MGM: IT’S NOT ABOUT OCCUPANCY

As predicted in my 7/30/08 posting “MGM: Q2 DOESN’T MATTER BUT EVERYTHING ELSE DOES”, MGM’s Q2 was not that bad. My issues continue to be prospective of Q2. Operationally, ADR’s and slot revenues are the metrics to watch to gauge the true health of the business. The trends there are not good. In Q2, MGM’s slot revenues declined 10% and ADR’s fell 5%. I believe these metrics will continue to deteriorate, especially room rates.

The company missed EBITDA and EPS estimates only slightly so the stock is up 6%. In its press release, management played up the occupancy stat as an indication of strong demand for the company’s Las Vegas properties. It’s funny how when times get tough occupancy becomes the selling point to investors. News flash: occupancies are always high in Las Vegas. Strip hotels will do anything to fill their rooms because they need to leverage that big fixed cost asset known as the casino. As I’ve written about extensively, room rates will always be sacrificed.

Real demand as measured by room rates and slot revenue is deteriorating. Unfortunately for MGM, these are also the two highest margin revenue drivers on the Strip.

"Real" demand in decline