MGM Resorts International (MGM) — Q3 2015 Earnings Call Transcript

Well, thank you, operator, and good morning and welcome everyone to our third quarter earnings call. This call is being broadcast live on the Internet at www.mgmresorts.com and a replay of the call will be available on the company's website. We furnished our press release and Form 8-K this morning to the SEC as well. On this call, we will make forward-looking statements under the Safe Harbor provisions of the federal securities laws. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in these forward-looking statements is contained in today's press release and in our periodic filings with the SEC, including our most recent 10-K. During the call, we will also discuss non-GAAP financial measures in talking about the company's performance. You can find the reconciliations of these measures to GAAP financial measures in our press release, which is available on our website. Finally, please note that this presentation is being recorded. And with that, I'll turn it over to Jim Murren.

Well, thank you, Dan, and good morning, everyone. We have a lot to get through today and a lot of exciting news. Before I dive into the quarterly results, I’d want to first briefly address the big news of the morning. The Board of MGM and its executive team have come together to announce, as a result of an exhaustive strategic review which we have outlined with you on many calls before, that MGM Resorts intends to create a real estate investment trust or a REIT. This is not a spinoff but a newly formed REIT, and it will be a publicly traded subsidiary of MGM Resorts. We will call this company MGM Growth Properties. We believe that this transaction is going to create significant long-term value for our shareholders and position MGM Resorts at a leadership position as well as set the framework for MGM Growth Properties to grow rapidly in the future. Before we get into that transaction, I want to make sure we're going to have a lot of time in Q&A for this, as you know, is an earnings call. So, we want to first start with our very fine results in the third quarter. As you can see, we outperformed in every market in which we operate in the third quarter. Our wholly owned domestic resorts had the best EBITDA in the third quarter in seven years. In fact, it was the best EBITDA growth quarter since 2007. I want to reflect on that for a second and thank the men and women of MGM who have produced such astonishing growth in our cash flows in the third quarter. The margins of our wholly owned domestic properties increased over 400 basis points year-over-year, driven by both our Las Vegas and our regional resorts. In fact, it was also the best margin growth quarter we had as a company since 2004. I think that speaks to the quality and the diversity of our resort offerings which are unrivaled in Las Vegas, and we believe that competitive edge is only going to strengthen when we continue to focus on our profit growth and bring on new amenities for our guests and customers. Notably, the new 20,000-seat Arena that opens up next year at the Park, along with the 5,000-seat theater that Monte Carlo will get by the end of next year. Over to CityCenter, their resort operations increased EBITDA at an astounding 20% year-over-year. That entire campus continues to thrive and grow literally across all its segments. And in Macau, Grant and his team have worked really hard to maximize profits, and that was evident in the sequential margin improvement that Grant was able to achieve. As you know, back in August, we announced our profit growth plan. If you recall, we said that MGM would fully implement that plan by the end of 2016, and in doing so, we would realize approximately $300 million of incremental EBITDA by the year 2017, ultimately driving our margins back to the 30% level. The key to the plan was to challenge, to literally reinvigorate and encourage the entire company to make positive changes and to work smarter, to be more innovative and permanently enhance our business. We were looking for meaningful long-term change. I wasn’t initially an easy task and certainly not one that everyone thought we could accomplish. It requires a structured approach and a very dedicated project management team and a relentless focus on change management, as well as communicating throughout the organization and being just absolutely dedicated to execution. I'm incredibly impressed with the progress we've made thus far in these few short months. I'm proud of the management team, I'm proud of the Board for giving us the tools to do this, and I'm especially proud of the employees who are fully engaged and have been instrumental in the success of the plan so far. I'm proud to say that we are implementing on all fronts, both in terms of revenue-generating initiatives as well as cost savings ideas throughout the entire portfolio of resorts. Some of the initiatives are in the early stages of being rolled out, some have already shown traction. Preliminary results are promising and in some areas, we're doing better than even we initially anticipated. We are well on track to actualize 10% or 15% of that targeted $300 million of incremental EBITDA by this year-end. More importantly, we're laying the groundwork for a stronger company that continues to drive value for everyone—our shareholders, our employees, guests, and of course the communities in which we operate. You will get, as promised, the quarterly update on our PGP, but the early report card is A plus for the management and employee team, and we are on a roll here. With that, I'll turn it over to Dan D'Arrigo to dig into the financials a little.

