Dangerous Knowledge

This note was originally published at 8am on May 02, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A little knowledge is dangerous. So is a lot.”

-Albert Einstein


I have a tremendous amount of respect for what Einstein’s independent thinking did for this world, and I love that risk management quote. No matter what you do or do not know this morning, there’s this interconnected Global Macro market’s last price.


US Dollar driven correlation-risk to currency, commodity, and stocks market prices is running at its highest level since Q2 of 2008. While it’s Dangerous Knowledge to have marked-to-market models on your desktop to help you price this real-time risk, it’s doubly dangerous to summarize the uncertainty associated with this risk with partisan politics.


Since neither the Manic Media nor 90% of Washington/Wall Street got what a Crashing Currency meant in Q2 of 2008, we don’t expect consensus to provide any proactive thought leadership on the risk management topic this time. Whether it’s the US Dollar Index’s relationship to the price of Oil, Gold, or even Volatility, the similarities to the second quarter of 2008 are borderline glaring at this point.


The most market relevant mathematical learning since Einstein’s Relativity has been Chaos and Complexity Theory. It, unlike Efficient Market Theory, accepts uncertainty as a grounding principle. The Keynesian Kingdom’s top brass doesn’t do uncertainty. Allegedly, this time they know exactly what’s going on out there in this gargantuan ecosystem of colliding factors that we call the Global Economy.


What’s going on in Global Macro markets may very well be trivial. Market prices and the trailing correlations that impacted them are historical facts. What’s “not clear” (to quote The Bernank’s favorite career risk management qualifier from last week) is what can be quantified as causal over a long period of time. “Not clear” that is, to the professional politicians who are accountable to the US Dollar Debauchery math.


Here’s what the US Dollar did last week:

  1. Down another -1.4% week-over-week to a new YTD low
  2. Down -9.8% from its January, 2011 price and down for the 14th week out of the last 18
  3. Down -17.5% from June 2010

Wait. What does June 2010 have to do with anything other than making Groupthink Geithner’s record as a credible US Dollar stability guy anything short of a national embarrassment? June 2010 is when the US Dollar was high and prices at the US pumps were a lot lower.


38% lower, actually…


Looking ahead at our kids getting out of school and the summer driving season (hearing from my expert network that both still occurs this year), I think most Americans think a -17.5% meltdown in their Crashing Currency and a +38% tax at the gas pump is a bad trade – for them.


Have no fear however, the President is here in his weekly address (Saturday): “When oil companies are making huge profits and you’re struggling at the pump, and we’re scouring the federal budget for spending we can afford to do without, these tax giveaways aren’t right.”


Right. right…


Meanwhile, Brazil’s President had a different take than blaming Petrobras: “Guaranteeing purchasing power means playing tough on inflation. This is one of the fundamentals of our political economy, and one we’ll never let up on.”


At least there’s a healthy political bid/ask spread out there in terms of what left-leaning President knows the least about Complexity Theory. With American central planners leaning more left than even Europe and Brazil at this point – who would have thunk…


Back to the Global Scorecard – here were the big Global Macro currency and commodity moves associated with the US Currency Crashing week-over-week:

  1. The Euro = UP another +2.1% to $1.48
  2. The Chinese Yuan = UP another +0.3% to a new all-time high of $6.49
  3. CRB Commodities Index (19 commodities) = UP another +0.8% to a new 2-year weekly closing high of 370
  4. WTI Crude Oil = UP another +1.5% to a new 2-year weekly closing high of $113.93
  5. Gold = UP another +3.5% to a new all-time high of $1556 (all-time is a long time)
  6. Copper = DOWN -5.4% at $4.17/lb

Oops, one of these things is not like the other. That’s right, Dr. Copper is reminding those of us with some knowledge about real-time market signals that Global Growth Slows As Inflation Accelerates. Maybe that’s why Chinese and Brazilian stocks lost -3.3% and -1.4% last week, respectively. They no likey The Inflation from The Bernank.


