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MGM Resorts International (NYSE:MGM ) Jefferies Global Consumer Conference Call June 20, 2022 8:00 AM ET
Jonathan Halkyard - Chief Financial Officer
Conference Call Participants
David Katz - Jefferies
Good day everyone, and thanks for joining us. I'm David Katz, Gaming Lodging and Leisure Analyst with Jefferies, and the next discussion that we're having today is with MGM Resorts and Chief Financial Officer, Jonathan Halkyard. We appreciate everyone making time for us today. MGM has been one of our top picks over the past number of months. Our belief is that there's a number of ways to win within the story and I hope we can cover that and then some this morning.
Jonathan, thank you for making time for us. I hope we could begin by just talking about the broad picture of the business today. Las Vegas, high-end regionals, digital, Macau, and frankly, given the changes in leadership that have occurred over the past few years, how do these pieces fit together? And I think we should probably even touch on Japan as a part of a preview of the company.
Okay. Well, it's good to be with you, and let me try to address that question and its component parts in turn. I guess, starting back really over the last couple of years, what we've been trying to do is, first of all, be very clear on the mission and the strategy of the company. Simplify the company's organizational structure and corporate structure so that we can execute on that strategy and then invest in some areas of growth in the business.
Let's do just a quick tour of where the business stands right now. The business in Las Vegas is quite strong. We can talk a little bit more about the specifics of that later, but the way in which we've changed the portfolio with the acquisition of the cosmopolitan depending disposition of the Mirage, the various segments that we have and our leaders in from group business to leisure travel and entertainment to gaming are all quite strong.
The business in Las Vegas is operating against a cost structure that's materially improved from 2019 to the order of 500, 600 basis points of margin improvement against similar levels of revenue. Overall, the supply addition environment in Las Vegas is fairly benign right now and looking out over the next couple of years.
And then finally, we have a new loyalty program, a reenergized loyalty program and MGM rewards, which I think are going to increase cross property play between our properties in Las Vegas. The regional properties that MGM has – are performing well. They're all leaders in their market. Just looking at some information this morning, four out of the top eight GGR regional properties in the country are MGM properties.
We obviously have a very strong position in the Northeast and those properties are performing well also against an improved cost structure versus several years ago. On the digital front, this has been where a lot of the action has been in the last 18 months. Hopefully, many of our shareholders were able to tune into the Bet MGM Investor Day a few weeks ago where they provided a nice update of their business.
That business is retaining market share levels in iGaming and online sports betting and solid number one or number two position in those different verticals. And more recently, MGM announced the acquisition of a European iGaming, an online sports betting company called LeoVegas to supplement our efforts and our investments in digital gaming, and down the road, we just see further and further integration of Bet MGM and the MGM loyalty program.
And then finally, on the international front, that's been a bit of a mixed bag. I mean, our really – our efforts in Macau have been oriented more towards the retendering for our license in Macau. The business itself has really, kind of been driven more by the public health considerations, in particular, the travel restrictions or lack thereof going into Macau.
So, before we get just a little bit deeper into the fundamentals in a number of those areas, the capital structure of leased properties is a point of discussion. How do we think – how have you thought about getting to that place? Would you buy, build, or own hard assets in the future or is MGM domestically off of hard asset ownership on a semi-permanent basis?
The capital structure of MGM has evolved pretty dramatically over the past five years. We are now in a place whereby MGM Resorts domestically owns none of its properties. We lease all of the properties from [VICI] [ph], and then a number of Blackstone entities. And the way I think about it is the following.
We have for our domestic businesses a perpetual capital structure in the form of these leases. The lease payments were originally designed to be slightly less than half of our EBITDAR for the property. So, built in just over two times coverage of these lease payments. They escalate on average at about 2% a year. They are CPI driven though, but subject to a cap, which is generally 3% a year.
So, to the extent we can grow our EBITDAR at our properties at a level greater than 2% a year, there's operating leverage within this lease portfolio. We don't have or within this capital structure. We have no refinancing risk. We have really no interest rate risk associated with it. In getting to this structure, of course, by selling the properties, we've freed up billions of dollars’ worth of capital, which we've reinvested in our own shares and we also have as dry powder for other acquisitions.
And so the capital structure is quite different, but I think provides the company and its shareholders with pretty interesting operating leverage. As it relates to new properties, I think it’s unlikely that we're going to own hard assets over the longer-term. We may develop additional properties using our own capital, but then I expect we would look to monetize those through the same type of transactions that we've done with our other assets.
