    X      No          
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

MGM Growth Properties LLC

  Large accelerated filer    X  
 
Accelerated filer        
 
Non-accelerated filer       
 
Small reporting company        
 
Emerging growth company        

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

MGM Growth Properties Operating Partnership LP
   Large accelerated filer       
 
Accelerated filer        
 
Non-accelerated filer    X  
 
Small reporting company        
 
Emerging growth company        

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act):
 
MGM Growth Properties LLC     Yes            No    X  
MGM Growth Properties Operating Partnership LP      Yes            No    X  


As of 
November 1, 201870,911,166 shares of MGM Growth Properties LLC Class A shares, no par value, and 1 share of MGM Growth Properties LLC Class B share, no par value, were outstanding.




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2018, of MGM Growth Properties LLC, a Delaware limited liability corporation, and MGM Growth Properties Operating Partnership LP, a Delaware limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “MGP” or “the Company” refer to MGM Growth Properties LLC together with its consolidated subsidiaries, including MGM Growth Properties Operating Partnership LP. Unless otherwise indicated or unless the context requires otherwise, all references to the “Operating Partnership” refer to MGM Growth Properties Operating Partnership LP together with its consolidated subsidiaries.
MGP is a real estate investment trust, or REIT, and the owner of the sole general partner of the Operating Partnership. As of September 30, 2018, MGP owned approximately 26.7% of the Operating Partnership units in the Operating Partnership. The remaining approximately 73.3% of the Operating Partnership units in the Operating Partnership are owned by subsidiaries of our parent, MGM Resorts International (“MGM”). As the owner of the sole general partner of the Operating Partnership, MGP has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control.
We believe combining the quarterly reports on Form 10-Q of MGP and the Operating Partnership into this single report results in the following benefits:
enhances investors’ understanding of MGP and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both MGP and the Operating Partnership, which we believe will assist investors in getting all relevant information on their investment in one place rather than having to access and review largely duplicative reports; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
There are a few differences between MGP and the Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between MGP and the Operating Partnership in the context of how we operate as an interrelated consolidated company. MGP is a REIT, whose only material assets consist of Operating Partnership units representing limited partner interests in the Operating Partnership and our ownership interest in the general partner of the Operating Partnership. As a result, MGP does not conduct business itself, other than acting as the owner of the sole general partner of the Operating Partnership, but it may from time to time issue additional public equity. The Operating Partnership holds all the assets of the Company. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from the offerings of Class A shares by MGP, which were contributed to the Operating Partnership in exchange for Operating Partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations and by the Operating Partnership’s issuance of indebtedness or through the issuance of Operating Partnership units.
The presentation of noncontrolling interest, shareholders’ equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of MGP and those of the Operating Partnership. The Operating Partnership units held by subsidiaries of MGM are accounted for as partners’ capital in the Operating Partnership’s condensed consolidated financial statements and as noncontrolling interest within equity in MGP’s condensed consolidated financial statements. The Operating Partnership units held by MGP in the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s condensed consolidated financial statements and within Class A shareholders’ equity in MGP’s condensed consolidated financial statements. The differences in the presentations between shareholders’ equity and partners’ capital result from the differences in the equity issued at the MGP and Operating Partnership levels.
To help investors understand the significant differences between MGP and the Operating Partnership, this report presents the condensed consolidated financial statements separately for MGP and the Operating Partnership.
As the sole beneficial owner of MGM Growth Properties OP GP LLC, which is the sole general partner with control of the Operating Partnership, MGP consolidates the Operating Partnership for financial reporting purposes, and it does not have any assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of MGP and the Operating Partnership are the same on their respective condensed consolidated financial statements. The separate discussions of MGP and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a condensed consolidated basis and how management operates the Company.




In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. §1350, this report also includes separate “Item 4. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of the Company and the Operating Partnership.
All other sections of this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk, are presented together for MGP and the Operating Partnership.





MGM GROWTH PROPERTIES LLC
FORM 10-Q
I N D E X

 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
MGM Growth Properties LLC:
 
 
 
 
 
 
 
MGM Growth Properties Operating Partnership LP:
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.




Part I.    FINANCIAL INFORMATION
Item 1.    Financial Statements
MGM GROWTH PROPERTIES LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
 
September 30, 2018
 
December 31, 2017
ASSETS
Real estate investments, net
$
9,803,410

 
$
10,021,938

Property and equipment, used in operations, net
789,039

 

Cash and cash equivalents
49,500

 
259,722

Tenant and other receivables, net
12,447

 
6,385

Prepaid expenses and other assets
56,395

 
18,487

Above market lease, asset
43,407

 
44,588

Goodwill
17,915

 

Other intangible assets, net
252,107

 

Total assets
$
11,024,220

 
$
10,351,120

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
 
 
 
Debt, net
$
4,684,717

 
$
3,934,628

Due to MGM Resorts International and affiliates
402

 
962

Accounts payable, accrued expenses and other liabilities
39,588

 
10,240

Above market lease, liability
46,403

 
47,069

Accrued interest
32,395

 
22,565

Dividend and distribution payable
116,395

 
111,733

Deferred revenue
157,725

 
127,640

Deferred income taxes, net
31,392

 
28,544

Total liabilities
5,109,017

 
4,283,381

Commitments and contingencies (Note 14)

 

Shareholders’ equity
 
 
 
Class A shares: no par value, 1,000,000,000 shares authorized, 70,911,166 and 70,896,795 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

Additional paid-in capital
1,711,813

 
1,716,490

Accumulated deficit
(137,781
)
 
(94,948
)
Accumulated other comprehensive income
10,404

 
3,108

Total Class A shareholders’ equity
1,584,436

 
1,624,650

Noncontrolling interest
4,330,767

 
4,443,089

Total shareholders’ equity
5,915,203

 
6,067,739

Total liabilities and shareholders’ equity
$
11,024,220

 
$
10,351,120

The accompanying notes are an integral part of these condensed consolidated financial statements.


1



MGM GROWTH PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Rental revenue
$
186,564

 
$
163,178

 
$
559,690

 
$
489,532

Tenant reimbursements and other
30,095

 
19,620

 
93,198

 
61,621

Gaming, food, beverage and other
65,562

 

 
65,562

 

Total revenues
282,221

 
182,798

 
718,450

 
551,153

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Gaming, food, beverage and other
43,331

 

 
43,331

 

Depreciation and amortization
66,578

 
68,662

 
203,043

 
190,573

Property transactions, net
339

 
1,662

 
18,851

 
19,104

Reimbursable expenses
29,168

 
18,983

 
90,435

 
60,112

Amortization of above market lease, net
171

 
172

 
514

 
515

Acquisition-related expenses
4,423

 
1,059

 
7,095

 
1,059

General and administrative
3,422

 
2,882

 
10,085

 
8,223

 
147,432

 
93,420

 
373,354

 
279,586

Operating income
134,789

 
89,378

 
345,096

 
271,567

Non-operating income (expense)
 
 
 
 
 
 
 
Interest income
163

 
1,480

 
2,473

 
3,039

Interest expense
(58,743
)
 
(45,544
)
 
(157,249
)
 
