Takeaway: We remain negative on a Strip recovery

Weaker than expected quarter - even after the negative revisions


"Our third quarter operating results are reflective of a challenging consumer environment, but we had some bright spots with strong results from MGM Grand Las Vegas and The Mirage and record third quarters from MGM China and CityCenter. Meanwhile, early fourth quarter trends are improving at our domestic resorts and forward convention booking pace is showing growth in 2013 and is further accelerating into 2014."


-  Jim Murren, Chairman and CEO of MGM Resorts International



  • Results in Vegas were in-line with their expectations.
  • They had tough comps in Las Vegas but have indications of a recovery.  August was very rugged but end of September was better and that carried into October. 
  • They are controlling costs where they can, with FTE's down 2% in LV
  • In MD, they continue to support their efforts to support Question 7
  • Toronto represents an exciting opportunity for MGM and they intend to participate
  • 50% of their database have opted to become M Life members
  • Expanding their strategic M-Life partners.  Announced RCL addition yesterday
  • My Vegas, their social game, have 350k average monthly users and many of these users have redeemed points at their LV properties
  • Bellagio low hold was 13% this Q, offset by high hold at other luxury strip properties
  • Maintained rate but lost occupancy in Vegas.  Had a 2% YoY decrease in convention mix this Q.  Mostly impacted Mandalay Bay.
  • F&B, retail, and entertainment was impacted by lower occupancies, remodels, and transitions, but they expect that to improve as remodels are completed
  • MD election is next week, so 4Q corporate expense will be higher - mid $60MM range before stock comp expense
  • Capex for FY 2012: $350-360 for US, ($80MM at MGM Macau and $80MM for MGM Cotai)
  • Stock comp: 10-11MM in 4Q
  • 230-235 for D&A in 4Q
  • Interest expense: gross interest 285MM in 4Q
  • City Center details:
    • Net table up 4% and 3% increase in slot volume
    • Elvis ended its run on August 31st and Zarkana is opening on November 9th - think that it will help their business when it opens
    • Crystals - executed lease for 8.3k of luxury space
  • MGM Macau:
    • EBITDA was negatively impacted by the low hold on their in-house business and RC program 
    • Completed Level Two VIP space
    • Main floor table win was up 27%. Had improved yields on mass floor by 300bps
    • Slot win increased 44%.  50% margin in the Q, up 50bps YoY
    • Paid $56MM for Cotai land contract in October.  Refining and enhancing their design and getting their construction team together.
      • $2.5BN (30-36 months of construction); up to 500 tables, 2500 slots, 1600 rooms
  • Going into the 4Q, improved LV trends are continuing:
    • Zarkana
    • Blue Man group (Monte Carlo mid Nov)
    • All rooms back online at MGM Grand (completed late Sept)
    • Bellagio Spa Tower remodel done in mid-Dec
    • Seeing a somewhat better RevPAR environment and expect that 4Q RevPAR will be flat to slightly up (depending on Sandy impact)
    • Convention bookings are pacing up 10% in 2013 and even better for 2014



  • MGM Macau hold impact:
    • RevShare had good hold - 87% of their business
    • Bad run on the RC operators: mid-teens MM's impact caused margin impact
  • They are open to JV partnerships on new projects. They will know on MD next week. If they win, they still need to win an RFP.  Same thing with MA.  If they win in Toronto, they will seek a capital partner. 
  • LV:  Internationally, they were down 12% on win... they got hit by 7 customers.  October is good for them. China visitation is up slightly, SE Asia is going well, South America and Japan are down.
  • Macau:  VIP business has been steady. Mass market still strong. Probably future growth, particularly VIP, will go in-line with the rate of China GDP.
  • Convention:  Sept/Oct--pretty good shape.  Group bookings were strong in 3Q and in 2013, 2014, and 2015.  
  • LV visitation vs spend per visitor:  fragile customer out there; overall, saw improvement in underlying metrics (REVPOR and visitation); more reliant on leisure customer (which is a lower spending customer); going forward, they see an increase in international visitors due to improvements at McCarran airport.
  • Case/Shiller housing prices and slot handle: 97% R^2 correlation
  • Sandy impact:  lost 4,000 room nights, about $1MM lost in revenue
  • Labor costs in Macau may increase (5.4% of total costs in Macau)
  • Net hold impact on STRIP EBITDA:  1% higher YoY in overall hold; net net positive $10 million impact to EBITDA
  • 91% for the year in the year booked for 2013 vs 80% last year at the same time.  Aria is almost sold out.  Better shape today than in 2Q.
  • Sees $100MM in future interest savings given good control of debt
  • Confident that as long as approval process goes through, they will get enough labor for Cotai
  • Post China election, resurgence in VIP? 
    • Unsure when VIP will ramp up.  Believes VIP is going through a consolidation phase. Expect a 8-10% long-term growth rate for VIP



