"Optimism means better than reality; pessimism means worse than reality."
Las Vegas, a city that has been a mature, grown-up, vital metro area for a long time finally might get its wish. This week, the National Hockey League (NHL) announced it was seriously considering final approval of the siting of an expansion team to the town starting in the 2017 season. Whether it's the first of more professional sports franchises to bloom there or not, one thing remains clear: it's a solid win for the Chamber of Commerce types and local investors who have pushed for this for years. And let's not forget the local hockey heads who have already plunked down deposits on 14,000 season ticket packages.
But what about the casino operators? Is this a biggie? Will it generate tons of new bodies in town to rev up gaming and non-gaming revenues? And if so, who'll benefit? And will it provide a meaningful contribution to earnings and, by that, prompt new interest in the gaming sector from investors still wary following the 2007/08 economic crisis that saw Vegas visitation and win numbers tank?
The NHL is the weakest of the four major professional sports leagues. Its been struggling for decades, hemmed in by a demo that has not grown beyond its traditional core. Low TV ratings persist. What limits its appeal is that too many teams are located in markets where the sport isn't a strong part of the local sports ethos as it is with the NFL, MLB and the NBA.
The base number for most teams, especially those in warm weather cities, ranges between 15,000 and 18,000 in live attendance per home game. Multiply that by 41 home games and use an 18,000 per game attendance base (not including playoffs), and you can project 738,000 bodies in the T-Mobile Arena for a regular season, or roughly 1.5% of total Vegas visitation. The majority of those projected bodies will be local fans. TV ratings for playoffs this year were dismal, and even the Stanley Cup finals were down (partially because no Canadian team contended).
Fervent hockey fans who would otherwise not visit Vegas, but who would come if their own home team were playing, could add some incremental revenue to the town. Our take is that close by MGM properties will be the overwhelming beneficiaries of this possibility due to the proximity to the T-Mobile arena (co-owned by MGM with Philip Anschutz) to both Monte Carlo and New York-New York, and its Park outdoor casual dining and relaxation space.
Warm weather cities where the NHL has expanded have not done well. This is largely due to the lack of deep-rooted fan development that springs from the popularity of kids hockey leagues and parent-to-offspring generational legacy enthusiasm. All in all, warm weather cities' attendance per game numbers have averaged between 14,000 and 16,000 for decades. Fan interest spikes or wanes, as it does in all sports, out of team performance.
The Los Angeles Kings, who now draw strong hockey fan interest from Las Vegas locals, began their run decades ago and have gone from an average attendance of 8,000 per game to 18,000, including their most recent runs at the championship. In the New York metro area, the nation's biggest market, where three NHL teams play, attendance and ratings are less than stellar. The New York Islanders, a contending team, moved from their outdated traditional home in Long Island to the snazzy new Barclay's Center in Brooklyn and actually saw their attendance numbers go down. The legacy New York Rangers dominate the sport, and their games at Madison Square Garden are always a sellout at 18,000, with a high ticket price. That's in a metro area of 18 million. Even in giant metro areas like New York, the sport's fan base, while fervent, is small.
However, we do see excellent potential in tour and travel casino hotel hockey packages aimed at Canadian markets where NHL hockey is a religion and dates coincide with away games of home teams.
So citywide, the best that can be attributed to this breakthrough for Las Vegas is as a long overdue trophy to its image as one of the nation's big league cities. The halo effect of the move and better-than-expected NHL success could spur a move by the NBA next, and after that, the golden NFL. All this is to the betterment of the town's image and knocks down the long-held blind views of pro sports honchos that Las Vegas could not qualify for teams because of its gambling element. That hypocrisy from leagues where illegal betting his thrived for decades has finally been put to rest by this move, modest as it is.
MGM: The lion's share for the lion
Because of the proximity of its two properties to the arena, its part ownership of the venue, its total room inventory on the strip and its strategic thrust into non-gaming amenities, we see the NHL arrival as a significant plus to MGM Resorts (NYSE:MGM). It will make a noticeable contribution to its already diverse revenue streams associated with music and sports events.
MGM (at writing):
- Price: $24.52
- 52-week range: $16.18-25.29, roughly at its high now.
- YTD return: 10%
- Consensus target: $28.20
- Our target: $30-35 by Q2 2017 or earlier.
