Land and Buildings Investment Management, LLC (“Land and Buildings”)
sent a letter to shareholders of MGM Resorts International (NYSE:MGM)
(“MGM” or the “Company”) announcing that today it is distributing
definitive proxy materials in support of electing Land and Buildings’
four independent, highly qualified, nominees to the Board of MGM who
Land and Buildings believes have the experience and independent
perspectives needed to fix what we view as the broken boardroom culture
at MGM and explore value-unlocking alternatives.
The full text of the letter is as follows:
April 20, 2015
Dear Fellow MGM Shareholder:
Land and Buildings is an investment firm that specializes in investing
in publicly traded real estate and real estate related securities. We
are seeking your support to elect four independent, highly-qualified
individuals to the Board of Directors of MGM (the “Board”) — Matthew
Hart, Richard Kincaid, Jonathan Litt and Marc Weisman. We believe that
these candidates have experience in precisely the areas in which MGM has
a poor track record and where the Board needs the most help: lodging,
balance sheet management, capital allocation, real estate expertise and
exploration of alternatives in today’s capital markets. Our nominees
will bring fresh perspectives and accountability to a Board that we
believe is in desperate need of improved stewardship.
We urge you to vote the enclosed GOLD proxy card TODAY by
telephone, over the Internet, or by signing, dating and returning your GOLD
proxy card in the postage-paid envelope provided.
MGM is a Relentless Underperformer
The Board has presided over consistent underperformance to its peers. Strikingly,
since Jim Murren became Chairman and CEO in 2008, MGM has underperformed
its peer group median by 453%.
MGM Has Underperformed its Peers by Approximately 453% Since Jim
Murren Became Chairman and CEO
Table Reflects MGM's Performance Relative to that of its Peers over the
Last 1-, 3- and 5-Year Periods and Since Mr. Murren Became CEO
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1-Year
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3-Year
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5-Year
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Since Mr. Murren
became CEO
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Gaming Peers
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Boyd
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-29.4%
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-39.2%
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-5.8%
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-195.6%
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Las Vegas Sands
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8.6%
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29.9%
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-141.8%
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-1327.0%
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Penn National
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-53.6%
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-30.2%
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-132.0%
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-197.3%
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Pinnacle
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-65.4%
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-182.3%
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-239.2%
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-563.5%
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Wynn Resorts
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18.1%
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19.3%
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-72.1%
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-348.6%
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Lodging Peers
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Hilton
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-56.7%
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N/A
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N/A
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N/A
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Hyatt
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-35.8%
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-5.8%
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-2.7%
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N/A
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Marriott
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-81.9%
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-91.6%
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-166.7%
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-452.5%
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Starwood
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-34.0%
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-23.7%
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-54.6%
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-469.9%
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Source: Bloomberg; Note: As of March 16, 2015 unaffected
closing price
Jim Murren became Chairman and CEO on December 1, 2008
Figures represent MGM total shareholder returns relative to
each peer company
Gaming peers consist of all publicly traded casino companies
disclosed in MGM’s 2015 proxy peers excluding Caesars, which filed
for Chapter 11 bankruptcy earlier this year
Lodging peers consist of a subset of MGM's 2015 proxy peers
that are focused in higher chain-scale and vacation destinations
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The Board has clearly failed to appreciate the magnitude of this
underperformance as the status quo has continued: poor capital
allocation, poor balance sheet management and failure to capitalize on
the underlying value embedded in the Company’s real estate.
MGM’s Persistent and Consistent Undervaluation
The Board has failed to address the continual and substantial EBITDA
multiple discount to its closest peers1, in our view. We
believe one of the key reasons for the persistent discounted valuation
is the Company’s overleveraged balance sheet combined with a history of
poor investment decisions (e.g. CityCenter). Rather than take advantage
of the current favorable capital markets environment to reduce debt – which
could help MGM close its persistent valuation gap – the Board
continues to make the same capital-allocation mistakes it made leading
up to the Company teetering on bankruptcy seven years ago. The Company
is currently further leveraging its balance sheet by embarking on $5
billion of new development.