Understood. So, whether it's fairly or unfairly, the stock tends to move off of Las Vegas and the fundamental setup in Las Vegas, which appears to be very strong, as you noted, from a group perspective, is there any particular concern that is a focus for you, whether that's labor costs, gas prices, you know, anything that we should contemplate in there? And, you know, has there been any notable change in demand as we, you know, sit here taping this today, the markets have been – are projecting a fair amount of uncertainty? Help us be balanced in our fundamental thoughts on Las Vegas?
Well, I will – I think it's a very good question and to say help us be balanced, because I think balance is important. It's easy now to be very ebullient about the market. The demand dynamics are strong. As we look out 90, 120 days, the group business is quite strong. In fact, this month in June of 2022 is stronger than it might normally be because many of the groups that cancel in January rebooked into May and June, and we're enjoying the benefits of that right now.
We expect the group business to be about 920% of 2019 levels as we exit 2022, and there have been no signs on that side of the business of any reduced demand. In fact, what we're hearing from our group business is that they're finding even greater ROI in their meetings and conventions in part because companies just haven't met together for the past two years. And so they're finding that it has even a greater return to do so.
I am concerned about the – just the pressures that inflation and some of the cost growth in everything from fuel prices to groceries to going out has put on, you know, on customers. You can't help, but be a bit concerned about that, we just haven't seen any evidence of the impact of those price increases on the visitation or spend pattern of our customers.
So, you know, all I can say is that we remain vigilant. We're looking at our booking patterns. We're speaking with our customers and what they're seeing and we just haven't seen any impact from it at this point.
Perfect and clearly noted. If I may, one more recession question and then it's going to be all positive the rest of the way, I promise, but if we were to look at a recessionary scenario, how would bottom line or cash flow be impacted if revenue were to pull back hypothetically 5% or 10%? How would that impact the convention business, and this is, I think fairly the most prominent concern that everyone has about, you know, the whole industry at this point, not just MGM?
Yeah. We've done some looking back at how the businesses performed during the 2008 recession, which of course was, it was a more dramatic revenue decline by that. And in part, in Las Vegas, it was exacerbated by supply additions during that time, including Aria and some others. So, it's been a little bit difficult to tease out what the impact of that was.
Look, if there was a revenue reduction of 5% to 10%, it kind of depends on where that's coming from. If it were from hotel pricing, that largely falls to the bottom line. I mean, that's some of what we're enjoying right now and with margin expansion and all those benefits. If it were instead due to visitation reduction, then that would I think that we would be able to reduce costs to keep margins generally in-line if we were just seeing that in terms of hotel occupancy.
I mean, when you look at what we experienced back in January where we had a dramatic reduction in hotel occupancy during the month of January, our margins declined by, kind of from the mid-30s to the low-30s, but that was because a lot of that was because visitation had reduced and not pricing. So, I think it really does depend if there were to be a revenue reduction, whether it's simply pricing or it's actual visitation.
Understood. So, what I'd like to spend a minute on is the progress that you've made in reimagining the rewards program. You have a particular experience and background with Caesars in the past, where are you in terms of reimagining that? And what would you have to do to measure up to where Caesars was at its peak or was or is today for that matter, from a loyalty productivity perspective?
You know, I did spend, as I think many folks know, 10 or 15 years at Caesars, a time and the Harrah's before that, a time during which that loyalty program grew in its size and its effectiveness and so on. The MGM loyalty program, as you mentioned, we reinvented it with MGM rewards this year. There are a number of opportunities that exist here that I have seen work really well at the Caesars program. And they're the following.
One is the cross property play that we would enjoy from customers within the regional properties coming to Las Vegas and staying with us at MGM. That's something that we did very well when I was at Caesars. It was, of course, augmented by a much larger regional network of properties than MGM has, but still that that was something that we did very well. That is both system driven and cultural, and it's meaning that the relationships that people have within the companies between the different properties.
At MGM, we have solved the systems issues so that people are earning and regional properties they can redeem in Las Vegas, not just gaming, but also non-gaming. What we're working on is building those relationships between the casino marketing folks in both the regions and the properties so that we can move those players. That's kind of the cultural element.
In Las Vegas, I think we have advantages against what I experienced when we were at Caesars, which is mainly that our properties here in Las Vegas are great customer attractors in their own right. So, we get non-lodging visitation much, to a much greater degree than I think Caesars did at least while I was there. People who are not staying with us come to the properties to enjoy the restaurants and the entertainment and so on.
