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Decent hold adjusted quarter. Forward commentary was very bullish and better than we expected.



“We have shown growth in year over year cash flows throughout the first half and expect those trends will continue. We believe the foundation of the Las Vegas recovery is solid and our business is building”

- Jim Murren, MGM Resorts International Chairman and CEO




  • Adjusted EBITDA: $366MM
    • Domestic wholly owned Adjusted Property EBITDA :$331MM
      • "Despite a lower table games hold percentage in the current quarter and an approximately $12 million impact related to the state mandated closure of Gold Strike Tunica in May 2011"
      • "Casino revenue ... increased 1%... . The overall table games hold percentage... was below the low end of the Company’s normal range of 19% to 23%. The overall table games hold percentage in the second quarter of 2010 was near the low end of the Company’s normal range which affected Adjusted Property EBITDA by approximately $27 million when compared to the mid point of the Company’s normal range." 

      • "Slots revenue increased 4% compared to the prior year quarter, including an increase of 7% at the Company’s Las Vegas Strip resorts."

      • Las Vegas RevPAR +10%
    • City Center Adjusted EBITDA: $64MM
      • "Positively affected by a higher than normal table games hold percentage."
      • Net Revenue: $275MM
      • Aria:
        • Net revenue: $233MM
        • Adjusted Property EBITDA: $53MM (includes an $18MM benefit from high hold)
        • RevPAR: $181 (ADR: $202/ Occ: 90%)
        • Vdara Adjusted Property EBITDA: $5MM
        • Crystals Adjusted Property EBITDA: $6MM
        • Residential impairments: $53MM
    • MGM China Adjusted EBITDA: $170MM
      • Net Revenue: $668MM
      • "Primarily due to an increase in VIP table games turnover of 110% and a 21% increase in main floor table games drop. VIP table games hold percentage was slightly above our expected range of 2.7% to 3.0%"
      • EBITDA includes $3MM of branding fees
      • D&A: $75MM
  • Balance Sheet:
    • Cash & equivalents: $922MM ($417MM at MGM China)
    • Debt: $12.8BN
      • $2.3BN under the MGM resorts credit facility
      • MGM Macau Credit facility: $591MM
      • $1.2BN of borrowing capacity



  • In Las Vegas, they expect to see continuous improvement in the back half of the year and into 2012
  • Net net adjusted for hold and the losses at CC residential, Adjusted EBITDA would have been $422MM  
  • Increase in short term bookings and strong demand across the portfolio led to stronger than expected RevPAR at MGM. June was their strongest month - up mid teens %.  FIT/Retail is their strongest segment in Vegas. National rated play was great, but international was weaker
  • In Detroit, they had the best quarter in slot play
  • Seeing a recovery in the domestic consumer and are benefiting from M Life. With the completion of the M Life roll-out they expect to see increases in non-gaming businesses as well.
  • Promotional spend is down as a result of more targeted marketing
  • Recovery in Vegas is broadbased - luxury saw 9% EBITDA improvement and core properties saw a 16% increase in EBITDA
  • Tunica is now back on track and performing well
  • D&A: $85-95MM per quarter going forward due to Macau consolidation
  • Leverage for June 30th is 8x - pro forma for MGM Macau consolidation
    • $22.4BN VIP RC
    • Mass Drop: $544MM
    • Slot handle: $862MM
  • NJ approved the extended plan for MGM to divest their share in Borgata
  • Bellagio's room remodel program started this quarter and will be completed by YE. Expect a $30/night room premuim when the renovation is complete. MGM Grand will begin their room remodel later this year and it will last one year.
  • City Center
    • ARIA: Benefited from growth in the convention segment and from strong table and slot volume
    • Vdara: 1300 hotel rooms online
    • Crystals: SS sales up 24% YoY- 2nd highest sales per SQFT in Las Vegas
    • Residential sales pace is slow, but the leasing program is good - 346 units were leased to date with expected revenue of $8MM
  • Las Vegas:
    • booking pace for the summer is up nicely and for the fall as well
    • +10% in 3Q RevPAR
    • Sept & Oct months are exceptionally strong. Convention mix up 300bps YoY.
    • Event calendar is also strong in the back half of the year
    • Expect that these trends will continue into year end
    • Expect to be able to drive these revenue improvement to the bottom line
  • Hoping to secure land approval in Cotai in short order
  • Looking for other expansion opportunities in Asia and beyond