Well, thanks, Jim. First we'll start in Las Vegas. We saw improvement across all three of our important segments: casino, hotel, and our food and beverage operations. On the casino front in Las Vegas, we were up 5% led by increases in both slot and table games win. Our domestic table games business continued to benefit from an improving domestic rated play customer as we continue to drive visitation into our resorts with our new and exciting entertainment offerings and our loyalty program. This was offset by lower China-sourced based business on the high end side of the equation, but our casino marketing team has done a terrific job in diversifying across various regions of the world, including other Asian countries to mitigate some of the softness we've seen in China. Our hotel business was led by a robust convention segment and healthy leisure bookings as the market continues to show signs of strength. Our wholly owned Las Vegas trip property has achieved 8% REVPAR growth in the third quarter, exceeding our guidance of 6%. These results were led by strong REVPAR gains at our non-luxury strip properties, which were up about 14%, while our luxury resorts were up 6%. Looking ahead, we are continuing to see strength in our forward convention booking trends, both in terms of volume and pricing. We're also seeing the booking window slightly expand as well. Based on these trends, we expect to reach a new record in terms of our convention road mix of 18% for the year, up from just over 17% last year, and we anticipate our fourth quarter wholly owned strip REVPAR growth to be at least 8%. Our wholly owned strip EBITDA margins increased 465 basis points to about 25% in the quarter. This was a result of strong performance across the board at all of our domestic properties, but also we're beginning to see the early benefits of our profit growth plan. Our wholly owned non-luxury strip resorts continue to grow in the third quarter, producing EBITDA growth of 41%, with our luxury strip resorts growing by 24%. Our regional properties continue to perform well and operate best in class resorts and demonstrate their leadership in each of their respective markets. Their collective EBITDA grew by approximately 10% in the quarter, and margins increased by 150 basis points collectively at those resorts. Jim mentioned CityCenter earlier; it was led by strong performance in ARIA, which reported an EBITDA growth of 23% to $59 million in the quarter, driven by 7% REVPAR growth and solid gaming volumes, as well as continued strength in their convention and catering business. Vdara also achieved strong results, with 30% and 7% EBITDA and REVPAR growth respectively in the quarter, while Crystals continues to perform well and attract luxury premium brands into its facility. Looking at the balance sheet at the end of the quarter, cash and equivalents was approximately $1.8 billion, of which approximately $808 million was at MGM China. We had $1.2 billion available liquidity under our corporate revolver and about $700 million of excess cash on hand at the parent company, after giving effect to the pay down of $875 million of senior notes during the quarter. To help with your modeling in terms of CapEx in the quarter, we invested approximately $252 million in capital related expenditures. Here domestically, we expect $109 million in our existing properties, $120 million on National Harbor, and $23 million for MGM Springfield in the quarter. In addition, we completed our required equity contributions as part of our Arena joint venture of $60 million in the quarter and are now into the loan at the Arena for the rest of the funding to complete that project in April next year. During the third quarter, MGM China spent approximately $155 million, of which $144 million was related to the development of MGM Cotai. Our corporate expense was higher than both our guidance and normal, as we had some expenses related to the implementation of our profit growth plan as well as the expenses related to our strategic review process. We anticipate that we’ll continue to incur both of those costs in the fourth quarter, and our guidance for corporate expense in Q4 is going to be similar to what we experienced in the third quarter. With that, I’ll turn it over to Grant for his Macau update.

