Resorts with significant exposure to Macau casinos face a sudden disruption of normal tourist trends during 3Q 2019. Expansive growth in Macau gaming is suddenly subject to sharp decline, due to recent disruption of Hong Kong tourism. Longer-term impacts to growth of Macau casinos include additional political turmoil in the region, China's currency devaluation, new regulations impacting junkets, as well as uncertainty relating to competition from new Macau casino and resort properties.
I provided information in my previous article on Hong Kong tourism trends and slowing Macau gaming receipts, as well as retail sales impact and the number of companies already discussing serious sales impact from the Hong Kong situation. I referred to that recent information as a reason for stock market investors to consider switching casino investments from Wynn Resorts Ltd. (WYNN) to a casino REIT, MGM Growth Properties (MGP). Here I provide a brief update on Hong Kong unrest and present a broader examination of the financial factors contrasting the Casino REITs to Resort Corps with casino exposure to Macau gaming, including Las Vegas Sands (LVS) and MGM Resorts International (MGM), as well as Wynn Resorts Ltd.
Update on Hong Kong Risk Factors
Hong Kong protests reached Macau this week, with the first arrest of Hong Kong demonstrators at a small assembly in Macau last night. Despite generally calm protests last weekend, with hundreds of thousands of peaceful demonstrators assembled in the rain in Victoria Park on Sunday, much risk remains. Friday and Saturday night last weekend saw more protest attacks on Hong Kong police stations, as well as eggs thrown at the offices of local politicians loyal to Beijing and spray painting the logo on the Hong Kong Federation of Trade Unions building in Hung Hom. This week, the largest protest event scheduled is a "human chain" along the MTR subway lines on Friday August 23, 2019, reaching from Hong Kong into the New Territories. According to the organizers, more than a million Hong Kong residents are expected to participate in this "human chain" on Friday.
In the happy event that protesters may reach a hoped-for dialogue with Hong Kong administrators, investors should still consider the analysis below to understand which of the Resort Corps with exposure to Macau casinos have the most at stake. In contrast, US-based Casino REITs offer a safe haven with both attractive yields and FFO growth supporting long-term returns.
Exposure for Resort Corps with Macau Casinos
As shown in the table below, the Resort Corp with the greatest exposure to Macau casinos for current earnings is Wynn Resorts, with Macau accounting for 71% of adjusted property EBITDA for 2Q 2019.
Next in order of Macau exposure is Las Vegas Sands, with 60% of total adjusted EBITDA contributed by Macau region. MGM Resorts International draws only 23% of adjusted property EBITDA from China Holdings, where results are consolidated, although the properties are only 56% owned, with the balance held by local investors.
2019 Stock Price Performance
Stock price performance year to date for 2019 shows the Resort Corps starting to weaken, while the two US-based Casino REITs are trading up 11% year to date, weakening only 9%-12% from their high prices reached in April 2019.
The stock of Las Vegas Sands is trading slightly lower on the year, while Wynn Resorts is trading up 5% year to date for 2019. The best stock performance in the group has been achieved by MGM Resorts International, trading up 12% year to date for 2019.
Yields, Market Cap and Expected Growth
The table below also contrasts market cap and the ratio of market cap to annualized revenues. Here we see a disparity in the valuation ratio, with US-based Casino REITs showing market cap valuations at 9.9-12.4 times annualized revenues compared to a range of 1.2-3.2 times for the Resort Corps. The disparity in market cap valuation of annualized revenue is due to the fact that Casino REITs draw revenues from rents, normally in a range of 11%-12% of total revenues generated by portfolio properties, while the Resort Corps report total revenues generated by the hotels, casinos, entertainment and retail venues they operate in each property.
Expectations for growth shown in this chart is based on guidance, management commentary and actual earnings results reported for the first six months of 2019. All three of the Resort Corps are looking at down earnings for 2019, while both of the Casino REITs see moderate earnings growth for 2019. Looking forward to 2020, both of the Casino REITs should see significant earnings growth, due to recent and pending acquisitions. As REITs, both MGM Growth Properties and VICI Properties (NYSE:VICI) are required to raise dividends as pretax income increases, so investors can look forward to higher dividend distributions.
Capitalization of FFO
The chart below presents my analysis of how total capitalization of each stock (adding debt, preferred stock and minority interest to current market cap) values FFO for the Casino REITs. In contrast, I apply the same balance sheet and market cap analysis to the Resort Corps, while reducing adjusted EBITDA by subtracting interest expense, making an adjustment to earnings that approximates the FFO reported by the REITs.
This analysis shows total cap to FFO at 21.2-26.2 times for the Casino REITs. This is an appropriate level for REITs, similar to stable REITs in most sectors (including Apartment REITs, Healthcare REITs, Office REITs, Retail REITs and Specialty REITs). In contrast, these three Resort Corps with Macau casino exposure show total cap relative to FFO in a range of 12.3-17.1 times. The highest in the range is MGM Resorts International, at 17.1 times, due to its current debt of almost $17 billion, exceeding its market cap of $15 billion. Las Vegas Sands, showing the lowest total cap to FFO, has $12 billion in debt, less than 30% of its $42 billion market cap.
Investors should see risk in owning Macau casinos at a time of sudden disruption of tourism during 3Q 2019, with the possibility that negative trends will continue through the end of 2019. Meanwhile, US-based Casino REITs offer a stable, lower-risk portfolio alternative, with attractive yields, dividend growth and earnings growth, driven by already announced portfolio expansion. I see the best trades available among these five alternatives is to SELL Wynn Resorts and BUY MGM Growth Properties.
Disclosure: I am/we are long MGP. 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.