A fourth wave of COVID-19 has prompted some Las Vegas Strip convention cancellations during the third and fourth quarters, but strong demand from leisure travelers is backfilling that loss and 2022 is ripe for business travel and conventions, according to MGM Resorts International CFO Jonathan Halkyard.
Halkyard touched on COVID-19 impacts and a variety of topics Thursday, including the continued investment in and importance of BetMGM, when he spoke to a virtual Bank of America lodging and hospitality conference.
“We have seen cancellations and others have as well, but at the same time, we’re seeing a near-record lead generation as it relates to group business for 2022,” Halkyard said. “Some of the midweek business we had expected in the late third and fourth quarters has canceled. It’s been largely filled by transient and leisure customers like we saw in the summertime. None of this gives us any reason to think that 2022 will be any different than we thought it would be a couple of months ago. There’s evidence around the country that this fourth wave is peaking, but some companies say we’re not going to travel yet and that’s had some impact on the group business. I wouldn’t say it’s that dramatic, however, thanks to what we can backfill it with.”
Halkyard cited record-setting gaming revenues on the Strip, with slot revenue from younger players over the past few months that has deviated from what’s been normal in the past.
“My own view is that it does not represent a long-term change in behavior,” Halkyard said. “These are the customers who were getting into the hotel who in some cases would have yielded from hotels with a stronger group base. Another reason is that there hasn’t been as much entertainment or nightclubs. I’m in the camp that believes some of these behaviors will return to more normalized levels over time. It has been great for operators, because these revenues come at high margins.”
During the second quarter, entertainment and food and beverage were still operating 10% to 30% below 2019 levels, Halkyard said. Not all customers have returned, he added.
“Our view as things normalize is that earnings will grow, because we don’t yet have what we consider to be an optimal customer mix for profitability for MGM,” Halkyard said. “As we get a wider variety of customer segments on weekdays and weekends, we’ll be able to increase earnings even over what we did in the second quarter, which is pretty extraordinary.”
Among the other highlights from Halkyard during the conference is what MGM will target in using its $6 billion current cash position, which will grow to $11 billion by mid-2022 after finalizing sales of CityCenter, MGM Growth Properties, and MGM Springfield.
“We have a few priorities,” Halkyard said. “Number one is investment in our own businesses, as we continue to improve our existing product. That will include room renovations and technology investments to bring digital tools to the hands of our customers with increasing sophistication. The second is funding BetMGM, which we think is a fantastic use of capital, so that the company continues to acquire customers. Finally is share repurchases. We think our shares remain an attractive use of capital. We will also retire our bonds.”
As for Japan, where MGM has proposed building a $9 billion casino, Halkyard said that given the magnitude and timing of that investment, they will not reserve current capital. He expects it to be funded out of free cash flow in 2024 and 2025.
Halkyard spoke glowingly about the future of BetMGM, the company’s joint venture with Entain, and reiterated it will be profitable in 2023.
“I think one of the elements that we, as well as our shareholders and lenders, will be watching closely is the way in which BetMGM over time turns from a consumer of capital to a generator of cash,” Halkyard said. “That will have a very important and positive effect on our leverage. We think it’s a business that can be a strong cash-flow generator.”
Halkyard said the joint venture with Entain, which provides the sports betting and igaming technology, was built to last. He noted that BetMGM provides an opportunity to drive cross-property play between regional markets and Las Vegas and within Las Vegas.
“We feel we’re in a very good position with a leading brand with BetMGM,” Halkyard said. “This company needs to be the best-known brand and most-trusted brand in gaming. It’s casual and high end and hopefully has as many distribution points and highest availability in this country.”
That additional investment in BetMGM is vital; their experience in Michigan, which launched sports betting in January, shows it’s important to be ready to go from the start, Halkyard said. Sports betting launched Thursday in Arizona and Bank of America analysts talked about the fall being a competitive landscape for market share in new and emerging markets like Arizona.
“It is difficult to overstate how critical day-one performance is in these markets,” Halkyard said. “It’s something I have certainly learned. It was certainly amplified with the experience of Michigan back in January — just how important that day-one launch is. Our company has been hands-on-deck for Arizona for weeks now. As a result, we’llget out of the gate very strongly in that state, plus South Dakota, Wyoming, and on and on.”
California and New York are enormous market opportunities in the future as well, Halkyard added.
Halkyard said BetMGM has passed on most media partnerships and feels it has more targeted ways to acquire customers than some of the deals that have been announced by competitors. BetMGM is one of the official partners of the NFL. “Product and getting out of the gate strong will be the most important.”
“There will be a time in the not-too-distant future when, instead of talking volume indicators like table drop and slot handle in Las Vegas or the regions, they will be talking about average daily users online and offline across the MGM system. I think that will go into our underwriting to the extent we have a look at those new distribution points.”
As for mergers and acquisitions and development, Halkyard said MGM has a more substantial Las Vegas presence and less of one in regional markets. He said it’s a great opportunity to increase the company’s regional distribution points and build more of a network.
“It’s a strategy that came a little bit later with MGM over the past few years, and I think has the opportunity to grow,” he said. “We have to do it correctly. These are premium properties. We have number-one market share and the highest price points in every one of the regional properties in which we operate, perhaps with the exception of Yonkers. It would have to be the right type of property. As it relates to Las Vegas, we’re all comfortable with the amount of exposure in the Las Vegas market relative to our revenues elsewhere.”
