MGM, Eldorado, Churchill Downs looking up

Credit Suisse‘s Cameron McKnight flew out to San Francisco to meet with MGM Resorts International CEO Jim Murren. The biggest headline item would be the eccentricity of Murren choosing to meet in Frisco rather than at MGM HQ in Las Vegas. It makes you wonder what J-Mur’s got cooking. Anyway, McKnight deemed Murren’s outlook to be the “right amount of optimism.” He found the company concerned with cost increases but “We’re positive on the outlook, given very good forward indicators in 1H and easy [comparisons] in 3Q … We see $200-300mm in efficiencies over the next 12-24 months as achievable,” McKnight said MGM’s cost-cutting plan, which could be interpreted as pushback against higher labor costs. Nothing was said about Macao but a MGM Growth Properties purchase of Bellagio and/or MGM Grand “may be tricky.” Ironically, given its complex ownership, a sale of CityCenter was deemed “possible.” What does McKnight know that we don’t?

In other MGM news, the company is pursuing a historic-preservation award for MGM Springfield. As radio station WAMC summarizes, “Rather than level and haul away everything that was on the 14-and-a-half acre site when construction of the $960 million project started in 2015, MGM’s architects and contractors took pains to preserve some of the structures and artifacts to later be incorporated into the modern casino complex.” The design inflections that pay homage to Massachusetts history in general and Springfield in particular have been much commented upon. Not every casino can claim a 1912 glass dome for their ballroom or a former armory for their comedy club. As the Massachusetts Gaming Commission wrote in support of the nomination, “In the global gaming industry, we are confident that there is not a project that compares with the distinctiveness of this resort casino and goal to be a destination located in the heart of an urban community.” We heartily agree.

Meanwhile, Eldorado Resorts was announcing 4Q18 results, although they were overshadowed by other issues. Eldorado “did not comment directly on [Wall Street Journal] reports of talks between itself and CZR, but we did come away feeling incrementally positive about the chances some form of tie-up could eventually take place,” reported JP Morgan analyst Daniel Politzer. While in the 3Q18
conference call Eldorado brass had said not to expect any merger-and-acquisition activity until late 2019, now their tune is “we are going to remain active and you should expect us to remain active … as we look at the landscape and see assets or properties or companies where you think we can do a better job, you should assume we’re analyzing the same things.” Added Politzer, “management noted they see value in a LV-centric hub/spoke model (unique to CZR), but for it to work, an operator needs a variety of assets to appeal to different customer bases/tastes (CZR operators 9 LV Strip properties). And third, ERI noted it sees things in the LV market (and other markets as well) where they can create value given their scale (27 properties).”

While Eldorado slightly missed Wall Street’s $676 million revenue projection, that number was more than overshadowed by cash-flow growth in all markets save Louisiana, where the Baton Rouge smoking ban and road construction in Lake Charles continue to depress results. In spite of new competition, Tropicana Atlantic City nearly doubled its cash flow, while EBITDA at the old MTR Gaming properties increased following the repeal of a smoking ban. Synergies are progressing swiftly at Grand Victoria (two-thirds accomplished) and Tropicana A.C. (three-fourths). “ERI continues to execute among the best in our coverage group … we believe ERI has positioned itself for multiple years of meaningful EBITDA growth.” Politzer summarized.

Churchill Downs overshot JP Morgan’s $215 million target, reporting $219 million in revenue, with Derby City slightly outperforming and online wagering somewhat down. Ocean Downs was one of the brightest spots in the portfolio, driving the preponderance of CHDN’s casino revenue. In a little-reported development, Churchill Downs has snagged the best-performing casino in Illinois, having entered talks to buy a $326 million majority stake in Rivers Casino in Des Plaines from Rush Street Gaming. (Neil Bluhm will remain chairman and Rush Street will continue to manage the casino.) The Des Plaines purchase is expected to close by July 1. The big draw? Imminent sports betting in Illinois. Horse racing was alive and well last quarter, with the Breeder’s Cup helping drive $34 million in equine revenue, $3 million above JP Morgan’s estimate. Churchill Downs has definitely been the growth story in the gaming industry and should be looked upon to continue surprising us.

* If you’re a military veteran and can prove it, Ocean Resorts has a deal for you: One free night, Sundays through Thursdays, once a month, along with automatic Gold status in the players’ club. You also get free self-parking (Las Vegas, take note) and a 10% food and beverage discount. What’s not to like about this? Nothing! Well done, Ocean.

* DraftKings‘ status as a purveyor of daily fantasy sports is rapidly being overtaken by legal sports betting. Caesars Entertainment has purchased a stake in the DFS provider, in return for which DraftKings will tout Caesars as its official resort partner. Said Caesars CEO Mark Frissora, “This alliance is the latest initiative by Caesars to capitalize on our database, generate a new revenue stream in a growth market and raise our profile in sports, in part by creating new sports-themed guest experiences at our resorts across the country.” Of course, there are still not many states in which sports betting is offered but Frissora is to be commended for being ahead of the curve. In his five-year tenure at Caesars, Frissora has done nothing spectacular but rather has picked his spots well and made accretive acquisitions. (We’ll temporarily forget that parking-fee thing.) An improvement on Gary Loveman? Unquestionably.