US stocks had another great week, rallying like Japanese equities have for decades to lower-long-term-highs on decelerating volume and scary skew signals. But don’t worry – this Currency Crash thing is cool, like it was in Q2 of 2008, until it isn’t…


In the Hedgeye Asset Allocation Model I proved that I still know a little about learning from my many prior mistakes. I ended the week with my highest invested position of 2011, dropping my allocation to Cash to 34% (at the last immediate-term overbought peak in US Equities I had 62% in Cash, so at least this time is different in that I am riding out more of The Inflation trade’s gains).


The Hedgeye Asset Allocation Model’s week-end allocations are now as follows:

  1. Cash = 34% (down from 40% last week and 52% in the last week of March)
  2. International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound - CYB, FCX, and FXB)
  3. Commodities = 12% (Gold, Oil, and Corn – GLD, OIL, and CORN)
  4. International Equities = 9% (China – CAF)
  5. Fixed Income = 9% (US Treasury Flattener – FLAT)
  6. US Equities = 6% (Technology – XLK)

A little knowledge of the Bin Laden takedown would have helped me be levered-long everything US Equities into this week’s start. Having Dangerous Knowledge like that though is a lot of knowledge I’ll pray to do without!


My immediate-term support and resistance lines for Gold are now $1515 and $1557, respectively. My immediate-term support and resistance lines for oil are now $111.47 and $115.61. And my immediate-term support and resistance lines for the SP500 are now 1338 and 1377, respectively.


I plan on taking down both my gross (Hedgeye Asset Allocation invested position) and net long positions (Hedgeye Portfolio: 17 LONGS, 11 SHORTS) into this morning’s newsy strength.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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Quarter was definitely better than expected even with the low hold. Sustainability is the question with convention business seasonally dissipating.



The Street clearly liked what they saw in MGM’s release this morning.  If we take MGM’s word for it, and add back the $34MM low hold impact, then results would indeed have been 10% better than we estimated for their wholly owned properties.   Without any adjustments, reported revenue of $1,505MM was 1% above our estimate, consolidated property level EBITDA was in line with our estimate and total EBITDA plus MGM’s pro-rata share of JV property level EBITDA was $3MM below our projection.  


All in all, this was a good quarter for MGM.  The real question is whether moderating Vegas trends will be enough to keep investors excited for the balance of the year.



1Q Detail:

Strip revenue was $3MM above our estimate while EBITDA was $11MM better.  That’s before factoring MGM’s $40MM hold impact on revenues and $34MM EBITDA impact.  It seems to us that management’s calculation of the flow through on the hold impact is a little high since there are usually a decent amount of rebates on gross gaming revenue – especially on table play.  