  • "Consolidated casino revenue increased 4%, representing a 7% increase at MGM China and a 2% increase at the Company's wholly owned domestic resorts"
  • "The overall table games hold percentage in the third quarter of 2012 was 20.4% compared to 19.5% for the prior year third quarter. 
    • Table games hold at the Bellagio was significantly below normal but was offset by other Las Vegas Strip resorts." 
  • "Slots revenue increased 1% compared to the prior year quarter."
  • "Rooms revenue decreased 3% with Las Vegas Strip REVPAR down 2%."

  • MGM China EBITDA of $152MM, including a $5MM branding fee
    • Net revenue: $665MM
    • Mass table volume increased 10% and slot volume grew 37%
    • VIP turnover fell 5%; hold was 3%
  • "In October 2012, MGM China and MGM Grand Paradise, as co-borrowers, entered into an amended and restated credit facility agreement which consists of $550 million of term loans and a $1.45 billion revolving credit facility due October 2017.  The interest rate on the facility will fluctuate based on HIBOR plus a margin, set at 2.5% for the first six months and ranging between 1.75% and 2.5% thereafter based on MGM China's leverage ratio. The credit facility will be used for general corporate purposes and for the development of the proposed Cotai development."
  • CC EBITDA of $59MM and net revenue of $263MM
    • Aria table hold was 29.3% vs. 25.5% in 3Q11. Estimated benefit from high hold was $8MM on Adjusted EBITDA
    • Aria's occupancy was 88% and ADR of $192
    • "CityCenter recorded approximately $36 million for a residential impairment charge related to the Mandarin Oriental and $32 million for accrued costs related to the future demolition of the Harmon within "Property transactions, net.""
  • "Corporate expense increased by approximately $19 million during the current quarter, largely as a result of approximately $17 million of costs associated with the ongoing referendum in Maryland and development efforts in Massachusetts and Toronto."
  • Cash at 9/30/12: $2.4BN (including $936MM at MGM China)
  • Debt at 9/30/12: $13.9BN, "including $1.3 billion of borrowings outstanding under its senior credit facility and $539 million related to the MGM China credit facility."
    • In September, the Company issued $1.0 billion of 6.75% senior notes due 2020, for net proceeds to the Company of approximately $986 million.
  • "We have opportunistically accessed the capital markets enabling us to extend maturities at lower borrowing rates. Our most recent senior notes issuance was done at the lowest interest rate we have achieved since 2006.  We remain focused on executing additional transactions to further reduce our interest expense and improve free cash flow"


Solid management delivers solid quarter in soft environment



"The 2012 third quarter was one of Ameristar's most profitable quarters ever despite a slight decline in net revenues and Adjusted EBITDA,"


- Gordon Kanofsky, Ameristar's Chief Executive Officer




  • Had table game hold challenges in East Chicago.  Dialed back on the ineffective promotions introduced in 3Q.  Half of the decrease in EBITDA was due to low hold, and the other half was due to the promotional campaign.
  • The Cline Avenue bridge is being rebuilt over the next 2-3 years at no cost to ASCA.  It will be a toll road.
  • Kansas City and East Chicago attributed $3.5MM of the EBITDA decline in the quarter. 
  • Lake Charles project will allow for another hotel tower down the road if demand warrants it
  • Do not expect TX to legalize gaming in the near future. Gaming initiatives have never gotten out of the TX legislature. Texas legislature will meet again in 2013, even if it passes both houses, it would need to go to a vote - which would likely occur during an election year which isn't until 2016, and then it would take several more years to hand out any licenses.
  • Lake Charles will help them diversify dependence on Missouri, provide a 15% ROI, 
  • 4Q12 Outlook: 
    • Expect that 4Q will continue to be challenging with higher competition at KC, weakness in discretionary consumer spending, and closures at the 1-70 bridge near St. Charles
    • Stock comp: $3.3-4.3 (Q4); $16-17 (2012)
    • Tax rate: 40-42% rate for the 4Q and 27-28% for the year
    • $17MM on construction at Lake Charles in 4Q; capital spend for 4Q: $31.5-36.5MM
    • Net interest expense in Q4: $29MM
    • Corporate expense: ~$13MM
    • 4Q Weighted average share count: 33.5MM



