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MGM Resorts’ East Coast Bets Are Paying Off

By Travis Hoium - Aug 3, 2017 at 6:32AM

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Betting billions on East Coast gambling was a risk, but it appears to be paying off at MGM Resorts.

I'll be the first to admit that I've been wrong about MGM Resorts(MGM -2.38%) strategy of expanding on the East Coast. The company bet billions of dollars on expanding and acquiring assets up and down the East Coast, which was risky given the financial problems that have been pervasive there. 

The move may have been far shrewder than I thought, and the numbers are starting to prove that out. Here's why MGM's bet on the East Coast could be a game changer for the company. 

Las Vegas skyline at night.

Image source: Getty Images.

National Harbor may have been a no-brainer

When MGM spent $1.4 billion to build MGM National Harbor outside of Washington, D.C., I was the first to call it a foolish investment. The region has plenty of gaming -- from Atlantic City to Pennsylvania -- and there wasn't a critical mass of properties to attract vacationers; this was a one-off resort. But first half of 2017 results show that thesis may have been wrong. 

Aerial view of MGM National Harbor.

Image source: MGM Resorts.

MGM reported $69.1 million in EBITDA at MGM National Harbor in the first half of the year, implying about a $140 million annual EBITDA run-rate, 10% of the resort's construction cost. And the property had just a 19.7% EBITDA margin on its $350.9 million in revenue over that time. A more typical EBITDA margin of 30% would result in around $210 million in annual EBITDA, implying a 15% return on its investment in the resort.

MGM National Harbor may not be the most profitable resort in MGM's portfolio, but it could be a solid contributor to the bottom line, which is a good investment long-term. 

New Jersey isn't a money sink for everyone

The other somewhat puzzling move was spending $900 million for the half of the Borgata resort it didn't already own. But again, that may have been a steal of a price.

Borgata generated $160.3 million in EBITDA in the first half of the year, implying a $320.6 million annual run-rate, or a 17.8% return on the $1.8 billion price MGM paid to complete the acquisition of the resort. If that rate continues MGM can pull the cash back to the corporate level (investing in expanding in Atlantic City probably isn't wise) and pay down debt or invest elsewhere. 

Springfield is coming

The next East Coast expansion is a $950 million resort in Springfield, Massachusetts. It's not quite the urban resort National Harbor is, but if the two resorts above worked out this one might too.

The other Massachusetts resort opening is Wynn Boston Harbor, the $2.4 billion property from Wynn Resorts (WYNN -2.54%). This will be more of an urban property, drawing from Boston and the surrounding area. Will the urban or small town bet be the better one in Massachusetts? 

East Coast gaming is all about what you bet on

What MGM has done well is bet on the right properties on the East Coast. Atlantic City is certainly in decline, but Borgata is performing well and may be one of only a few major resorts left standing. And Washington DC's market may have needed a gaming and convention option for its visitors. If the Springfield investment pays off MGM will be three for three on the East Coast, and that's not something I would have predicted a year or two ago. 

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