  • They had a poor April  - held very poorly. In May, June and July they've done well. They've been enjoying a high end resurgence recently.
  • Doesn't anticipate to cut material costs from here - payroll is pretty flat. Look to cut expenses in February every year. Their results are improving so there doesn't seem to be a reason to cut more costs
  • F&B, retail, entertainment were all up in the quarter and are seeing those trends continue into the summer
  • Slot business in Las Vegas:
    • General improvement in the customer coming to Vegas
    • General increase in RevPOR which drives slot play
    • M Life helping
  • MGM Macau: Adding a lounge next week in August. In-house VIP upgrade coming online later this year.  There is an opportunity to add more leverage in Macau. They will look at a new facility to bring down the cost of debt.
  • Delta between group and leisure in Las Vegas. Convention is relatively flat YoY but they've seen a nice pickup in the retail channel.
  • Expect to be up again in 2012 for Convention rate; Leisure & Retail is driving confidence in 3Q. Seeing similar growth in convention and leisure block.
  • Macau VIP hold was 3.1%
  • This past weekend was packed in Vegas. They have had no changes in their call center, booking, or consumption activity over the last week or so.
  • July share decrease was hold related
  • Cash ADR - the entire increase was cash because the comp rate was flat YoY
  • Weakest component at Aria is the entertainment  - primarily the Cirque show. Think that Aria should have done a little better in the quarter but are happy with the performance.  The show is only 1/2 occupied. A good show should contribute $40-50MM of EBITDA.  Their show doesn't contribute any EBITDA nor does it bring in the traffic benefit. 
  • Aria win per slot per day: +9% from $188 to $206
  • General strength in the Macau market has continued. Liquidity has remained strong. Market is pretty stable regarding commissions.
  • Convention mix is the smallest % of business in the 3rd Q - 12.5-13% this year.  Rate delta is $40-60 between leisure and convention.
  • 12% increase in active players in their database since launching M Life and average spend per trip increased 4%. Up double digits in people moving up in tiers. Added 500k customers in 2Q. At 1.5MM enrollments YTD.
  • Mirage had its biggest booking month in July.  Booking months in general are not falling but accelerating at some properties.
  • Highly unlikely that they will be tapping the debt or equity market from MGM this year. They will be in the bank market.
  • Already brought back $190MM of cash from the Macau JV
  • Goal is to deleverage the company
  • Booking pace in 2012 is a lot less informative on the retail business booked - which really only books out up to 4-5 months in advance.  Mandalay Bay has been sold out pretty much for the next 4 months. Going into the fall they hope to be 80% booked on the convention side. Have 60% of their rooms book for 2012.
  • Are prepared to start moving dirt in Macau as soon as they get approval. Would take about 3 years to build once they have approval.
  • Haven't decided on a dividend payment strategy for MGM Macau - they will meet with the board and discuss. They do want to leave powder to grow. 
  • Their revenues from mgmt hotel contracts won't be substantial until 2013/2014.  They expect that they will generate $50MM in a few years and then hitting $100MM.
  • Have 65 units left at Mandarin, at Veer have 202 units remaining

Covering Japan… We’ll Be Back

Conclusion: We covered our Japan short earlier this afternoon, as it is immediate-term TRADE oversold. The intermediate and long-term issues facing the Japanese economy remain, however.


Position: Covered our Japanese equities short (EWJ).


