The success of MGM Resorts (NYSE:MGM) over the last five years can be traced back to one place: The Las Vegas Strip. MGM generates a vast majority of its revenue from the Las Vegas Strip, which has been on a long, slow recovery since the recession ended.
That's why it's curious, to say the least, that MGM is investing billions to expand in regional markets on the East Coast that have struggled for most of the past decade. MGM has completed National Harbor near Washington, DC, is building MGM Springfield in Massachusetts, and bought the half of Borgata in Atlantic City that it didn't own from Boyd Gaming (NYSE:BYD). Why spend so much when the opportunity is really in Las Vegas?
The dream of a gaming empire
One of the reasons why gaming companies have long wanted to expand around the country is the idea that there's synergy between casinos. Caesars Entertainment's (NASDAQ:CZR) expansion and eventual buyout in the 2000s was driven by the idea that the Total Rewards program would track profitable players and keep them coming back to resorts across the country. In theory, a local player from Iowa would be more likely to stay in a Caesars' resort in Las Vegas with the same rewards program.
If you've been following gaming at all over the last decade, you know that Caesars' plan ended up being a disaster. The company's largest subsidiary, which owns most of its regional resorts, has been in bankruptcy for the last two years, and the entire company is going to have to be restructured to emerge from bankruptcy.
Still, the failure of Caesars hasn't warned MGM off from expanding in regional markets where Caesars failed before. So the company is spending, or has spent, $900 million to buy Boyd's half of the Borgata, $1.4 billion on National Harbor, and $950 million on the resort in Springfield, Massachusetts. Over $3 billion is being bet that this time, regional gaming will pay off.
This time is different
MGM thinks this time is different based on where it's building resorts. The East Coast has finally opened up to gaming outside of Atlantic City, and MGM wants a piece of the action.
Its location near Washington, DC is close to a population center, and Springfield is one of only two casinos being built in Massachusetts. As the theory goes, being close to population centers will be an advantage for these casinos, which can host events, provide entertainment, and have the draw of a casino, as well.
The flip side is that none of these locations provide a critical mass of entertainment attractions like Las Vegas does, and all have nearby competitors from a recent expansion of gaming on the East Coast. It's hard to see why any of these resorts will be particularly attractive next to all of the other options customers have. And the price tag for each is enormous.
Better uses for cash today
What's most curious about MGM's expansion is that the company is just now beginning to get back on solid financial footing. But it still has $12.9 billion in debt compared to $2.7 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) over the past year, a fairly high debt/EBITDA ratio of 4.8. By comparison, Las Vegas Sands currently has a debt/EBITDA ratio of 2.0, and Melco Crown's ratio is 1.9.
I think the odds that MGM Resorts will generate a strong return from over $3 billion in regional gaming investments is low, and with competition in the area increasing, it's likely revenue will decline over time. The better choice for MGM's cash would have been reducing debt on the balance sheet to prepare for the next downturn in the gaming market. In the next few quarters, we'll start to see if the investment was a good bet or not.