  • Comparable RevPAR growth of 11% was about 3% better than we estimated.  As a reminder, some of MGM’s properties already introduced resort fees in 2010, like Bellagio, MGM Grand and Mandalay Bay.  For most of the lower end properties resorts fees skewed the comparison – looking at MGM’s adjusted 2010 numbers though, it appears that the resort fee ranged between $6-9/night at these properties
  • Casino revenues were lower than we expected.  As a reminder, we indicated in our preview that while RevPAR would be strong, that strength would not be reflected in casino revenues. Therefore, we modeled low single digit casino revenue growth for most Strip properties.  With low hold, the results were clearly worse.
  • On the bright side, cost controls were a lot tighter than we projected, attributing to the better EBITDA performance
  • While many properties had great results,  double digit RevPAR didn’t always translate into improved results:
    • Bellagio – RevPAR was up 13% but net revenue was flat;  EBITDA was down 13%
    • MGM Grand – RevPAR was up 14% but net revenue was only up 1%; EBITDA was down 4%
    • Excalibur – RevPAR was up 15.5% but net revenue was only up 3%; EBITDA was only up 3%
  • Some properties also had very easy comps which get much harder for the balance of the year:
    • Circus Circus – EBITDA grew 170% YoY, off of $1.7MM of EBITDA.  EBITDA for the next 2 quarters in 2010 was $5.5 and $6.1MM, respectively.  Therefore, growth going forward should be much more moderate
    • Monte Carlo EBITDA increased 113% YoY off of $6.4MM of EBITDA but produced EBITDA of $27MM for the last 9 months of 2010.
    • Luxor EBITDA increased 58% YoY, off of $13MM in 1Q2010. In the balance of 2010, Luxor produced EBITDA of $48MM.
    • Mandalay Bay posted a 44% EBITDA increase, off of the $25MM 1Q2010 EBITDA, which was down 40% YoY.  The balance of 2010 showed average EBITDA declines of 15%.
  • MGM Detroit results were a little better than we projected due to lower promotional expenditures. 
    • The 2H2011 faces a difficult comp here as EBITDA in 2H2010 increased 24% YoY
  • The Mississippi properties were a little weaker than we projected due to lower revenues at Beau Rivage
  • City Center EBITDA was $18MM above our estimate, largely due to high hold at Aria
    • Factoring out high hold, Aria’s EBITDA would have been $6MM better than our estimate due to lower operating expenses.  Operating expenses benefited by $6MM of a tax refund.
  • MGM Macau EBITDA beat our estimate by $10MM, despite being materially above the Street to begin with.
    • It looks like we overestimated direct play volumes, and therefore hold was better than we expected.  Fixed expenses were also a little lower than we projected.


History may not exactly repeat itself, but it certainly does rhyme.  We continue to notice strong similarities between 2008 and the present. 


Today the ISM non-manufacturing index posted a larger than expected fall in April to 52.8; the weakest reading for this index since August and most of the Index’s components were feeling the same pressure.  That magnitude of the drop shown in today’s April number is unnerving with the 4.5 point month-to-month decline the largest in more than two years.


Most of the survey’s components weakened in April, including the forward-looking new orders index, which plunged 11.4 points to 52.7 and the business activity index, which fell 6 points to 53.7.  Showing smaller declines were the employment index, which fell 1.8 to 51.9 and backlogs, which fell 0.5 to 55.5.  Supplier deliveries gained 1.5 to 53.


In addition to the ISM Non-Manufacturing Index slowing, the ADP number for April was equally disappointing; the ADP figure of 179,000 was below consensus of 198,000 and last month’s revised 207,000.  The combination of the ADP number and a weak ISM Non-Manufacturing survey increases the chance that the Friday jobs picture will also miss expectations.  That ISM survey’s employment index has hit its lowest level since September 2010, a month when private net job creation was closer to 100,000.


What is the ISM telling us about the potential for GDP growth going forward?  For the first three months of 1Q11, the ISM nonmanufacturing index averaged 58.8, which coincided with 1.8% GDP growth.  With the index at 52.8 in April and the manufacturing side of the economy slowing, it’s quite a stretch to arrive at the consensus GDP growth number for 2Q11 of +3.2%.


Howard Penney

Managing Director





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Brazil’s “High and Controlled” Inflation Rate

Conclusion: We continue to receive official confirmation of our longstanding call that inflation will surprise to the upside in Brazil, leaving a path of slower growth and higher interest rates in its wake. Further, we’re flagging the potential for structural inflation to take hold in Brazil – an outcome that would have negative consequences for the region at large.


Conclusion: Bearish on Brazilian Equities and real-denominated debt for the intermediate-term TREND. Bullish on Brazil’s inflation-linked bonds for the intermediate-term TREND.


This morning, we got a plethora of very sobering news regarding the slope and trajectory of inflation within Brazil (higher, in both cases). Both are going in the wrong direction for holders of Brazilian equities or real-denominated fixed income assets. Holders of Brazil’s inflation-linked bonds should continue to cheer on these developments, however.


