MGM Resorts International annual report, FY2018

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MGM Resorts International — FY 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Dollar amounts are U.S. dollars.

Business context and reporting period

MGM Resorts owns, operates, manages or invests in casino, hotel and entertainment resorts in the United States and Macau. Its reportable segments are Las Vegas Strip Resorts, Regional Operations and MGM China. MGM opened MGM Cotai in February 2018 and MGM Springfield in August 2018; the company owns approximately 56% of MGM China and consolidates MGM Growth Properties (MGP).

Financial performance and liquidity

  • Revenue: FY 2018 net revenue was $11.76 billion, up 9% from $10.80 billion in 2017. Growth was led by MGM Cotai and MGM Springfield.
  • Operating and net income: Operating income was $1.47 billion, down 14%. Net income attributable to MGM Resorts was $466.8 million, versus $1.95 billion in 2017; diluted EPS was $0.81 versus $3.34. The 2017 comparison included a $1.4 billion non-cash tax benefit from U.S. tax reform.
  • Fourth quarter: Revenue was $3.05 billion and operating income was $335.8 million. Net income was $5.8 million; net loss attributable to MGM Resorts was $23.3 million, or $0.06 per diluted share. The quarter included a $92 million Tax Act-related tax expense and $24 million of business-interruption insurance proceeds.
  • Adjusted EBITDA: $2.81 billion, down 1% from $2.83 billion. Segment Adjusted Property EBITDA was $1.71 billion for Las Vegas Strip Resorts (down 4%), $759.1 million for Regional Operations (up 4%) and $568.3 million for MGM China (up 6%). Segment margins were 29.8%, 25.9% and 23.2%, respectively; MGM China’s margin declined from 28.8%, primarily due to MGM Cotai’s ramp-up and lower gaming win percentages.
  • Cash flow and capital spending: Operating cash flow was $1.72 billion, down from $2.21 billion. Investing cash outflow was $2.08 billion, including the Northfield acquisition; capital expenditures were $1.49 billion, down from $1.86 billion. Financing provided $389 million. Management attributed lower operating cash flow primarily to working-capital timing at MGM China, lower operating income and increased cash interest paid.
  • Debt and liquidity: Principal debt outstanding was $15.25 billion at year-end, versus $13.02 billion in 2017; balance-sheet long-term debt, net, was $15.09 billion. Cash and cash equivalents were $1.53 billion, including $510 million at MGM China and $60 million at the Operating Partnership. The company reported $1.5 billion of undrawn capacity under its senior secured revolver. Interest expense, net of capitalized interest, rose to $769.5 million from $668.7 million.
  • Balance sheet and shareholder returns: Total assets were $30.21 billion and total stockholders’ equity was $10.47 billion. MGM repurchased $1.28 billion of shares during 2018 and paid $261 million in dividends; the annual dividend declared was $0.48 per share.

Material changes versus prior periods

  • Revenue growth reflected the openings of MGM Cotai and MGM Springfield. MGM China revenue rose 32%, including $729 million from MGM Cotai; Regional Operations revenue rose 8% (from $2.71 billion to $2.93 billion), with new Springfield operations contributing.
  • Las Vegas Strip revenue was broadly flat, but Adjusted Property EBITDA declined 4%; Park MGM rebranding and related disruption weighed on results. Strip occupancy remained 91%, while REVPAR increased to $147 from $146.
  • Borgata faced increased Atlantic City competition after two casino resorts opened there in June 2018. MGM sold its 50% interest in Grand Victoria, recording a $45 million gain.
  • Operating income was affected by higher depreciation and corporate expense, start-up costs and new-property ramp-up. FY 2018 included $151 million of preopening and start-up expenses, versus $118 million in 2017.
  • Net income comparisons are especially affected by taxes: 2017 included the $1.4 billion Tax Act benefit; 2018 included a $50 million income tax provision. The 2018 fourth quarter had a net loss attributable to MGM Resorts, unlike the prior-year quarter, which included a substantial tax benefit.

Outlook, risks, contingencies and unusual items

  • Outlook and planned investment: MGM 2020 targets approximately $200 million of annualized Adjusted EBITDA benefit by the end of 2020 and a further $100 million by the end of 2021. For 2019, management expected domestic capital investment of $600 million to $650 million, plus $45 million to $50 million of Springfield closeout costs, and MGM China investment of $350 million to $375 million, including $250 million of Cotai closeout costs.
  • Debt and fixed commitments: The company highlighted substantial indebtedness, scheduled maturities and significant fixed and percentage rent. Annual master-lease rent was $770 million beginning April 2018; the lease is triple-net and cross-collateralized. Contractual principal debt maturities totaled $1.27 billion in 2019 and $1.97 billion in 2020, before the February 2019 repayment of the $850 million 2019 notes.
  • Macau concession and tax: MGM Grand Paradise’s gaming subconcession was scheduled to expire March 31, 2020. The filing warns that non-extension or termination could materially affect Macau operations; renewal is not assured. The Macau gaming-profit tax exemption also runs through March 31, 2020. MGM recorded a $2.45 billion valuation allowance against foreign tax credit carryforwards and stated realization depends on future U.S. taxable income.
  • Acquisitions and related-party lease activity: MGM acquired Empire City in January 2019 for approximately $864 million and subsequently sold its real estate to MGP for approximately $634 million, leasing it back under the master lease. The Northfield operating-asset purchase for approximately $275 million and Park MGM/NoMad transaction with MGP for approximately $638 million were pending at filing; each would increase master-lease rent if completed.
  • Legal contingency: Lawsuits related to the October 1, 2017 Las Vegas shooting were stayed pending mediation. MGM considered liability reasonably possible but could not estimate a range. The company said it believed losses in excess of insurance coverage were unlikely; this is not a determination of liability.
  • Other material risks: High leverage and refinancing needs, gaming regulation and taxes, competition, reliance on high-end customers and Macau gaming promoters, labor negotiations, cyber and privacy risks, weather and travel disruptions, and the performance of CityCenter and MGP. The filing also notes planned 2019 labor negotiations at several properties and a CFO transition effective March 1, 2019.

Most important facts for investors to verify

  • Whether new resorts, particularly MGM Cotai and MGM Springfield, achieve stronger operating performance and margins as start-up costs subside.
  • Debt maturities, interest costs, available borrowing capacity and cash flow after rent, capital spending, dividends and repurchases.
  • Progress and realized savings from MGM 2020, compared with management’s stated $300 million annualized benefit target by the end of 2021.
  • Macau subconcession and tax arrangements after March 31, 2020, and the assumptions supporting foreign tax credit asset realization.
  • Outcome and insurance coverage for the October 1 litigation, plus final completion and financial terms of the Northfield and Park MGM MGP transactions.