This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see "Forward-Looking Statements" for a discussion of the uncertainties, risks, and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this quarterly report on Form 10-Q, and the audited consolidated financial statements and notes for the fiscal year endedDecember 31, 2020 , which were included in our annual report on Form 10-K, filed with theSEC onFebruary 23, 2021 . Executive Overview MGP is one of the leading publicly traded REITs engaged in the acquisition, ownership and leasing of large-scale destination entertainment and leisure resorts, whose tenant generally offers diverse amenities including casino gaming, hotel, convention, dining, entertainment and retail amenities. MGP is a limited liability company that was formed inDelaware inOctober 2015 . MGP conducts its operations through theOperating Partnership , aDelaware limited partnership formed byMGM inJanuary 2016 , that became a subsidiary of MGP inApril 2016 . We elected to be taxed as a real estate investment trust ("REIT") forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2016 . As ofJune 30, 2021 , we generate all of our revenues by leasing our real estate properties through a wholly owned subsidiary of theOperating Partnership to a subsidiary ofMGM pursuant to the MGM-MGP Master Lease which requires the tenant to pay substantially all costs associated with each property, including real estate taxes, ground lease rent, insurance, utilities and routine maintenance, in addition to the base rent and the percentage rent, each as described below. The lease has an initial lease term of ten years that began onApril 25, 2016 with the potential to extend the term for four additional five-year terms thereafter at the option of the tenant (other than with respect toMGM National Harbor , whose initial lease term ends onAugust 31, 2024 ; refer to Note 5 for further detail of the lease term). Additionally, the lease provides MGP with a right of first offer with respect to any future gaming development byMGM on the undeveloped land adjacent to Empire City, which MGP may exercise shouldMGM elect to sell such property in the future. Following the formation transaction inFebruary 2020 of the MGP BREIT Venture, owned 50.1% by theOperating Partnership and 49.9% by a subsidiary of BREIT, MGP BREIT Venture owns the real estate assets ofMGM Grand Las Vegas andMandalay Bay and leases such real estate properties back to a wholly owned subsidiary ofMGM under the MGP BREIT Venture lease. The lease provides for a term of thirty years with two ten-year renewal options. As ofJune 30, 2021 , our portfolio, including properties owned by the MGP BREIT Venture, includes seven large-scale entertainment and gaming-related properties inLas Vegas :Mandalay Bay ,MGM Grand Las Vegas , The Mirage, Park MGM,New York-New York , Luxor and Excalibur, and The Park, a dining and entertainment district located betweenNew York-New York and Park MGM. Outside ofLas Vegas , we also own five market-leading casino resort properties:MGM Grand Detroit inDetroit, Michigan , Beau Rivage and Gold Strike Tunica, both of which are located inMississippi , Borgata inAtlantic City, New Jersey , andMGM National Harbor inPrince George's County, Maryland . We also own the casino properties ofMGM Northfield Park inNorthfield, Ohio and Empire City inYonkers, New York . Additionally, we expect to grow our portfolio through acquisitions with third parties and withMGM . In pursuing external growth initiatives, we will generally seek to acquire properties that can generate stable rental revenue through long-term, triple-net leases with tenants with established operating histories, and we will consider various factors when evaluating acquisitions. InMarch 2021 , certain subsidiaries ofMGM delivered a notice of redemption to us covering approximately 37.1 millionOperating Partnership units that they held which was satisfied with aggregate cash proceeds of approximately$1.2 billion using cash on hand together with the proceeds from the issuance of Class A shares. InMay 2021 , we entered into an agreement to acquire the real estate assets ofMGM Springfield fromMGM for$400 million of cash consideration.MGM Springfield will be added to the MGM-MGP Master Lease between us andMGM . Following the closing of the transaction, the annual rent payment under the MGM-MGP Master Lease will increase by$30 million ,$27.0 million of which will be fixed and contractually grow at 2% per year with escalators subject to the tenant 23 -------------------------------------------------------------------------------- meeting an adjusted net revenue to rent ratio. The transaction is expected to close in the fourth quarter of 2021, upon receipt of interim regulatory approvals from theMassachusetts Gaming Commission and the satisfaction of other customary closing conditions. Final regulatory approvals, which are not necessary for the transaction to close, are expected to be received within nine to twelve months following the interim regulatory approval. Until final regulatory approvals are obtained, the parties will be subject to a trust agreement, which will provide for the property to be placed into a trust (or, atMGM's option, be returned toMGM ) during the interim period in the event that the regulator finds reasonable cause to believe that the Company may not be found suitable. The property will then remain in trust until a final determination regarding our suitability is made. InAugust 2021 , we entered into an agreement with VICI Properties, Inc. ("VICI") andMGM whereby VICI will acquire us in a stock-for-stock transaction (such transaction, the "VICI Transaction"). Pursuant to the agreement, MGP Class A shareholders will have the right to receive 1.366 shares of newly issued VICI stock in exchange for each MGP Class A share outstanding andMGM will have the right to receive 1.366 units of the new VICI operating partnership ("VICI OP") in exchange for eachOperating Partnership unit held byMGM . The fixed exchange ratio represents an agreed upon price of$43 per share of MGP Class A share to the five-day volume weighted average price of VICI stock as of the close of business onJuly 30, 2021 . Subsequent to the exchange, VICI OP will redeem the majority ofMGM's VICI OP units for cash consideration of$4.4 billion , withMGM retaining approximately 12.2 million VICI OP units. MGP's Class B share that is held byMGM will be cancelled. The transaction is expected to close in the first half of 2022, subject to customary closing conditions, regulatory approvals, and approval by VICI stockholders. COVID-19 Update The COVID-19 pandemic has not had a material impact on our operations; however, we cannot estimate the duration of the pandemic and potential impact on our business if our properties will be required to close again, or if the tenant (or the guarantor) is otherwise unable or unwilling to make rental payments. For further information regarding the potential impact of COVID-19 on our operations, refer to "Liquidity and Capital Resources" below.
