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Turnaround story unfolds for MGM Resorts International

18 Aug 2014

By Howard Stutz
LAS VEGAS -- A few years ago, when the recession had a firm chokehold on the casino industry, MGM Resorts International was a mess.

CityCenter opened in December 2009 to cost overruns and a depressed consumer market. MGM Resorts’ stock price was trading in single digits, and the company was looking to unload several hotel-casinos to bolster its sagging balance sheet.

MGM Resorts’ survival was actually in doubt.

Today, it’s a whole new story.

Following the company’s release of second-quarter earnings this month — a profit of $105.5 million on revenue of $2.6 billion — the investment community praised the company and lauded expansion opportunities in the U.S. and Macau.

“MGM remains the most compelling way for investors to play a Vegas recovery paired with growth in Macau,” Credit Suisse gaming analyst Joel Simkins said in a research note. “With Las Vegas back in vogue, investors should turn to MGM as the best way to play this theme.”

Wells Fargo Securities gaming analyst Cameron McKnight wrote, “Las Vegas trends clearly remain strong, and we remain positive on the potential upside from MGM China’s Cotai project and its strong dividend profile (which is up 25 percent year-to-date).”

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said MGM Resorts’ stock price — which has been trading in the mid-$20s much of August — has “widely outperformed the broader market” over the past 12 months.

The company’s Las Vegas story — where its 10 Strip operations include MGM Grand Las Vegas, Bellagio, The Mirage, Mandalay Bay Resort & Casino and CityCenter — was key to the investment upside.

“The early innings of the Strip recovery was directly tied to a resurgence in group and convention travel,” Wieczynski said. “Recent results suggest the group strength has started to trickle down into the midtier and value segments.”

Clearly, there are smiles in the MGM boardroom.

No analysts or company executives are mentioning asset sales. In fact, two properties that were on the market in 2009 — Beau Rivage Resort & Casino in Mississippi and MGM Grand Detroit Casino — had healthy revenue and cash flow increases in the second quarter.

The company’s long-term debt, which was at $13.4 billion at the end of 2013, was down to $12.6 billion as of June 30.

“We think this quarter is a really good example of the power of being a leading operator here in Las Vegas,” MGM Resorts Chairman Jim Murren bullishly told analysts during the company’s conference call. “Our key markets are continuing to grow, and we continue to invest and focus where we see opportunity.”


Like its rivals — Wynn Resorts, Limited and Las Vegas Sands Corp. — MGM Resorts relied on its single casino in Macau, the MGM Macau, to help boost the company endeavors while Las Vegas recovered.

In the second quarter, MGM Resorts’ Strip revenue increased 7.7 percent. CityCenter, which the company manages and owns in a 50-50 partnership with Dubai World, increased revenue 9 percent in the quarter.

Macau revenue fell less than 1 percent.

Simkins said returns from Bellagio and Mandalay Bay were expected.

What he found “notable” was “continued improvement” at the company’s “secondary” Strip resorts, such as New York-New York Hotel & Casino, Luxor Hotel and Casino, and Monte Carlo.

MGM Resorts Chief Financial Officer Dan D’Arrigo said the company’s cash flow on the Strip was up for the seventh consecutive quarter and results were fueled by baccarat.

“Clearly, the customer relationships we have developed in Asia are benefiting MGM Resorts in Las Vegas, and we expect this trend to continue,” he said.

Meanwhile, MGM Resorts is expanding its footprint in Las Vegas by enhancing its nongaming amenities.

A 33-acre open-air concert venue between Circus Circus Hotel Casino and Sahara Avenue is being designed. New York-New York unveiled its 13,000-square-foot Hershey’s Chocolate World in June, and two new restaurants, Tom’s Urban and Shake Shack, open in December.

Also underway is The Park, a dining and retail district, anchored by a $350 million sports arena-events center on 23 acres between New York-New York and the Monte Carlo.

By fall, the transition of The Hotel into the Delano Las Vegas will be complete. The 1,100-room nongaming hotel attached to Mandalay Bay is undergoing $80 million in upgrades.


CityCenter is drawing increased interest from Wall Street.

Goldman Sachs gaming analyst Stephen Kent asked Murren if MGM Resorts was still considering selling Crystals, the retail and entertainment component of the complex. Or, would the company buy back Dubai World’s 50 percent in all of CityCenter.

“As it relates to buying out our partners, I think we both like owning half of it,” Murren said. “I’d like to own 100 percent of it, but you have to have somebody that wants to sell when you want to buy. And our partners don’t want to sell.”

Murren said MGM and Dubai World like the free cash flow growth potential at CityCenter.

“(Dubai World) likes that Aria Resort & Casino is becoming even more profitable than it is today,” Murren said. “They like the fact that Mandarin Oriental and Vdara are making money and Crystals having a big growth path.”

Murren said MGM Resorts looked into selling Crystals more than a year ago, but that idea has passed. He said the complex was always intended to be a separate component from CityCenter.

“We believe that Crystals is a very valuable asset,” Murren said. “The question for us will become, do you sell Crystals for $1 billion today, or do you wait and grow it and see how you can expand it further. Which has more potential?”


2016 could be a pivotal year for MGM Resorts.

In those 12 months the company is expected to open the $2.9 billion MGM Cotai in Macau, the $1.2 billion MGM National Harbor in Maryland and the Strip arena.

Both the 1,500-room Cotai project and National Harbor have been targeted for increases in size and scope.

On Cotai, Murren said architect David Rockwell, who designed Crystals, will create the Spectacle, an entertainment and retail complex. A Sky Loft component of luxury hotel suites will be added.

Plans are being developed for the second phase of MGM Cotai, which will include 700 hotel rooms and nongaming amenities.

MGM National Harbor is increasing its presence by 475,000 square feet in the future public space.

Analaysts believe both projects benefit the company.

“We think CityCenter, MGM Cotai and MGM National Harbor are overlooked and should create value for the company,” Buckingham Research Group gaming analyst Brian McGill said. “The balance sheet has also improved and leverage should decline going forward.”

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