MGM buys half of Borgata from Boyds

It was announced yesterday that MGM Resorts International will buy the remaining 50 percent stake in Borgata that it didn’t already own from Boyd Gaming.  This announcement had been anticipated ever since MGM regained a license to operate in Atlantic City. I think this is good news for Boyd because it will give them more financial flexibility to reduce debt and plow resources into updating their current properties and systems, especially after recently announced Las Vegas acquisitions. The real estate of Borgata will also be sold to MGM Growth Properties.  Shares of MGM were flat on the open today, but shares of BYD were up more than 3% and MGP were up 2%.

Boyd Gaming sells its 50 percent stake in Borgata to MGM Resorts

ATLANTIC CITY – Boyd Gaming said Tuesday it is selling its 50 percent stake in Atlantic City’s top casino to MGM Resorts International, the company that owns the other half. It will get $900 million, plus half of any future tax settlement MGM reaches with Atlantic City.

Casino REIT dominoes are falling

Last week MGM Resorts International announced they will carve out a REIT from their operations to be called MGM Growth Properties. This is the first major Las Vegas strip property owner to clearly give intentions on REIT creation. Caesars has a desire to convert to a REIT, but its still mired in a long bankruptcy battle with its creditors.  For MGM, 10 of their properties will be rolled into MGM Growth Properties including most of its Las Vegas strip properties with the Park development, but the REIT will exclude Bellagio and the MGM Grand.  The festival grounds on the corner of Sahara and the Strip as well as Circus Circus will also be excluded from the REIT. MGM Detroit and the gulf coast properties will be included, and MGM Springfield will likely be folded into the REIT once its operational.

The creation of an MGM REIT will have major impacts on the Las Vegas Strip, but at first, MGM Resorts International will retain a 70 percent stake in MGM Growth Properties. This means that MGM Resorts International will control the REIT and operate the two divisions with parallel business strategies.

MGM vs Land & Buildings

While public companies should welcome any input from shareholders, since it’s the shareholders who own the company, boards should be cognizant of balancing the interests of all shareholders in proportion to their ownership. In the case of the proposal made by Land & Buildings for MGM Resorts to convert to a REIT, Land & Buildings only owns 1 percent of outstanding shares, so the board should weigh the views of Land & Buildings in proportion to their ownership interest.

Regarding the slate of directors proposed by Land & Buildings, some of the directors would be valuable to have represented on the board. Although I think a good first step to improve governance at MGM should be to no longer have any executive of the company also serving as board member. A major responsibility of the board should be to hold management accountable, and it creates a conflict of interest to have management also serving on the board. Jim Murren should only serve as CEO of MGM.

The MGM REIT conversion is going to be a fun fight to watch, but I think Land & Buildings will need to recruit more shareholders to support their strategy, and ultimately, Kirk Kevorkian will need to provide an opinion.

MGM REIT speculation heats up

The dominoes are falling as MGM is now being pushed publicly by real estate fund manager Land and Buildings to spin off its real estate assets into a real estate investment trust. An MGM REIT would have a dramatic impact on the Las Vegas market as MGM is the largest hotelier in the city and dominates certain areas of the Las Vegas strip.  I believe if MGM converted to a REIT, it would focus the new REIT on ways to grow its assets, which would mean a greater investment in Las Vegas and a greater intensification of its properties on the strip.  If one considers the excess undeveloped land holdings that MGM owns and the parking space that is currently underutilized, with the value of that property in the hands of a REIT, I think it makes sense for those excess land holdings to be developed.  This would mean greater development at the south end of the strip including space at Mandalay Bay, Luxor, and Excalibur. At the north end of the strip, there is a lot of potential in Circus Circus and the festival lands on the corner of Sahara & the Strip.

As this process unfolds, I wonder about the role of Kirk Kerkorian who is age 97 and who owns about 20% of MGM Resorts International.