(134,998
)
Other non-operating expenses
(1,020
)
 
(126
)
 
(6,409
)
 
(1,438
)
 
(59,600
)
 
(44,190
)
 
(161,185
)
 
(133,397
)
Income before income taxes
75,189

 
45,188

 
183,911

 
138,170

Provision for income taxes
(5,266
)
 
(1,488
)
 
(7,760
)
 
(3,903
)
Net income
69,923

 
43,700

 
176,151

 
134,267

Less: Net (income) attributable to noncontrolling interest
(50,439
)
 
(32,675
)
 
(127,691
)
 
(101,214
)
Net income attributable to Class A shareholders
$
19,484

 
$
11,025

 
$
48,460

 
$
33,053

 
 
 
 
 
 
 
 
Weighted average Class A shares outstanding:
 
 
 
 
 
 
 
Basic
71,005,052

 
60,614,664

 
70,991,129

 
58,612,916

Diluted
71,201,791

 
60,755,186

 
71,174,270

 
58,807,948

 
 
 
 
 
 
 
 
Net income per Class A share (basic)
$
0.27

 
$
0.18

 
$
0.68

 
$
0.56

Net income per Class A share (diluted)
$
0.27

 
$
0.18

 
$
0.68

 
$
0.56

 
 
 
 
 
 
 
 
Dividends declared per Class A share
$
0.4375

 
$
0.3950

 
$
1.2875

 
$
1.1775

The accompanying notes are an integral part of these condensed consolidated financial statements.


2



MGM GROWTH PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
69,923

 
$
43,700

 
$
176,151

 
$
134,267

Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on cash flow hedges, net
4,736

 
1,754

 
27,372

 
(2,992
)
Other comprehensive income (loss)
4,736

 
1,754

 
27,372

 
(2,992
)
Comprehensive income
74,659

 
45,454

 
203,523

 
131,275

Less: Comprehensive income attributable to noncontrolling interests
(53,912
)
 
(33,948
)
 
(147,767
)
 
(98,866
)
Comprehensive income attributable to Class A shareholders
$
20,747

 
$
11,506

 
$
55,756

 
$
32,409


The accompanying notes are an integral part of these condensed consolidated financial statements.

3



MGM GROWTH PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
176,151

 
$
134,267

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
203,043

 
190,573

Property transactions, net
18,851

 
19,104

Amortization of deferred financing costs and debt discount
9,391

 
8,443

Loss on retirement of debt
2,736

 
798

Amortization related to above market lease, net
514

 
515

Deemed contributions - tax sharing agreement
4,912

 
3,903

Straight-line rental revenues
14,657

 
3,820

Amortization of deferred revenue
(2,762
)
 
(1,510
)
Share-based compensation
1,516

 
943

Deferred income taxes
2,848

 

Changes in operating assets and liabilities:
 
 
 
Tenant and other receivables, net
527

 
3,399

Prepaid expenses and other assets
455

 
(4,214
)
Due to MGM Resorts International and affiliates
(560
)
 
358

Accounts payable, accrued expenses and other liabilities
(9,022
)
 
2,200

Accrued interest
9,830

 
1,256

Net cash provided by operating activities
433,087

 
363,855

Cash flows from investing activities
 
 
 
Capital expenditures for property and equipment
(795
)
 

Acquisition of Northfield, net of cash acquired
(1,034,534
)
 

Net cash used in investing activities
(1,035,329
)
 

Cash flows from financing activities
 
 
 
Net borrowings (repayments) under bank credit facility
747,375

 
(33,500
)
Proceeds from issuance of debt

 
350,000

Deferred financing costs
(17,490
)
 
(5,381
)
Issuance of Class A shares

 
404,685

Class A share issuance costs

 
(17,137
)
Dividends and distributions paid
(337,865
)
 
(284,213
)
Net cash provided by financing activities
392,020

 
414,454

Cash and cash equivalents
 
 
 
Net increase (decrease) for the period
(210,222
)
 
778,309

Balance, beginning of period
259,722

 
360,492

Balance, end of period
$
49,500

 
$
1,138,801

Supplemental cash flow disclosures
 
 
 
Interest paid
$
137,623

 
$
125,077

Non-cash investing and financing activities
 
 
 
Non-Normal Tenant Improvements by Tenant
$
18,172

 
$
42,303

Accrual of dividend and distribution payable to Class A shareholders and Operating Partnership unit holders
$
116,395

 
$
101,222

The accompanying notes are an integral part of these condensed consolidated financial statements.

4



MGM GROWTH PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
Class A Shares
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Class A Shareholders' Equity
 
Noncontrolling Interest
 
Total Shareholders' Equity
Balance at January 1, 2018

 
$
1,716,490

 
$
(94,948
)
 
$
3,108

 
$
1,624,650

 
$
4,443,089

 
$
6,067,739

Net income

 

 
15,830

 

 
15,830

 
42,339

 
58,169

Deemed contribution - tax sharing agreement

 

 

 

 

 
1,231

 
1,231

Dividends and distributions declared

 

 
(29,777
)
 

 
(29,777
)
 
(81,956
)
 
(111,733
)
Share-based compensation

 
102

 

 

 
102

 
282

 
384

Other comprehensive income - cash flow hedges

 

 

 
4,358

 
4,358

 
11,997

 
16,355

Other

 
108

 

 

 
108

 
293

 
401

Balance at March 31, 2018

 
1,716,700

 
(108,895
)
 
7,466

 
1,615,271

 
4,417,275

 
6,032,546

Net income

 

 
13,146

 

 
13,146

 
34,913

 
48,059

Deemed contribution - tax sharing agreement

 

 

 

 

 
1,263

 
1,263

Dividends and distributions declared

 

 
(30,492
)
 

 
(30,492
)
 
(83,907
)
 
(114,399
)
Share-based compensation

 
149

 

 

 
149

 
407

 
556

Other comprehensive income - cash flow hedges

 

 

 
1,675

 
1,675

 
4,606

 
6,281

Other

 
237

 

 

 
237

 
(240
)
 
(3
)
Balance at June 30, 2018

 
1,717,086

 
(126,241
)
 
9,141

 
1,599,986

 
4,374,317

 
5,974,303

Net income

 

 
19,484

 

 
19,484

 
50,439

 
69,923

Deemed contribution - tax sharing agreement

 

 

 

 

 
2,418

 
2,418

Dividends and distributions declared

 

 
(31,024
)
 

 
(31,024
)
 
(85,371
)
 
(116,395
)
Share-based compensation

 
153

 

 

 
153

 
423

 
576

Other comprehensive income - cash flow hedges

 

 

 
1,263

 
1,263

 
3,473

 
4,736

Other

 
(5,426
)
 

 

 
(5,426
)
 
(14,932
)
 
(20,358
)
Balance at September 30, 2018

 
$
1,711,813

 
$
(137,781
)
 
$
10,404

 
$
1,584,436

 
$
4,330,767

 
$
5,915,203


The accompanying notes are an integral part of these condensed consolidated financial statements.