Today, Keith covered our short-Japanese equities position with the Virtual Portfolio for a gain. The position – perhaps aided by the global equity market selloff – continues to be one of our core theses in Asia over the intermediate and long term. From an intermediate-term perspective, the bearish catalysts remain: 

  • ZERO interest rate policy continues to depress confidence and growth;
  • Burgeoning debt/deficits is setting up a likely a growth-negative fiscal adjustment;
  • Regulatory uncertainty surrounding the timing of leadership changes and nuclear power regulation is depressing industrial production and both consumer and business confidence;
  • Sharp yen appreciation is weighing on corporate profits and (subsequently) job creation via declining business investment; and
  • Slowing sequential growth momentum bumping up against increasingly tough YoY economic growth comparisons. 

See our 8/1 note titled, “Things Are About to Get a lot Worse In Japan” and our 5/16 note titled, “Time to Press?: Revisiting Japan From a Secular Perspective” for more details.


Contrary to the consensus belief that quake/tsunami reconstruction is just what Japan needs to revive growth, we remain bearish on Japanese growth over the intermediate and long term. Despite Japan being very “cheap”, valuation, as consensus is finding out, remains no catalyst.


The economic grip around Japan’s Jugular is about to get incrementally tighter…


Darius Dale



Covering Japan… We’ll Be Back - 1

European Bank Swaps Shake

Positions in Europe: Short EUR-USD (FXE); Covered short EUFN (European Financials) today

Below is our European Financials CDS Monitor that is tracked weekly by our Financials Managing Director Josh Steiner and his team.  As we’ve noted in recent work, the rising spotlight on the sovereign health of Italy and Spain have sent bank stocks in both countries shaking. Announcements over the weekend from Spain and Italy to further tighten spending to reduce budget deficits and the ECB’s decision to re-activate its bond purchasing program (SMP) did little to quell investor fears today: European equities fell -2 to -6%, and most towards the latter end of the range. [For more see today’s note titled “European Risk Monitor: In the Red”].


While the “news” did send 10YR Italian and Spanish sovereign bond yields tumbling around 70bps day-over-day to 5.35% and 5.23% respectively, it’s clear that the ECB too is worried about bond yields creeping up in both countries. Our break-out yield target level remains 6%, which both have flirted around, even after the announcement of Greece’s second bailout on July 21st. 


As it relates to the banks, we see the 300bps (affectionately named the Lehman Brothers line) as a critical break-out momentum line. And here the score card is very telling. Currently 13 out of the 39 large European banks are trading over the 300bps line. If we focus on the banks of the peripheral countries, the majority of them are above 300bps, and a significant number have cleared the line by a country mile. We think many of these banks that defy the line are in serious risk of default. 


A breakdown of the monitor shows that bank swaps in Europe were mostly wider last week: 34 of the 38 swaps were wider and 4 tightened. 


Widened the most vs last week: Banco Popular Espanol (Spain), Svenska Handelsbanken, Barclays

Widened the least vs last week: Alpha Bank, EFG Eurobank, National Bank of Greece

Widened the most vs last month: Banco Popolare (Italy), Banco Pastor (Spain), Bayerische Hypo (Germany)

Tightened the most/widened the least vs last month: Alpha Bank (Greece), EFG Eurobank (Greece), Hannover Rueckverischerung (Germany)


Today we covered our short position in European Financials (EUFN) in the Hedgeye Virtual Portfolio for a 15.7% gain (see levels chart below).


European Bank Swaps Shake - 1. josh


European Bank Swaps Shake - 2. josh


Matthew Hedrick

Senior Analyst

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Change in FL/FINL Estimates Reflect Lackluster July


Weekly footwear data registered a third consecutive decline last week confirming that sales have indeed turned sharply lower through the back half of July. Not surprisingly, FL and FINL are among the names that trade most heavily on these numbers. We are adjusting our estimates based on the latest data, but remain well above Street estimates for FL while FINL is more in-line. With that in mind there are several key factors to consider:

  1. Many investors still trade on these numbers with similar conviction to the prior sample set (before Jan ’11) when only athletic specialty channel sales were reported. With department stores and national shoe chains now included in the weekly data, the variability factor has increased substantially tracking 4%-6% below athletic specialty channel sales.
  2. In terms of sizing July sales, it represents roughly 7% of annual dollars – the same as May both of which are less significant than June, which was up 12.3% (see chart below).  
  3. Based on monthly data where the athletic specialty channel is broken out, sales were up 9.6% through the first two months of FL’s Q2. With weekly sales coming in down -2% in July and assuming at least a 4% adjustment, we assume July came in up +2%. This suggests comps are tracking at 7.5% in Q2. With FL coming in at least 200bps above our proprietary blended rate in each of the last three quarters, we have adjusted comps to +9.5% for the quarter with EPS shaking out at $0.17 for Q2 and $1.68 for the year well aboveconsensus at $0.12 and $1.57 respectively.
  4. Taking a similar look at FINL, which closes its books at the end of August and has a tighter performance range around the blended rate, we have adjusted comps to +8.5% for the quarter with EPS shaking out at $0.40 for Q2 and $1.56 for the year essentially in-line with consensus at $0.39 and $1.56 respectively. Keep in mind, that August is the second largest month of the year from a dollar perspective aside from December and will be key to locking in the quarter for FINL.
  5. Importantly, July monthly numbers will be out next Monday ahead of FL’s earnings release Thursday afternoon providing further clarity to our adjustment to weekly figures. We’ll update our view if necessary as soon as we have those numbers.
  6. Lastly in looking at footwear trends over the last few weeks, sales declines have come from lower unit volume depsite relatively stable ASP trends +/- 1%. This suggests that we could see an increase in promotional acitivity during the critical BTS selling season as retailers look to drive top-line results.


 Change in FL/FINL Estimates Reflect Lackluster July  - FW App Agg Table 8 9 11


 Change in FL/FINL Estimates Reflect Lackluster July  - Fw App BrandTable 8 11 11


 Change in FL/FINL Estimates Reflect Lackluster July  - FW App FW Mkt Sh 8 9 11


 Change in FL/FINL Estimates Reflect Lackluster July  - FW App App 1Yr 8 9 11


 Change in FL/FINL Estimates Reflect Lackluster July  - FW App App 2Yr 8 9 11


 Change in FL/FINL Estimates Reflect Lackluster July  - FW FL Comp 8 11


 Change in FL/FINL Estimates Reflect Lackluster July  - FW FINL Comp 8 11


 Change in FL/FINL Estimates Reflect Lackluster July  - FW Mo as Pert of Annual Revs 8 11


 Change in FL/FINL Estimates Reflect Lackluster July  - FW Mo Channel 7 11



Casey Flavin



In preparation for IHG's Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from IHG’s Q1 earnings call and subsequent conferences/releases.