  • East Chicago: Des Plaines has ramped up but other properties in the area increased promotional expenditures to compete
  • Springfield: There is talk that one or more proposals will go to the state level. There is some disconnect on Springfield making some decisions ahead of the state. Thinks that Jan/Feb will be when the city will negotiate agreements with host communities and then that would go to a city vote. Then, once they get a host community license, it will go up to the state.
  • Unclear whether they need financing in place or just show the ability to finance. 
  • Lapping the Kansas City property new competition:  when it laps, ASCA thinks that they will see a similar environment to what happened in St Louis. Doesn't think that the promotional activity will be too high - so it should be rational.
  • IL:  Government has indicated some interest in expansion
  • The 3Q was somewhat soft and the numbers reflect that.  Consumer cost of living likely increased more than consumer income increased. 
  • Springfield: If competitive conditions change, they will take that into account and will stick to their 15% hurdle   



  • "Our scale and diversification helped mitigate the impact from additional competition faced in two of our markets....our efficient operating model absorbed a $1.1 million year-over-year increase in development expenses in the third quarter, which were related to our Louisiana and Massachusetts projects."
  • "We will continue our pursuit of North American acquisitions and development projects that surpass our ROI hurdles and are within our risk tolerance, as well as other means to maximize long-term shareholder value, including debt reduction, dividends and stock repurchases."
  • "St. Charles overcame floor disruption from a slot system upgrade and street construction near our property. Both projects were completed in the third quarter of 2012. Maintenance on the I-70 bridge near our St. Charles property will commence in earnest in early November and is expected to negatively impact results for approximately one year, during which four of the bridge's 10 lanes will be closed."
  • "Jackpot's construction disruption related to a road repaving project on Highway 93 between Twin Falls, Idaho and Jackpot that concluded late in the third quarter and a hotel renovation affecting 21% of the Jackpot properties' rooms that was completed in late July 2012"
  • "New competition continued to impact Ameristar Kansas City"
  • "East Chicago's third quarter net revenues declined by $4.6 million (8.5%) year over year mostly as a result of low table games hold and increased competition in the Chicagoland market. A promotional program intended to counter East Chicago's new competitive environment contributed to an increase of $0.6 million (0.8%) in consolidated third quarter promotional allowances over the prior-year third quarter."
  • "Construction of Ameristar Casino Resort Spa Lake Charles began on July 20, 2012 and is progressing on schedule. The resort is being developed on a leased 243-acre site and will include a casino with approximately 1,600 slot machines and 60 table games, a hotel with approximately 700 guest rooms (including 70 suites). The cost of the project (including the purchase price) is expected to be between $560 million to $580 million, excluding capitalized interest and pre-opening expenses. We anticipate funding the project through a combination of cash from operations and borrowings under our revolving credit facility. We expect to open the resort in the third quarter of 2014."
  • "On October 23, 2012, we announced specific plans for our proposal to develop Ameristar Casino Resort Spa Springfield if we are awarded the license. Our plan includes a 150,000-square-foot casino featuring approximately 3,300 slot machines and 110 table games, including a poker room. Ameristar Springfield is expected to include a 500-room luxury hotel with 50 suites. We estimate the initial development cost of Ameristar Springfield would be approximately $910 million, which includes capitalized interest and pre-opening expenses and a license fee payment to the Commonwealth of Massachusetts. Ameristar's proposed budget also includes the $16.9 million paid earlier in 2012 to acquire the site and $58 million for planned traffic improvements to create easy access to the resort and alleviate current traffic problems in the area."
    • "The City of Springfield is currently conducting a process to select one or more casino proposals to be submitted to the gaming commission that is currently scheduled for completion during the first half of 2013. The gaming commission anticipates making decisions for the awarding of licenses in the first quarter of 2014"
  • Cash: $116.3MM; Debt: $1.9BN; Leverage: 5.01x
  • Capex: $34.4MM (including $15.2MM for Lake Charles)
  • "On Sept. 15, 2011, our Board of Directors approved the repurchase of up to $75 million of Ameristar common stock through Sept. 30, 2014. During the third quarter of 2012, we repurchased approximately 0.7 million shares of common stock at a total cost of approximately $11.1 million under the stock repurchase program. To date, we have repurchased approximately 1.0 million shares of common stock, or 3% of our outstanding stock, under the program at an average price of $16.67 per share, for a total cost of $16.7 million."
  • FY 12 Outlook: 
    • D&A: $106.6MM to $107.6MM
    • Interest, net of capitalized interest: $114.4MM to $115.4MM (includes $5.5MM non-cash interest)
    • Capex: $147-152MM, including $70MM for maintenance, "$31.9MM related to Lake Charles and construction costs, $29.8 million recorded for the fair value of a Lake Charles intangible asset and $16.9 million for the January 2012 Springfield, Mass. land purchase." 
    • Non-cash stock comp: $16-17MM
    • Corporate expense (ex. stock comp): $50.5-51.5MM



Takeaway: Despite still difficult market conditions, ASCA met our and consensus expectations. Management continues to deliver strong margins.