Combined Results of Operations for MGP and the Operating Partnership
Overview
The following table summarizes our financial results for the three and six
months ended
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Total Revenues$ 194,342 $ 194,342 $ 388,684 $ 403,912 Total Expenses 68,314 68,348 136,673 336,875 Net income (loss) 73,697 97,025 189,106 (28,297) Net income (loss) attributable to Class A shareholders 43,889 41,016 103,487 (8,732) Revenues Rental revenue. Rental revenues, including ground lease and other, for both the three months endedJune 30, 2021 and 2020 were$194.3 million . Rental revenues, including ground lease and other, for the six months endedJune 30, 2021 and 2020 were$388.7 million and$403.9 million , respectively. The$15.2 million , or 3.8%, decrease for the year-to-date period was due primarily to a decrease in rental revenues as a result of the removal ofMandalay Bay from the MGM-MGPMaster Lease relating to the MGP BREIT Venture Transaction inFebruary 2020 .
Expenses
Depreciation. Depreciation expense was$57.8 million and$58.4 million for the three months endedJune 30, 2021 and 2020, respectively. Depreciation expense was$115.7 million and$120.5 million for the six months endedJune 30, 2021 and 2020, respectively. The$4.7 million , or 3.9%, decrease for the year-to-date period was primarily due to the contribution ofMandalay Bay to the MGP BREIT Venture inFebruary 2020 . Property transactions, net. Property transactions, net for the three months endedJune 30, 2021 and 2020 were less than$0.1 million and$(0.1) million , respectively. Property transactions, net for the six months endedJune 30, 2021 and 2020 were$0.9 million and$195.0 million , respectively. The prior year-to-date period included the difference between the carrying value 24 -------------------------------------------------------------------------------- of theMandalay Bay real estate assets and the net consideration received that resulted in a loss on sale of theMandalay Bay real estate assets of$193.1 million inFebruary 2020 . Ground lease expense. Ground lease expense was$5.9 million for each of the three months endedJune 30, 2021 and 2020. Ground lease expense was$11.8 million for each of the six months endedJune 30, 2021 and 2020 Acquisition-related expenses. Acquisition-related expenses were$0.3 million for both the three and six months endedJune 30, 2021 , which related to our agreement to acquire the real estate assets ofMGM Springfield fromMGM . See Note 1 in the accompanying financial statements for a description of the transaction. Acquisition expenses were$0.4 million and$1.0 million for the three and six months endedJune 30, 2020 , which related to the MGP BREIT Venture Transaction. General and administrative expenses. General and administrative expenses were$4.3 million and$3.7 million for the three months endedJune 30, 2021 and 2020, respectively. General and administrative expenses were$8.0 million and$8.6 million for the six months endedJune 30, 2021 and 2020, respectively. Other Expenses Income from unconsolidated affiliate. Income from unconsolidated affiliate was$25.3 million and$25.5 million for the three months endedJune 30, 2021 and 2020, respectively, and$50.8 million and$38.8 million for the six months endedJune 30, 2021 and 2020, respectively. Our Income from unconsolidated affiliate is entirely attributable to income from our investment in MGP BREIT Venture. The$11.9 million , or 30.8%, increase in the year-to-date period primarily reflects the timing of the MGP BREIT Venture formation inFebruary 2020 and, accordingly, the current year-to-date period having a full six months of income attributable to the venture. Other expenses, excluding income from unconsolidated affiliate, were$75.8 million and$51.9 million for the three months endedJune 30, 2021 and 2020, respectively. The$23.9 million , or 46.1%, increase for the quarterly period was primarily related to the$6.5 million loss on unhedged interest rate swaps, net for the three months endedJune 30, 2021 compared to the$1.6 million gain on unhedged interest rate swaps, net for the three months endedJune 30, 2020 , as well as an increase in interest expense due to an increase in outstanding debt due to theJune 2020 issuance of the$800 million 4.625% senior notes due 2025 and the issuance of$750 million 3.875% senior notes due 2029 inNovember 2020 . Other expenses, excluding income from unconsolidated affiliate, were$109.1 million and$130.5 million for the six months endedJune 30, 2021 and 2020, respectively. The$21.4 million , or 16.4%, decrease for the year-to-date period was primarily related to the$28.6 million gain on unhedged interest rate swaps, net for the six months endedJune 30, 2021 compared to the$10.5 million loss on unhedged interest rate swaps, net, for the six months endedJune 30, 2020 , in addition to the six months endedJune 30, 2020 containing a$18.1 million loss on retirement of debt relating to our repayment of the term loan A and term loan B facilities. This was partially offset by an increase in interest expense due to an increase in debt period over period relating to the issuance of the$800 million 4.625% senior notes due 2025 inJune 2020 and the issuance of$750 million 3.875% senior notes due 2029 inNovember 2020 .
