Cannibalization is a big risk for the MGM Strip properties. The Bellagio/Mirage history is instructive. CC may do well but it probably won’t grow the market enough to push up Strip ADR as projected by the Street.
MGM management sure is projecting an aura of positivity when it comes to 2010 in Las Vegas. “Strip room supply growth next year is only 5%.” “The back half of 2010 looks strong.” "MGM room rate premium will continue to grow in 2010.” I’m paraphrasing but these are generally the comments I’ve heard. The problem is that none of these comments give me comfort that 1) there won’t be serious cannibalization from CityCenter next year, 2) RevPAR won’t be down, 3) the Street’s MGM projections are not too high, 4) the increase in premium room supply isn't more like 57% (see "PLENTY OF ROOM AT THE STRIP INN IN 2010" 07/17/09) and 5) the first quarter isn’t under pressure already. Never mind that no Vegas operator ever has visibility beyond the next quarter and certainly not into the back half of the next year.
MGM should be commended for its balance sheet work this year (although they did get themselves into this mess). However, there is still a lot more work to do given the funding gap and debt maturities over the next two years. So anything they say must be taken with a grain of salt. We’ve seen this rerun before. I’d prefer to look at the data, both anecdotal and historical.
CityCenter opens on December 16th. Yes, the property only increases Strip room supply by only 5%. This is misleading because CityCenter will open with 5,900 rooms at “premium” pricing. Some of those rooms may or not set the price ceiling (MGM management thinks so) but combined they will increase the Premium room supply by 30%. See the chart below. Who is most at risk? MGM is, of course, with 34k Strip rooms before CityCenter even opens.
Anecdotally, we’ve been hearing Aria and Vdara average daily rates may come in below $160 for January, well below our estimate of $225. Moreover, in direct contrast to management’s assertion that Aria is pricing above Bellagio 80% of the time, our room rate survey prices Bellagio slightly above Aria in January. Our recent conversations with industry participants indicate that the Strip in general is under pressure in January.
So the supply/demand and market exposure pictures are not too appealing for MGM and the anecdotal suggests a tough start to 2010. What does history show us? We dusted off our old Mirage Resorts model and discovered that The Mirage took a big hit from the Bellagio punch. As shown in the following chart, The Mirage experienced a 32% hit to EBITDA in the quarter that Bellagio (Q4 1998) opened. For the four quarters following Bellagio’s opening, EBITDA at The Mirage fell less, -24% which was still severe, but included a quarter with significantly higher hold percentage. Even Treasure Island was cannibalized as its EBITDA fell 27% in Q4 1998. This suggests that Bellagio, Mirage, Mandalay Bay, and MGM Grand could all be under pressure from CityCenter.
Surely, the cannibalization is captured in Street estimates? Not so fast. The consensus 2010 EBITDA estimate for Bellagio is north of $300 million, up from 2009’s $297 million. With history as a guide, the huge supply addition right in Bellagio’s sweet spot, and the anecdotal feedback discussed above, this seems highly unlikely. As shown in the following chart, we are projecting Bellagio EBITDA of only $236 million, approximately 20% below our 2009 estimate. For all of MGM’s LV properties excluding CityCenter, the EBITDA projection is $1.13 billion, UP 7% from the 2009 projection. We fear the Street is falling into the old trap of projecting a quick recovery after a bad year. “It can’t be worse than this year.” Supply growth be damned.
High-end gaming is a wild card and whether Aria can grow that segment where Bellagio failed in 1 will be key to suppressing cannibalization. The room side is more predictable. It looks bad for MGM. Excluding CityCenter, every $5 move in Las Vegas ADR moves the company-wide EBITDA needle by approximately $55 million, or 4% of total projected 2010 EBITDA. Including CityCenter, the impact from our estimate would be $60 million.