As Dilma Rousseff (Brazil’s Obama), Alexandre Tombini (Brazil’s Bernanke), and Guido Mantega (Brazil’s Geithner) talk down, up, and around inflation, respectively, we continue to receive confirmation of our call that inflation is a growing problem in Brazil – one that will surprise consensus expectations to the upside over the intermediate-term TREND. Consider the following takeaways from an Alexandre Tombini interview with famed Brazilian economic columnist, Miriam Leitao provided by our Portuguese-speaking Managing Director Moshe Silver: 

  • A major take-away was his statement that inflation over the coming 12 months may well exceed the current upper limit of the bank’s target range (+4.5% +/- 200bps);
  • Tombini said the uncontrolled influx of foreign capital – US$35 billion in the last three months alone – is undoing the central bank’s work to restrict credit; and
  • Tombini affirmed that there is no political interference with the bank’s programs, and reaffirmed that inflation would be returned to current target by the end of 2012. 

By the end of 2012??


As we pointed out in prior reports, Brazil’s political elite has become increasingly comfortable with higher rates of inflation over the near-to-intermediate term, opting instead to slow the pace and magnitude of rate increases in what we feel is a misguided attempt to preserve near-term economic growth.


As a point of reference, consensus for Brazil’s 2011 CPI YoY growth rate have been ripping to the upside as of late (lagging our early November call and alongside a subsequent (-12.7%) decline in the Bovespa Index). The latest 2011 Brazilian CPI forecasts are as follows: 

  • Bloomberg Consensus: +5.5%
  • Brazil Central Bank Economist Survey: 6.37% 

Brazil’s “High and Controlled” Inflation Rate - 1


By comparison, our proprietary models peg Brazilian CPI to average in a range of +6.42% YoY to +6.67% YoY throughout 2011 – with the balance of risks skewed to the upside, given that Rousseff and Mantega appear to have successfully halted real appreciation for the time being through a series of newly implemented foreign capital controls and levies dating back to October.


The real is down (-2.6%) in a straight line vs. the US Dollar since it peaked on April 26 – the largest decline of any currency internationally vs. the USD over that duration. As we outlined in a couple of reports back in March, we expect Brazilian CPI to continue making higher-highs on top of our own street-high current estimates. Make no mistake, the confluence of recent policies designed to curb real appreciation may eventually become the final nail in the coffin with regard to Brazil’s current bout with The Stagflation.


“We’ve Got It Under Control,” Says Mantega


As central bank chief Tombini talks up Brazilian inflation towards Hedgeye estimates, Finance Minister Guido Mantega – Brazil’s equivalent of Tim Geithner – basically affirmed that neither he, nor the central government of Brazil have any idea what they’re doing to address it. His quotes are “Youtube-able”, and rather than attempt to paraphrase them, we’ll just paste Moshe’s translated notes below. We’re certain you’ll arrive at a similar conclusion as our own: 

  • In public testimony before the senate economic affairs committee, Mantega said Brazil is experiencing a new form of inflation that has never been studied in economic literature: “high and controlled.” He said the consumer price index could rise to 6% this year, but that would not be out of control. Rather than try to guide inflation back to the 4.5% midpoint – the original “inflation targeting” policy that Tombini executed for many years as a senior official at the central bank – Mantega says the objective now is for inflation to not exceed the 6.5% ceiling of the target range.
  • Mantega, speaking before the Senate, said he is comfortable with 6% inflation for 2011. Mantega articulated a significant shift in the government’s approach, saying he is comfortable with inflation at the upper end of the central bank’s target range (6%-6.5% ceiling) rather than trying to hold inflation to the midpoint of the range (4.5%), which has always been the “inflation targeting” policy.
  • Mantega blames current inflation on an “outbreak of inflation in developing nations,” saying producers fell asleep at the switch and “didn’t realize that there were countries where people were eating more, causing an increase in food consumption.” Mantega also blamed meteorological conditions and financial speculators as causes for the rise in inflation.
  • Mantega says things aren’t so bad – after all, Brazil’s inflation is still below Russia’s (9.4%) and India’s (8.8%). But Brazil has other issues, including that many contracts are inflation indexed, meaning the cost of certain goods and services will automatically rise based on increases in reported CPI, creating a vicious cycle.
  • One Senator angrily told Mantega that inflation is a major concern for all Brazilians, especially now that the central banker has thrown in the towel and said it is no longer possible to control inflation for the rest of this year. The senator said Mantega was being Pollyannaish and refusing to confront reality. Mantega reportedly did not have any new ideas about reducing prices. 

