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MGM Resorts Is Spending $1.3 Billion on National Harbor -- Worth the Bet?

By Bradley Seth McNew – Jul 17, 2016 at 2:07PM

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This massive development near Washington, D.C. is a major investment for MGM, but the project has a lot of skeptics. Will it work out for investors or be another Atlantic City?

MGM Resorts International (MGM 1.11%) is preparing to open its newest mega-development later this year -- a $1.3 billion resort and casino just 10 miles outside of D.C. The company expects this to be its most profitable casino in the U.S. outside of Las Vegas. However, some people are having a hard time forgetting how poorly casinos have fared in Atlantic City in recent years. Now that MGM's massive new east coast project gets closer to its fourth quarter opening, is this development worth a bet?

Why National Harbor looks attractive

National Harbor is an area of Maryland, just outside of D.C. and accessible by water taxi from Northern Virginia, which has become a tourist destination for hotels, shops, and restaurants over the last decade. The miniature city has nearly four million people who live within 25 miles and gets more than 10 million visitors annually, according to the official website.

A view of National Harbor. Image Source:

That's attractive to MGM, which believes that a high-end resort and casino in the area could attract both locals and visitors from the nation's capital and surrounding area. MGM originally planned to spend around $800 million developing MGM National Harbor, though that cost increased by half a billion as developments were made increasingly grand.

A rendered aerial view of MGM National Harbor. Image Source: MGM Resorts International

MGM National Harbor sits on 23 acres of land on the Potomac River, visible from the Capital Beltway. The resort will have more than 300 hotel rooms, including 74 luxury suites that are as large as 3,210 square feet; a casino with 3,600 slot machines and 140 gaming tables; and many more amenities like a large pool, celebrity-chef restaurants, a 3,000-seat theatre, and more. While this is still a relatively small resort compared to MGM's mammoth properties in Las Vegas, it will be by far the largest of its kind in the area. 

A rendered view of an MGM National Harbor suite. Image Source: MGM Resorts International

MGM is working with the local government to solve transportation issues by expanding bus lines to reach National Harbor from D.C. and Northern Virginia. There have been talks about a potential Metro line or similar rail option, though nothing has been scheduled yet.

Not everyone is happy about this new casino. Local critics have taken strong stands in article comments and on social media about their fears that this casino will prey on economically challenged locals and will eventually become a dump instead of a luxury destination. The two words many of them evoke to prove their point: "Atlantic City". Still, the resort is expected to generate $40 million to $45 million in tax revenue per year for the county and is on track to create thousands of jobs for locals.

The downside?

Without getting into the debate on the risks a new casino poses to the local population, what about risks this development poses to MGM investors? The biggest one might be the amount of debt MGM is taking on. 

MGM already had $12.9 billion in long-term debt as of the most recent quarter. In May, the company announced completion of another $1.05 billion offering of senior notes -- MGM is the most indebted company in its industry. The former debt leader was Caesars Entertainment, which has put its largest subsidiary into bankruptcy and is now facing potential bankruptcy company-wide due to its heavy debt burden. This should be a red flag for MGM and its shareholders.

So is MGM worth a bet?

Maryland proves to be a hard place to pull gambling profits: The state charges 61% taxes on slot machine revenue and 21% on table revenue. But even so, analysts at Fitch Ratings upgraded MGM, saying they believe MGM National Harbor will contribute $240 million of EBITDA (earnings before interest, tax, depreciation and amortization) and an 18% return on investment. MGM recently raised its 2017 year-end EBITDA target from $300 million to $400 million. 

This MGM National Harbor resort represents a nice diversification for the company, which gets the majority of its revenue from Las Vegas and Macau. This new property poses a great opportunity, and so long as debt levels are monitored, it's one that could pay off for shareholders in the next few years. 

Seth McNew has no position in any stocks mentioned. The Motley Fool is short Caesars Entertainment. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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