So, what we have now is a program that has more incentive to sign those customers up, and then engage them in our loyalty program, hopefully convert them to lodging customers. The final thing I'd add is, Bet MGM. Bet MGM now is our largest source of new of MGM rewards customers. We've signed up over a million MGM rewards customers through Bet MGM over the last year or so. And so having those folks come to know our company, visit the bricks and mortars property, and engage them in our loyalty program, I think, is a big opportunity for us.
And if I can just follow-up and step back to the element of the Las Vegas Resorts, where I think you've talked about the prospect of rewarding non-gaming spend, which we've known historically to be more than half, well more than half, how far long would you say you are in that or what inning of progress are you with that? Is this something that we'll start to see in the results next year or is it the year after? How would you classify that
I think we're in the early innings. During, I think it was our fourth quarter call, I talked about the percentage of non-gaming revenue, which had, which we were tracking, and it was about 35% as compared to close to 80% of our gaming revenue. That number is now close to 40%. So, it is growing, but it's still a wide gap between what we're seeing in our non-gaming revenue tracking versus our gaming revenue tracking.
Why does that matter? It matters because many customers that we have, loyal and valuable customers, it's not that they don't play at all in the casino, but that's not anywhere near the majority of their spend. And yet, we would benefit our shareholders would benefit from their loyalty just as they do from the gaming customers that they continue to visit us, particularly when we have properties now like the cosmopolitan in our portfolio.
So, the impact of this success in this area will be greater market share, greater pricing power in the hotels and the other non-gaming amenities as we go forward. So, I would say, we're still very early in this, but this is not going to be a six month program, but I would hope to be able to report as we get into 2023 that we're really moving the meter in terms of the amount of non-gaming revenue that we're tracking.
We should spend just a couple of minutes on Bet MGM and MGM's digital strategy, broadly speaking, how do we think about the corporate aspiration or the corporate wish for what Bet MGM can ultimately turn into? Is it something that could get spun? We are repeatedly asked the question about whether Entain is potentially a corporate partner? Again, at some point in the future, what does MGM wish for as an outcome for Bet MGM?
Well, as it relates to Entain, you know, we, clearly, we invited those questions by having made a run at Entain a little over a year ago. And so, it was plain – and plainly known that we were interested in acquiring that business. It didn't work out. We didn't get to a deal on that. So, we just moved on. And by moving on, we're really just focusing on the continued development of Bet MGM as a business.
Depending upon the fortunes of some of the other companies in that industry, we've gotten either more or less attention or inquiries about whether we would take Bet MGM public and our view really hasn't changed, which is that job one right now is having Bet MGM execute their business plan, which is to grow the business as new jurisdictions open up, maintain or grow its market share, and then continue on a road to eventual profitability of that enterprise, which we think is in 2023.
That's, you know, we're funding that journey right now along with Entain and that's basically the plan as it relates to Bet MGM. There's a lot going on at our properties to integrate Bet MGM into the business and MGM rewards as well, but the ultimate vision for that is that Bet MGM becomes a big digital business of MGM Resorts. It becomes almost a synthetic regional network where that's how we're meeting new customers in states where we operate, where we don't operate, that those customers then become entangled in our loyalty program and visit our properties in Las Vegas and so on. The typical things that we do with our other customers.
So, if I can just follow that up with one detail, can you get to a point where Bet MGM is integrated with MGM such that there is a singular digital wallet, for example, so that a player can have, you know, an end-to-end cohesive experience with MGM whether that's digital or land-based? Can that happen under the current structure?
Yes. It can. We have the unfettered ability to market to our – to the Bet MGM customers with the MGM Rewards program. In fact, as I think most folks know, if you sign up for Bet MGM, you become a member of MGM Rewards. And so, when you come to our properties, it's on our roadmap. There are some considerable issues to deal with, both in terms of regulatory, as well as payments.
The technology is not terribly difficult, but the payments mechanisms and the regulatory, and there's some responsible gaming issues that we need to certainly be aware of and deal with, but the idea of a Bet MGM customer coming to a MGM Resorts property with a single wallet shared between the two is certainly something that we're going to be able to do.
Understood. I want to make sure that we spend at least a couple of minutes on New York. It seems like [that may] [ph] perhaps the nearest term large market opportunity for MGM, and talk about that opportunity as you see it today and what its prospects are, but are there other U.S. markets that you'd be keen for an opportunity, should they become viable at some point?