The most important takeaways from his testimony are threefold: 

  • Brazil will experience a period of higher inflation, likely at or near the upper end of the central bank’s target range;
  • The Brazilian government will be relatively comfortable with this higher rate(s) of inflation and will likely have a muted policy response as a result of it being “controlled”; and
  • Brazilian officials, much like The Bernank and his Fed cronies, blame current higher rates of inflation on emerging market demand, the weather, and speculators in commodity markets. 

Apparently, it seems the entire developing world took a cue from Jackson Hole to eat more, drive more, work more, shop more, etc… We obviously disagree with that conclusion and reject it as another fallacy of the Keynesian Kingdom. The great 20th century economist Ludwig von Mises has our back on this one:


"The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy."

The net result of this marginally dovish stance out of the central bank and central government is that inflation has the potential to become a structural issue in Brazil as it once was many moons ago. Two factors that support this budding thesis is the fact that Brazil is highly susceptible to a price-wage spiral, given the left-leaning tendencies of the central government and its massive influence on big business in Brazil (see: Vale, Petrobras, BNDES loans to private firms). We anticipate that Rousseff will be quick to give in to worker demands for higher wages should inflation continue to do what we expect it will do. Additionally, financing needs for the 2014 World Cup, the 2016 Olympics, and a bevy  of infrastructure and energy investments will require a combination of public spending, BNDES loans, and foreign capital to the tune of roughly R$3.3 trillion (US $2.1T) over the next 3-5 years. Putting that in context, Brazil’s Gross Domestic Product is only US $2.02T (2010).


A shift on the margin towards incremental hawkishness and fiscal conservatism SOONER, rather than later, would be a very, very good thing for Brazil’s long-term economic prosperity. We’ll leave you and whomever from the Brazilian bureaucracy that is reading this note with the following quote from Milton Friedman:


"Inflation is a disease, a dangerous and sometimes fatal disease, a disease that if not checked in time can destroy a society."


Moshe Silver

Managing Director


Darius Dale



Brazil’s “High and Controlled” Inflation Rate - 2


A recent article on YUM, published on an online Franchise News website called Blue Mau Mau, put forth some interesting perspectives on the company’s franchise business in the United States.  YUM has been facing mounting problems in the U.S. for some time and the evidence this article presents suggests that these issues may prove difficult to resolve. 


Last year, at YUM annual investor conference in NY, the company centered its message to the investment community on “three pillars of growth”: China, YRI, and Taco Bell.  The critical component here is Taco Bell, because it represents the life of the U.S. business, with over 60% of the operating profit for the division.  The U.S. Division accounts for 35% of total operating profit, as of December 2010.


In the most recent quarter, the US business underperformed as Taco Bell had a very disappointing quarter with SSS flat in the quarter but seeing a negative reversal in trends following a lawsuit that made allegations regarding the ingredients of Taco Bell’s beef.  From the initiation of the lawsuit through the end of the quarter, SSS slumped 2% versus +4% during the first period of the quarter.  The plaintiff’s law firm subsequently dropped the case but there is significant damage to the brand’s public image. 


The company now has to continue to strive to repair that image while also mend relations with the franchisee community.  The beef lawsuit has proven to be a tipping point, of sorts, for franchisees.  According to the article on, Taco Bell’s Franchise Management Advisory Council (FRANMAC) sent an email to franchisees with 14 bullet points that the Board had taken up on the franchisees behalf on topics such as the lack of transactions being driven by value propositions and the need for a reduction in the costs of new buildings.  The letter also implored the franchisees to partake in a “Town Hall Call” to have their voices heard. 