5



MGM GROWTH PROPERTIES LLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
Class A Shares
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Class A Shareholders' Equity
 
Noncontrolling Interest
 
Total Shareholders' Equity
Balance at January 1, 2017

 
$
1,363,130

 
$
(29,758
)
 
$
445

 
$
1,333,817

 
$
4,274,444

 
$
5,608,261

Net income

 

 
11,348

 

 
11,348

 
35,344

 
46,692

Deemed contribution - tax sharing agreement

 

 

 

 

 
1,238

 
1,238

Dividends and distributions declared

 

 
(22,282
)
 

 
(22,282
)
 
(71,827
)
 
(94,109
)
Share-based compensation

 
44

 

 

 
44

 
144

 
188

Other comprehensive income - cash flow hedges

 

 

 
(150
)
 
(150
)
 
(484
)
 
(634
)
Other

 
96

 

 

 
96

 
305

 
401

Balance at March 31, 2017

 
1,363,270

 
(40,692
)
 
295

 
1,322,873

 
4,239,164

 
5,562,037

Net income

 

 
10,680

 

 
10,680

 
33,195

 
43,875

Deemed contribution - tax sharing agreement

 

 

 

 

 
1,177

 
1,177

Dividends and distributions declared

 

 
(22,777
)
 

 
(22,777
)
 
(73,218
)
 
(95,995
)
Issuance of Class A shares

 
7,014

 
(4,125
)
 

 
2,889

 
(2,889
)
 

Share-based compensation

 
86

 

 

 
86

 
276

 
362

Other comprehensive income - cash flow hedges

 

 

 
(975
)
 
(975
)
 
(3,137
)
 
(4,112
)
Other

 

 

 

 

 

 

Balance at June 30, 2017

 
1,370,370

 
(56,914
)
 
(680
)
 
1,312,776

 
4,194,568

 
5,507,344

Net income

 

 
11,025

 

 
11,025

 
32,675

 
43,700

Deemed contribution - tax sharing agreement

 

 

 

 

 
1,488

 
1,488

Dividends and distributions declared

 

 
(28,004
)
 

 
(28,004
)
 
(73,218
)
 
(101,222
)
Issuance of Class A shares

 
326,728

 

 
(109
)
 
326,619

 
60,929

 
387,548

Share-based compensation

 
99

 

 

 
99

 
294

 
393

Other comprehensive income - cash flow hedges

 

 

 
481

 
481

 
1,273

 
1,754

Other

 
(183
)
 

 

 
(183
)
 
(475
)
 
(658
)
Balance at September 30, 2017

 
$
1,697,014

 
$
(73,893
)
 
$
(308
)
 
$
1,622,813

 
$
4,217,534

 
$
5,840,347


The accompanying notes are an integral part of these condensed consolidated financial statements.


6



MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
(unaudited)

 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Real estate investments, net
$
9,803,410

 
$
10,021,938

Property and equipment, used in operations, net
789,039

 

Cash and cash equivalents
49,500

 
259,722

Tenant and other receivables, net
12,447

 
6,385

Prepaid expenses and other assets
56,395

 
18,487

Above market lease, asset
43,407

 
44,588

Goodwill
17,915

 

Other intangible assets, net
252,107

 

Total assets
$
11,024,220

 
$
10,351,120

LIABILITIES AND PARTNERS' CAPITAL
 
 
 
Liabilities
 
 
 
Debt, net
$
4,684,717

 
$
3,934,628

Due to MGM Resorts International and affiliates
402

 
962

Accounts payable, accrued expenses and other liabilities
39,588

 
10,240

Above market lease, liability
46,403

 
47,069

Accrued interest
32,395

 
22,565

Distribution payable
116,395

 
111,733

Deferred revenue
157,725

 
127,640

Deferred income taxes, net
31,392

 
28,544

Total liabilities
5,109,017

 
4,283,381

Commitments and contingencies (Note 14)

 

Partners' capital
 
 
 
General partner

 

Limited partners: 266,045,289 and 266,030,918 Operating Partnership units issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
5,915,203

 
6,067,739

Total partners' capital
5,915,203

 
6,067,739

Total liabilities and partners’ capital
$
11,024,220

 
$
10,351,120

The accompanying notes are an integral part of these condensed consolidated financial statements.


7



MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit and per unit amounts)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Rental revenue
$
186,564

 
$
163,178

 
$
559,690

 
$
489,532

Tenant reimbursements and other
30,095

 
19,620

 
93,198

 
61,621

Gaming, food, beverage and other
65,562

 

 
65,562

 

Total revenues
282,221

 
182,798

 
718,450

 
551,153

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Gaming, food, beverage and other
43,331

 

 
43,331

 

Depreciation and amortization
66,578

 
68,662

 
203,043

 
190,573

Property transactions, net
339

 
1,662

 
18,851

 
19,104

Reimbursable expenses
29,168

 
18,983

 
90,435

 
60,112

Amortization of above market lease, net
171

 
172

 
514

 
515

Acquisition-related expenses
4,423

 
1,059

 
7,095

 
1,059

General and administrative
3,422

 
2,882

 
10,085

 
8,223

 
147,432

 
93,420

 
373,354

 
279,586

Operating income
134,789

 
89,378

 
345,096

 
271,567

Non-operating income (expense)
 
 
 
 
 
 
 
Interest income
163

 
1,480

 
2,473

 
3,039

Interest expense
(58,743
)
 
(45,544
)
 
(157,249
)
 
(134,998
)
Other non-operating expenses
(1,020
)
 
(126
)
 
(6,409
)
 
(1,438
)
 
(59,600
)
 
(44,190
)
 
(161,185
)
 
(133,397
)
Income before income taxes
75,189

 
45,188

 
183,911

 
138,170

Provision for income taxes
(5,266
)
 
(1,488
)
 
(7,760
)
 
(3,903
)
Net income
$
69,923

 
$
43,700

 
$
176,151

 
$
134,267

 
 
 
 
 
 
 
 
Weighted average Operating Partnership units outstanding:
 
 
 
 
 
 
 
Basic
266,139,175

 
245,976,800

 
266,125,252

 
243,975,052

Diluted
266,335,914

 
246,117,322

 
266,308,393

 
244,170,084

 
 
 
 
 
 
 
 
Net income per Operating Partnership unit (basic)
$
0.26

 
$
0.18

 
$
0.66

 
$
0.55

Net income per Operating Partnership unit (diluted)
$
0.26

 
$
0.18

 
$
0.66

 
$
0.55

 
 
 
 
 
 
 
 
Distributions declared per Operating Partnership unit
$
0.4375

 
$
0.3950

 
$
1.2875

 
$
1.1775

The accompanying notes are an integral part of these condensed consolidated financial statements.


8



MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
69,923

 
$
43,700

 
$
176,151

 
$
134,267

Unrealized gain (loss) on cash flow hedges, net
4,736

 
1,754

 
27,372

 
(2,992
)
Comprehensive income
$
74,659

 
$
45,454

 
$
203,523

 
$
131,275

The accompanying notes are an integral part of these condensed consolidated financial statements.