MGM’s Valuation is Significantly Discounted to its Closest Peers
While Leverage Levels are Significantly Higher
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Wynn Resorts
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Las Vegas Sands
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MGM Resorts
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EV/2015E EBITDA
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18.4x
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14.9x
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11.9x
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Las Vegas Sands
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Wynn Resorts
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MGM Resorts
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2014 Net Debt/EBITDA
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1.2x
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3.0x
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5.4x
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Source: JP Morgan, April 13, 2015
Note: For MGM, adjusted net debt and EBITDA calculations back
out 49.0% stake of MGM Macau and add back MGM’s share of
CityCenter and Borgata debt and EBITDA
Note: For Wynn, adjusted net debt and EBITDA calculations back
out 27.7% stake of Wynn Macau debt and EBITDA
Note: For Sands, adjusted net debt and EBITDA calculations back
out 29.7% stake of Sands China debt and EBITDA
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Significant Upside to Intrinsic Value in MGM
We believe the net asset value of MGM is at least $33 per share,
indicating an approximately 50%
further upside to intrinsic value above and beyond the 13% rise in the
stock since our announcement of Board nominations and proposal to
enhance shareholder value on March 17, 20152. We have
utilized our extensive experience in evaluating real estate, lodging and
gaming companies to arrive at what we believe is the intrinsic value of
the company and there is broad agreement within the investment community
based on our conversations that MGM is meaningfully undervalued.
MGM’s Credibility Issues
Prior to our involvement, there was no evidence that the Board
had recently thoroughly evaluated alternatives to unlock shareholder
value. For example:
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Decide for Yourself: If the management team was truthfully
evaluating a REIT, would they have done a $1.25 billion bond offering
in November 2014 that was subject to an onerous prepayment penalty?
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Knee-Jerk Reaction: After meeting with us – but prior to any
announcement of our public involvement – MGM’s Chairman and CEO
suggested on CNBC that the Company might explore a REIT proposed
structure. We believe that Mr. Murren’s assertion that the Company
could explore a REIT structure lacks credibility and that his
statements were nothing more than an attempt to pacify the numerous
shareholders who have told us they believe that the REIT structure
should be independently evaluated during this window of opportunity to
permanently revalue MGM’s assets at higher levels.
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Too Little, Too Late: Under pressure from our director
nominations, MGM announced a $400 million special dividend from
CityCenter. We believe the CityCenter dividend is being used by the
Company to deflect the justified criticism it has received about the
CityCenter project – which nearly put the Company into Chapter 11 and
whose massive debt load has contributed to MGM’s persistent valuation
gap. To this day – the senior executives at MGM have not been held
accountable for the value destruction at MGM, including CEO and
Chairman Jim Murren – who pioneered and widely supported the project –
and Robert Baldwin – a current director and CEO of CityCenter since
inception.
We are Concerned about the Board’s Poor
Stewardship
We believe there are a host of reasons which indicate that the Board
would benefit from shareholder-elected independent directors.
Specifically we highlight the following tangible issues which we believe
indicate that the Board would benefit from shareholder-elected
independent directors:
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Lack of accountability for consistent underperformance
During
Jim Murren’s tenure as Chairman and CEO, MGM has underperformed its
peer group median by 453% and traded at a large EBITDA multiple
discount to its closest peers – yet the Board has demonstrated no
ability or willingness to hold his team accountable for such poor
performance.
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A history of poor compensation practices
CEO and
Chairman, Jim Murren, has received $64 million since 2009 and the
Company has received a consistent compensation grade of “D” from Glass
Lewis since 2011. The Company’s short-term incentive bonus is based
off of annual EBITDA targets rather than total shareholder return –
and – Mr. Murren has sold the vast majority of his stock, owning 30%
fewer shares then he did the year prior to being appointed CEO3.
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Entrenchment techniques
Shareholders need to
look no further than the dead-hand put incorporated into recent bond
offerings which serve no purpose other than to entrench the
incumbents; if a majority of the Board is replaced, the bond would be
immediately required to be pre-paid in full.
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Being disingenuous with the Company’s annual meeting dates
This
year, the Board accelerated both the record date and meeting date
materially from their historical dates in what we believe was an
effort to limit the full impact of shareholder democracy.
The Lead Independent Director Should Be Beyond
Reproach
A board led by Lead Independent Director Roland Hernandez pressured one
of our nominees, Richard Kincaid, to resign from the Vail Resorts, Inc.
