MGM CFO talks acquisitions, divestitures, and strength of Las Vegas tourism and convention business

September 21, 2022 1:31 PM
Photo: By Tristan Surtel - Own work, CC BY-SA 4.0, Link
  • Buck Wargo, CDC Gaming Reports
September 21, 2022 1:31 PM

Speaking to the Deutsche Bank Leveraged Finance Conference on Tuesday, MGM Resorts International CFO Jonathan Halkyard touted the strength of the Las Vegas Strip, especially convention business, and spoke glowingly about the casino-giant’s property and company transactions.

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Halkyard also discussed the second quarter and closing on the sale of its REIT to VICI Properties for $4.5 billion. He cited MGM’s acquisition of the Cosmopolitan of Las Vegas and paired that with the $1 billion sale of the operation of the Mirage to Hard Rock International. That sale will close by the end of the year, he said.

“Together, these two transactions have materially improved the portfolio in Las Vegas,” Halkyard said. “It has moved us slightly upmarket and it will be margin and cash-flow accretive, as the Mirage was requiring a reasonable amount of investment for the next several years. The Cosmopolitan has been the beneficiary of a great deal of capital investment over the last several years.”

Two weeks ago, MGM closed on the sale of LeoVegas, the Swedish online gaming company, for $604 million. Halkyard called it a “fantastic company with a terrific management team and great technology” to bring the MGM brand to digital gaming in Europe.

“It was a public company, but didn’t really have the capital resources to either pursue additional acquisitions or invest in new markets. but now with MGM’s ownership of LeoVegas, we intend to fund those efforts,” Halkyard said. “The company has a small pipeline of acquisitions they’ve have been working on that we’re anxious to evaluate and perhaps proceed with, as well as entertain new markets.”

During the second quarter, MGM announced an agreement to sell the operations of Gold Strike Tunica in Mississippi for $450 million in cash to Cherokee Nation Entertainment Gaming Holdings, a subsidiary of Cherokee Nation Businesses.

“This is one we didn’t intend to take to market, but we were approached by a fantastic buyer and what we felt was a very strong price for this property, which despite its strong financial performance is not an importer to our businesses in Las Vegas,” Halkyard said. “It made sense to transact this sale.”

Halkyard was excited about the potential of a resort in Osaka, Japan, assuming MGM is awarded a license. He said the resort will “be a fantastic property, certainly down the road, but we’re optimistic about our ability to proceed with that.”

Halkyard said those acquisitions and divestitures have provided MGM’s shareholders a summary of what it means for the company’s liquidity.

“MGM’s liquidity position has never been stronger,” Halkyard said. “Rolling forward and taking into account retiring our notes next March, we will have more than $4 billion in cash on the balance sheets and almost $6 billion in total liquidity.”

Halkyard noted a disconnect between MGM’s business and performance prospects and the company’s valuation in the stock market.

On the Las Vegas Strip, Halkyard said, “Business has never been stronger” than it is right now. During the second quarter, MGM set all-time records at its Las Vegas properties. Margins are about 1,000 basis points higher than they were prior to the pandemic, he said.

“It’s strong across virtually all segments,” Halkyard said. “In the second quarter, groups started to come back and now in the third quarter and looking into the fourth, our group business, which typically makes up 18% to 20% of our room nights in Las Vegas, is back running at that level.”

Halkyard said the return to normalcy in group business is expected to continue into second quarter 2023. Though only 20% of business, it’s important because it’s midweek and its pricing is a base for the revenue management activities for other segments.

Gaming customers have been strong, and Halkyard said they’ve seen a “nice transition” of room nights at the margins from leisure customers to gaming customers.

“This is helped even more by our acquisition of the rest of CityCenter and of course Cosmopolitan brings a very strong and profitable non-gaming customer as well,” Halkyard said.

Regionally, MGM’s eight properties are market leaders and that business has “stabilized significantly” over the last six months, Halkyard said. A year ago in the regional market, they were seeing historically high levels of unrated play and operating with employment levels below what was needed for margins of about 1,000 basis points higher than prior to the pandemic.

“Since a year ago, we’ve staffed these properties adequately and we’ve seen some unrated play decline, and that’s been more than made up by the return of our known customers, particularly our older demographic,” Halkyard said. “The result has been continued growth in revenue and profitability and a slight decrease in margins, because we’re bringing on more employees and the full complement of services. These businesses are performing exceptionally well and very different from our Las Vegas properties; they don’t have the breadth of customer segments that our Vegas properties do.”

In terms of BetMGM and its 50-50 joint venture with Entain, Halkyard said it has turned into a “fantastic and growing business.” The igaming market share averages about 30% across all of its markets. “Having brick-and-mortar properties in the U.S., this is a true competitive advantage for us.”

In sports betting across its markets in 23 states, BetMGM’s share is more than 20% and is a top three operator, depending on the state and month, he said.
“BetMGM is making tremendous strides as states legalize online sports betting or igaming. Entering those states on day one, oftentimes with a physical sportsbook and sometimes digital only — the momentum has been fantastic,” Halkyard said. “Our mission has been to capitalize on this market penetration. Every BetMGM customer becomes a member of our loyalty program and depending on their playing behavior, we bring them to Las Vegas or other markets and deliver a true omnichannel experience, which our digital-only competitors simply can’t do. This has proven to be our most important customer-acquisition tool and a great source of competitive advantages that’s just beginning.”

With BetMGM, the management team has guided it to $1.3 billion in net gaming revenue this year and the long-term margin goal is in the mid-30s.

Answering a question about international tourists, Halkyard said they represented about 12% of business pre-pandemic and it has been running about half that level during the second quarter. That segment is driven by airlift availability and travel restrictions, he said.

“It’s growing, but still not back to levels where it was pre-pandemic,” Halkyard said. “The airlift is maybe 80% of where it was in 2019. It’s a very important customer base. They tend to stay longer than our typical customers. They tend to skew a bit more to our premium properties and the attachment rate for entertainment is quite high.”

As for the international high-end gaming business, while they’re starting to see some of that return, that’s well below pre-pandemic levels, Halkyard said.