Youtube from Q1 Conference Call

  • “RevPAR trends continued into April with global RevPAR growth of 6.1% excluding Japan, Egypt and Bahrain, 4.9% growth on a reported basis. U.S. RevPAR grew 7.2% and China RevPAR grew 14.6%.”
    • “On EMEA, we were up 1.9% excluding Bahrain and Egypt. And actually if you exclude Lebanon where there are other issues, we were up 3.1% in EMEA. And then in Asia-Pacific, the 5.3% is 12.8% excluding Japan, and that includes 14.6% in China”
  • “Looking further forward, our reported RevPAR figures were clearly be impacted to some extent by Japan and the Middle East, particularly in 2Q. April RevPAR in Japan was down 26%. Moving through the year, we’ll also face progressively tougher comparatives, particularly for our Shanghai hotels due to the world expo last year.”
  • “Overall, booking pace looks good with increases in both demand and rate. Future travel intentions data collected from guests in our hotels is positive, and specifically as we head into the key summer leisure season, leisure travel intentions are also up. We’ve not seen any impact from the rise in the oil price although clearly this remains a risk if the price spikes further.”
  • “We’ve estimated the full year impact of the events in the Middle East and Japan at between $15million and $20 million, and at this stage we expect much of this would be offset by positives elsewhere. The situation in each market is however clearly fluid and our visibility is limited with extremely short-term booking activity. Our estimates are based on no return to normality until at least the fourth quarter of this year.”
  • [Japan] “The cancellation activity has ceased and booking pace is starting to show a gradual pickup.”
  • “In the Middle East, the key impacted markets are Egypt and Bahrain, and although we’re starting to see some recovery in the outskirts of Cairo and the Red Sea resorts, we do not expect any return to normality until there is stability in government.”
  • [Regional/central costs] “For the full year, we still expect these cost to be between $250 million and $260 million at constant currency.”
  • “Looking now at the pipeline. Financing for new hotel construction remains constrained in some of our biggest markets, and we don’t anticipate much change in the short-term.”
  • “We have the industry leading pipeline, with 18% of the active global pipeline according to Smith Travel and our nearest competitor has just 13% and that pipeline is high quality. Around 70,000 rooms, close to 40%, are under construction. In Greater China, some 70% of the projects are under construction, and across EMEA, this figure is around 60%. It drops to around 20% in the Americas, where the figure is typically lower due to the shorter time from signing to opening for midscale hotels.”
  • “We remain confident with our 3 to 5% net system growth guidance from next year into the medium term as the level of removals revert to more historic norms.”
  • “Net debt at the end of March stands at $846 million. This is around $100 million up on year-end, due to seasonal working capital movements which we expect to reverse for the full year.”
  • “We’ve got around 20 hotels in Shanghai, out of 150 open and obviously more opening this year. So, we’ll have some impact but we’re, not only we’re seeing RevPAR growth but we also adding hotels in China, so the momentum is pretty strong there.”
  • “As far as the Barclay is concerned, I think historically we’ve always talked about the six to nine months for a disposal of a major asset. We aren’t a forced seller with that asset, so the important thing for us is to find the right buyer who is going to support that hotel, support the brand and invest in it, I think we said before, we’re going to require at least $100 million refurbishment program of that hotel. And if you play it right you can also get other hotels or built a good new relationship. So there is a lot of good interest in that hotel.”
  • “We’re actually seeing rate growth in the corporate negotiated area. At inflation or slightly above inflation. But what we’ve done is push quite hard for market share growth, which is obviously one thing you have to look at and with our move to dynamic pricing and real focus on bigger accounts, we’re seeing some quite significant share gains.”
  • “Booking windows are short…the momentum looks okay for leisure. We’ll certainly start feeling that much more in June, July as we get to that.”
  • “But as you say, that is new supply (in New York) and with our share of that particularly with the InterContinental in Times Square that’s been performing really well. Honestly for a brand owner with good product in the market, new supply is obviously a good thing for us if we get our share of it. And we’ve certainly been seeing that in New York.”
  • [FY2011 Capex] “$100 million to $200 million and it’s a broad range. But because most of this is working with third-party owners we are not dictating the timing, then it’s hard to be very specific about the amount. And then on top of that we’ll have about a $150 million of maintenance capital this year, which is slightly ahead of depreciation. I think I’ve always said that depreciation should broadly equal maintenance and over the last couple of years for obvious reasons we were significantly below depreciation, so a little bit of catch up this year. Quite a lot in the technology area which is obviously important for us.”

European Risk Monitor: In the Red

Positions in Europe: Short EUR-USD (FXE); Covered short EUFN (European Financials) position today

European equity indices closed last week down -9 to -14% week-over-week with neither the periphery nor core immune to the move. This weekend’s European news flow on the ECB’s decision to re-implement its bond purchasing program (SMP) and buy Italian and Spanish debt had some impact on bond yields for Italy and Spain today, however the terms of the program remain vague and largely appear at best an intermediate term package or cover before the terms of the EFSF is voted on in mid to late September by the EU. In any case, European equities got smacked today alongside this weekend’s news, falling -2 to -6%.


In our eyes, neither facility will be a panacea to the region’s longer term fiscal imbalances. At the right price we’re getting more comfortable shorting the equity or credit of Germany or France as debt risks move beyond Greece, Ireland and Portugal and closer to Italy and Spain, which should erode the sovereign credit worthiness of Germany and France and its lending institutions, and drag on the broader equity indices. While consensus, we’d also short the equity markets of Italy (EWI) and Spain (EWP) on any bounce.



