Gaming Industry: Performance Review

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By the mid-point of 2016, many of the gaming industry trends witnessed in 2015 are continuing. In Macau, declines in revenues and gaming volume present sustained challenges for operators in the region. These trends are at times significant enough to overshadow positive news in the domestic markets, as several companies saw upward growth in their properties in Las Vegas and other key markets around the United States.

MGM Resorts’ Q1 Mixed

Continued challenges in Macau delivered a weak opening quarter for MGM Resorts International (MGM), which was not unexpected. However, MGM’s domestic properties showed healthy signs of growth in the first quarter, which helped offset the contraction underway in China.

Company-wide first quarter net revenue dropped 5.3 percent to $2.2 billion. The decline was attributed to falling revenue for MGM China, which reported a 25.6 percent quarterly decline to $469 million. Net revenue for MGM’s wholly owned domestic resorts finished the quarter with modest growth of 2.6 percent, bringing net revenue to $1.6 billion.

Adjusted property earnings before interest, taxes, depreciation and amortization (EBITDA) in the first quarter were down 8.1 percent to $617.9 million. MGM’s domestic resorts showed positive results with an EBITDA of $484.9 million, a strong 24.4-percent improvement. Domestic results for the quarter helped offset lagging profitability by MGM China, which reported a 23.1-percent decline in EBITDA to $114.1 million.

MGM also continues to make progress on the implementation of a profit growth plan designed to enhance margins and improve business efficiency. This initiative is expected to deliver $300 million in annualized adjusted EBITDA benefit to be fully realized by the end of 2017.

MGM has also made some moves in Las Vegas and Atlantic City. The company announced a $450-million rebranding and remodel of the Monte Carlo Resort and Casino. In addition, MGM announced the acquisition of Boyd Gaming’s 50-percent interest in the Borgata Hotel Casino & Spa in Atlantic City.

Caesars Starts Positive in 2016

With no Macau properties to impact its portfolio, Caesars Entertainment Corporation (CZR) began 2016 reporting strong growth in both net revenue and profitability.

For the first quarter, company-wide net revenue rose 6.7 percent to nearly $1.2 billion. Caesars attributed growth in net revenue to its hospitality offerings as well as the performance of Caesar Interactive Entertainment’s social and mobile games business.

Company profitability also began the year in positive territory. Property EBITDA in the first quarter reached $336.0 million, up 8.4 percent. The company cited rising net revenues, operational efficiencies and improved hotel customer mix for increased profitability.

The major story in Caesar’s positive trends in operating metrics has been the expansion of its social and mobile gaming business. With a 28.8-percent increase in revenues from the prior period, Caesar Interactive Entertainment has been a contributor to both revenue and EBITDA expansion. Renovations at the LINQ Hotel have also helped boost room revenues, which are generally up throughout most of Caesars’ Las Vegas properties. Occupancy rose from 92 percent to 94 percent in the current quarter, and Caesars continues to expand revenues from its resort fee program.

Macao Impacts Sands Q1 Results

Las Vegas Sands (LVS) began 2016 with sinking revenue and earnings overseas overshadowing mostly positive performances in the United States.

Company net revenue for the quarter fell 9.8 percent to $2.7 billion. The decline was fueled by drops at each of the company’s four Macao properties and the Marina Bay Sands in Singapore. Net revenue for Sands’ Las Vegas resorts climbed 8.5 percent to $384.9 million, while Sands Bethlehem net revenue rose 8.6 percent to $138.7 million.

Company profitability followed a similar pattern. In the first quarter, adjusted property EBITDA declined to $917.6 million, a fall of 12.7 percent. The quarterly drop was consistent among the company’s five overseas resorts, which combined for $785.3 million (- 16.7 percent) in EBITDA. Profitability at U.S. properties climbed 19.8 percent to $124.6 million on the strength of the Las Vegas resorts, where EBITDA rose 17.3 percent to $86.9 million.

Las Vegas Sands is currently constructing the $2.7-billion Parisian Macao with an anticipated opening date in the second half of 2016.

Profits Down for Wynn

Wynn Resorts (WYNN) crept out of the gates in 2016 with first quarter declines in net revenue and profitability at the company’s Macau operations. Those results outweighed positive results from its Las Vegas properties.

