MGM “YOUTUBE” PREVIEW

No real conviction either way heading into the Q. LV may disappoint in 2010 but mgmt is unlikely to give a realistic outlook. Here is the “YouTube” of forward looking statements from Q3’s release and conference call.

As we wrote about, Aria at CityCenter had a great start, especially on the Baccarat tables in its first 15 days of operations.  Some of it was good luck, some of it was volume related.  Either way, there appeared to be a significant degree of cannibalization on existing Strip properties, including MGM’s portfolio.  At the end of the day, however, 15 days hardly makes a trend.  That makes management’s forward looking commentary especially important.

Unfortunately, MGM’s management’s outlook has been unreliable.  We first wrote about this way back on August 6th, 2008 in our post “MGM MANAGEMENT: SOOTHSAYERS OR HOPEFUL AGNOSTICS?” and with the exception of “the bankruptcy months” in 1H 2009, management has put an overly optimistic spin on the outlook.  They will probably do the same this week and we have no idea how investors will react.  Short interest is high. Q4 was arguably better than people thought, and Macau is booming – at least for now.  The investment community may not put the appropriate “deflation factor” on management’s comments.  We’ll stay on the sidelines for now.

The following is the “YouTube” from the Q3 earnings release and conference call:

"YOUTUBE" 

 

Forward looking & current trends 

•  “On the Convention side, we confirmed approximately 550,000 convention room nights in the third quarter, which puts us at a booking level very similar to those before the downturn.”
• “We have, in fact, returned to booking levels that are better than what we are seeing earlier this year and back to more normal levels. And we are confident that next year will be even better in this regard.”
• “A recovery in convention business travel is key to increasing rates. And based on early bookings, it looks like that is achievable in the second half of 2010 and throughout 2011.”
• “Our lead volume was up dramatically in the third quarter, up 9% versus last quarter, the second quarter or in the first quarter… We're also seeing that they're trying to secure their meetings before dates or space fills up again. We're seeing industries, like the farming industry, insurance and even auto industry, showing signs that they need to get back to Las Vegas. And the other good news, our conversion rates are also rising, as people are serious when they talked to us and we're booking a higher rate of those calls.”
• “Cancellations have slowed down dramatically since the beginning of the year. We're not quite at our normal levels but we're getting close. And I think this is significant. 90% of the cancellations we had were for business occurring this year in 2009. We're getting very few cancellations for '10 or beyond.”
• “FTEs are 12% lower in 2009 and 2008, and down 17% when compared to 2007 despite occupancy levels consistent with the prior year and our service standard's second to none.”
• “We look for a meaningful margin improvement as room rates improve, given the significant operating leverage in our business model. As we've outlined before, for every $5 increase in ADR, we generate over $50 million in annual EBITDA. For every 100 basis points improvement in occupancy, we would generate nearly $40 million of annual EBITDA.”
• “Our revenue and market outlook. Our room rates, we believe, will remain soft in the fourth quarter as we continue to occupy our buildings at higher levels. But we expect a lower year-over-year percentage decline than what we saw in the third quarter.”
• “We think the visitation next year will be closer to 38 million, probably about 38.1 million. I think it's going to be up around 7%, is our guess. We project the room capacity next year in 2010 to be around 54.4 million available room nights. That's adding the capacity that we're adding and everything we know about the market, and that's about a 5% increase over 2009. So we think visitation is going to be up about 7%. We've been saying 5% to 10%, but we think it's going to be up about 7%.... We think that our market share will increase next year... We think CityCenter will be additive. We're projecting that citywide occupancy next year will be around 80. And we'll be north of 90% for 2010.”
  • For MGM’s sake we hope Jim is right, because December showed no signs of higher occupancy, and table win (ex Baccarat) as well as slot win were all down 
  • Same store volume metrics–slot and table– were both down double digits in December

• “We believe that the visitation that we're going to see next year will lead to higher table win and higher slot win. We think both will be up double digits in the market, in fact. And that we believe that MGM MIRAGE is going to get more than its fair share of table win and slot win.”
• “We see the Convention business starting to improve in April and accelerating throughout 2010 and into next year. And that will accrue to the benefit of primarily the higher-end properties.”
• “So when we're talking about the rooms we've booked for next year, every quarter in 2010 improves…The lead times have also been expanded. So in other words, we've talked about booking windows being very tight, within 60 days, within 30 days. We're starting to see more rooms being booked 60 days plus out, which is also an encouraging sign where we're able to capture some of those rooms, and therefore, help us yield our rooms better on a going forward basis. And obviously, in 2011, it improves further.”
  • Seasonality alone explains this, since Q1 is the strongest group and convention quarter.

