MGM: The lion roars; Station doubles down

MGM Resorts International, so long in the headlines due to bad news, made some good news this week. In the third quarter room revenues were up 4% along the Las Vegas Strip and table game hold was substantially higher, both powering MGM to 3Q17 result that exceeded Wall Street‘s expectations. It can be no coincidence that two major boxing matches fell into this time period. As for its response to the Oct. 1 massacre, MGM said it engaged in a“short-lived uptick in cancellations and a temporary suspension of marketing efforts. (According to Deutsche Bank analyst Carlo Santarelli, “investors are willing to overlook the impact of the tragedy, should the perception of a strong underlying business persist”). Since restarting such efforts, [MGM’s] booking pace has largely rebounded to normal levels.” On the plus side, MGM reported “significant progress” in the conversion of Monte Carlo into Park MGM. Still, MGM was at pains to downplay expectations for 4Q17.

Cash flow rocketed past stock-pickers’ predictions, on the strength of Strip business and Borgata, with no help from MGM Grand Paradise in Macao. (MGM National Harbor also underperformed.) Strip table game hold was 27% higher, while slots were only tightened 1%. Room rates escalated 6%.

* Over at Station Casinos, Santarelli reported that “results were very encouraging” and that the forward-looking focus will be on the $340 million in capex improvements to the Palms, as revamping the property moves into Phase II. (We saw little evidence of capex reinvestment while the Palms was in private-equity hands.) “For starters, we believe the 3Q17 was the best fundamental quarter for [Station] since IPO. Same-store casino revenue grew a robust 6.2% y/y, some of which management attributed to the new IGT slot system, despite only using some of the functionality at present,” elaborated Santarelli. “That said, we believe the unveiling of Phase II spend ($340 mm), which brings the total investment into Palms to ~$800 mm, likely caught most off guard from a capital outlay perspective.”

Locals business is expected to grow “meaningfully,” in the area of 5%. JP Morgan analyst Joseph Greff called Station’s results “better than expected,” with revenue up 4% and Native American management fees offsetting higher corporate expenses (or vice versa). “However,” added Greff, “and on a less than positive but not fatal note, [Station] announced that its Palms property phase 2 capex will be $340m, about $200m more than our thinking, bringing all-in investment in the property to ~$810m (recall, phase I capex was $146m). Given that the property’s adjusted EBITDA peaked in the high $70m range, it is not totally crazy to think it can do a 10% EBITDA return at some point close to 2020 (as an FYI, Stratosphere does ~$50m per year, and it is off Strip as well). We wouldn’t be surprised to see the stock to sell off tomorrow on concerns over generating an adequate [return] on this level of capex, and we’d be buyers on weakness.” That being said, Station’s Las Vegas revenues comfortably exceeded Greff’s expectations.

The Palms re-do encompasses an unspecified number of F&B outlets and entertainment venues, along with 282 rooms and suites, as well as the addition of 60 new rooms. There was no mention of a new hotel tower, as previously speculated, for Palace Station, where $226 million of reinvestment will bring “luxury movie theaters, a third new restaurant concept, a resort style pool complex, a casino bar, new race and sports bar, renovated poker room, and a fully renovated casino floor.” Another $100 million of capex will be scattered around unspecified Station properties. After all, in the casino business if you’re not moving forward you are by definition moving backward.

* There weren’t many — if any — surprises in Pinnacle Entertainment‘s conference call. Revenue at its newly acquired Meadows racino in Pennsylvania is the second-highest in the Pinnacle universe and management hasn’t even rolled out its MyChoice rewards program yet. Management has an appetite for further acquisitions, even if a Pinnacle/Penn National Gaming merger remains temporarily off the table (perhaps due to the number of properties Penn would have to shed to get it past antitrust concerns).

* Last night’s election results included — as predicted — a crushing defeat for New Jersey Lt. Governor Kim Guadagno (R). Let’s hope that Governor-elect Phil Murphy (D) is more supportive of Atlantic City than Gov. Chris Christie (R) turned out to be.