(NYSE:MTN) (“Vail Resorts”) Board of Directors.
Roland Hernandez is currently MGM’s Lead Independent Director and has
been on the Board for 13 years, making it difficult for him, in our
view, to be truly independent, or in a position to hold the combined
Chairman and CEO accountable. We would also ask shareholders to consider
Mr. Hernandez's background and most recent maneuver at Vail Resorts:
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* Mr. Hernandez, in addition to being Lead Independent Director of
MGM, is the Lead Independent Director of Vail Resorts, where he
and one of our nominees, Richard Kincaid, have jointly sat on the
Board for eight years. Just days after Land and Buildings sent Mr.
Hernandez a letter requesting that in his capacity as Lead
Independent Director of MGM to form a special committee of
independent board members and hire an independent financial
advisor to analyze all available options to create sustained
shareholder value, Mr. Kincaid was given an ultimatum by Vail–
pull out of Land and Buildings' slate for MGM or resign from the
board of Vail Resorts. Mr. Kincaid resigned from Vail Resorts’
Board.
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* We find it notable that Mr. Hernandez was on the Lehman Brothers
board of directors from 2005-2008 and was a member of the Finance
and Risk Committee at the time of the Lehman collapse.
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* Mr. Hernandez received the lowest support of any director at
MGM’s 2014 shareholder meeting with just 65% of the outstanding
common stock voting in support of his candidacy despite the fact
that neither ISS nor Glass Lewis issued a recommendation against
him.
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* Mr. Hernandez also received the lowest support of any director
at the last six Vail Resorts shareholder meetings – averaging 84%
of the outstanding common stock voting in support of his candidacy
despite the fact that neither ISS nor Glass Lewis issued a
recommendation against him. This compares to Richard Kincaid’s
average support of 93% of the outstanding common stock over the
same period.
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L&B Board Nominees: Highly-Qualified and
Independent
The Land and Buildings nominees will not only seek to ensure that the
Company takes a clear-eyed assessment of the Land and Buildings REIT
proposal, among others, but that the Board adopts a culture of
accountability to shareholders. Given the substantial underperformance
of MGM and the Board’s lackluster response to this underperformance, we
believe that the addition of our independent nominees would compel the
Company to take the necessary steps to close its persistent and material
discount to its potential valuation.
Land and Buildings’ slate of proposed nominees possess track records
that speak for themselves:
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Matthew J. Hart: Former President, COO and CFO, Hilton
Hotels Corporation (NYSE: HLT), and former CFO, Host Marriott
Corporation
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Richard Kincaid: Former President and CEO of Equity Office
Properties Trust
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Jonathan Litt: Founder and CIO of Land and Buildings
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Marc Weisman: Former Partner of Weil Gotshal & Manges, and
former CFO of Oppenheimer & Co., Inc.
Now is the Time to Unlock Value at MGM
Land and Buildings has conducted extensive due diligence to understand
the potential value and feasibility of its proposals to MGM. This has
included consulting with leading legal advisors with extensive
experience in the area of REIT conversions in an effort to propose a
structure that would be cost and tax efficient.
There are a number of factors that make now an ideal time for MGM to
explore our proposals:
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Fundamentals in Las Vegas are especially strong
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Limited new construction benefits MGM’s premier position
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All relevant gaming and lodging metrics indicate cycle
“sweet-spot”
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Numerous recent precedent transactions make our proposal compelling
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Two other gaming companies have either implemented a REIT
structure or have publicly committed to the structure and in each
of these situations tremendous value was created for shareholders
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MGM will be a tax-payer for the first time in 2015
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The urgency of creating a tax efficient REIT structure has
never been higher with a growing tax bill looming
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Debt Repayment Opportunity
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The window is open for MGM to repay half of its debt in the
near-term with no penalty
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A significant portion of MGM’s debt matures in the next 12
months
THE MARKET PRICE INCREASED SUBSTANTIALLY SINCE WE RELEASED OUR
PROPOSAL – DRIVING UP THE COMPANY’S STOCK PRICE BY 13% AND CREATING $1.2
BILLION IN MARKET VALUE
THE COMPANY’S RESISTANCE TO TAKING MEANINGFUL ACTION, HOWEVER,
COULD CAUSE MUCH OF THAT VALUE CREATION TO ERODE
We have been extremely disappointed by the lack of appropriate urgency
and apparent unwillingness of the Board and Management to take
meaningful action. This includes the Board’s apparent decision to ignore
for months our call to hire independent financial advisors to evaluate
our proposals and other available options for the benefit of all
shareholders. As a result of the Company’s apparent inaction, we were
compelled to do what the Board had not done, retain an independent
financial advisor, Houlihan Lokey, to conduct a thorough strategic
review of our proposed structure.