The body of the article raises several questions regarding the malaise that Taco Bell faces in the U.S. and the root cause(s) of it.  The most interesting questions posed by the author are: “Is YUM advancing its growth in China at the expense of its struggling domestic fast food restaurants?  Has Yum lost touch with the American consumer? Is it so wedded to old ideas that the marketplace has moved beyond them?”


These are all relevant questions not only for Taco Bell, but KFC and Pizza Hut too.  Until this quarter, Taco Bell has not faced the same degree of commercial adversity that has become so familiar to KFC and Pizza Hut.  Now, thinking about it, the investment community has been hearing for several years about the innovations or iterations that are going to fix these ailing brands.  Alas, nothing seems to work. 


On the one hand, it is understandable that the company is focusing on international operations and, some might say, YUM have been ahead of the game in this respect.  Emerging Markets offer significant growth opportunity for the company and the infrastructure that has been built up in China is highly impressive.  Nonetheless, it is important for investors to note that the malaise in YUM’s domestic business only amplifies the leverage of the stock to China and emerging markets.  To the extent that there is volatility in those geographies for any reason and YUM suffers, do not expect the domestic market to offer much stability. 


Drawing from a book I recently read, and applied to a thought-piece on Starbucks, YUM’s brands in the USA have a long-term secular problem that will require significant time and capital to fix.  I’m once again referring to the book The New Rules of Retail, by Robin Lewis and Michael Dart, an impactful book that offers a comprehensive account of the history and future of retail with in depth accounts of the key macro trends that impacted the retail industry and the executive decisions that impacted companies. 


While I encourage anyone interested in retail to read the book, I can attempt to sum it up the key consumer shifts that Lewis and Dart outline pertaining to “Wave III” (post 2000):

  • From needing “stuff” to wanting experiences
  • From conformity to customization
  • From plutocracy to democracy
  • From wanting new to demanding new and demanding now
  • From self to community

The shift from ubiquitous brands such as GAP and Levi’s to niche brands, from large chains to small brands, and from (perceived-to-be) socially irresponsible firms to (perceived-to-be) socially responsible firms certainly corroborates with The New Rules of Retail thesis.  I see the first bullet as being most crucial here; the chains that offer an experience, and the anticipation of such, are thriving while those standing still in this regard are faltering.  In my view, KFC, Taco Bell, and Pizza Hut are standing still.


As FRANMAC sees it, there are some key steps that Taco Bell could take to address its issues.   I’ve outlined a few of the fourteen below.  For the rest, please see the image at the end of this note or visit


INEFFECTIVE ADVERTISING: A core responsibility of our advertising agency is to produce creative that effectively promotes our menu.  Ads in the past 12 to 18 months have been largely ineffective and we believe that an agency review should take place.  Taco Bell Corporate, in conjunction with FRANMAC should immediately undertake an agency review.  Without a doubt, we will learn new things, obtain fresh ideas, and be further ahead, even if we decide to stay with the incumbent agency.


TRYING TO DO TOO MUCH AT ONE TIME (not focusing on the core)We have either a real or perceived quality problem at Taco Bell.  Until such time that we reinvigorate our base business, we should redeploy the resources that are utilized on HMR, Oasis, and Breakfast to focus on our quality perception and fixing our core.


DRIVING VALUE CAN BE DIFFICULT (I wonder how the MCD franchisees are feeling as transactions slow?): The value proposition as currently being executed is not driving transactions, and squeezing margins beyond a reasonable tolerance.


SALES ARE NOT GETTING ANY BETTER: We do not understand the unwillingness to allow DMA's to run the Beef Quality spot while senior management says we just have to wait until we start running value again.  The business will turn around then.  Well, it didn't.  Now what?


GIVEN YUM FOCUS ON ROI THIS WAS VERY SURPRISING: All mandates must have an adequate return on investment.


