CEO Jim Murren explained to analysts why MGM Resorts is taking a different approach to revenue per available room to drive up its margins.
LAS VEGAS—During their second-quarter earnings call, MGM Resorts International executives touted the company’s continued growth and success on the Las Vegas Strip as well at its regional domestic and international properties.
Chairman and CEO Jim Murren said the company’s cash flows rose in the quarter and on a hold-adjusted basis, earnings before interest, taxes, depreciation and appreciation would have been up 10%. The company was able to meet and exceed its previous guidance on profitability and margins, he said.
CityCenter saw revenue and cash flows grow 10% and 36% year over year, respectively, he said. MGM Detroit hit an all-time record in revenue and EBITDA, National Harbor is already a market leader and Borgata is performing at an outstanding rate, Murren added.
On a macro level, there was some softness in early June before a rebound at the end of the month, he said. The company also underestimated the disruption in converting the Monte Carlo into Park MGM, and Murren said he expects it to remain disruptive throughout the end of the year but will turn out to be a success.
As of Thursday afternoon, MGM Resorts stock was up 16.1% year to date. The Baird/STR Hotel Stock Index was up 23.9% for the same time period.
A different approach to RevPAR
MGM Resorts’ 100-basis-point revision on revenue per available room was a point of interest among analysts, who asked company executives several questions during the call.
The company has moved to maximize revenue per occupied room, Murren said, which is why margins were up higher than expected and why RevPAR came in under guidance.
In terms of driving margin in the non-gaming areas, he said most hotel divisions in resorts, much like MGM’s, are run more independently and focused on driving RevPAR. That’s not how to drive profitability in a casino-hotel environment, he said.
“We made a decision when we moved from (the profit growth plan) to continuous improvement to dig in more on our hotel yielding and do it more holistically,” he said. “We actually started that at the beginning of the year.”
That decision had a minimal impact on the first quarter because there was strong convention business, Murren said. It had a larger effect on RevPAR in the second quarter, but the company was able to drive profits throughout the resorts, which is why revenue per occupied room was up more than 5%.
Looking forward, Murren and other executives feel in order to drive increased margin and profitability, it requires “yielding total resort” for driving revenue into the resort. That has a dampening effect on RevPAR, he said, but that’s OK because the company is trying to drive more profits.
Overall, if there’s a 1% difference in RevPAR, such as coming in at 2.2% instead of 1.2%, he said, that’s only a matter of $2 million of profit. An increase of 1% in margin on the strip is $14 million, he said.
“We made a decision which we will continue to make to focus on profitability and margin,” he said.
Conventions and events
Convention partners have been changing their practices, Murren said. Instead of holding five conventions of a certain size in a given year, he said, now they’re consolidating down to three or four.
While there might be fewer conventions, it drives more delegates per convention, he said, and MGM properties are seeing bigger spikes in attendance per convention compared to previous years.
Microsoft held its convention last week, Murren said, and it was highly successful for MGM. The upcoming Floyd Mayweather Jr. and Conor McGregor fight will be 26 August at MGM’s T-Mobile Arena.
“We intend to maximize every penny of profitability opportunity there,” he said.
Convention business in 2018 will be as good if not better than 2017, Murren said, and 2019 is shaping up to be strong as well. The airlines have positive things to say about flights heading into McCarran International Airport next year, he said, and the Las Vegas Convention Center is also talking about a strong year. MGM will benefit from the expansion of its conference facilities at Aria and MGM Grand, he said.
Murren also added he wouldn’t ignore the fact Las Vegas will have its first professional sports team, the Golden Knights, start its season later this year. Increasing the number of college and professional teams will have a significant effect on the market, he said.
When asked about his thoughts on conventions that have rotated into Las Vegas as a result of the Moscone Center closing for expansion in San Francisco, Murren said he wasn’t worried about gaining and then losing conventions.
“We usually don’t borrow conventions,” he said. “We steal and keep them.”
Delegation attendance usually grows 20% to 30% when events are held in Las Vegas compared to other cities, he said, so the conventions generally don’t leave once they’re held there.
The MGM Cotai is on track to open within the next two to three months, said Grant Bowie, CEO and executive director of MGM China Holdings. The company understands the Cotai market is different from the Macau market, he said, but it also accepts it has certain characteristics it’s strong at, particularly mass business. MGM Cotai also needs to develop its VIP business over time.
For the property itself, most important is capacity. It’s not just a question of being able to expand based on the current pool of customers, he said. It’s necessary to tap into new customers who might already be in Cotai, he said, and not necessarily share shift but allocation of wallet.
The property is getting ready to launch its food-and-beverage operations, he said, and it’s now introducing the customer base to the entertainment products.