The company’s Macau properties reported first quarter net revenue of $608.2 million, a drop of 13.8 percent that pulled company-wide net revenue down 8.7 percent to $997.7 million. Quarterly net revenue for Las Vegas operations finished up 0.7 percent to $389.4 million.

Wynn’s profitability generally tracked its revenue results. In the first quarter, adjusted property EBITDA was reported at $300.3 million, down 7.0 percent, while the Macau operations fell 9.9 percent to $191.2 million. EBITDA for Las Vegas operations also declined 1.5 percent to $109 million.

Wynn is currently constructing a 1,700-room resort hotel called Wynn Palace in the Cotai area of Macau. The $4.2 billion project is expected to open in the third quarter of 2016 and features a performance lake along with a wide range of amenities. In addition, Wynn acquired a license to build Wynn Boston Harbor in Everett, Massachusetts. The projected is estimated to cost between $1.9 and $2.1 billion and is situated on a 33-acre site along the Mystic River.

Las Vegas Investment

With relatively stable results in the Las Vegas gaming market and the continuing economic recovery, operators in both the resort corridor and off-Strip are making investments in Las Vegas. With positive trends in visitor volume, population and personal income, Las Vegas is now attracting more investment. While gaming is still an important component of new projects throughout the state, casino operators continue to share their focus with hospitality as the demographics and preferences of visitors shift.

Of the $17 billion in planned investment in the Las Vegas area, over $13 billion will be related to tourism infrastructure. A significant portion of this investment will be dedicated to new resorts and hotels. Resorts World Las Vegas is a $4 billion project with an estimated completion date in 2019, adding 3,500 rooms, 3,500 slot machines and table games. Alon Las Vegas, planned at the former site of the Frontier, will add another 1,100 rooms. The $2-billion project on the northwest corner of Las Vegas Boulevard and Fashion Show Drive is slated for completion in 2018. Lucky Dragon is the closest new casino to reaching completion. The $373- million casino will feature 204 rooms and 19,000 square feet of gaming space. Other recent announcements include MGM Resorts’ rebranding and renovation of the Monte Carlo.

The investment trend has not been limited to new property construction, as several properties have changed hands in recent months. Station Casinos moved its presence closer to the Strip with its announced acquisition of the Palms Casino Resort for $312.5 million in May of this year. Additionally, Boyd Gaming (BYD) announced an acquisition of Aliante Casino Hotel and Spa in North Las Vegas for $380 million and the acquisition of Cannery Casino’s two Southern Nevada properties for $230 million. Investments in both the on- and off-Strip segments of Las Vegas remain attractive for gaming operators.

Expansion in the non-gaming space has been a continued trend in Nevada for the past several years as revenue continues to shift away from gaming and towards the hospitality space. Wynn’s announced expansion, called Paradise Park, is slated for opening in 2020. The $1.6-billion project will bring new amenities to the Wynn portfolio, including a lagoon with beach waterfront and the addition of a new 1,000-room hotel with suites facing the water.

Large-scale entertainment and sports venues are becoming another area of opportunity as operators look to bring new attractions to the Strip. MGM recently completed the $375-million T-Mobile Arena, and Las Vegas Sands announced a joint venture with The Madison Square Garden Co. to build a concert venue that would be the third-largest in Las Vegas based on capacity. With a projected capacity of 17,500, the venue will be located behind the Palazzo and may play host to boxing and mixed martial arts matches along with music concerts and other forms of live entertainment. While new construction is underway, the Thomas & Mack Center (arena) is undergoing $72.5 million in renovations to further modernize the visitor experience. The renovations include an observation deck with a Strip view which hope to bring the stadium back to the forefront of arena experiences.

Conventions continue to be a large business in Nevada with convention attendance tracking back towards peak pre-recession levels. With a proposed $1.4-billion expansion to the Las Vegas Convention Center District and the recently completed additions to the Mandalay Bay Convention Center, resorts are laying the groundwork to offer space to the expanding convention business.

The Las Vegas gaming market continues to strengthen, with most publicly traded casino operators seeing growth in their Las Vegas revenues in the first quarter of 2016. As revenues continue to shift towards non-gaming sources, casinos both within the resort corridor and off Strip will continue to shift their investments and resources to take advantage of these trends.

Brian Gordon is a principal with the Nevada based advisory services firm, Applied Analysis. Gordon has extensive gaming and leisure experience from an accounting, finance and operational perspective.

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