9



MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
176,151

 
$
134,267

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
203,043

 
190,573

Property transactions, net
18,851

 
19,104

Amortization of deferred financing costs and debt discount
9,391

 
8,443

Loss on retirement of debt
2,736

 
798

Amortization related to above market lease, net
514

 
515

Deemed contributions - tax sharing agreement
4,912

 
3,903

Straight-line rental revenues
14,657

 
3,820

Amortization of deferred revenue
(2,762
)
 
(1,510
)
Share-based compensation
1,516

 
943

Deferred income taxes
2,848

 

Changes in operating assets and liabilities:
 
 
 
Tenant and other receivables, net
527

 
3,399

Prepaid expenses and other assets
455

 
(4,214
)
Due to MGM Resorts International and affiliates
(560
)
 
358

Accounts payable, accrued expenses and other liabilities
(9,022
)
 
2,200

Accrued interest
9,830

 
1,256

Net cash provided by operating activities
433,087

 
363,855

Cash flows from investing activities
 
 
 
Capital expenditures for property and equipment
(795
)
 

Acquisition of Northfield, net of cash acquired
(1,034,534
)
 

Net cash used in investing activities
(1,035,329
)
 

Cash flows from financing activities
 
 
 
Net borrowings (repayments) under bank credit facility
747,375

 
(33,500
)
Proceeds from issuance of debt

 
350,000

Deferred financing costs
(17,490
)
 
(5,381
)
Proceeds from purchase of Operating Partnership units by MGP

 
387,548

Distributions paid
(337,865
)
 
(284,213
)
Net cash provided by financing activities
392,020

 
414,454

Cash and cash equivalents
 
 
 
Net increase (decrease) for the period
(210,222
)
 
778,309

Balance, beginning of period
259,722

 
360,492

Balance, end of period
$
49,500

 
$
1,138,801

Supplemental cash flow disclosures
 
 
 
Interest paid
$
137,623

 
$
125,077

Non-cash investing and financing activities
 
 
 
Non-Normal Tenant Improvements by Tenant
$
18,172

 
$
42,303

Accrual of distribution payable to Operating Partnership unit holders
$
116,395

 
$
101,222


The accompanying notes are an integral part of these condensed consolidated financial statements.

10



MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands)
(unaudited)
 
General Partner
 
Limited Partners
 
Total
Partners'
Capital
Balance at January 1, 2018
$

 
$
6,067,739

 
$
6,067,739

Net income

 
58,169

 
58,169

Deemed contribution - tax sharing agreement

 
1,231

 
1,231

Distributions declared

 
(111,733
)
 
(111,733
)
Share-based compensation

 
384

 
384

Other comprehensive income - cash flow hedges

 
16,355

 
16,355

Other

 
401

 
401

Balance at March 31, 2018

 
6,032,546

 
6,032,546

Net income

 
48,059

 
48,059

Deemed contribution - tax sharing agreement

 
1,263

 
1,263

Distributions declared

 
(114,399
)
 
(114,399
)
Share-based compensation

 
556

 
556

Other comprehensive income - cash flow hedges

 
6,281

 
6,281

Other

 
(3
)
 
(3
)
Balance at June 30, 2018

 
5,974,303

 
5,974,303

Net income

 
69,923

 
69,923

Deemed contribution - tax sharing agreement

 
2,418

 
2,418

Distributions declared

 
(116,395
)
 
(116,395
)
Share-based compensation

 
576

 
576

Other comprehensive income - cash flow hedges

 
4,736

 
4,736

Other

 
(20,358
)
 
(20,358
)
Balance at September 30, 2018
$

 
$
5,915,203

 
$
5,915,203


The accompanying notes are an integral part of these condensed consolidated financial statements.






















11



MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands)
(unaudited)
 
General Partner
 
Limited Partners
 
Total
Partners'
Capital
Balance at January 1, 2017
$

 
$
5,608,261

 
$
5,608,261

Net income

 
46,692

 
46,692

Deemed contribution - tax sharing agreement

 
1,238

 
1,238

Distributions declared

 
(94,109
)
 
(94,109
)
Share-based compensation

 
188

 
188

Other comprehensive income - cash flow hedges

 
(634
)
 
(634
)
Other

 
401

 
401

Balance at March 31, 2017

 
5,562,037

 
5,562,037

Net income

 
43,875

 
43,875

Deemed contribution - tax sharing agreement

 
1,177

 
1,177

Distributions declared

 
(95,995
)
 
(95,995
)
Share-based compensation

 
362

 
362

Other comprehensive income - cash flow hedges

 
(4,112
)
 
(4,112
)
Other

 

 

Balance at June 30, 2017

 
5,507,344

 
5,507,344

Net income

 
43,700

 
43,700

Deemed contribution - tax sharing agreement

 
1,488

 
1,488

Distributions declared and paid

 
(101,222
)
 
(101,222
)
Issuance of Operating Partnership units

 
387,548

 
387,548

Share-based compensation

 
393

 
393

Other comprehensive income - cash flow hedges

 
1,754

 
1,754

Other

 
(658
)
 
(658
)
Balance at September 30, 2017
$

 
$
5,840,347

 
$
5,840,347


The accompanying notes are an integral part of these condensed consolidated financial statements.


12



MGM GROWTH PROPERTIES LLC AND MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 — BUSINESS

Organization. MGM Growth Properties LLC (“MGP” or the “Company”) is a limited liability company that was organized in Delaware on October 23, 2015. MGP conducts its operations through MGM Growth Properties Operating Partnership LP (the “Operating Partnership”), a Delaware limited partnership that was formed on January 6, 2016 and acquired by MGP on April 25, 2016. The Company has elected to be treated as a real estate investment trust (“REIT”) commencing with its taxable year ended December 31, 2016.

MGP is a publicly traded REIT engaged through its investment in the Operating Partnership in the real property business, which primarily consists of owning, acquiring and leasing large-scale destination entertainment and leisure resorts, whose tenants generally offer casino gaming, hotel, convention, dining, entertainment and retail. MGM Resorts International (“MGM” or the “Parent”) is a Delaware corporation that acts largely as a holding company and, through its subsidiaries, owns and operates large-scale destination entertainment and leisure resorts. Pursuant to a master lease agreement (the “Master Lease”), a subsidiary of the Operating Partnership (the “Landlord”) leases the real estate assets of The Mirage, Mandalay Bay, Luxor, New York-New York, Park MGM (which was branded as Monte Carlo prior to May 2018), Excalibur, The Park, Gold Strike Tunica, MGM Grand Detroit, Beau Rivage, Borgata, and MGM National Harbor back to a subsidiary of MGM (the “Tenant”). One of the Company’s wholly-owned taxable REIT subsidiaries (“TRS”), MGP OH, Inc. owns the Hard Rock Rocksino Northfield Park (the “Rocksino”) in Northfield, OH.

    As of September 30, 2018, there were 266,045,289 Operating Partnership units outstanding in the Operating Partnership of which MGM owned 195,134,123 or 73.3% and MGP owns the remaining 26.7%. MGM’s Operating Partnership units are exchangeable into Class A shares of MGP on a one-to-one basis, or cash at the fair value of a Class A share. The determination of settlement method is at the option of MGP’s independent conflicts committee. MGM’s indirect ownership of these Operating Partnership units is recognized as a noncontrolling interest in MGP’s financial statements. A wholly owned subsidiary of MGP is the general partner of the Operating Partnership and operates and controls all of its business affairs. As a result, MGP consolidates the Operating Partnership and its subsidiaries. MGM also has ownership of MGP’s outstanding Class B share. The Class B share is a non-economic interest in MGP which does not provide its holder any rights to profits or losses or any rights to receive distributions from the operations of MGP or upon liquidation or winding up of MGP but which represents a majority of the voting power of MGP’s shares. As a result, MGP continues to be controlled by MGM through its majority voting rights, and is consolidated by MGM.

