MGM Resorts International — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request refers to 2016 Q4, this is an annual report; fourth-quarter results are noted separately below. Unless otherwise stated, amounts are U.S. dollars.
Business context
MGM operates domestic casino resorts and MGM China, which operates MGM Macau and was developing MGM Cotai. The company also manages and holds investments in unconsolidated resorts, including CityCenter. During 2016, MGM completed its IPO of MGM Growth Properties (MGP), acquired full ownership of Borgata, increased its MGM China interest to approximately 56%, and opened MGM National Harbor in December. MGP’s IPO placed several resort real estate assets in a consolidated REIT structure and leased them back to MGM under a long-term triple-net master lease.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Net revenue | $9.455 billion | $9.190 billion | Up 3% |
| Operating income (loss) | $2.080 billion | ($156 million) | 2016 included significant gains; 2015 included a $1.468 billion goodwill impairment |
| Net income (loss) attributable to MGM Resorts | $1.101 billion | ($448 million) | Basic/diluted EPS: $1.94/$1.92 versus ($0.82) |
| Adjusted EBITDA | $2.796 billion | $2.239 billion | Up 25%; non-GAAP measure |
| Operating cash flow | $1.534 billion | $1.005 billion | Up; helped by domestic operations and lower cash interest |
| Capital expenditures | $2.262 billion | $1.467 billion | Primarily development and resort investment |
| Cash and cash equivalents at year-end | $1.447 billion | $1.670 billion | Includes cash held in subsidiaries; $454 million related to MGM China |
| Debt principal outstanding | Approximately $13.1 billion | Approximately $12.7 billion | 2016 year-end debt balance-sheet carrying amount was $12.988 billion |
Operating cash flow less reported capital expenditures was approximately negative $729 million. Management said it expected to meet obligations and planned investment over the next 12 months using cash, operating cash flow, subsidiary distributions, and credit-facility availability. Estimated 2017 cash interest was about $751 million. The company reported compliance with applicable credit-facility covenants at year-end.
Annual rent under the MGP master lease rose from $550 million to $650 million after the Borgata real estate transaction. Rent is predominantly fixed, with contractual escalators; the lease is triple-net and its properties are effectively cross-collateralized. The filing’s contractual-obligations table excludes future obligations under this master lease.
Segment trends and material changes
- Domestic resorts: Revenue was $7.056 billion, up 9%; Adjusted Property EBITDA was $2.063 billion, up 22%. Same-store revenue rose to $6.654 billion and same-store Adjusted Property EBITDA rose 17% to $1.972 billion; same-store margin increased to 29.6% from 26.3%. Las Vegas Strip occupancy was 93%, ADR was $157 versus $149, and REVPAR was $146 versus $138.
- MGM China: Revenue was $1.920 billion, down 13%, and Adjusted EBITDA was $521 million versus $540 million. VIP table-games revenue declined 26%; main-floor table-games revenue increased 1%. The filing cites China economic and policy conditions, Macau compliance rules, and restrictions on proxy betting. MGM China’s Adjusted EBITDA margin rose to 27.1% from 24.4%, reflecting a more favorable main-floor mix and cost reductions.
- Fourth quarter: Revenue was $2.461 billion versus $2.192 billion in Q4 2015. Operating income was $282 million versus an operating loss of $1.197 billion; net income attributable to MGM Resorts was $25 million versus a loss of $781 million. The prior-year quarter included the MGM China goodwill impairment.
- Cash generation and investment: 2016 capital expenditures included $948 million for MGM Cotai, $741 million for MGM National Harbor, and $121 million for MGM Springfield. CityCenter distributed $540 million to MGM in 2016, associated largely with the Crystals sale.
Outlook, commentary, risks and unusual items
- Management expected approximately $400 million of annualized Adjusted EBITDA benefit from its Profit Growth Plan versus its baseline, fully realized by the end of 2017. The company cautions that this non-GAAP benefit is not a substitute for GAAP earnings or cash flow.
- MGM Cotai was expected to open in the second half of 2017, with an estimated project budget of $3.3 billion, excluding specified development fees, capitalized interest and land-related costs. The Macau government would determine the table allocation, expected to be below the resort’s capacity of 500 tables. The land concession requires opening by January 2018.
- MGM Springfield was expected to be completed in late 2018, with estimated development and construction costs of approximately $865 million, excluding capitalized interest and land-related costs. Management’s 2017 capital-spending estimates included $530 million for domestic resorts and corporate entities excluding National Harbor and Springfield, $270 million for Springfield, $150 million for National Harbor, and approximately $990 million for Cotai plus $100 million of MGM China maintenance improvements.
- Results were materially affected by a $430 million Borgata transaction gain and MGM’s $401 million share of CityCenter’s Crystals sale gain. These items, together with other adjustments, make the 2016 reported profit and Adjusted EBITDA less indicative of recurring performance. Other notable charges included $152 million related to exiting NV Energy’s fully bundled sales system and $140 million of preopening and start-up expense.
- The effective income tax rate was 1.8%. The filing attributes tax effects in part to reductions in the valuation allowance on foreign tax credit carryforwards. At year-end, foreign tax credit carryforwards were $2.8 billion, with a $2.5 billion valuation allowance; realizability depends on future U.S. and MGM China profitability and tax assumptions.
- Key risks include substantial debt and fixed rent commitments; debt maturities, including significant maturities beginning in 2018; refinancing and covenant constraints; competition and economic sensitivity; exposure to high-end gaming customers and potentially uncollectible gaming receivables; and reliance on gaming promoters in Macau. MGM Grand Paradise’s gaming subconcession expires March 31, 2020, and the Macau government may redeem it beginning in 2017 under specified terms.
- Other contingencies include a Borgata property-tax settlement agreement for $72 million, payable by Atlantic City in installments in 2017 and subject to conditions; MGM agreed to pay Boyd half of net amounts received or used under the transaction terms. A sole objector’s appeal remained pending after a securities class-action settlement funded by directors’ and officers’ insurers for $75 million. Borgata’s significant multiemployer pension plan was in critical status; the filing estimates Borgata’s share of unfunded vested liabilities at approximately $288 million as of January 1, 2016.
Important facts for investors to verify
- How much cash is available to the parent company after considering subsidiary restrictions, noncontrolling interests, and the non-recourse nature of certain subsidiary debt?
- How should the $650 million annual master-lease rent and future escalators be considered alongside reported debt and cash flow?
- Are domestic operating improvements and the Profit Growth Plan benefits recurring, after excluding transaction gains, distributions, preopening costs, and other adjustments?
- Are Cotai’s construction schedule, final table allocation, remaining funding needs, and January 2018 land-concession deadline on track?
- What is the outlook for MGM China’s VIP and main-floor business, promoter relationships, and renewal or replacement of its gaming subconcession and related tax arrangements by 2020?
- Will Atlantic City and New Jersey make the Borgata tax-refund payments as agreed, and what is the resulting net amount payable to Boyd?