What Will Drive The Growth For MGM’s U.S. Hotel Operations In The Coming Years?

MGM Resorts (NYSE:MGM) continues to benefit from the higher demand and better convention mix at its U.S. hotel properties. Higher demand has led to a better pricing for the company’s hotels over the past few years. The average daily rate (ADR) has been growing steadily at an average annual rate of around 7% since 2010, driven by the recovery in the U.S. economy and higher disposable personal income, which grew from a little over $11,500 billion in January 2011 to over $13,150 billion in November 2014. ^[1] However, ADR is still lower than the pre-recession levels. This can be attributed to the company’s efforts in keeping the occupancy rate high. Casino operators are motivated to sustain occupancy in order to generate demand for the casino and other ancillary facilities, thereby, compromising the ADRs. MGM has maintained the occupancy rate at over 90% since past three years and now it should focus on ADR growth at a faster pace. Currently, we expect ADR to grow at an average annual rate of 6% in the coming years and reach pre-recession levels by 2017. However, there could be a potential upside of 10% to our price estimate if the ADR grows at an average rate of 8%. On that note, we discuss below MGM’s hotel operations over the past few years and what can drive the growth for its hotels in the coming years.

We estimate gross revenues of about $11 billion for MGM Resorts in 2014, with EPS of $0.54, which is in line with the market consensus of $0.40-$0.62, compiled by Thomson Reuters. We currently have a $24 price estimate for MGM Resorts, which is more than 15% ahead of the current market price.

See our complete analysis for MGM Resorts International

Higher ADR Will Drive MGM’s Hotel Operations In The Coming Years

We estimate that the Las Vegas hotel business contributes more than 30% to MGM’s value. The hotel operations are driven by ADR and occupancy levels of the hotel. MGM’s ADR has been trending well over the past few years and has increased at an average annual rate of 7% from $108 in 2010 to $131 in 2013 and $140 in September 2014. ^[2] Looking at Wynn Resorts’ (NASDAQ:WYNN) U.S. hotel ADR, it has grown at an average 7% while Las Vegas Sands (NYSE:LVS) saw a growth of mere 2% since 2010. MGM was able to grow its ADR primarily due to its better convention mix, which was around 17% for 2014. ^[3]

ADR is largely dependent on the hotel’s occupancy levels as it is demand that weighs on the pricing of the rooms. The average rate usually differs for group bookings and individual bookings. Apart from casino guests, the hotel sales team is focused on bringing in a defined number of room nights through various corporate travel agents and large travel agencies such as Thomas Cook and Cox & Kings. Since these corporates and travel agents bring in a huge chunk of room nights and help occupancy levels to grow, the price offered to them is often lower than the one offered to individual bookings. Overall, we estimate MGM’s ADR will continue to grow in the coming years. We estimate it will reach pre-recession levels of $160 by 2017 and over $200 by end of the decade. This will translate into revenues of $2.68 billion and an estimated EBITDA margin of 48% will translate into EBITDA of $1.28 billion, representing close to 25% of the company-wide EBITDA. This growth will primarily be driven by a revival in the U.S. economy and higher international travel, in our view.

As the U.S. economy stabilizes disposable personal income is expected to improve. This would give rise to the demand for luxuries including travel, leisure and entertainment and we expect MGM hotels to benefit from this. Moreover, a recovery in global economies and sophisticated financial markets of emerging economies are driving growth in international travel. According to National Travel And Tourism Office, the U.S. visitation has increased from close to 60 million in 2010 to approximately 70 million in 2013. ^[4] This is further driving the average guest spend as well as the occupancy levels of the hotels. The overall industry will continue to grow in the coming years with average annual travel and tourism GDP growth rate of 4% till 2024, according to a research by the World Travel And Tourism Council. ^[5] All these factors will lead to higher room pricing and drive MGM’s hotel operations in the coming years.

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1. United States Disposable Personal Income, Trading Economics [↩]
2. MGM Resorts’ SEC Filings [↩]
3. MGM Resorts International’s (MGM) CEO James Murren on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 30, 2014 [↩]
4. KEY FACTS ABOUT INTERNATIONAL TRAVEL AND TOURISM TO THE UNITED STATES, U.S. Department of Commerce International Trade Administration Industry & Analysis [↩]
5. Economic Impact of Travel & Tourism 2014Mid-Year Update, October 2014, World Travel And Tourism Council [↩]