Northfield Acquisition

On July 6, 2018, the TRS completed its previously announced acquisition of the membership interests of Northfield Park Associates, LLC (“Northfield”), an Ohio limited liability company that owns the real estate assets and operations of the Rocksino (the “Northfield Acquisition”) from Milstein Entertainment LLC. Simultaneously with the close of the transaction, Northfield entered into a new agreement with an affiliate of Hard Rock Café International (STP), Inc. (“Hard Rock”), to continue to serve as the manager of the property. Refer to Note 2 and Note 3 for additional details.

On September 18, 2018, the Company entered into an agreement to sell the operations of Northfield (“Northfield OpCo”) to a subsidiary of MGM. Northfield will be added to the existing Master Lease between the Landlord and Tenant. The transaction is expected to close in the first half of 2019, subject to regulatory approvals and other customary closing conditions. The transaction was approved by the Company’s Conflicts Committee. Refer to Note 3 for additional information.

Empire City Transaction

On May 28, 2018, the Company entered into an agreement to acquire the real property associated with the Empire City Casino’s race track and casino (“Empire City”) from MGM upon its acquisition of Empire City for total consideration of $625 million, which will include the assumption of debt by the Operating Partnership with the balance through the issuance of Operating Partnership units to MGM (“Empire City Transaction”). Empire City will be added to the existing Master Lease between the Landlord and Tenant. As a result, the annual rent payment to MGP will increase by $50 million. Consistent with the Master Lease terms, 90% of this rent will be fixed and contractually grow at 2% per year until 2022. In addition, pursuant to the Master Lease, MGP will have a right of first offer with respect to certain undeveloped land adjacent to the property to the extent MGM develops additional gaming facilities and chooses to sell or transfer the property in the future. The transaction is expected to close in the first quarter of 2019, subject to regulatory approvals and other customary closing conditions.

13



NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. All adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Certain reclassifications have been made to conform the prior period presentation. Property tax expense was separately classified in prior periods and is now classified within “reimbursable expenses” in the accompanying condensed consolidated statements of operations.

The accompanying condensed consolidated financial statements and related notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.
Variable Interest Entities. The condensed consolidated financial statements of MGP include the accounts of the Operating Partnership, a VIE of which the Company is the primary beneficiary, as well as its wholly owned and majority-owned subsidiaries. MGP’s maximum exposure to loss is the carrying value of the assets and liabilities of the Operating Partnership, which represents all of MGP’s assets and liabilities. As MGP holds what is deemed a majority voting interest in the Operating Partnership through its ownership of the Operating Partnership’s sole general partner, it qualifies for the exemption from providing certain of the required disclosures associated with investments in VIEs. The condensed consolidated financial statements of the Operating Partnership include the accounts of its wholly owned subsidiary, the Landlord, which owns the real estate, a VIE of which the Operating Partnership is the primary beneficiary. As of September 30, 2018, on a consolidated basis the Landlord had total assets of $9.9 billion primarily related to its real estate assets, and total liabilities of $239 million primarily related to its deferred revenue and above market lease liability.
Noncontrolling interest. The Company presents noncontrolling interest and classifies such interest as a component of consolidated shareholders’ equity, separate from the Company’s Class A shareholders’ equity. Noncontrolling interest in the Company represents Operating Partnership units currently held by subsidiaries of MGM. Net income or loss of the Operating Partnership is allocated to its noncontrolling interest based on the noncontrolling interest’s ownership percentage in the Operating Partnership except for income tax expenses. Ownership percentage is calculated by dividing the number of Operating Partnership units held by the noncontrolling interest by the total Operating Partnership units held by the noncontrolling interest and the Company. Issuance of additional Class A shares and Operating Partnership units changes the ownership interests of both the noncontrolling interest and the Company. Such transactions and the related proceeds are treated as capital transactions.
MGM may tender its Operating Partnership units for redemption by the Operating Partnership in exchange for cash equal to the market price of MGP’s Class A shares at the time of redemption or for unregistered Class A shares on a one-for-one basis. Such selection to pay cash or issue Class A shares to satisfy an Operating Partnership unitholder’s redemption request is solely within the control of MGP’s independent conflicts committee.

Fair value measurements. Fair value measurements are utilized in the accounting and impairment assessments of its long-lived assets, assets acquired and liabilities assumed in a business combination, and goodwill and other intangible assets. Fair value measurements also affect the Company’s accounting for certain of its financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and is measured according to a hierarchy that includes: Level 1 inputs, such as quoted prices in an active market; Level 2 inputs, which are observable inputs for similar assets; or Level 3 inputs, which are unobservable inputs. The Company used the following inputs in its fair value measurements:

Level 2 inputs for its long-term debt fair value disclosures. See Note 8;
Level 2 inputs when measuring the fair value of its interest rate swaps. See Note 9; and
Level 2 and Level 3 inputs when assessing the fair value of assets acquired and liabilities assumed during the Northfield Acquisition. See Note 3.
Real estate investments. Real estate investments consist of land, buildings, improvements and integral equipment related to the Landlord. The contribution or acquisition of the real property by the Operating Partnership from MGM represent transactions between entities under common control, and as a result, such real estate was initially recorded by the Company at MGM’s historical cost basis, less accumulated depreciation (i.e., there was no change in the basis of the contributed assets), as of the contribution or acquisition dates. Costs of maintenance and repairs to real estate investments are the responsibility of the Tenant under the Master Lease.

14



Although the Tenant is responsible for all capital expenditures during the term of the Master Lease, if, in the future, a deconsolidation event occurs, the Company will be required to pay the Tenant, should the Tenant so elect, for certain capital improvements that would not constitute “normal tenant improvements” in accordance with U.S. GAAP (“Non-Normal Tenant Improvements”), subject to an initial cap of $100 million in the first year of the Master Lease increasing annually by $75 million each year thereafter. The Company will be entitled to receive additional rent based on the 10-year Treasury yield plus 600 basis points multiplied by the value of the new capital improvements the Company is required to pay for in connection with a deconsolidation event and such capital improvements will be subject to the terms of the Master Lease. Examples of Non-Normal Tenant Improvements include the costs of structural elements at the properties, including capital improvements that expand the footprint or square footage of any of the properties or extend the useful life of the properties, as well as equipment that would be a necessary improvement at any of the properties, including initial installation of elevators, air conditioning systems or electrical wiring. Such Non-Normal Tenant Improvements are capitalized and depreciated over the asset’s remaining life. Inception-to-date Non-Normal Tenant Improvements were $143.6 million through September 30, 2018.