Yeah. New York is a, is we think of a very attractive opportunity for the company. MGM required Empire City up in Yonkers several years ago, and it was really done with the idea that eventually we could have a full scale table games and casino in that area. That's taken a little bit longer than we expected, but it now appears to be, kind of well underway and so we're going to be an aggressive bidder for that opportunity.
I think most folks, kind of know what the process is. There's going to be gaming commission established and then a selection process subject, you know, following an RFP. So, we've begun work on preparing for that, on thinking about the way the program would be designed. It's a big opportunity for us because certainly it's a huge market.
We have between our operations at the Borgata in Las Vegas, we already have a database of, you know, in the millions of people in the region. And we have – with Empire, we think we have a really competitive location and an infrastructure and management team and the rest to really make a really strong business there.
We'll be disciplined in the capital that we invest to move [phase it] [ph] so that we're not building a full program right away, but we'll be able to be in business if we get the license with table games very quickly. You know, it's an important just an important opportunity and one that we've been working on for probably five years. So…
As a New Yorker, I can tell you that most things related to New York take longer than [how you expected]?
I do want to spend just a minute or two on Japan, which is a bit out in the distance, but seemingly a pretty large opportunity, just talk about what's being done, what's being worked on today in anticipation of that becoming a reality?
Well, we've been working on Japan for many years. In April, we together with our partners at ORIX, we submitted what's called an area development plan. And we would expect in the September time frame to be among the licenses awarded, that is Osaka with the Osaka prefecture to be awarded a license in the fall and that we would then be underway as we get into 2023. This a large project. It's going to take a number of years to complete.
I think as a matter of communication, we're going to wait until, you know, things are a little bit more advanced until we get into specifics about the cost and the program that we're thinking about, but we think it's a massive market opportunity for the company that we've got great partners, our brand is known in the region and the program that we're developing is going to be just a phenomenal integrated resort with strong returns, but we're going to wait till the process advances by a few more months before we get into more specifics in terms of what we're planning there.
Understood. With a handful of minutes that I think we have left, we have to talk about capital allocation. At least in my coverage, among the CFOs, you have more cash than anybody [has] [ph], which presents a series of analyses, questions, etcetera, bring us up to date on how you're thinking about deploying capital near term and at some point you reach a normalization of what the business generates and how that gets allocated? So, near-term and long-term would be helpful.
Sure. The capital that we've accumulated over the past two years have mainly been a consequence of the real estate strategy that we've executed. So, even before the pandemic, we sold the real estate of the Bellagio, Mandalay Bay, MGM Grand, those were the major transactions to Blackstone or Blackstone entities. We then sold the Springfield property to MGP, and then this, just a few months ago, we closed on the sale of our stake in MGP to VICI. And so these transactions have generated quite a lot of capital for the company.
We've invested just in the last several weeks, $1.6 billion in the Cosmopolitan of Las Vegas. That will be funded in a way by the sale of the Mirage and of [Gold Strike in Tunica] [ph], which we just announced last week. Those two together are approximately $1.6 billion as well. So, we have been active repurchasers of our shares. I think at our last – as of our last earnings call, we had repurchased about $3 billion worth of stock.
Our capital allocation approach is as – so that's kind of what's happened until now, but our capital allocation approach is as follows: We believe the company needs to have a minimum liquidity level of about $3 billion that's because – that's made up of cash on the balance sheet as well as availability under our revolving credit. That's a bit higher than I would normally have, but given the company's capital structure, now I think it's prudent to have that level of liquidity on the balance sheet.
And then certainly at these levels, our shares represent, we think an attractive value depending upon what value you ascribed or Bet MGM stake, our shares right now were trading, you know, at 5x EBITDA, you know, according to, if you look at what most folks have modeled for us for 2023, we just sold, you know, a Gold Strike in Tunica at a multiple well in excess of that.
So, we think the shares are valuable right now, and we'll maintain some dry powder for some additional MA, things like LeoVegas, which we just announced, which will complete this fall. The, you know, the – which is, kind of said about what's the ongoing view? The way I always look at it is the capital, the free cash flow that we generate belongs to the shareholders failing any better use of that capital, we return it to shareholders.
Our Board will determine at some point whether it makes sense to reinstitute a dividend once we kind of get fully into – more fully into the recovery from the pandemic, but I think that share repurchases will continue to be a meaningful part of our capital allocation strategy.
Okay. With that, I think we'll leave it there. We appreciate everyone's time and listening and we certainly appreciate your time Jonathan as well. We'll leave it there and have a good day everyone, and thanks for your time.
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