Well, thanks, Dan, and very much appreciated for this early call time for those of us in Asia. MGM China, like the other operators in the market, continued to experience a challenging business environment in Macau. We’re encouraged to see some recent stabilization in the mass market; however, we still believe the VIP suite statement is still not out just yet. For the third quarter, we recorded net revenues of $529 million and adjusted EBITDA of $137 million, a decrease of 4% sequentially before the license fees. It’s worthy of noting that despite current market conditions, our EBITDA margin has improved sequentially in the past few quarters, and our property EBITDA margin before license fees was 26% for the quarter, a 49 basis point improvement over the second quarter. We’ve always maintained a disciplined approach to efficiency management, and we continue to review our business processes and have been successful in eliminating costs to prevent deterioration in margin, without impacting our customer service standards. Our VIP table game win was flat quarter-on-quarter, while VIP was favorable, and Nassau was at the low end of the range. In this changing market environment, we are adapting our business to drive revenue across our business segments, with more focus on our non-gaming operations. Compared to a year ago, our hotel cash revenue was up 24%, and our rental income from leasing was up 36%. This was, of course, on a lower base, but it reaffirms our commitment to diversifying our business. As we execute our plans in anticipation of our Cotai opening, we are realizing a cost base that will be significantly leaner than if we were running these two properties as separate units. At MGM Cotai, we’ve achieved a milestone by topping off their hotel towers, and we will be celebrating this event in the coming week. We've also completed the structural steel installation on our spectacle roof structure and are on target to be completely enclosed by the end of December. We remain on budget and on target for a fourth quarter 2016 opening. To support the Macau business community, earlier this month India and China announced plans to expand business for their local small and medium-sized enterprises. These initiatives will further increase our engagement with the local business community. Additionally, six of our most promising Macau team members have traveled to Las Vegas, where they will develop their management, gaming, and hospitality skills as part of the MGM Resorts’ highly acclaimed Management Associate Program. This is our second year that we have participated in this program. Our goal is to provide local talent with the opportunity to be our future leaders as we look to support Macau's development as an international tourism destination. And with that, I’d like to turn back to Jim. Thank you.

