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Sober and realistic have typically been good words to describe PENN management commentary. We’d say they apply to CFO Bill Clifford’s recent thoughts on MGM.

PENN CFO recently spoke at a conference and the commentary turned to Las Vegas and MGM.  Bill Clifford’s comments were enlightening and not just because we agree with them.  Here are a few:


Bill Clifford on Las Vegas and CityCenter

“I mean 63% occupancy for a CityCenter is a good thing? I don’t know, I mean. And I’m not trying to be – I mean obviously, it’s a new property and they’re going to grow into it and it’s a property that’s very focused on group business or it’s a property designed significantly for group business. And obviously that market’s got to come back, et cetera, et cetera. But – so I don’t want to downplay the CityCenter results as necessarily bad. I think that’s just a natural process and it’s an enormous facility. I mean it’s – I mean thousands and thousands of rooms that are – that they’ve got to fill. You’ve got Cosmopolitan coming. But all of a sudden the stock market’s basically saying, well, everything is great in Las Vegas. So valuations are up. I saw somebody’s report this morning. It wasn’t this guy. But 14 times is a good number. Okay, 12 times for next year, great. We can’t buy a facility at 14 times and make it work. We just can’t”

Basically, 12x is a ridiculous multiple for Las Vegas assets; unworkable from a buyout perspective.  The public equity multiple is higher than a private multiple, so what gives?  Investors must really be expecting a v-shaped recovery.  Our view is that there are too many structural issues with the consumer and the economy. The LV of 2005-2007 was housing fueled more than anything else.  We are not getting back to those levels anytime soon.  We think PENN management probably agrees.

Clifford was being fair when it came to CityCenter.  The property will get better but there are still a lot of hurdles including new capacity.  As of now, it is pretty much a disaster.

Bill Clifford on Borgata

“We’ve got 95 million for Perryville, I don’t how much Borgata can I get for [that much]...I don’t think it’s very much either. I mean buying Borgata, I just can’t imagine a situation where given that Boyd has a right for first refusal, I just can’t imagine there’s a price we would pay that Boyd wouldn’t match. So – and I don’t know anything about Boyd’s strategic objectives. But just given that they’re a controlling partner and our views on Atlantic City, the price that we’d offer is just not going to be something that I think Boyd would sit there… I actually very much expect Boyd would be 100% owner of Borgata”

Clifford’s Borgata comments followed a trashing of Atlantic City’s prospects.  The question really is how much would you pay for half of a good asset in a horrible market with no operating control from a forced seller.  The answer is not much which pretty much guarantees BYD will end up with 100% ownership at a very good price.  This is not good for MGM.

Of course, Clifford’s comments must be taken with a grain of salt.  It’s no secret that PENN maintains some dry powder and has expressed an interest in acquiring a Strip property.  From this perspective, management is probably not happy that Las Vegas valuations have gotten so high.  However, I’ve always known this management team to be straight shooters and Clifford’s assessment makes a lot of sense.