A PERCEIVED LACK OF DIRECTION: There continues to be an ongoing lack of alignment around the Refresh program.


QUESTIONS ABOUT HOW SOON TACO BELL WILL REALLY BE GROWING UNITS AGAIN:  We believe there is a need to cut 20-25% out of the cost of a new building to make the economic model work.


I understand that franchisees can get emotional when sales and profitability are down.  The article even describes one Pizza Hut franchisee’s view that YUM’s “hardball tactics” in counteracting pushback from Pizza Hut franchisees have reached “Syrian” proportions.  Whether or not franchisees are categorically correct on every gripe they have at the moment, they are on the front lines dealing with real issues.  On the other side of the equation, any franchisor at any company will tell you that franchise relationships are not perfect, but strong.  As always, the truth lies somewhere in the middle.





Howard Penney

Managing Director


Good quarter but with seasonally slower convention activity, is it sustainable?


“Our improved results are broadly based throughout our resort portfolio. Performance at our Las Vegas properties was driven by increased hotel occupancy and room rates.  MGM Grand Detroit had another impressive quarter and remains the market leader. Results from joint ventures reflected record quarters at both MGM Macau and CityCenter. Our belief that the Las Vegas recovery is underway is supported by our first quarter operating results and our positive early second quarter trends.”


- Jim Murren, MGM Resorts International Chairman and CEO




  • Net revenue: $1.5BN; Adjusted property EBITDA: $364MM; Wholly owned adjusted property EBITDA: $301MM
  • "Rooms revenue grew by 13% led by a 16% increase in Las Vegas Strip REVPAR"
  • "Casino revenue decreased 5% mainly as a result of a lower than normal table games hold percentage"
    • "The overall table games hold percentage in the first quarter of 2011 was below the low end of the Company’s normal range of 19% to 23%, which affected Adjusted Property EBITDA attributable to wholly-owned operations by approximately $34 million. The overall table game hold percentage in the first quarter of 2010 was near the mid-point of the Company’s normal range.  Slot revenues increased 1% compared to the prior year quarter. "
  • CityCenter:
    • Adjusted property EBITDA $64MM and net revenue of $262MM
    • Aria net revenue: $225MM and EBITDA was $55MM
      • "Aria’s hold percentage was above the high end of its normal range in the current quarter which positively impacted Adjusted Property EBITDA by approximately $13 million"
      • ADR: $201; Occ: 86%; RevPAR: $172
    • Crystals: $6MM adjusted EBITDA
    • "Recorded a $24 million loss on debt retirement related to the write-off of debt issuance costs in connection with the refinancing of its credit facility in January 2011."
  • MGM Macau: $146MM Adjusted property EBITDA
  • "The Company received approximately $31 million in distributions from MGM Macau during the first quarter of 2011."
  • Corporate finance stuff:
    • Debt: $12.3BN; incl $2.6BN of R/C borrowings ($826MM of availability)
    • "Repaid the remaining $325 million of its 8.375% senior subordinated notes in February at maturity."
    • $1.1BN  of total liquidity