Property and Equipment used in operations. Property and equipment used in operations are stated at cost. The property and equipment used in operations was acquired through the Northfield Acquisition and therefore recognized at fair value at the acquisition date. Property and equipment used in operations are generally depreciated over the following useful lives on a straight-line basis:
Buildings and improvements
20 to 40 years
Land improvements
10 to 20 years
Furniture, fixtures and equipment
3 to 20 years
    
The Company evaluates its property and equipment and other long-lived assets for impairment based on its classification as held for sale or to be held and used. Several criteria must be met before an asset is classified as held for sale, including that management with the appropriate authority commits to a plan to sell the asset to a third-party at a reasonable price in relation to its fair value and is actively seeking a buyer. For assets held for sale, the Company recognizes the asset at the lower of carrying value or fair market value less costs to sell, as estimated based on comparable asset sales, offers received, or a discounted cash flow model. For assets to be held and used, the Company reviews for impairment whenever indicators of impairment exist. The Company then compares the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment charge is recorded based on the fair value of the asset, typically measured using a discounted cash flow model. All recognized impairment losses, whether for assets held for sale or assets to be held and used, are recorded as operating expenses.

Goodwill and other intangible assets. Goodwill represents the excess of purchase price over fair market value of net assets acquired in business combinations. Goodwill and indefinite-lived intangible assets must be reviewed for impairment at least annually and between annual test dates in certain circumstances. The Company performs its annual impairment tests in the fourth quarter of each fiscal year. The Company will perform its first such annual impairment test in the fourth quarter of 2018.

Accounting guidance provides entities the option to perform a qualitative assessment of goodwill and indefinite-lived intangible assets (commonly referred to as step zero) in order to determine whether further impairment testing is necessary. In performing the step zero analysis the Company considers macroeconomic conditions, industry and market considerations, current and forecasted financial performance, entity-specific events, and changes in the composition or carrying amount of net assets of reporting units for goodwill. In addition, the Company takes into consideration the amount of excess of fair value over carrying value determined in the last quantitative analysis that was performed, as well as the period of time that has passed since the last quantitative analysis. If the step zero analysis indicates that it is more likely than not that the fair value is less than its carrying amount, the entity would proceed to a quantitative analysis.

Under the quantitative analysis, goodwill for relevant reporting units is tested for impairment using a discounted cash flow analysis based on the estimated future results of the Company’s reporting units discounted using market discount rates and market indicators of terminal year capitalization rates, and a market approach that utilizes business enterprise value multiples based on a range of multiples from the Company’s peer group. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Under the qualitative analysis, the license rights are tested for impairment using a discounted cash flow approach. If the fair value of an indefinite-lived intangible asset is less than its carrying amount, an impairment loss is recognized equal to the difference.
Deferred revenue. The Company receives nonmonetary consideration related to Non-Normal Tenant Improvements as they become MGP’s property pursuant to the Master Lease and recognizes the cost basis of Non-Normal Tenant Improvements

15



as real estate investments and deferred revenue. The Company depreciates the real estate investments over their estimated useful lives and amortizes the deferred revenue as additional rental revenue over the remaining term of the Master Lease once the related real estate assets are placed in service.

Revenue recognition. Rental revenue under the Master Lease is recognized on a straight-line basis over the non-cancelable term and reasonably assured renewal periods, which includes the initial lease term of ten years and all four additional five-year terms under the Master Lease, for all contractual revenues that are determined to be fixed and measurable. The difference between such rental revenue earned and the cash rent due under the provisions of the Master Lease is recorded as deferred rent receivable and included as a component of tenant and other receivables, net or as deferred revenue if cash rent due exceeds rental revenue earned.

Tenant reimbursement revenue arises from costs for which the Company is the primary obligor that are required to be paid by the Tenant or reimbursed to the Company pursuant to the Master Lease. This revenue is recognized in the same periods as the expense is incurred.

Northfield generates gaming, food, beverage and other revenue, which primarily consists of video lottery terminal (“VLT”) wager transactions and food and beverage transactions. The transaction price for a VLT wager is the difference between gaming wins and losses (net win). The Company accounts for VLT revenue on a portfolio basis given the similar characteristics of wagers by recognizing net win per gaming day versus on an individual wager basis. The transaction price of food and beverage contracts is the amount collected from the customer or stand-alone selling price for such goods and services and is recorded when the delivery is made. Sales and usage-based taxes are excluded from revenues.
Income tax provision. For interim income tax reporting the Company estimates its annual effective tax rate and applies it to its year-to-date ordinary income. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur. The Company’s effective income tax rate was 7.0% and 4.2% for the three and nine months ended September 30, 2018, respectively.
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recorded a tax provision of $2.1 million on the TRS operations for the three and nine months ended September 30, 2018.
The Landlord is required to join in the filing of a New Jersey consolidated corporation business tax return under the New Jersey Casino Control Act and include in such return its income and expenses associated with its New Jersey assets and is thus subject to an entity level tax in New Jersey. Although the consolidated New Jersey return also includes MGM and certain of its subsidiaries, the Company is required to record New Jersey state income taxes in the accompanying financial statements as if the Landlord was taxed for state purposes on a stand-alone basis. The Company and MGM have entered into a tax sharing agreement providing for an allocation of taxes due in the consolidated New Jersey return. Pursuant to this agreement, the Landlord will only be responsible for New Jersey taxes on any gain that may be realized upon a future sale of the New Jersey assets resulting solely from an appreciation in value of such assets over their value on the date they were contributed to the Landlord by a subsidiary of MGM. MGM is responsible for all other taxes reported in the New Jersey consolidated return and, accordingly, the related income tax balances related to such taxes is reflected within noncontrolling interest within the accompanying financial statements. No amounts were due to MGM under the tax sharing agreement as of September 30, 2018 and December 31, 2017.

Recently issued accounting standards.  In January 2017, FASB issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Under the amended guidance, the Company will perform its annual goodwill impairment tests (and interim tests if any are determined to be necessary) by comparing the fair value of its reporting units with their carrying value, and an impairment charge, if any, will be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company early adopted ASU 2017-04 and it did not have a material effect on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. ASU 2017-12 amends the hedge accounting recognition and presentation requirements

16



in order to improve the transparency and understandability of information about an entity’s risk management activities, and simplifies the application of hedge accounting. The Company does not expect the adoption of ASU 2017-12 to have a material effect on its consolidated financial statements.

In 2016 and 2018, the FASB issued ASC 842 “Leases (Topic 842),” which replaces the existing guidance in ASC 840, “Leases.” ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (“ROU”) asset and a corresponding lease liability. For finance leases, the lessee will recognize interest expense and amortization of the ROU asset and for operating leases the lessee will recognize a straight-line total lease expense. The Company will adopt ASC 842 on January 1, 2019 utilizing the simplified transition method. The Company has established a cross-functional implementation team to evaluate the impact of the new standard and is in the process of executing the implementation plan which included performing an assessment of its existing leasing arrangements. The Company plans to elect the package of practical expedients available under ASC 842, which includes that the Company need not reassess the lease classification for existing contracts. Accordingly, the Master Lease will continue to be classified as an operating lease and, as such, the Company does not expect the adoption of ASC 842 to have a material effect on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers (Topic 606) which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods and services. The Company adopted ASC 606 on January 1, 2018 and it did not have a material impact on the Company’s financial statements.
NOTE 3 — NORTHFIELD ACQUISITION

As discussed in Note 1, on July 6, 2018 the TRS completed its acquisition of 100% of the membership interests of Northfield for a purchase price of approximately $1.1 billion. The Company funded the acquisition through a $200 million draw on the term loan A facility and a $655 million draw under the revolving credit facility, with the remainder of the purchase price paid with cash on hand. The acquisition will expand MGP’s real estate assets and diversify MGP’s geographic reach.