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • IN-LINE:  Despite still difficult market conditions, ASCA met our and consensus expectations.  Management continues to deliver strong margins.


  • SAME:  Road disruption on main street affected the property for most of the quarter and there is now preparatory work for the Interstate 70 bridge project.
  • PREVIOUSLY:  "We also have had some road disruption in the St. Charles area. They have been repaving project on Main Street, which is one of the main roads running right in front of our property, and that will be finished in mid-September and also the state is doing some preparatory work for the Interstate 70 bridge project that will begin later this year in earnest."


  • WORSE:  Low table hold and increased promotional spending (+600k YoY) due to a highly competitive market drove down results.  But ASCA said that promotional campaign has since been dialed back. 
  • PREVIOUSLY:  "We have found ways to profitably grab market share in the Northwest Indiana market and are exhibiting tight cost controls not only at that property but company wide."


  • SAME:  Construction began on July 20.  Target spend of $560-580 million remains unchanged.  ASCA has the flexibility to add a 2nd hotel if market conditions warrant it.  Following an initial ramp-up period, the project is expected to generate a 15% ROI.  ASCA will fund the project through a combination of cash from operations and borrowings under our revolving credit facility.  The resort is expected to open 3Q 2014. 
    • We now having to include the purchase price of Creative, we expect to spend about $560 million to $580 million excluding capitalized interest and pre-opening expenses."
      • "The budget factors that have gone into this decision include rightsizing some of the food and beverage outlets with the expectation that at some point, a second hotel tower will be warranted and developed at the property."
      • "We don't expect much borrowing under the revolver in 2012, as we believe we can fund much of the CapEx for Lake Charles out of free cash flow. We anticipate the full project funding will be split about 50/50 between free cash flow and revolver borrowing."


  • SAME:  ASCA does not expect the final decision on Massachusetts to be made until early 2014.
  • PREVIOUSLY:  "So my expectation is it'll probably still be late 2013 at the earliest – probably, the time that they would make license selections. It could stretch into the first half of 2014."


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Macau: Slowing But Still Strong

Takeaway: Gaming revenues in Macau should reach record levels in October.

With October just about to go in the books, Macau’s gaming revenues for the month should squeak out a gain compared to some tough comps and should reach record levels, according to Hedgeye’s Gaming, Lodging and Leisure research team.


The team also says it still believes that double-digit year-on-year growth could resume in November and December for two key reasons: easier comparisons and the Beijing government handover.  


Below is a chart that shows average daily table revenue for the last few months.


Macau: Slowing But Still Strong - macauchart

Building Momentum?

Takeaway: The NAHB Remodeling Index shows a flat reading, but is at its highest level in seven years.

The NAHB Remodeling Index moved to a level of 50 last quarter, which indicates a flat reading. The index, which tracks the number of contractors who are reporting that remodeling activity is high or lower than the previous quarter, is at its highest level since the third quarter of 2005. A reading of 50 shows equal  numbers of respondents reporting activity higher or lower compared to the previous quarter. Below is a chart of the index since its inception in 2003.


Building Momentum? - Josh


Client Talking Points


It’s certainly a difficult time for millions of people impacted by the devastation of Hurricane Sandy. Our CEO, Keith McCullough, hopes for health and safety to the many in the dark on the East Coast. As Keith says, “Hope isn’t a risk management process.” He is really at a loss for words, so we wanted to offer you a few risk management lines.

  • US Dollar Index immediate-term TRADE breakout line $79.57 (long-term TAIL support=$78.11)
  • SP500 TRADE (1431) and TREND (1419) resistance
  • CRB Commodities Index TRADE (305) and TAIL (312) resistance


It’s the last day of October, which means it’s not only Halloween, but something potentially scarier -- the year-end for many mutual funds. Futures are indicating that we’re going to get a lift thanks to these month-end markups. That doesn’t change the big picture – global growth and corporate earnings both are slowing.


Many are saying that China’s stock market has bottomed. As we say, bottoms are processes, not points and we’re still bearish on a TRADE, TREND and TAIL basis for the Shanghai market. Sure, Chinese stocks rallied off two week lows to close up marginally (0.3%), but China hasn’t bottomed.


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.


Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“All people begging for banker and #oldwall bailouts when people in the dark need them, #reflect.” -@KeithMcCullough


“If the world was perfect, it wouldn’t be.” – Yogi Berra



8 million, the number of American homes without power after Hurrucane Sandy

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.