Our target for the shares since we began following the stock last year began from a high of $35 at a time when it was stuck in sideways movement in the low $20s. We downgraded MGM sequentially to $30 and then to $25, based on our sense that the needed moves to deleverage its $9 billion in debt, rationalize its underperforming properties and define a long-term strategy weren't clear enough to the market. Yet, we liked its total dominance in Las Vegas room capacity as the market slowly revived. We liked the company's National Harbor project that would bring a top-shelf property to the Washington DC market.
We were bullish that its Macau Cotai project would be last of the new properties to open there, giving more breathing space for the market to stabilize - that's already happening. MGM's project should open to a stronger market than is currently being experienced there.
We were less sanguine about MGM's Springfield Massachusetts project. Its core feeder market is Hartford-New Haven. The two Connecticut tribal operators are planning to co-develop a border property as a fighting brand to protect the hold on that area. That will complicate the MGM property's marketing challenges. We see that property landing into MGM's REIT, MGM Growth Properties (NYSE:MGP).
We now see MGM Springfield winding up in the company's REIT portfolio once it establishes a reasonable base to lend confidence that it could meet the triple net lease payments of the subsidiary. We do see National Harbor remaining happily ensconced in the parent MGM family. It's going to do great numbers.
MGM on the move
Though it took time for management to suss out its moves, they started to come hard and fast this year. First, the company announced a $300 million cost control program that is meeting success in improving margins. Second, it announced and completed the sale of 10 of its properties to a parent-controlled REIT, MGM Growth Properties. While we were never fans of casino REITs, we liked MGM's savvy approach in keeping parent company control of MGP, buffering it against mischief with poison pills and providing a viable way to unlock shareholder value.
(We were less sanguine about MGM's decision to charge for parking at selected properties. It's too early to yet determine if that is working.)
Once that deal went public, we wrote on SA on April 19 that based on our industry sources, we imminently expected MGM to buy out the Boyd interest in the market-leading Borgata of Atlantic City and move that property into the REIT. That has happened, and since the announcement, shares have gone up 15.21%. The company paid $900 million for the Boyd (NYSE:BYD) share and will sell it to MGP to $1.18 billion, in the process picking up $600 million of Boyd debt on the property.
MGM's Q1 numbers showed a 3% uptick in net revenues for its wholly-owned properties.
The NHL Hockey Effect
We've estimated the mix of locals and the potential of hockey room packaging in NHL cities in the US and Canada. We've added the company's strong track record in promoting boxing events and added the proximity value of its two nearest properties as well as its part ownership of the venue itself, and concluded that the continuing diversification of MGM's entertainment options in sports will be accretive to its earnings.
As we've pointed out, NHL hockey in Las Vegas is no bonanza by any means, but it's perceptual benefits to the town are many and valuable. However, there is no question in our appraisal of the impact that MGM will disproportionally benefit from whatever upsides there are to revenue streams across the board:
- RevPAR in its close in hotels, gaming revenue, sports book action, dining, co-ownership of the arena. If and when team play matures in strong contention for the playoffs, and even someday the Stanley Cup Finals, MGM will have the front seat with the biggest cash register open and ready to fill up on the events.
We think any dollar or percentage forecast of NHL-related revenue/EBITDA increases for MGM would be far too premature to make now. We don't know what the company's marketing strategy will be going forward Nor can we compare hockey, for example, to straight entertainment events by A-list acts some games may displace. But there is little doubt that it will be a positive factor for the town in general, and very specifically, for MGM.
The NHL development is the latest in a series of moves from which MGM shares will benefit, causing us to revalue the shares again to the $33-35 area by Q2 2017. That's lofty above consensus, we realize. But we believe the company now has its strategic act together and is undervalued. With leverage starting to diminish, new properties in the pipeline and strong performance in the Las Vegas market, plus shareholder value unlocked by MGP, we think MGM now has immensely improved transparency. The company has clarified its strategy. Investors now need to take a good hard look at what we see as a strong upside going forward.
About the author:
Howard Jay Klein is a 25+ years c-level casino executive and consultant. He is the author of Mastering the Art of Casino Management. His own gaming portfolio resides in a blind trust for his family in order to avoid any potential conflicts of interest with gaming clients past, present or future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.