MGM: Q2 OK, MANAGEMENT BULLISH

We weren’t blown away by the quarter although it was decent. Management’s bullishness was surprising, even for MGM.

There is no love for gaming exposure and no love for leverage.  MGM has both.  So despite a decent quarter and a very favorable outlook, MGM is selling off this morning.  MGM’s not our favorite stock in gaming but if management’s forward looking commentary is close to reality, the stock will likely push forward.  Here is our analysis of the quarter and the outlook.

 

2Q11 RECAP

  • Despite being the high on the Street at $420MM of EBITDA, adjusted for hold and impairments at the residential division of CC, MGM beat our number by $2MM
  • Las  Vegas:
    • RevPAR growth was a little stronger than we expected.  Partly due to Q2 resort fees of $9-10 vs $6-9/day in 1Q.  Occupancy was also surprisingly stronger – so rate did not come at the price of occupancy
    • Despite higher RevPAR, EBITDA was lower than we estimated by $21MM.  The miss versus our number was likely due to lower than normal hold which management claims cost the Strip properties $27MM
    • The 3 properties that missed our EBITDA estimates by the widest margin were:  MGM Grand, Mirage and Luxor by 38%, 25%, and 15%, respectively
    • Mandalay and Monte Carlo beat our EBITDA estimates by 16% and 14%, respectively
    • Total property level expenses increased 4% YoY
      • NY NY, Mirage and Bellagio had the highest YoY increases in growth of 10%, 6% and 5% respectively
      • MGM Grand had the most controlled expense growth at 2%
      • All the other properties at expense growth of roughly 3.5%
  • The lower end properties had the best RevPAR growth. Despite strong RevPAR growth, 2 properties still had YoY declines in EBITDA – likely due to hold comparisons
    • Excalibur RevPAR increased 27% but EBITDA decreased 0.2%
    • MGM Grand RevPAR increased 9% but EBITDA decreased 32%. It looks like MGM Grand had very good hold last year
    • Since MGM reported positive income the $1.45BN of 4.25% converts were treated as dilutive to the share count per GAAP accounting rules  - hence the increase in share count.  [The converts are struck at $18.58 – you can either count them in the share count or as debt but not both.  We tend to treat them as debt until they are in the money]
    • City Center’s revenues were $22MM above our estimate but EBITDA was only $2MM better. Adjusting for $18MM high hold benefit, City Center continues to underwhelm us at a $33MM quarterly run rate.
      • Excluding residential, the revenue beat would only have been $16MM and the EBITDA beat would have been $5MM or ($60MM of EBITDA excluding residential and $42MM on a hold adjusted basis)
      • Net casino revenues were roughly flat QoQ or roughly $111MM
        • Estimated slot revenue $37MM
        • Estimated table revenue $80MM
          • Drop $285MM, hold of 28%
    • Rebate rate of 5%
  • $122MM of net non-gaming revenue
  • Total expenses increased $10MM QoQ to $180MM
  • MGM Macau total EBITDA was $9MM above our estimate while revenue $12MM better
    • Implied direct play was 8% vs. our prior estimate of 13%
    • Mass hold was quiet high at 27.5%
    • The slot win % was 5.6%
    • We estimate that fixed operating expenses increased to $82MM from $76MM in Q1

OUTLOOK

Management went so far to say the forward trends were “very positive”.  If they can achieve their projection of 10% RevPAR growth and generate gains in the casino as implied in their commentary, Q3 will be a strong quarter.  Here are some of the important forward looking takeaways:

  • “Our booking pace is so far up quite nicely for the summer and really throughout the fall period as well.”
  • “We expect RevPAR in the third quarter here in the Las Vegas strip to be up around 10%. We’re particularly encouraged in terms of second half of the year on our convention calendar, most notably the months of September and October; they’re exceptionally strong. And in fact, the third quarter convention mix is expected to be up about 300 basis points over last year’s mix.”
  • “The event calendar is also strong. The back half of this year is better than the first half”
  •  “…July we’ve been up and in fact we’re having a very solid time of the high end internationally.”
  • “I think the slot increases, though, are a function of a few things. One, overall general improvement  in the customer that’s coming to Las Vegas. We’re seeing across the board improvements in RevPOR, total revenue per occupied room; that translates well on the slot side. The mix has improved in terms of the room mix so as we’re driving more productive customers through the buildings, we’re seeing higher slot revenue”
  •  “In terms of looking at booking trends it had its biggest booking month in three years in the month of July. So in terms of booking new business, getting back to an earlier question, we’re seeing booking trends if anything have not fallen; certainly not in July, not here in August, but we’re seeing it accelerate in some of our properties.”
  • [Convention space in 2012]  “I think first four months is virtually sold out and Chuck doesn’t have any space more or less to really book any large piece of business at Mandalay
  • “We actually have 68% of our rooms booked for 2012”
  • “I think Aria is even pacing ahead of that in terms of 2012 this early in the game and our convention folks are pretty excited about the way ‘13 and ‘14 are actually shaping up.”

TIDBITS FROM THE 10Q

  • Casino net revenue increased 1% YoY
    • Table game revenue was down 5% YoY, partly due to an 85bps YoY decrease in table hold to below 19%
    • Table volumes were down 4% YoY
    • Slot revenues were up 5% YoY and 7% in Las Vegas
  • MGM Macau:
    • Gaming concession expires April 20, 2020 while the land concession is good through April 6, 2031
    • Company recognized intangible assets related to gaming promoter relationships with an estimated value of $180 million which will be amortized over their estimated useful lives of four years
    • MGM Grand Paradise’s tax exemption expires on Dec 31, 2011. An application for a 5 year extension is pending Macau government approval
  • Silver Legacy distressed situation:
    • “Has approximately $143 million of outstanding senior notes due in March 2012. Silver Legacy is exploring various alternatives for refinancing or restructuring its obligations under the notes. There can be no assurance, however, that it will be able to refinance or restructure the notes on acceptable terms, or at all. If Silver Legacy is unable to refinance or restructure its obligations with respect to the mortgage notes, the holders of the notes will be entitled to exercise the remedies provided in the indenture governing the notes, including foreclosing on the assets securing the mortgage notes.”
  • TTM EBITDA for Credit Facility covenant calculation purposes was $1.25BN at 2Q end vs a min required level of $1.1BN

  • There was $619MM funded on the CC completion guarantee and $18MM of estimated net obligation outstanding (including outstanding Perini litigation).  MGM recorded a $110MM receivable which represents amounts reimbursable to MGM from CityCenter from future residential sales