MGM Resorts International (MGM 0.84%), despite posting yet another loss for the fourth quarter and full-year 2014, has actually seen its share price trade up slightly since its Feb. 17th earnings release. Investors still appear bullish on domestic growth prospects, led by a resurgence in Las Vegas.
While the company faced significant troubles during the year, notably a huge revenue drop from its China operations, there were also some bright spots. The most important component in the past few quarters has been its growing non-gaming revenue in Las Vegas, including gains in convention and hotel revenue.
The fountains and iconic Bellagio resort in Las Vegas. Source: MGM Resorts International
With its Las Vegas success in hand, MGM continues to expand in the U.S. and is now working on two new resorts in the Northeast. However, even as the company takes on sizable debt to make its investments in the East Coast, a recent report indicates that gaming revenue in that region is below previous forecasts. This could be bad news as the company draws closer to completing its projects.
Help from Las Vegas
Revenue from MGM operations in Macau fell 22% year-over-year to $719 million for the most recent quarter, a major driver for the disappointing earnings report. Las Vegas Sands and Wynn Resorts have even bigger bets in Asia, with nearly 80% of their total revenue coming from the region. Only about one-third of MGM revenue comes from Macau, and the company instead aims for the domestic market to be its top growth driver going forward.
MGM had some trouble in the U.S. as well, including a one-time tax settlement fee related to a property sale in Las Vegas. However, its strategy appears to be a winning bet thanks to its growing domestic non-gaming operations, such as hotel revenue that increased 6% year-over-year, led by a 7% spike in revenue per available room at Las Vegas Strip properties.
A rendered view of the National Harbor resort. Source: MGM Resorts
More growth -- but at a cost
The newest MGM resort, under construction at National Harbor in Maryland, is set to open in 2016. This 1.7 million-square-foot complex is expected to house about 4,000 slot machines. On the heels of this project, the company also received approval to build a new resort in Massachusetts. It plans to start construction this year in Springfield for an opening some time in 2017. The Maryland project has an expected cost of $925 million, and the Massachusetts resort is budgeted for $885 million.
Investors bullish on domestic growth plans should also consider the significant debt MGM is taking on to fund these projects. The financing for the National Harbor project, as well as new resorts in China ($2.9 billion) and Massachusetts, is over $4.7 billion. If these resorts underperform compared to MGM forecasts, this debt load could be trouble.
Total debt stands at $12.9 billion, the second highest level in the industry (behind Caesars but once its bankruptcy proceedings are complete, MGM will move to the No. 1 spot). The MGM debt load is about 30% larger than that of Las Vegas Sands, with far less liquidity. MGM has an interest coverage ratio of just 1.5 times, well below Las Vegas Sands at 14.5 times, and one of the lowest in the industry.
The bad news -- sales in the Northeast are below expectations
According to a recent article from The Associated Press, gaming revenue in the states that most recently opened casinos (Maryland, Ohio, and Pennsylvania) has fallen below baseline forecasts previously calculated by industry consultants. These consultants make forecasts based on models that look at factors such as the size of resorts, the affluence of the surrounding areas, the amount of competition, and, most importantly, overall growth of the regional gaming economy.
As it turns out, the projections for a rising gaming economy in the Northeast were probably mixed with a good deal of optimism -- estimates made by the developers are often much higher than the projections from local regulators, since the developers are trying to win bids. The article reports that developer projections are on average 20% higher than those of local authorities. Now that the actual numbers are coming in lower than projected, new development in the region could be problematic for MGM.
These new resorts in the Northeast could be an opportunity for MGM to diversify outside of Las Vegas but still benefit from domestic growth. However, with lower than expected gaming revenue in the region, the recent weakness could worsen. If the company posts losses on these new casinos, while also holding a larger debt load due to financing their construction, this could be very bad news for MGM and its shareholders.