• Q: “When you're giving numbers like that, is it same-store of existing inventory or is it with the addition of the rooms of CityCenter and the capacity at CityCenter?” 
  • A: “It's not same-store because ARIA is included but ARIA is so small relative to the overall rooms because of the vast space that we have at Mandalay Bay. So we can break it out separately on a same-store basis. We didn't do it here. But everything I'm looking at, the booking trends, for example, the convention bookings, that's all Mandalay for the most part. And the room nights we have in the pipeline for '10 and '11 are for the most part, all of the MGM MIRAGE wholly-owned properties. ARIA has a conference facility similar in size to Bellagio and really very small as a percentage of the overall portfolio we have at MGM MIRAGE. ….It can't be 5% of the increase in the room nights booked that we have for '10 and '11.”

City Center

• “During this final phase of pre-opening, we expect to deliver approximately 340,000 hours of training, spinning 90 different courses. Of the 12,000 employees at CityCenter, 3,100 were hired from existing MGM properties.”
• “At ARIA, we continue to see a steady pace of room bookings. We've already contracted 38% more room nights with convention groups over what Bellagio had done two months prior to its opening.” 
• As for the room rate pricing in the Transient and Leisure Market segment, ARIA continue to be priced at a premium to Bellagio. From opening through August 31, 2010, which is a 258-day period, ARIA's price is greater than or equal to Bellagio 80% of the time in the Transient Market and 90% of the time in the Leisure Market.” 
• Crystals: “We anticipate 47% of the square footage to open in December and have 82% of the square footage in terms of leases opened by July of 2010.”
• “As it relates to the budget for CityCenter, with regards to this budget, $7.75 billion has been funded to date and we have approximately $740 million left to fund the completion of CityCenter based on our $8.5 billion budget. We have about $350 million remaining to be drawn on our CityCenter credit facility and $140 million in remaining sponsor equity to be contributed. And the remaining funds will come from closing proceeds from condo sales.” 
• Unofficial guidance from Baldwin: “The $27 million in the first operating year is a little heavy. Usually advertising runs 1% to 2% of revenues and we forecast to have about $1.2 billion in revenues.”
  • And the $1.2BN is just for Aria…

Macau

• Q: “Macau. How much did hold benefit the property-level EBITDA performance?”  
  • A:”Okay, so it's up a little bit. So that helped a little.”
    • Hold was 3.1% and helped revenues to the tune of $24MM in the 3Q.  While VIP RC looks like it’s down a little in 4Q, hold is a little low. So we expect a $40MM sequential decline in VIP revenues  
• “As it relates to the Macau listing, we're clearly very interested in doing that and we've been moving very determinedly towards that goal. And we believe that, that will occur and could likely occur even as early as the first half of next year… We're very determined to take Macau public.”

Other commentary

• “As of today, we have availability of $1.6 billion under our credit facility. This is enough capacity to take us through 2010, as we have approximately just inside $1.1 billion of senior debt maturing between now and the end of 2010.  We're in good shape as far as our bank covenant. We have a minimum bank EBITDA covenant of approximately $900 million.”
• “Our total stock compensation expense, we estimate to be approximately $10 million in the fourth quarter. Corporate expense is estimated to be approximately $30 million to $35 million, including $4 million of stock compensation expense. Pre-opening expenses will be higher in Q4, primarily resulting from our share of pre-opening expenses with CityCenter's opening on December 16. Depreciation is estimated to be $170 million to $180 million in the quarter. Gross interest expense is estimated to be approximately $250 million to $260 million, with capitalized interest of $40 million in the fourth quarter. Our previous capital expenditure guidance was $200 million for the year. We're tracking to come in inside of that number. And so that guidance will be slightly lower as we finish up the fourth quarter.”
• MGM management contracts: “They won't be largely profitable over the next couple of years and won't be significantly meaningful to our cash flows. This is an enterprise that will generate, we think, $100 million to $200 million of EBITDA annually, within next five years.”
• “We don't give hold percentages quarter-to-quarter, but it was just slightly higher than our range. It wasn't materially so. So like maybe 100 basis points higher than our top end of our range, for example, something like that.”
  • 100 bps above the high end of their range is pretty material especially when it’s across that large of a base of volume
• “On an annual basis, we've taken out over $700 million of cost savings out of the system… And we eliminated thousands of positions within this company. And so when you look at, for example, this past quarter, and you see that our FTEs were down about 12% year-over-year but our occupancy was equal with last year's, I think that's a very telling correlation”
• “We'll be able to maintain that CapEx for the next few years.”