Melco Resorts & Entertainment LTD annual report, Q4 FY2020

Business context and reporting period

Melco Resorts & Entertainment Limited’s Form 20-F is an audited annual report for the fiscal year ended December 31, 2020, prepared under U.S. GAAP. It is not a standalone 2020 fourth-quarter report. Melco develops, owns and operates integrated resorts, with most revenue generated in Macau and additional operations in the Philippines and Cyprus.

Financial and operating performance

Revenue fell 69.9% year over year; casino revenue declined 70.4% to $1.471 billion and non-casino revenue fell to $256.6 million. The company reported an operating margin of approximately negative 54.4%, compared with positive 13.0% in 2019, and a net loss attributable to Melco equal to approximately 73.1% of revenue. Management attributed the deterioration mainly to COVID-19-related closures, travel restrictions and sharply lower visitation. Macau contributed 82.5% of group revenue; City of Dreams alone generated $985.6 million, or 57.0% of the total.

Cash, cash equivalents and restricted cash totaled $1.756 billion at year-end. Current assets were $2.009 billion and current liabilities $1.116 billion. Gross debt principal was $5.700 billion; debt net of issuance costs was $5.645 billion. Approximately 96% of debt was fixed-rate. The filing reported $1.666 billion of available capacity under the 2020 revolving facility, subject to conditions, in addition to smaller facilities. Capital expenditures were $464.3 million, and contracted capital commitments not yet incurred totaled $771.0 million.

Material changes versus the prior comparable period

• The pandemic reversed FY 2019 operating profitability: Melco moved from $747.7 million of operating income and $373.2 million of attributable net income to substantial losses in 2020.
• Operating cash flow swung from a $836.2 million inflow to an $861.0 million outflow. Financing activities provided $1.264 billion, helping cash and cash equivalents increase despite the operating cash burn.
• Net debt increased: long-term debt, net rose approximately $1.251 billion, while year-end cash increased approximately $360 million.
• Revenue declined at every major property. Macau visitor arrivals fell 85.0% and Macau gross gaming revenue fell 79.3% year over year, according to the cited government sources.
• Melco sold its approximately 9.99% Crown Resorts stake for about $359.1 million, after recording a substantial fair-value loss; it also terminated its planned purchase of a second tranche.

Outlook, risks and unusual items

• COVID-19 and recovery: Management said the duration and financial impact of restrictions, recovery in travel and customer behavior could not be reasonably estimated. Macau properties operated with health measures and reduced activity; City of Dreams Manila and Cyprus properties faced closures or limited operations. Management reported cost reductions and capital-spending deferrals.
• Development and licensing: The Studio City land concession required full development by May 31, 2022, with any extension subject to Macau government approval. City of Dreams Mediterranean was required to open by September 30, 2022; Melco expected a summer 2022 opening, subject to construction and regulatory approvals. The projects carry cost, funding and deadline risks.
• Macau gaming rights: Melco’s Macau subconcession was scheduled to expire in June 2022. Renewal, extension or replacement was uncertain, and the filing warns that loss of the right to operate could materially affect the business.
• Leverage and covenants: Melco issued substantial debt during 2020, including $850 million of 5.75% senior notes and $1.0 billion of Studio City notes. Lenders waived specified 2020–2021 financial covenants under the 2020 Credit Facilities. Debt service, refinancing, covenant compliance and access to additional financing remain risks.
• Dividends: The quarterly dividend program was suspended in May 2020 to preserve liquidity. The board gave no assurance of resumption.
• Unusual charges and estimates: FY 2020 included a $150.97 million net other expense, primarily reflecting the Crown investment fair-value loss; a $20.0 million debt-extinguishment loss; $13.9 million of goodwill impairment for the Japan ski resort; and $8.1 million of property impairment. The casino credit-loss allowance rose to $333.8 million, or 72.2% of gross casino receivables, from $258.0 million, or 47.7%.
• After-year-end developments: In January 2021, Studio City issued $750 million of 5.0% notes and Melco Resorts Finance issued $250 million of additional 2029 notes; proceeds were used in part to refinance debt. The Studio City credit facility maturity was extended to January 2028 in March 2021. These occurred after the reporting date.

The auditor issued an unqualified opinion on the financial statements and internal controls over financial reporting; management also reported effective disclosure controls and internal control over financial reporting as of year-end. The filing provides no quantified FY 2021 earnings or revenue guidance.

Most important facts for investors to verify

1. Whether visitor volumes, gaming revenue and operating cash flow recovered after year-end, and the timing and terms of reopening across Macau, Manila and Cyprus.
2. Actual debt principal, maturities, interest costs, available undrawn facilities and compliance with financial covenants; distinguish the $249.9 million 2020 facility balance from the much larger undrawn commitment.
3. Construction spending, remaining funding needs and government-approved deadline extensions for Studio City and City of Dreams Mediterranean.
4. Status and terms of Macau subconcession renewal, and any changes to gaming licenses, table allocations or regulation in the operating markets.
5. Collectability of casino receivables, adequacy of the credit-loss allowance, and any further impairments or material non-operating charges.
6. Whether the dividend program resumes and whether restrictions in debt agreements or subsidiary structures limit distributions to Melco shareholders.