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MGM Resorts Overcoming Short Term Pain for Long Term Gain

Third quarter results at MGM Resorts International (MGM) were above expectations, largely due to a boost from two massively popular boxing events during the prior three months. MGM also benefited from slightly above average luck on gaming profits. The strong results were offset by disappointing guidance for the fourth quarter after MGM experienced elevated reservation cancellations in the wake of the tragedy at Mandalay Bay on the first day of October. Importantly, MGM also noted that booking activity largely returned to normal once marketing efforts resumed in the following weeks. Still, MGM expects revenue per available room to decline 5-7% in the fourth quarter compared to the previous year. The stock rallied on the results as the strong third quarter and temporary nature of the fourth quarter headwinds allayed fears of prolonged weakness.

Aside from the boost generated by the two major boxing events, third quarter results also benefited from ongoing efforts to enhance profitability. MGM has been investing in technology to assist with data analytics with the goal of maximizing revenue from every occupied hotel room. This focus on revenue per occupied room is a departure from the industry standard focus on maximizing revenue per available room. In some cases, MGM can steer customers away from rooms that might charge a higher daily rate to less expensive rooms with 25-50% higher profitability. MGM noted that oftentimes these customers are non-gaming visitors who are instead spending more on sports and nightlife entertainment options as well as food and beverage options. The new NHL team, the Vegas Golden Knights, has helped MGM attract even more of these visitors now that the inaugural season is underway.

As expected, ongoing disruption from the renovation of the Monte Carlo detracted from third quarter performance. The resort is being rebranded as the Park MGM and NoMad Las Vegas Hotel. Although the project is anticipated to negatively impact results into the middle of next year, it should be a positive contributor by the end of 2018. Early signs of success in the few restaurants and room products that are already completed provide confidence that the full project will earn nice returns for shareholders. MGM foreshadowed that these low-risk Las Vegas renovation projects should be expected in future years.

Outside of Las Vegas, MGM is nearing completion of two new resorts; MGM Cotai in Macau will open in January 2018 and MGM Springfield in Massachusetts is slated to open in September 2018. Once completed, these construction projects will free up substantial amounts of free cash flow which can then be used to increase shareholder returns. Relatedly, MGM Macau has continued to perform well and the recently opened MGM National Harbor in Maryland has gotten off to a strong start. We expect all four resorts to be important upside catalysts for MGM in the intermediate term.

In summary, Northlake believes MGM can push into the upper-$30’s based upon a sum of the parts valuation analysis breaking down the company’s domestic operations and the public equity values of its majority owned holdings, MGM Macau and MGM Properties. The completion of new construction and renovation projects will add to the already strong collection of assets and drive revenue growth. The ongoing efforts to drive profit margins higher will also be an important contributor. As each project wraps up and profitability continues to improve, more free cash flow can be returned to shareholders.

MGM is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  MGM is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

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