) is benefiting from the higher demand and better convention
mix at its hotel properties in the U.S. MGM offers more than 40,000
rooms in the U.S., primarily at the Las Vegas Strip. The Strip was
hit hardest by the recession, but has been recovering well. The
hotel average daily rate (ADR) has been growing steadily at an
average annual rate of around 7% over the past few years, driven by
the recovery in the U.S. economy and growth in the consumer
spending. U.S. consumer spending has been on an uptrend since 2011,
moving from $10,373 billion in January 2011 to 10,912 billion in
January 2014. However, ADR is still lower than the pre-recession
levels. We expect ADR to grow at an average annual rate of 5% in
the coming years and reach pre-recession levels by 2017.
ADR for MGM's hotels in the U.S. is around $130 currently with
occupancy levels of more than 90%, translating into annual revenues
of $1.6 billion in 2013. The estimated EBITDA margin of 46% for the
U.S. hotels translates into EBITDA of over $700 million,
representing 31% of MGM's overall EBITDA for 2013.
See our complete analysis for MGM Resorts
Hotel Operations Are Recovering At The Las Vegas
We estimate that the Las Vegas hotel business contributes around
30% to MGM's value. The hotel operations are driven by ADR and
occupancy levels of the hotel. MGM's ADR has been trending well
over the past few years and has increased from $108 in 2010 to $131
in 2013. We estimate it to reach pre-recession levels of $160 by
2017 and over $185 by end of the decade. The revival in the U.S.
economy and higher international travel will boost the ADR for
As the U.S. economy stabilizes, consumer discretionary spending
is expected to improve. This will give rise to the demand for
luxuries like travel, leisure, entertainment etc. Moreover,
international tourism is also growing and visitation in the U.S.
has increased from close to 60 million in 2010 to approximately 70
million in 2013, according to National Travel And Tourism Office.
This will have a positive impact on hotel operations.
We don't expect any significant jump in ADR growth rate as
occupancy is more important consideration than ADRs for hotels.
Casino operators in particular are motivated to sustain occupancy
in order to generate demand for the casino and other ancillary
facilities, thereby, compromising on ADRs.
Average occupancy levels for MGM declined from 96% to 89%
between 2007 and 2010. The decline was accentuated due to the
economic recession and consequent decrease in consumer
discretionary spending. In 2008-2009, economic uncertainty caused
trade groups, corporations, and unions in the U.S. to cancel events
or hold them in local jurisdictions. This had a pronounced effect
on convention activity at the Las Vegas Strip. However, occupancy
levels improved post 2010 and moved to 91% in 2013.
We don't see any further growth in the occupancy levels for MGM
primarily due to the oversupply of rooms at the Las Vegas Strip.
Las Vegas offers more than 150,000 rooms and MGM itself operates
more than 25% of those rooms. Other U.S. states are legalizing
casinos and this will impact the number of visitors to Las Vegas.
Moreover, unprecedented growth of Macau and Singapore gaming
industry has affected Las Vegas gaming industry adversely. This has
also affected the number of Asian tourists visiting Las Vegas. It
must be noted that over a brief interval of time, Singapore has
become the third largest gaming market after Macau and Las Vegas.
Moreover, there is a very narrow gap between Singapore and Las
Vegas gaming. In 2013, Singapore generated $6.1 billion in gaming
revenues, a little short of $6.5 billion generated at the Las Vegas
Strip. Continued growth in Macau and Singapore will have a
meaningful impact on Las Vegas gaming as well as on the demand for
ADR of $186 and occupancy levels of 92% will translate into
annual revenues of $2.27 billion by the end of our forecast period.
We forecast EBITDA margins to be around 49%, translating into
annual profits of over $1.1 billion, representing 21% of total
EBITDA by 2020. This is much lower than 31% EBITDA contribution
currently. The low contribution to profits in the coming years can
be attributed to significant growth in the company's Macau
operations and its contribution to the overall profits.
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