Well, thank you, Grant. And thank you for your great work over there. I look forward to seeing you next week. Reflecting on the quarter, the third quarter, I think the management team would say here that it validates our positioning in hospitality and in entertainment, not only in Las Vegas but around the world. We are clearly outperforming our peers in our key markets, our market share is growing, and we’ve been building upon our strengths with the types of products we have initiated in Las Vegas. Our growth projects, for example, in National Harbor and in Springfield, Mass and of course in Cotai. The profit growth plan is already showing improvement, and it’s accelerating, and we believe it will lead to an acceleration of the annual earnings growth of the company that we call MGM Resorts. We are in a perfect position, at a perfect time to announce the type of transition we announced this morning. This announcement is the culmination of a tremendous amount of effort and literally many hours of meticulous brainstorming, not only by our Board and management teams but by a legion of expert advisors in tax, legal, and corporate finance. It was, I have to say, the most exhilarating effort that I have been through in my 20-odd years doing this. We looked at every single iteration and idea. We chased down every thought that might lead to an increase in shareholder value. We recognize that the company was blessed with significant real estate value. We also understood that we did not want to jeopardize near-term value for the sake of a one-time gain. I know most of you have read the details in the release, but in short, let me lay out this project for you. MGM Resorts will create a REIT called MGM Growth Properties. We hope this REIT will go public in the first quarter right around the corner here. MGM Resorts will retain a substantial majority interest in the REIT. We will contribute 10 of our premier assets, and approximately $4 billion of debt will transfer over to MGP. For a year now, we’ve explored countless structures and even more iterations, and we determined that this transaction holds some great opportunities for us. It will highlight the significant inherent value of our portfolio of destination resorts, and it also creates a very healthy platform for future growth both at MGM Resorts and at MGM Growth Properties. This is all part of our overall goal of maximizing long-term value for all our stakeholders. We believe we found the answer and frankly it’s more exciting than we had imagined when we began this journey last year. So MGM will contribute some of the most widely known iconic resorts in the world. Specifically, Mandalay Bay, the Mirage, New York-New York, Luxor, Monte Carlo, Excalibur, as well as the park that we’re building right now which will open in April—all of those Las Vegas properties will be contributed into MGT Growth Properties. In addition, we will contribute our existing regional resorts, MGM Grand Detroit, Beau Rivage, and Gold Strike Tunica. MGM Resorts will lease and continue to operate the contributed properties under a long-term triple net lease REIT. We will also retain 100% ownership of Bellagio, MGM Grand Las Vegas, Circus Circus Las Vegas, our significant undeveloped land holdings, and the equity interests in CityCenter, MGM China, Borgata, among a few others. With the cash flows generated by the businesses remaining within MGM Resorts, MGM Resorts will maintain a very strong asset base to allow it to fund capital expenditures at these properties as well as our new projects in the pipeline. With that structure, I want to take a few moments to talk through the rationale for this decision and how we got here. First, it’s obvious to everyone on the call that we have long identified and understood that our assets were significantly undervalued in the marketplace. For years, we have been searching for ways to create greater connectivity between the assets that we own and the values that are presently ascribed to them. Our main objective was clear: we wanted to thoughtfully address the valuation disparity in our portfolio of assets and businesses in a way that MGM Resorts was. Number one, creating long-term sustainable value for our shareholders; number two, ensuring that we were deleveraging the balance sheet as well as minimizing dilution and transaction costs in other words, not to strain shareholder value for the sake of a transaction; and number three, enhancing our growth strategy both in terms of operations and marketing and preserving the overall alignment of interest between what will now be two different companies. We believe that this transaction meets all the criteria I just mentioned and is the best course for the following reasons. Our teams have worked incredibly hard to strike the right balance and alignment of interest between MGM Resorts on one hand and MGM Growth Properties, so that both companies will be strong and thrive, and have a sustainable future. The structure we’ve designed minimizes friction cost; in fact, we are highly excited about how minimal they are relative to all the alternative transactions that we initially explored. The value-destructive ideas of spin-off in massive asset sales would have resulted in large debt breakage costs or purging of earnings and profits. None of that happens here because we found a way to create a new company, a new REIT, where we will have a substantial equity interest so we can benefit from the growth of that REIT with minimal cost. This structure appealed to our Board, given the experience and expedient timetable. There is no waiting for an IRS ruling; there is no hoping that a deal can close in a year or two. We expect that this transaction will close within the next few months, and we will have an opportunity to offer shares in this exciting new REIT in the first quarter of next year. Secondly, we wanted to create a large publicly traded triple-net lease REIT that has a tremendous portfolio of assets—certainly the highest quality assets of any triple-net lease REIT in the gaming industry. We wanted to create a vehicle in a financing platform by which we could lower our cost of capital and raise funds for future growth opportunities for this REIT. MGM Resorts will maintain a substantial economic interest in MGP, so we’re in it together. We want to see MGP grow rapidly, and MGM Resorts expects to receive dividends that any REIT holder would expect and benefit from the stable and growing cash flows of MGM Growth Properties. MGM Growth Properties also will have a right of first offer of our development properties in Maryland and Massachusetts, thereby presenting a growth path that is superior to any in the space—large projects that can be acquired over time to add to the portfolio of already high-quality, high cash-flowing assets. And in MGM Resorts, it certainly backtracks our REIT and our dedication to deleveraging our company. Because as part of this transaction, MGM Resorts will transfer approximately $4 billion of debt over to MGP, and that company, MGP, will subsequently refinance that indebtedness through its own debt and equity as a result of the IPO we expect in the first quarter. So as a result, MGM Resorts will have the ability to accelerate its path of deleveraging and further improve the financial strength and flexibility that MGM Resorts has. In short, we believe we found a mechanism to create two strong, rapidly growing companies with different investment profiles that will attract different investors—yield investors in the case of MGM Growth Properties, growth investors in the case of MGM Resorts. Importantly, this is very important: the daily operations will continue as usual. We do not expect any impact on our employees—all of whom will be MGM Resorts employees as they are today—our guests and our business partners. When I look back on MGM over the past 18 years, I believe we’ve grown to be one of the best managed and most innovative companies in our industry and one that is not afraid to make change. This company has always and will always be an architect for thoughtful and transformative pursuits that create long-term value. We believe this is the dawn of a new threshold for this company, and we will lead this industry into an exciting decade to come. And with that, operator, I’d like to turn it back over to you so we can get into Q&A.

With regard to MGP, can you give us a little bit more detail on the rental lease terms, dividend policy, and the target leverage? I know there is one other gaming REIT out there that we all kind of look at as one version of it, but if you can provide those details? And then my second question: obviously, the 3Q much better than all of us were expecting. On the EBITDA line, how much of it is just a better domestic market? How much does it relate to the profit growth plan? And then where do you think you are in terms of the annualized amount you achieved in the 3Q? Where are you with respect to the benefits of the profit growth plan? That is all for me. Thank you.

Maybe I’ll start, Dan, and then turn it over to you so you can correct me. First, we have studied the GLPI lease. I think it’s safe to say that we used that as an initial benchmark, looking at the current state that’s out there. We’ve also looked at leases that have been proffered by other companies that have explored this concept. The overarching objectives were to create a strong REIT and have good coverage in something that is pretty much market-based, I think it's safe to say. So even though we’re not trying to reinvent the wheel in terms of lease structures here, we would say that there are certain iterations to ours, which will be forthcoming that make it a little contemporary, but beyond that, it’s pretty much as expected.

