MGM Resorts International quarterly report, Q3 FY2016

Business context and reporting period

MGM Resorts International filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. It operates casino resorts, with reportable segments of domestic resorts and MGM China. The period includes Borgata results from its August 1 acquisition and consolidates MGM Growth Properties (MGP), in which MGM retained control after MGP’s April IPO.

Financial performance and position

Amounts are in U.S. dollars; financial statement figures are in millions unless noted.

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Net revenue	$2,515	$2,281	$6,994	$6,998
Operating income	$713	$297	$1,798	$1,041
Net income attributable to MGM	$536	$66	$1,077	$334
Diluted earnings per share	$0.93	$0.12	$1.88	$0.61
Adjusted EBITDA (non-GAAP)	$662	$526	$2,207	$1,724
Operating cash flow	—	$1,049	$738

Q3 revenue rose about 10%, primarily reflecting Borgata and stronger domestic casino, rooms, and food-and-beverage revenue; MGM China revenue declined. Nine-month revenue was essentially flat.
Reported earnings include a $430 million Borgata acquisition gain in Q3 and a $397 million Crystals sale-related gain in unconsolidated affiliate income during the nine-month period. These unusual items materially lift reported operating income and year-to-date earnings.
Domestic same-store Adjusted Property EBITDA margin was 30.6% in Q3, up 527 basis points, and 30.3% year to date, up 445 basis points. MGM China’s Adjusted EBITDA margin was 30.0% in Q3 and 27.0% year to date; its revenue weakened, notably in VIP gaming.
Cash and cash equivalents were $1,446 million at September 30, versus $1,670 million at year-end 2015. Current assets were $2,214 million and current liabilities $2,131 million. Operating cash flow was more than offset by investing outflows, including $1,590 million of capital expenditures and $551 million net cash paid for Borgata.
Cash flow from operations improved year over year to $1,049 million. Investing used $1,590 million; financing provided $318 million. Cash declined by $224 million over the nine months.
Long-term debt carrying value was $12,786 million; principal debt was approximately $12,951 million. Management cited approximately $13 billion of principal debt and estimated $734 million of cash interest over the next 12 months. The company had $250 million drawn on its $1.5 billion senior credit facility; its revolver was undrawn. Other facilities also had undrawn capacity, subject to terms and covenants.
Interest expense was $168 million in Q3 and $533 million year to date, down from comparable periods. The company reported compliance with its credit-facility covenants at quarter-end.

Material changes versus prior periods

Domestic resorts benefited from stronger Las Vegas room demand and operating improvements. Las Vegas Strip Q3 occupancy was 97% versus 96%, ADR was $154 versus $141, and REVPAR was $149 versus $135.
MGM China’s nine-month revenue declined 17%; VIP table games revenue fell 34%, while main-floor table games revenue increased. Management cited mainland China economic and policy conditions, tighter gaming-promoter compliance, and restrictions on proxy betting.
MGM acquired the remaining Borgata interest on August 1, paid approximately $594 million, and began consolidating the property. Borgata contributed $151 million revenue and $23 million operating income after acquisition through quarter-end.
MGP’s IPO and related transactions changed the group’s financing and ownership structure. MGM retained control and consolidated MGP; following the Borgata transaction, MGM indirectly owned 76.3% of the Operating Partnership.
Annual rent under the MGP master lease increased from $550 million to $650 million after Borgata was added. The lease is generally triple-net and includes fixed and percentage rent provisions.
Capital spending rose to $1,590 million from $1,001 million in the prior-year nine-month period, reflecting major resort developments.

Outlook, commentary, risks and contingencies

Management expected to achieve approximately $400 million of annualized Adjusted EBITDA benefit from its Profit Growth Plan by the end of 2017, saying initiatives were ahead of schedule.
MGM National Harbor was expected to open December 8, 2016; MGM Cotai was expected to open in the second quarter of 2017; MGM Springfield construction was expected to be completed in late 2018. Estimated development costs were approximately $1.4 billion, $3.1 billion, and $865 million, respectively, excluding specified costs such as capitalized interest and land costs.
Management anticipated fourth-quarter 2016 capital spending of approximately $205 million at domestic resorts and corporate entities, $200 million for National Harbor, $55 million for Springfield, and $385 million for Cotai, plus other stated Macau spending. It expected to meet debt and capital needs with operating cash flow, cash, and available borrowings.
The company recorded $139 million of NV Energy exit expense after electing to leave the fully bundled sales system. It paid upfront impact costs and accrued estimated ongoing non-bypassable charges extending through 2040.
Tax results involve significant judgment. Changes in assumptions about Macau’s complementary tax exemption and future U.S. income reduced the foreign-tax-credit valuation allowance and tax provision; management projected a net foreign-tax-credit deferred tax asset of approximately $360 million at year-end. Changes in future profitability, distributions, or exemption assumptions could materially affect taxes.
Borgata is owed approximately $106 million plus interest in Atlantic City property-tax refunds. The city had not paid the refunds; a proposed financing plan was rejected by New Jersey, and MGM said it had not agreed to a settlement. Refund realization and related contingent consideration remain uncertain.
Key risks include substantial debt and fixed lease commitments, construction and opening execution, Macau market and regulatory conditions, gaming-license renewal, foreign tax-credit realizability, interest-rate and currency exposure, and the company’s dependence on MGP as lessor. A 100-basis-point rate increase was estimated to increase annual interest cost by $28 million for LIBOR exposure and $18 million for HIBOR exposure.
A securities class-action settlement was approved, but an objector appealed. Management said it would defend the judgment; other litigation was described as routine and not expected to have a material adverse effect.
Management reported effective disclosure controls. MGM China implemented a new financial accounting system, with related internal-control changes expected to continue through 2016; Borgata was excluded from the quarter’s internal-control assessment following its acquisition.

Important facts for investors to verify

How much of earnings growth is attributable to recurring operations versus the Borgata and Crystals gains, tax benefits, and other unusual items.
Whether the $400 million Profit Growth Plan target and announced development schedules and budgets remain achievable.
Liquidity after planned project spending, debt service, and the $650 million annual MGP rent obligation; also confirm facility availability and covenant headroom.
Progress and resolution of Borgata’s Atlantic City property-tax refunds and the related acquisition consideration.
Macau VIP and main-floor trends, regulatory developments, Cotai gaming-table allocation, and the status of the gaming subconcession and tax exemption.
Updates to foreign tax-credit valuation assumptions, MGM China’s new-system controls, and the securities-litigation appeal.