MGM Resorts’ Posts Better Than Expected Q3 Results Amid Costs Efficiencies While The Key Takeaway Is Its REIT Proposal

MGM Resorts (NYSE:MGM) recently reported its Q3 2015 earnings, which came in better than most of the street estimates amid cost efficiencies. The company saw a whopping 400 basis points jump in EBITDA margins for its domestic properties. ^[1] However, it continued to struggle in Macau amid government’s tightening rules for junket operators, along with a slowdown in the economy. Overall Macau market saw a 34% drop in gross gaming revenues during the third quarter. Besides earnings, what caught everyone’s attention was the real estate investment trust (REIT) proposal of MGM. The company will form an REIT to reduce debt and drive its stock price. It would tie some of its properties to the REIT, assuming a debt of $4 billion. There will be no spinoff and MGM Resorts will hold a majority stake in the new company – MGM Growth Properties LLC. ^[2] On that note, we discuss below MGM’s Q3 results, its REIT plans and our estimates.

• Trefis has a $26 price estimate for MGM Resorts’ shares, translating into a $15 billion market cap. This is around 15% above the market price of around $23 seen over the week.
• We currently estimate the company’s 2015 gross revenues to be around $9.6 billion for earnings per share of $0.58, as compared to $0.53, according to Reuters. We’ll soon update our model to incorporate the recent quarterly earnings.

See our complete analysis of MGM Resorts’ stock here

Q3 Results Reaffirm The Importance of MGM’s Domestic Hotels

MGM posted an 8% RevPAR (revenue per available room) growth at its domestic hotels, beating its own guidance of 6% growth. Occupancy level in Q3 improved 100 basis points to 96% while ADR (average daily rate) grew 8% to $141, as compared to the prior year quarter. ^[3] The company is benefiting from higher convention mix, which is now close to 18% for MGM. Casino revenues also grew 4%, reflecting growth in slot volumes. It must be noted that the Las Vegas Strip was struggling since June through August this year amid lower baccarat volume and a tough comparison with the prior year period. However, that streak ended in September with 2% revenue growth at the Strip, led by a 17% jump in baccarat volumes. ^[4] This surely aided MGM’s Q3 performance.

We continue to believe that MGM’s hotel operations will drive domestic growth in the coming years. In fact, we estimate that the segment accounts for more than 35% of MGM’s stock value. MGM has a massive room supply at the Las Vegas Strip, while it is expanding its casino resort properties in other states as well. Now despite a high room supply for a casino operator (approximately 36,000 rooms), MGM is able to post occupancy levels of 95%. This is significant and it is more important consideration for any casino operator, as higher occupancy levels will aid the demand for casino and other ancillary facilities. With such high occupancy levels, we believe MGM can now focus on growing its ADR at a faster pace. We expect the ADR to be north of $200 levels by 2020 with occupancy levels of around 95%. This will result in room revenues of over $2.5 billion and an estimated EBITDA margin of 47% for MGM’s hotel operations will translate into EBITDA of over $1 billion, representing 30% of the company-wide EBITDA.

REIT Proposal Will Boost MGM’s Cash Flows

A REIT for MGM was always on the cards as some of its competitors, including Caesars Entertainment, took the same route. Earlier this year, one of the investment funds revealed that MGM’s stock price could see significant growth if it takes the REIT route. MGM in its earnings conference call stated that it actually started looking at this option towards the end of 2014. Now with REIT, MGM will enjoy tax advantage and distribute most of their taxable income to shareholders. This move was well received with the investors and the stock price rose over 6% since the news came out on Thursday, October 29th. So the proposed REIT will have 10 properties (approximately 24,000 rooms) with debt of around $4 billion. This will lower MGM’s debt levels by around one-third to $8.8 billion. With lower debt levels, MGM will be able to generate higher cash flows to meet the capital requirement for its ongoing projects as well as the ones in the pipeline.

Expect Macau To Do Well In The Long Run

Looking at Macau, MGM’s Q3 revenues declined 33% while EBITDA was down 40%, amid continued weakness in world’s largest gambling hub. ^[3] The gaming revenues have been on a decline for 17 straight months led by the government’s anti-graft measures, followed by a weakening economy. Having said that, overall gaming revenues have remained stable for most of 2015 and base mass appears to be stabilizing. Many have been seeking catalysts that could bring in the much anticipated revival in Macau gaming. So far, the situation at best has been stable, which is not bad given the intensity of the fall the market has witnessed since the summer of 2014. Looking forward, the comparison will be favorable from Q1 2016 given this stability in gross gaming revenues sustains.

Macau accounts for more than 25% of MGM’s value, according to our estimates. While the market has been on a decline for several months now, most of the weakness in the Macau is on the VIP front, especially on the junket side, while the mass-market gaming has been comparatively better. This is favorable for MGM, which has been expanding its mass-market gaming operations in the region. We continue to believe that mass-market gaming will be the future growth driver for the overall Macau market, led by buoyant growth in China’s middle class, which will boost visitation from Mainland China to Macau. Key infrastructural projects for better connectivity to Macau will further aid the overall visitation growth. While we currently estimate more than 30% drop in MGM China revenues for 2015, we expect revenues to grow from $3.5 billion in 2014 to a little over $5.5 billion by the end of our forecast period (towards 2022). An estimated EBITDA margin of 36% for MGM’s Macau operations will translate into EBITDA of over $2 billion, reflecting over 45% of the company wide EBITDA. Now much of this growth will be driven by MGM’s new casino resort in Cotai, which will significantly enhance MGM’s capacity in the region, along with a growth in the overall Macau market. In fact, MGM’s Cotai property has a potential to generate $1 billion in annual EBITDA, in our view (see – MGM’s Cotai Resort Has A Potential To Generate More Than $1 Billion In Annual EBITDA).

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More Trefis Research

1. MGM Resorts International’s (MGM) Jim Murren on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, Oct 31, 2015 [↩]
2. MGM Resorts’ Press Release, Oct 29, 2015 [↩]
3. MGM Resorts’ Q3 Earnings Release, Oct 29, 2015 [↩] [↩]
4. Nevada gaming revenue rises 1.5 percent in September, Las Vegas Review Journal, Oct 29, 2015 [↩]