  • Seeing some positive trends in the second quarter
  • Convention room nights represented 20% of their mix vs. 15% last year. It's the best convention Q they had since 2007, which allowed them to yield up rates.
  • Expect full year convention mix to be 2% better than last year or up 14% YoY
  • Consumer spending is strengthening and they will take advantage of this through a strong event calender.  Revenue per occupied room was up 3% in the quarter. They also saw an increase in their rated play.
  • Over the last 4 months, they have been outpacing last year's room nights on the books. 
  • Events calendar is favorable, and events drive more spending at their properties
  • Will invest in their properties to capitalize on the improvement in the economy. 
  • M Life - have enrolled 1MM new members since launching the program. Regional properties have seen an increase in number of trips and players. Especially at the higher end tiers. The program also helped them decrease the promotional spending at their lower tier properties. Signed a deal with Rank Gaming, Dover Downs, SBE and Avis
  • Began a room remodel at Bellagio and MGM Grand. Bellagio will also launch a new nightclub. Replacing & refreshing some of their F&B and entertainment outlets. Signed Blue Man Group to Monte Carlo.  Michael Jackson Cirque show starting in 2013 at Mandalay Bay
  • MGM Macau
    • Drop in VIP grew 94%
    • Drop in Mass grew 21%
    • Slot drop up 92%
    • Held within normal range in the quarter
    • Doing more with Pansy in China
  • Excluding resort fees, RevPAR was up 11%
  • Tunica property is temporarily closed as of Monday.
  • Received a $175MM refund from IRS last week
  • 2Q Guidance:
    • Corporate expense; 30-35MM ex stock comp
    • Stock comp: 9-10MM
    • D&A: 150-155
    • Gross interest expense: $265-270MM (220MM was cash interest - no capitalized interest)
    • 2Q RevPAR: + mid single digit
  • MGM will consolidate MGM China when the IPO goes through. They will recognize a material gain
    • Debt: 695MM Cash: 280MM
  • Capex of $34MM; FY spend of $275MM for all of 2011
  • City Center commentary:
    • Aria: EBITDA 55MM, net casino revenue $111MM, $72MM table game revenue; $147MM non-casino revenues.
      • Benefited from a favorable property tax adjustment of $6MM in the quarter
      • 2011 convention room nights have already surpassed estimates, had 72k room nights in 1Q
      • Aria REVPAR: $172 (86% occu, $201 ADR)
    • Cosmopolitan opening has had a positive impact on CC by increasing foot traffic
    • Vdara:
      • EBITDA: 3MM 
      • Net revenue of $15MM
      • 83% occupancy
      • Increased room inventory by 200 units
    • Crystals:
      • EBITDA: 6MM
      • Net revenue: 12MM
      • 82% occupied
    • Residential division: leased 212 units (72 in Mandarin and 14 in Veer towers)
      • Closed 8 units with $7.5MM in revs
        • 1 unit in Mandarin ($2.7MM)
        • 4 units in Vdara ($2.8MM)
        • closed 3 previously contracted units at Vdara ($1.9MM)
    • Took a $5.4MM writedown on notes related to lower value given by outside consultant


  • The 20% convention mix is for their wholly owned, and higher than they predicted
  • Convention business is always seasonally stronger in the first quarter.  As you get into May and June, you have a lot more leisure and FIT business
  • Core properties did really well compared to last year and think that's the beginning of a trend. Convention business is allowing them to yield up and the leisure customer is also improving.
  • Does the change in the MGM Macau structure change anything for Borgata?
    • No, they have a settlement agreement that they are adhering to
  • How does rate look like for their convention business?
    • It's what they were achieving in 2005 and should be up double digits next year
  • Saw good traffic in LV in general. Mass table business is starting to pick, but most of the improvement has been on non-gaming.
  • October will be a good month on the convention side
  • Mandarin continues to be a drag, what can they do to reduce that drag?
    • Occupancy was up 20 points from 35% last year so they are working hard to improve operations
    • Think that they will slowly improve
  • Operating expense creep?
    • Not really. Payroll will go up a bit. But doesn't expect expenses as a % of revenues to increase
  • Baccarat business?
    • Had a tremendous quarter last year so the comps were tough this year
    • It's going to be harder for the international business in Vegas to show growth
    • They believe that they will gain share of the high end business this year
    • International business makes up most of the business
  • $120MM of gross receivables and were 50% reserved on those at MGM Macau
  • Rates on leased inventory at CC: $2/foot
  • Have 1,050 rooms at Vdara being rented currently
  • Mix of 3rd party or discount channel business and what is the delta? 
    • $50 delta between discount channels and convention business
  • Length of play hasn't been impacted, they just had a run of bad luck given the concentration of high end in 1Q & 4Q
  • $17MM benefit annually of tax adjustments for City Center, so the $6MM benefit in the quarter is not one time, although it is going to be less in subsequent quarters.

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