The Springfield Casino Can Revive Gaming Growth For MGM Resorts

MGM Resorts (NYSE:MGM) has received its final state license from the Massachusetts Gaming Commission (MGC) for its proposed casino resort in Springfield. ^[1] MGM will spend close to $1 billion in building the new casino project. The company first expressed its interest in setting up a resort in Massachusetts in 2012. It must be noted that Massachusetts is an important location for casinos, as it is the third richest state in the U.S. with high per capita income. We believe the new project can generate more than $100 million in annual EBITDA for MGM. On that note, we discuss below MGM’s Massachusetts project and our estimates for its casino operations.

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Massachusetts is an important location as it is the third richest state in the U.S. with a per capita income that is $8,399 higher than the average U.S. per capita income. This bodes well for a casino project. Springfield is the third largest city in Massachusetts and is located in close proximity to Connecticut, which is the second richest state. Springfield is well connected with other major cities of Massachusetts and the proposed casino will be very close to the Interstate 91, thus eliminating transportation issues. It is also close to Interstate 90 linking Boston Massachusetts and Albany New York.  Overall, MGM will have a geographic as well as demographic advantages in Springfield.

It makes sense for MGM to diversify its operations outside of the Las Vegas Strip. Slow economic growth, the legalization of gaming in other U.S. states, and the strong growth of Macau’s gaming industry (until 2014) have adversely affected Las Vegas’ gaming industry. The gaming revenues at the Strip were down 2% in 2014 and it is down a little over 1% so far in 2015. ^[2] While the major casino companies such as Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) have set their roots predominantly in Macau, MGM remains confined mostly to the Las Vegas Strip. For MGM, expanding its operations outside the Las Vegas Strip will help revive its gaming growth in the U.S.  However, we continue to believe that Macau will contribute more value to MGM’s casino operations in the coming years, led by its new casino project in Cotai, which is scheduled to open towards the end of 2016.

MGM derives around 65% of its domestic gaming revenues from slot games. The company has more than 22,000 slots in the U.S. and has a win rate of $207 per slot per day, according to our estimates. The figure has seen consistent growth in the past few years and is likely to continue this trajectory in the coming years, especially with the changing trends in the gaming industry. Players now prefer to have some control over the game (unlike Baccarat) and they are inclining towards other games. Accordingly, casinos are now including skill-based slots to their offering. While table games will continue to be an important contributor to casino revenues, its overall share is likely to come down with the arrival of skill-based slots. Given that MGM has a massive capacity for slot games, it will benefit from any growth in this segment. Now the company plans to have 3,600 slot machines and 140 gaming tables in its Springfield casino and this could generate $450 million revenues and close to $100 million in EBITDA, in our view. While MGM Springfield will benefit from the casino operations in the region, the new resort will also be a large source of non-gaming revenues driven by the hotels, retail, food & beverage, entertainment and other activities, a trend seen in MGM’s other casino properties in the U.S.

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1. MGM Resorts Receives Final Mass. License For $950 Million Casino, Hartford Courant, Dec 17, 2015 [↩]
2. Nevada Gaming Revenues and Collections, Nevada Gaming Control Board, October 2015 [↩]