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A 50% move in the stock and this is all we get?  Macau is finally delivering and the Borgata multiple was nice but where is the evidence of a big Las Vegas recovery? Certainly not in CityCenter.

Our big picture thoughts haven’t changed much since our post last night, “MGM: SO IT WAS A DEAL ROADSHOW”.  However, we wanted to add some additional observations and details.  Given the run in the stock, the looming cash flow issues in 2011, and the negotiations to restructure their City Center debt, management was smart to strike while the iron was hot with an equity deal.

Vegas was only in line with expectations.  Where was the blowout anticipated after the August Strip revenues were released?  EBITDA was a little better but so was hold percentage.  Reported Strip baccarat volumes were up 39.6% and 87.2% in July and August, respectively, yet MGM’s wholly owned Bacc volume declined 6% in Q3.  We were hoping for more from a company that boasts to own 35-40% of the baccarat volume on the Strip.  With Aria they say it’s over 50%.  Who’s hiding the bacon or was September a complete disaster on the Strip?

The most interesting aspect of Q3 was the diverging fortunes of MGM’s newest assets:  MGM Macau and City Center i.e. The pretty sister and the big ugly duckling.

  • So let’s start with the pretty girl (we’ll call her Anna)
    • $83MM in EBITDA is pretty good, despite a low hold; 4Q should be even better.
    • 3Q detail: Slot win was $33MM; RC volume of $13BN with low hold of 2.6% (we assume 15% direct play); Mass table win of $113MM
    • MGM is already tracking ahead in market share for October at 9.8% for the first 10 days. So we think that if the market holds up and MGM’s hold is normal, a $100MM quarter is within reach.
    • We now believe that MGM should be able to sell the deal on about $350MM of EBITDA, which means that at 11x they can net $450MM on a 30% IPO
  • Thoughts on the ugly duckling (let’s call him Todd)
    • Is there really anything good to say about the 3rd quarter, where a $9BN property makes no money?  If there is, I’m sure Jim will say it on the next call.
    • When we stifle out the noise, CityCenter reported a marvelous result of $0 EBITDA for the quarter… here’s how we get there
      • Reported Adjusted EBITDA was $52.4MM
      • Subtract $28MM of forfeiture profits = $24MM
      • Add back $2MM of losses on condo sales ($26MM of residential EBITDA pre development & admin less the forfeitures) = $26MM
      • Less the $26MM of positive hold impact = $0MM
    • Another way to think about City Center (ex residential) is that Aria is on a run rate of $15MM/quarter… let’s say things improve a lot.. .and they get to $30MM.  Everything else is a small bleeder or small contributor but basically inconsequential unless things just really get a lot better to the tune of $50-$100 of incremental RevPAR.  Forfeitures should wind down over the next quarter or 2 so then we are left with the residential sales – which basically make no money and at best proceeds can repay the extra money that MGM is on the hook for.
    • MGM’s net obligation in City Center was $137MM last quarter – and has now increased by $232MM to $369MM per the release
    • City Center lenders can’t be too happy right now.  There must be real doubt whether this project can produce $150MM of EBITDA much less meet the 5.5x leverage covenant that comes into play in June 2010. We believe that MGM will have to make a decent pay down of the CityCenter facility as part of its debt restructuring.