MGM Resorts International quarterly report, Q3 FY2020

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MGM Resorts International — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020; unaudited. MGM owns and operates casino resorts in Las Vegas, regional U.S. markets and Macau. Results were severely affected by COVID-19 closures, capacity limits and travel restrictions. All properties had reopened by the filing date, but operated with restrictions and substantially below historical revenue levels.

Financial performance

  • Revenue: Q3 revenue was $1.126 billion, down 66% year over year; nine-month revenue was $3.669 billion, down 62%.
  • Profitability: Q3 operating loss was $495 million, versus $238 million of operating income in Q3 2019. Net loss attributable to MGM was $535 million, or $1.08 per diluted share, versus a $37 million loss, or $0.08 per share. For the first nine months, operating loss was $279 million and MGM-attributable net loss was $585 million, versus operating income of $980 million and attributable net income of $38 million in 2019.
  • Segment performance: Q3 revenue fell 68% at Las Vegas Strip Resorts, 40% at Regional Operations and 94% at MGM China. Adjusted Property EBITDAR was $15 million for the Strip (margin 3.1%, versus 29.3%); $146 million for Regional Operations (margin 26.2%, versus 28.8%); and a $96 million loss for MGM China. Consolidated Q3 Adjusted EBITDAR, a non-GAAP measure, was a loss of $49 million.
  • Cash flow: Nine-month operating cash flow was negative $1.250 billion, versus positive $1.356 billion in 2019. Investing cash flow was positive $2.272 billion, principally reflecting $2.456 billion of proceeds from the Mandalay Bay and MGM Grand Las Vegas real estate transaction. Financing cash flow was positive $1.240 billion.
  • Liquidity and debt: Cash and equivalents were $4.594 billion at quarter-end, versus $2.330 billion at December 31, 2019. Principal debt was approximately $11.5 billion; balance-sheet long-term debt, net, was $11.415 billion. The company reported no debt maturities before 2022. Cash included $396 million at MGM China and $655 million at the Operating Partnership.
  • Leases and commitments: Operating lease liabilities were $8.416 billion. Annual rent obligations disclosed included $828 million under the MGP master lease, $245 million for Bellagio and $292 million for Mandalay Bay and MGM Grand Las Vegas. The company also guarantees up to the shortfall on $3.01 billion of Bellagio venture debt and $3.0 billion of MGP BREIT Venture debt.

Material changes and unusual items

  • In February 2020, MGM contributed the Mandalay Bay and MGM Grand Las Vegas real estate to the MGP BREIT Venture. Consideration was reported as $4.6 billion, including $2.5 billion cash, $1.3 billion of assumed debt and an equity interest. The transaction generated a $1.492 billion net gain in the nine-month results; it is a significant nonrecurring item and should not be treated as operating earnings.
  • Q3 general and administrative expense included lease costs associated with the Bellagio and Mandalay Bay/MGM Grand Las Vegas leases. Nine-month corporate expense included $49 million for the October 1, 2017 shooting settlement and $44 million of CEO transition expense.
  • The October 1 litigation settlement was accrued at $800 million. MGM recorded a $751 million insurance receivable and expects to fund the remaining $49 million. The company and insurers expected to deposit the settlement funds by November 13, 2020; a small number of claims were outside the settlement.
  • Property transactions included a $64 million impairment charge on an equity-method investment during the first nine months. Management said its September 2020 assessment did not trigger an interim quantitative impairment review of goodwill or indefinite-lived intangibles, but warned that prolonged disruption could lead to future impairment.

Outlook, management commentary and risks

  • Management could not determine when demand or pricing would return to pre-pandemic levels, or whether properties might again close. It expected COVID-19 to materially affect 2020 results and potentially later periods. Weakened travel, reduced discretionary spending, venue restrictions and fixed costs were identified as continuing pressures.
  • Cost actions included reduced or deferred domestic capital spending, headcount reductions and furloughs, and a substantially reduced dividend. Management cautioned that cost cuts could affect guest loyalty, staffing and labor relations.
  • Management estimated remaining-2020 capital spending of $60–$70 million domestically and $35–$45 million at MGM China, and planned approximately $145 million of BetMGM investment over the next 12 months. Estimated consolidated cash interest for the next 12 months was $680–$690 million.
  • The company estimated CARES Act benefits including a $150–$175 million federal tax refund expected in Q2 or Q3 2021, approximately $115–$120 million of permanent employer payroll-tax savings and $50–$60 million of deferred payroll taxes. These were estimates, not guaranteed receipts.
  • Credit amendments waived specified financial maintenance covenants during the pandemic and imposed restrictions, including a $600 million minimum-liquidity test for the borrower group during the relief period. MGM China also obtained covenant waivers, extended in October 2020. MGM reported covenant compliance at September 30, 2020.
  • After quarter-end, MGM issued $750 million of 4.75% notes due 2028; the filing said proceeds would include repayment of the $550 million drawn on its senior revolver. The board approved a quarterly dividend of $0.0025 per share for December 2020.

Most important facts for investors to verify

  • Whether reopening, Macau travel restoration and capacity restrictions translate into a sustained recovery in revenue, occupancy and property-level margins.
  • Cash available to the parent versus cash held at subsidiaries, compliance with liquidity tests, and refinancing needs as debt maturities approach in 2022 and beyond.
  • The burden of contractual rent and venture-debt guarantees relative to cash generation, particularly if demand remains weak.
  • Whether the $751 million insurance recovery and $800 million October 1 settlement funding were completed as expected, and the status of claims outside the settlement.
  • Whether estimated CARES Act tax benefits are received as projected, and whether Macau tax-credit valuation allowances or asset impairments require further changes.
  • How the $1.492 billion real estate transaction gain, lease expense and other unusual items affect comparisons of reported earnings with recurring operating performance.