Reviewing MGM’s 2014 Financials

MGM Resorts International is based in Las Vegas with shares traded under the symbol “MGM”. The company has a market cap of just over $10 billion and also has a 51% stake in MGM China (which represents the MGM Grand Macau) with shares traded on the Hong Kong Stock Exchange under the symbol “2282”. MGM China has a market cap of 68 billion HKD, which is equivalent to almost $9 billion USD. MGM has an interest in both Las Vegas and Macau and a smaller interest in casinos in Detroit and the Gulf Coast of the US.

I recently reviewed the February 17th 8-k financial filing from MGM. This report provides the Las Vegas watcher with interesting information on MGM’s various hotel/casinos in Las Vegas. The regular report provides readers with a breakdown of top level financials from MGM consolidated and also provides top level metrics on MGM’s various properties.

The first thing to keep in mind when analysing MGM is to remember that it’s deeply indebted. MGM owns $14 billion worth of property/equipment and has $2.2 billion in cash, but it also has almost $13 billion in long term debt outstanding. Operating income was $1.3 billion last year, but interest expense is just over $800 million. After subtracting taxes and a loss at City Center (which isn’t consolidated), MGM lost $150 million in 2014 or 31 cents per share.

The difference between Las Vegas and Macau is striking. Las Vegas is currently experiencing a bullish environment. Tourist traffic is hitting all-time highs. Revenue from rooms and dining/entertainment have also been very strong. Macau in contrast is experiencing a large downturn. Gaming revenue is down sharply in 2014. But Macau will adjust to the loss in gaming revenue the same way Las Vegas has, by adding other forms of revenue unrelated to gaming such as dining, entertainment, and other tourist revenue. I expect Macau to eventually bounce back and grow to new highs.

In their financials, MGM breaks down revenue and expenses from each property. Nothing dramatic has changed over the past few years, but it’s worth noting that MGM Detroit is profitable. In fact, MGM Detroit brings in about as much revenue as The Mirage and has an EBITDA higher than The Mirage. So shareholders should not forget about MGM Detroit since it’s a valuable piece of MGM’s overall portfolio. However, shareholders should wonder how MGM Detroit fits in strategically to the entire MGM portfolio. Does MGM Detroit create any synergies with the rest of the company and portfolio? The same should be asked of the Gulf Coast properties of Gold Strike Tunica and Beau Rivage. They represent a small part of the MGM portfolio, and might it be more strategic to focus the business by selling off non-core properties?

One idea is to sell MGM Detroit and the Gulf Coast Properties and use the proceeds to re-develop the Circus Circus property. As Resorts World Las Vegas comes online in a couple of years, and the Riviera set to close, and with the festival lands on the corner of Sahara and the Strip, could there be a possible deal to trade Ichan for a share in Fountainebleau in order to complete this project and bring more traffic to the north end of the strip? More traffic at the north end of the Strip makes Circus Circus more valuable. This is a pretty wild speculation and I doubt anything this dramatic will happen.

Looking at the hotel data, Las Vegas is clearly experiencing a bullish hotel market. All of MGM’s properties have increased occupancy rates in 2014. ADR and RevPar rates also increased strongly. This is a particularly positive sign for MGM Resorts as they are the largest hotelier on the Strip and hotel room rental revenue represents a growing portion of total revenue for the Las Vegas hotel/casino.

Here is a link to the report,

MGM Resorts International 2014 Financial Update

 

 

Crown Las Vegas

Las Vegas watchers will be particularly excited about the recent annoucement that Crown Resorts plans to develop the former Last Frontier land on the strip.  While Phil Ruffin collects income from Treasure Island, he must watch with some interest how the land he sold for $1.2 billion has sat vacant for several years, and is now being developed at a valuation probably 1/4 of what he got for it.

Now, Australian billionaire James Packer and Crown Resorts will take a leap by developing the site into a integrated resort with the help of some former Wynn execs.  What should be of main interest to Vegas watchers though should be how the north end of the strip is filling in.  I wonder what this latest development means for the Fontainebleau development that still sits idle nearby.  With new developments happening in the neighbourhood including Resorts World, and the Rock in Rio festival space planned for the corner of Sahara/LVB.  Add the SLS opening to the mix of new developments, and it seems the north end of the strip will be where the action is.