The Company recognized 100% of the assets and liabilities of Northfield at fair value at the date of the acquisition. Under the acquisition method, the fair value was allocated to the assets acquired and liabilities assumed in the transaction. The allocation of fair value for substantially all of the assets and liabilities is preliminary and may be adjusted up to one year after the acquisition. 

The following table sets forth the preliminary purchase price allocation (in thousands):
Fair value of assets acquired and liabilities:
 
Property and equipment used in operations
$
792,807

Cash and cash equivalents
35,831

Racing and gaming licenses
228,000

Customer list
25,000

Goodwill
17,915

Other assets
9,598

Other liabilities
(38,786
)
 
$
1,070,365


As discussed above, the Company recognized the identifiable intangible assets at fair value. The estimated fair values of the intangible assets were preliminarily determined using methodologies under the income approach based on significant inputs that were not observable. The goodwill is deductible for tax purposes and all of the goodwill was assigned to the TRS segment. The goodwill is primarily attributable to the synergies expected to arise after the acquisition.

Consolidated results. For the period from July 6, 2018 through September 30, 2018, Northfield’s net revenue was $65.6 million, operating income was $16.9 million and net income was $14.8 million.
    
Pro forma information (unaudited). The operating results for Northfield are included in the accompanying consolidated statements of operations from the date of acquisition. The following unaudited pro forma consolidated financial information for

17



the Company has been prepared assuming the Northfield Acquisition had occurred as of January 1, 2017. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2017.

The pro forma results include adjustments related to purchase accounting, primarily interest expense related to debt used to fund the acquisition, and the conformance of accounting policies. The following table represents MGP's and the Operating Partnership’s unaudited pro forma information for the nine-months ended September 30, 2018 and 2017:
 
2018
 
2017
 
(unaudited, in thousands, except per share amounts)
Net revenues
$
858,051

 
$
740,444

Net income
190,358

 
134,957

Net income attributable to Class A shareholders
52,247

 
33,327

Basic net income per Class A share
0.74

 
0.57

Diluted net income per Class A share
0.73

 
0.57


As discussed in Note 1, on September 18, 2018, the Company entered into an agreement to sell the operations of Northfield to a subsidiary of MGM for approximately $275 million, subject to customary purchase price adjustments. The TRS will concurrently liquidate and the real estate assets of Northfield will be transferred to the Landlord. The Landlord will lease such real estate assets to the Tenant pursuant to an amendment to the Master Lease. As a result, the annual rent payment will increase by $60 million, prorated for the remainder of the lease year. Consistent with the Master Lease terms, 90% of this rent will be fixed and contractually grow at 2% per year until 2022. The transaction is expected to close in the first half of 2019, subject to regulatory approvals and other customary closing conditions. The Northfield OpCo sale will be accounted for as a transaction between entities under common control and therefore the Company will continue to carry the Northfield OpCo operating assets and liabilities as held and used until the close of the transaction.
NOTE 4 — REAL ESTATE INVESTMENTS
The carrying value of real estate investments is as follows:
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Land
$
4,143,513

 
$
4,143,513

Buildings, building improvements, land improvements and integral equipment
8,411,369

 
8,512,334

 
12,554,882

 
12,655,847

Less: Accumulated depreciation
(2,751,472
)
 
(2,633,909
)
 
$
9,803,410

 
$
10,021,938


NOTE 5 — PROPERTY AND EQUIPMENT USED IN OPERATIONS

The carrying value of property and equipment used in operations of the TRS is as follows:
 
September 30, 2018
 
(in thousands)
Land
$
392,500

Buildings, building improvements and land improvements
382,683

Furniture, fixtures and equipment
17,998

Construction in progress
230

 
793,411

Less: Accumulated depreciation
(4,372
)
 
$
789,039


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NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consisted of the following:
 
September 30, 2018
 
(in thousands)
Goodwill
$
17,915

 
 
Indefinite-lived intangible assets:
 
Racing and gaming licenses
228,000

Total indefinite-lived intangible assets
228,000

Finite-lived intangible assets:
 
Customer lists
25,000

Less: Accumulated amortization
(893
)
 
24,107

Total finite-lived intangible assets, net
24,107

Total other intangible assets, net
$
252,107

    
Goodwill. A summary of changes in the Company’s goodwill by reportable segment is as follows:
 
 
2018
 
 
Balance at January 1
 
Acquisitions
 
Balance at September 30
 
 
(in thousands)
Goodwill, net by reportable segment:
 
 
 
 
 
 
TRS
 
$

 
$
17,915

 
$
17,915


Other intangible assets, net. The Company recognized an indefinite-lived intangible asset for the racing and gaming licenses acquired in the Northfield Acquisition and recognized an intangible asset related to Northfield’s customer list, which is amortized on a straight-line basis over its estimated useful life of seven years.
    
Total amortization expense related to intangible assets was $0.9 million for the three and nine months ending September 30, 2018. Remaining estimated future amortization is as follows:
 
(in thousands)
Years ending December 31,
 
2018
$
893

2019
3,571

2020
3,571

2021
3,571

2022
3,571

Thereafter
8,930

 
$
24,107

NOTE 7 — MASTER LEASE
Pursuant to the Master Lease, the Tenant has leased the Company’s real estate properties (other than the real estate associated with the TRS). The Master Lease is accounted for as an operating lease and has an initial lease term of ten years with the potential to extend the term for four additional five-year terms thereafter at the option of the Tenant.

On April 1, 2018, the second 2.0% fixed annual rent escalator went into effect. Rent payments under the Master Lease for the third lease year of April 1, 2018 through March 31, 2019 are currently $770.3 million.


