MGM Resorts faces tough questions about Q3 guidance
 
MGM Resorts faces tough questions about Q3 guidance
02 AUGUST 2018 9:59 AM

While MGM Resorts International reported strong performance during the second quarter, executives spent most of their time during an earnings call answering tough questions about previous guidance for the third quarter.

LAS VEGAS—Executives at MGM Resorts International had a number of highlights from the second quarter to talk about, but analysts on the company’s second-quarter earnings call focused mainly on the company’s guidance for the third quarter.

The third quarter is always volatile in Las Vegas, MGM Resorts Chairman and CEO Jim Murren said. The third quarter this year is shaping up to be the third-best Q3 in the company’s history, he said, but it’s running up against tough comps from 2016 and 2017, which hold the first- and second-best records, respectively.

“It’s not a bad convention quarter,” he said. “It’s just up against two incredible comps the last couple of years.”

The challenge has been the company did not get the acceleration of small group business to fill in those holes that it had hoped to achieve, he said. The entire Las Vegas market scrambled to mix rooms differently, he said. He doesn’t believe this will be an issue in the fourth quarter.

COO Corey Sanders said when looking ahead at bookings, particularly to 2019 and 2020, there isn’t the same softness coming to Las Vegas. The market is geared up for competition from other cities, he said, as it can create experiences no other city can and house conventions no other can because of its scale.

MGM Resorts will continue to bring content to Las Vegas, Murren said, such as its sponsorship of the NBA Summer League and its growing lineup for its T-Mobile Arena. He believes that strategy is working and sees no reason to change it.

However, analysts did not seem satisfied with the explanations, with many questioning the company’s decision to buy back stock in face of its tougher Q3 guidance. Some asked if the company is facing facing tougher competition and why MGM Resorts based its guidance for the second half of the year on business it did not yet have on the books.

“You guys get so worked up about a few weeks—it’s just unreal,” Murren said in response to a question about pricing pressures and its stock buyback. “In May, we talked about what we saw happening. We wanted to fill some of those holes with smaller group business. We thought we would. We did not. We bought back still and will continue to buy back stock because we believe it’s ridiculously undervalued. It’s a good allocation of our free cash flow. Do we think there is anything structurally in Las Vegas to cause us concern? The answer is no.”

While he appreciates the concern around the third quarter, he said he would say the same if he shared analysts’ concern. The company’s data tells them the fourth quarter going into 2019 will be stronger, he said.

While he shares the same frustrations as analysts that group business didn’t come through for the third quarter as hoped, Murren said he was getting weary talking about revenue per available room as that’s not the metric it uses to measure itself.

“We measure ourselves on cash flow and profitability,” he said.

However, when sharing RevPAR guidance, he said the company will use “tremendous conservatism in the future.”

Over the years, MGM Resorts has tried to be granular on what RevPAR will be every quarter, he said. When RevPAR meets or exceeds guidance, the response is that everyone thinks that’s fine, but when the company misses it, “it’s a disaster,” he said.

“We’re just not going to take that kind of forecasting hit anymore,” he said. “We are going to be, including right now, very conservative with a lot of cushion in RevPAR guidance. It is what it is.”

Second-quarter performance
Las Vegas Strip revenue increased 2% year over year, Murren said, which was consistent with guidance. Earnings before interest, depreciation, taxes and amortization, excluding Park MGM, increased, and margins were better than expected, down only 82 basis points. The company’s luxury properties performed well, he said, and Aria Las Vegas reached its all-time high EBITDA during the quarter.

The company’s outside of Las Vegas had solid performances as well, he said, particularly the MGM National Harbor near Washington, D.C.

MGM China in Macau held low in both the main floor and VIP, he said, which had a negative impact of almost $40 million. However, it has seen a strong pickup following the World Cup. Since opening its new property in Cotai, the team in Macau has been capturing opportunities in the market place.

MGM Resorts will continue its path to becoming asset-light and an operating management company, Murren said. It will look for opportunities to sell its owned real estate assets to its spinoff real estate investment trust, MGM Growth Properties. At the same time, the company is looking to reduce its ownership stake in MGM Growth Properties, he said, and it has a goal of having less than 50% economic interest in the REIT within the next three years.

MGM Resorts’ stock was trading at $27.73 at press time, down 16.9% year to date. The Baird/STR Hotel Stock Index was down 0.9% for the same time period.

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