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MGM's New Maryland Property Could Be A Game-Changer

Summary

In its savvy design and conception MGM clearly went to school of the roller coaster ride of Atlantic City.

We think consensus estimate of $240 million in EBITDA is low.

MGM's corporate debt at $12.9 billion suppresses stock but this new property could help a sharp upside.

"To expect the unexpected shows a thoroughly modern intellect."

Oscar Wilde

We're all guilty in one way or another when we appraise obvious, hidden or unrecognized values in stocks. We're all victims of the gambler's fallacy at times, i.e. detecting non-existing patterns. We collect facts, weigh them, arrange them into a plausible narrative we create and make a prediction. The best that can be hoped for I've found is to go to school on the next guy's mistakes, blunders and proven fallacies. This in my view is precisely what MGM Grand Resorts, Inc. (NYSE:MGM) did in planning its National Harbor integrated resort-casino scheduled to open at the end of this year.

The company has three pipeline projects: MGM Springfield (Massachusetts) a center-city casino-hotel we believe will be battered by excess competition and location problems from day one. We expect to see its realty quickly spun off into the parent controlled REIT MGM Growth Properties (NYSE:MGP).

Its MGM Cotai project in Macau, scheduled for a late opening in 2017 will arrive at a time we believe revenue flow through market-wide will have stabilized. It will do fine as the balance between capacity, economics and improving infrastructure to the island will by then have bolstered overall visitation.

However of the three projects, we see its Maryland MGM National Harbor property as the runaway gem. So much so that we think even the robust estimates of EBITDA contribution of $240 million, is on the shy side. And for that reason, we're raising guidance on MGM back up to $30 a share by Q1 2017. We think a great, opening quarter for this property will have an upside echo effect on the stock.

Here's the basics and the rationale of MGM National Harbor:

Cost: $1.3 billion

Location: On the Maryland bank of the Potomac River across from northern Virginia. Effective Metro area population reach: 6 million.

Casino: 135,000 square feet featuring 3,600 slots and 140 table games at the outset.

Rooms: 300-room tower inclusive of 74 suites.

Showroom: 3,000 seats.

Dining: 12 restaurants covering 24 hour popular priced to gourmet rooms with celebrity focus.

Garage: Parking capacity: 5,000 cars.

Estimated revenues:

Casino: $650 to $715 million in gaming annual according to projections of various consulting groups as well as MGM management since inception. (Note: state tax will gobble up an unholy 67% on slot revenues and 21% of table games. Guess which department will be increasing its number of gaming positions faster)? Question two: Do you think for one second MGM's calculation on its $1.3 billion investment didn't massage the tax burden numbers to death?

Non-gaming: $220 million

Total revenue forecast (ours) $915 million in 2017, $1.1 billion for 2018.

EBITDA: $240 million consensus. Our estimate: $255 million to $260 million based on the following assumptions:

a) Table game spread and win will expand. Penn National's (NASDAQ:PENN) Rosecroft Racino in Maryland recently applied for and received permission to remove 308 slots from its floor. Likewise Horseshoe Baltimore increased table games.

b) Strong Asian population base in metro area with higher than average gaming profile will support bigger spread of table games, taxed at the lower figure.

c) MGM has raised seating capacity of its showroom to 3,000 from 2,000 since its initial design proposal. A-list acts and events from its Las Vegas base will provide an event calendar unmatched by any local competition.

d) Underlying metro DC economy one of the strongest in nation largely due to federal presence.

ROI: 18%. We think this is a good number that could be better but at this point can't forecast what MGM will be paying for refinancing $6 billion of it' total $12.9 billion debt that comes due in 2018. It is more than less likely their rates will go up. But at the same time its three pipeline projects will by then have all...


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