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Rental revenues from the Master Lease for the three and nine months ended September 30, 2018 were $186.6 million and $559.7 million, respectively. The Company also recognized revenue related to tenant reimbursements and other of $30.1 million and $93.2 million for the three and nine months ended September 30, 2018, respectively.
NOTE 8 — DEBT
Debt consists of the following:
 
September 30,
 
December 31,
 
2018
 
2017
 
(in thousands)
Senior secured credit facility:
 
 
 
Senior secured term loan A facility
$
470,000

 
$
273,750

Senior secured term loan B facility
1,803,750

 
1,817,625

Senior secured revolving credit facility
565,000

 

$1,050 million 5.625% senior notes, due 2024
1,050,000

 
1,050,000

$500 million 4.50% senior notes, due 2026
500,000

 
500,000

$350 million 4.50% senior notes, due 2028
350,000

 
350,000

 
4,738,750

 
3,991,375

Less: Unamortized discount and debt issuance costs
(54,033
)
 
(56,747
)
 
$
4,684,717

 
$
3,934,628

Operating Partnership credit agreement. At September 30, 2018, the Operating Partnership senior credit facility consisted of a $470 million term loan A facility, a $1.8 billion term loan B facility, and a $1.4 billion revolving credit facility. In March 2018, the Operating Partnership repriced its term loan B interest rate to LIBOR plus 2.00% and extended the maturity of the term loan B facility to March 2025, effective in August 2018. In addition, the Operating Partnership will receive a further reduction in pricing to LIBOR plus 1.75% upon a corporate rating upgrade by either S&P or Moody’s.
In June 2018, the Operating Partnership amended its credit agreement to provide for a $750 million increase of the revolving facility to $1.4 billion, provide for a $200 million increase on the term loan A facility, and extend the maturity of the revolving facility and the term loan A facility to June 2023. Additionally, the revolving and term loan A facilities were repriced to LIBOR plus 1.75% to 2.25% determined by reference to the total net leverage ratio pricing grid. In addition, amortization payments under the term loan A facility’s will start on the last business day of each calendar quarter beginning September 30, 2019, for an amount equal to 0.625% of the aggregate principal amount of the term loan A outstanding as of the amendment effective date.

The Operating Partnership permanently repaid $4.6 million and $17.6 million of the term loan A and term loan B facility in the three and nine months ended September 30, 2018, respectively, in accordance with the scheduled amortization. At September 30, 2018, the interest rate on the term loan A facility was 4.49% and the interest rate on the term loan B facility was 4.24%, and the interest rate on the revolving credit facility was 4.37%. At September 30, 2018, $565 million was drawn on the revolving credit facility. The Operating Partnership was in compliance with its financial covenants at September 30, 2018.
Refer to Note 9 for further discussion of the Company’s interest rate swap agreements related to the term loan B facility.
Fair value of long-term debt. The estimated fair value of the Company’s long-term debt was $4.7 billion at September 30, 2018 and $4.1 billion at December 31, 2017. Fair value was estimated using quoted prices for identical or similar liabilities in markets that are not active (level 2 inputs).

Deferred financing costs.  The Company recognized non-cash interest expense related to the amortization of deferred financing costs of $3.3 million and $9.4 million and during the three and nine months ended September 30, 2018, respectively. The Company recognized non-cash interest expense related to the amortization of deferred financing costs of $2.8 million and $8.4 million and during the three and nine months ended September 30, 2017, respectively.

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NOTE 9 — DERIVATIVES AND HEDGING ACTIVITIES

The Company uses derivative instruments to mitigate the effects of interest rate volatility inherent in its variable rate debt, which could unfavorably impact our future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.

The Operating Partnership is party to interest rate swaps to mitigate the interest rate risk inherent in its senior secured term loan B facility. In May 2017 in connection with the term loan B re-pricing, the Company amended its outstanding interest rate swap agreements. As of September 30, 2018 and December 31, 2017, the Company pays a weighted average fixed rate of 1.844% on total notional amount of $1.2 billion and the variable rate received will reset monthly to the one-month LIBOR, with no minimum floor. As of September 30, 2018 and December 31, 2017, all of the Company’s derivative financial instruments have been designated as cash flow hedges and qualify for hedge accounting.
    
The fair values of the Company's interest rate swaps are $38.3 million and $11.3 million as of September 30, 2018 and December 31, 2017, respectively, based upon the present value of expected future cash flows using observable, quoted LIBOR swap rates for the full term of the swap (level 2 inputs). Interest rate swaps valued in net unrealized gain positions are recognized as asset balances within the prepaid expenses and other assets. Interest rate swaps valued in net unrealized loss positions are recognized as liability balances within accounts payable, accrued expenses and other liabilities. For the three and nine months ended September 30, 2018 and 2017, there was no material ineffective portion of the change in fair value derivatives. For the three and nine months ended September 30, 2018, the Company recorded offsets to interest expense of $0.6 million and interest expense of $0.1 million, respectively, related to the swap agreements. For the three and nine months ended September 30, 2017, the Company recorded interest expense of $2.0 million and $7.4 million, respectively, related to the swap agreements.
NOTE 10 — SHAREHOLDERS’ EQUITY AND PARTNERS’ CAPITAL

MGP dividends and Operating Partnership distributions. The following table presents the distributions declared and paid by the Operating Partnership and the dividends declared and paid by MGP for the nine months ended September 30, 2018 and September 30, 2017. MGP pays its dividends with the receipt of its share of the Operating Partnership’s distributions.

Declaration Date
 
Record Date
 
Distribution/ Dividend Per Unit/ Share
 
Payment Date
 
Operating Partnership Distribution
 
MGP Class A Dividend
(in thousands, except per unit and per share amount)
2018
 
 
 
 
 
 
 
 
 
 
March 15, 2018
 
March 30, 2018
 
$
0.4200

 
April 15, 2018
 
$
111,733

 
$
29,777

June 15, 2018
 
June 29, 2018
 
$
0.4300

 
July 16, 2018
 
$
114,399

 
$
30,492

September 17, 2018
 
September 28, 2018
 
$
0.4375

 
October 15, 2018
 
$
116,395

 
$
31,024

 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
March 15, 2017
 
March 31, 2017
 
$
0.3875

 
April 13, 2017
 
$
94,109

 
$
22,282

June 15, 2017
 
June 30, 2017
 
$
0.3950

 
July 14, 2017
 
$
95,995

 
$
22,777

September 15, 2017
 
September 29, 2017
 
$
0.3950

 
October 13, 2017
 
$
101,222

 
$
28,004


Dividends with respect to MGP’s Class A shares are characterized for federal income tax purposes as taxable ordinary dividends, capital gains dividends, non-dividend distributions or a combination thereof.

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NOTE 11 — ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income attributable to Class A shareholders are as follows:
 
Cash Flow Hedges
 
(in thousands)
Balance at December 31, 2017
$
3,108

Other comprehensive income before reclassifications
27,241

Amounts reclassified from accumulated other comprehensive income to interest expense
131

Other comprehensive income
27,372

       Less: Other comprehensive (income) attributable to noncontrolling interest
(20,076
)
Balance at September 30, 2018
$
10,404

NOTE 12 — NET INCOME PER CLASS A SHARE
    
The table below reconciles basic and diluted net income per Class A share. Diluted weighted average Class A shares outstanding includes an adjustment for potential dilution of share-based compensation awards outstanding and does not assume conversion of the Operating Partnership units held by MGM as such conversion would be antidilutive. Net income per share has not been presented for the Class B shareholder as the Class B share is not entitled to any economic rights.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except share amounts)
Numerator:
 
 
 
 
 
 
 
Net income attributable to Class A shares - basic and diluted
$
19,484

 
$
11,025

 
$
48,460

 
$
33,053

Denominator:
 
 
 
 
 
 
 
Weighted average Class A shares outstanding (1) - basic
71,005,052

 
60,614,664

 
70,991,129

 
58,612,916

Effect of dilutive shares for diluted net income per Class A share (2)
196,739

 
140,522

 
183,141

 
195,032

Weighted average Class A shares outstanding (1) - diluted
71,201,791

 
60,755,186

 
7