Whether it is the proposal Land and Buildings has outlined, or a
variation thereof, we believe it is important for the Land and Buildings
nominees to be in the boardroom of MGM to ensure that all value creating
ideas are evaluated.
Vote FOR our Nominees on the GOLD Proxy Card
Today
As detailed above, we believe MGM has lacked the Board stewardship
necessary to create long term shareholder value. Today, significant
value is being trapped in MGM and we believe our Board nominees can help
unlock that value. We believe the net asset value of MGM is $33 per
share, indicating an approximately 50%
further upside to intrinsic value. We believe strongly that our four
candidates would help realized the intrinsic value for the benefit of
all our fellow shareholders.
Sincerely,
Jonathan Litt
Founder & CIO
Land and Buildings
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REMEMBER:
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Your broker provides for voting by telephone or via the
Internet.
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Please follow the easy instructions on the enclosed proxy card.
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If you have any questions or need assistance in voting
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your shares, please call our proxy solicitor,
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INNISFREE M&A INCORPORATED
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TOLL-FREE, at 1-888-750-5834.
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LAND & BUILDINGS CAPITAL GROWTH FUND, L.P., LAND & BUILDINGS INVESTMENT
MANAGEMENT, LLC AND JONATHAN LITT (COLLECTIVELY, "LAND & BUILDINGS") AND
MATTHEW J. HART, RICHARD KINCAID AND MARC A. WEISMAN (TOGETHER WITH LAND
& BUILDINGS, THE "PARTICIPANTS") FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC") ON APRIL 16, 2015 A DEFINITIVE PROXY STATEMENT
AND ACCOMPANYING FORM OF PROXY CARD TO BE USED IN CONNECTION WITH THE
PARTICIPANTS' SOLICITATION OF PROXIES FROM THE STOCKHOLDERS OF MGM
RESORTS INTERNATIONAL (THE "COMPANY") FOR USE AT THE COMPANY'S 2015
ANNUAL MEETING OF STOCKHOLDERS (THE "PROXY SOLICITATION"). ALL
STOCKHOLDERS OF THE COMPANY ARE ADVISED TO READ THE DEFINITIVE PROXY
STATEMENT AND OTHER DOCUMENTS RELATED TO THE PROXY SOLICITATION BECAUSE
THEY CONTAIN IMPORTANT INFORMATION, INCLUDING ADDITIONAL INFORMATION
RELATED TO THE PARTICIPANTS. THE DEFINITIVE PROXY STATEMENT AND AN
ACCOMPANYING PROXY CARD HAVE BEEN FURNISHED TO SOME OR ALL OF THE
COMPANY'S STOCKHOLDERS AND ARE, ALONG WITH OTHER RELEVANT DOCUMENTS,
AVAILABLE AT NO CHARGE ON THE SEC'S WEBSITE AT HTTP://WWW.SEC.GOV/.
IN ADDITION, INNISFREE M&A INCORPORATED, LAND & BUILDING'S PROXY
SOLICITOR, WILL PROVIDE COPIES OF THE DEFINITIVE PROXY STATEMENT AND
ACCOMPANYING PROXY CARD WITHOUT CHARGE UPON REQUEST.
___________
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1 Closest peers represent Las Vegas Sands and Wynn
Resorts, which are the most comparable in size, revenue sources
and geographic footprint.
2 Stock price through April 15, 2015.
3 Based on the number of shares beneficially owned as
of March 30, 2015, as disclosed in MGM's proxy statement filed on
April 13, 2015, and the number of shares beneficially owned as of
June 12, 2009 (the year following Mr. Murren’s appointment as
CEO), as disclosed in MGM's proxy statement filed on June 25, 2009.
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Copyright Business Wire 2015