New News and More Known Unknowns

Late Sunday the ECB released a statement following an emergency meeting Sunday afternoon in which it praised actions by the governments of Italy and Spain in the last days to accelerate and enlarge austerity measures in order to (better) adhere to Eurozone debt and deficit targets. We’ve been largely negative on peripheral countries’ ability to meet accelerated deficit targets, nevertheless Spanish Economy Minister Elena Salgado said on Sunday that the government would use an August 19 cabinet meeting to outline further savings. Salgado did not give details except to say that €2.5 billion of savings (worth an estimated deficit reduction of half a percent of GDP) could be made through changes to the methodology for large companies' tax payments.  Spain is projected to run a 6% deficit (as a % of GDP) this year.


On Friday, PM Berlusconi announced that Italy will balance its budget, by bringing its deficit to -3% of GDP by 2013 instead of 2014. Finance Minister Giulio Tremonti said costs would be saved in reforming Italy's extensive, and expensive, social welfare system, which includes national health care and generous retirement payments, and by amending its labor laws.


The ECB’s release also noted that it will re-implement its bond purchasing program, known as the Securities Markets Programme (SMP), which began in May 2010 and bought up some €74 billion in bonds from Ireland, Greece, and Portugal, but had remained dormant over the last four months. There were few explicit details in the statement—no individual countries, amounts, or a time horizon was specified. Yet based on rumors over the weekend it appears the Bank will buy Italian and Spanish debt (which it may have started on today) in additions to the paper of the rest of the PIIGS. 


Speculation includes a purchasing program of €500-600 Billion spread out over 6-12 months. Tobias Blattner, a former ECB economist, estimates the central bank will have to buy about €200 Billion of Italian bonds and €60 Billion of Spanish securities to make an impact.


The ECB’s positioning is clearly in response to heightening bond yields in Spain and Italy, especially since the second bailout package for Greece was announced on July 21st. As we’ve noted in our work, the critical breakout level on sovereign yields is 6% based on the historical performance of Greece, Ireland, and Portugal, countries which after breaking this level required a bailout package in short order to temper yields (see chart below). While the aforementioned countries received bailout packages to help tame default, should Italy and Spain require a fiscal package to prevent default/meet its maturities, the existing loan facilities of the EFSF is undercapitalized to handle them.


European Risk Monitor: In the Red - 1.na


And this is the danger. While Eurozone leaders have agreed to expand the scope of the EFSF, they have not agreed to expand its overall size. This meeting comes in mid to late September. Further, the €440 Billion posted as AAA collateral in the facility has been reduced by existing portions of the original loans to Ireland (€85B), Portugal (€78) and Greece’s second loan (€109B), and we're raising the threat that France could lose its AAA rating, which would greatly impair the facility.


The scenario that presents itself for a “solution” given recent development are:

  1. The EFSF must be expanded by an estimated 2-4x from its current size of €750 Billion (adding in €250 IMF contribution)
  2. The ECB unloads far more debt on its balance sheet in directly buying up bonds across the Eurozone

We put “solutions” in quotation markets for neither option is very certain nor guaranteed to be an explicit solution to very pervasive fiscal imbalances across the region that are bottled in with political indifference. To point one, political indecision could well get in the way of expansion (approval is needed from every EU member). To point two, assuming point one isn’t acceptable, it appears the ECB would have to roll out the printing press and take far more risk on its balance sheet. This could have disastrous inflationary consequences for the common currency. This action would go directly against the Bank’s mandate for price stability. 


In all of this, the common currency has held up relatively well against major currencies. Against the EUR-USD, we continue to outline $1.43 as an important intermediate term TREND level and $1.40 as a critical immediate term support TRADE level. Should both break to the downside, we don’t see long-term support until $1.28. That said, the pair has traded in a tight range of $1.40-1.45 over the last 4+ months, largely on the back of implicit guarantees of the EU community to support any member country in need with fiscal assistance. We don’t expect this to change, but caution that the terms are going to get a lot more challenging as Italy and Spain take a brighter light in the arena of European sovereign debt contagion.   


Matthew Hedrick

Senior Analyst

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