Provision for Income Taxes
Our effective tax rate was a provision on income before income taxes of 2.3% and 2.5% for the three months endedJune 30, 2021 and 2020, respectively. Our effective tax rate was a provision of 2.4% on income before taxes and a provision of 14.7% on loss before income taxes for the six months endedJune 30, 2021 and 2020, respectively. The effective tax rate in the six months endedJune 30, 2020 was impacted by the loss resulting from the MGP BREIT Venture Transaction, which provides no federal or state income tax benefit due to our REIT status. Refer to Note 2 of the accompanying financial statements for additional discussion regarding income taxes.
Non-GAAP Measures
Funds From Operations ("FFO") is net income (computed in accordance withU.S. GAAP), excluding gains and losses from sales or disposals of property (presented as property transactions, net), plus depreciation, as defined by theNational Association of Real Estate Investment Trusts , plus our share of depreciation of our unconsolidated affiliate. Adjusted Funds From Operations ("AFFO") is FFO as adjusted for amortization of financing costs and cash flow hedges; our share of amortization of financing costs of our unconsolidated affiliate; non-cash compensation expense; straight-line rental revenue (which is defined as the difference between contractual rent and cash rent payments, excluding lease incentive asset amortization); our share of straight-line rental revenues of our unconsolidated affiliate; amortization of lease incentive asset and deferred revenue relating to non-normal tenant improvements; acquisition-related expenses; non-cash ground lease rent, net; 25 -------------------------------------------------------------------------------- other expenses; (gain) loss on unhedged interest rate swaps, net; our share of provision for income taxes of unconsolidated affiliate; and provision for income taxes. Adjusted EBITDA is net income (computed in accordance withU.S. GAAP) as adjusted for gains and losses from sales or disposals of property (presented as property transactions, net); depreciation; our share of depreciation of our unconsolidated affiliate; amortization of financing costs and cash flow hedges; our share of amortization of financing costs of our unconsolidated affiliate; non-cash compensation expense; straight-line rental revenue; our share of straight-line rental revenues of our unconsolidated affiliate; amortization of lease incentive asset and deferred revenue relating to non-normal tenant improvements; acquisition-related expenses; non-cash ground lease rent, net; other expenses; (gain) loss on unhedged interest rate swaps, net; our share of provision for income taxes of unconsolidated affiliate; interest income; interest expense (including amortization of financing costs and cash flow hedges); our share of interest expense (including amortization of financing costs) of our unconsolidated affiliate; and provision for income taxes. FFO, FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA are supplemental performance measures that have not been prepared in conformity with accounting principles generally accepted inthe United States ("U.S. GAAP") that management believes are useful to investors in comparing operating and financial results between periods. Management believes that this is especially true since these measures exclude depreciation expense and management believes that real estate values fluctuate based on market conditions rather than depreciating in value ratably on a straight-line basis over time. The Company believes such a presentation also provides investors with a meaningful measure of the Company's operating results in comparison to the operating results of other REITs. Adjusted EBITDA is useful to investors to further supplement AFFO and FFO and to provide investors a performance metric which excludes interest expense. In addition to non-cash items, the Company adjusts AFFO and Adjusted EBITDA for acquisition-related expenses. While we do not label these expenses as non-recurring, infrequent or unusual, management believes that it is helpful to adjust for these expenses when they do occur to allow for comparability of results between periods because each acquisition is (and will be) of varying size and complexity and may involve different types of expenses depending on the type of property being acquired and from whom. FFO, FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA do not represent cash flow from operations as defined byU.S. GAAP, should not be considered as an alternative to net income as defined byU.S. GAAP and are not indicative of cash available to fund all cash flow needs. Investors are also cautioned that FFO, FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA as presented, may not be comparable to similarly titled measures reported by other REITs due to the fact that not all real estate companies use the same definitions. 26 --------------------------------------------------------------------------------
The following table provides a reconciliation of the Company's consolidated net income to FFO, AFFO and Adjusted EBITDA:
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