Yes, that is good.

I’d have to say about the quality of the assets and the growth trajectory of the assets being contributed—Mandalay Bay, as an example, just finished its convention expansion. You know that’s the fifth largest convention center in the United States. We have invested a significant amount of capital in that property with the Delano upgrading restaurants and the convention expansion. I would say that the same would be said for the amount of money we’re currently investing around the Arena, with significant dollars going into Monte Carlo with the theater, and the upgrading of New York-New York, and the Park. I would say that because I believe there are going to be significant opportunities for all the contributed assets to grow. In fact, they are growing right now. I looked at the third quarter and if you were to look at the contributed properties, their cash flow is, I think, up 33%.

Right.

So we are really limited as to what we can talk about specifically on MGM Growth Properties, but since these properties are MGM Resorts, I can tell you they had a great quarter, and most of that was due to strong operating results in terms of REVPAR, food and beverage, and a great convention quarter and a great outcome for this year. The profit growth plan was minimal relative to the overall growth results that we had in the quarter. By the time we get to the end of the year, it might be 10%, 15% into the number, but certainly, the third quarter was not as big an impact. It’s going to accelerate rapidly as we progress over the next five quarters.

Can I just follow up with regard to the REIT and the leverage? So the REIT will initially have $4 billion of debt. If I try to think about that leverage, will that be variable relative to the amount of equity to kind of have a market-based leverage ratio compared to other triple-net leases? Is that how one should think about it?

Yes, Jeff. That is pretty fair. It will be, I am afraid, middle down the fairway in terms of its leverage compared to its peers in the market.

Yes, so, Jim, a large part of the value of this transaction in our view, how we are looking at it is the valuation multiple overcharge you’re going to get by having the majority of your assets in the triple-net leased REIT and then having MGM own a significant majority of that. So we’re trying to work that through now, everybody is. And with the REIT not being tax-free, with the REIT being a taxable entity, it’s probably going to trade a bit differently than the triple-net leased REIT peers out there. So as you thought about the value that would be created by this transaction, just wondering how you were thinking about the valuation relative to the peers in light of the tax status of the entity?

Well, the REIT will be tax-free.

Okay, so it’s going to be a true REIT. Okay, because a lot of people had that question and that would lead to this distribution, so that's great. And then when you say the significant majority, is there a way that you can help us through that? I mean is it more than 60%, less than 70%? I mean is there a way you can…

Yes, yes, yes we’ve been asking here, because we’re trying to figure out what we are allowed to tell you. So we got a legion of lawyers that the way I will just tell you how that is done. So it is important, and we are establishing a REIT tax-free and that will be, we hope, launched in the first quarter when we do an IPO and we will offer shares to the public. Initially, MGM Resorts will probably own around 70% odd of MGM Growth Properties, with the balance being held in terms of the economic interest. We’ll own about 70% plus or minus of the economic interest of MGM Growth Properties, with the balance being held by the public. The reason why we’re working through this is that we clearly believe there is substantial upside in the ownership of those debt-equity.

That's helpful, and actually just to your last point, estimate last final question. Is with the—how are you thinking about now the optimal leverage levels at MGM?

Well, I promised our Board we’d get down under five times leverage. I think I have mentioned that on a few conference calls, and I have gotten some sideways looks for somebody here, but you could see we had a few ideas in mind, so that still is the goal. It is certainly very achievable, given this transaction what it means for MGM Resorts, and frankly many other options we have on the table in terms of dividends, distributions, and any of our other joint venture enterprises.

A couple of questions, Jim, you touched on the management of the thesis. Maybe you could begin with your thoughts on how that's going to evolve?

Sure. One is that MGM Resorts’ Board, obviously I Chair. And Roland Hernandez is our Lead Director. MGM Resorts will populate the new company, MGM Growth Properties, with its own Board of Directors. I likely will also be the chairman of that company. But MGM Growth Properties will have its own independent set of directors, some of whom we know today and many others we’re going to find. We’ve already engaged a highly regarded search firm to reach out and find experts in REITs, both triple-net lease REITs and otherwise. MGM Resorts will manage the properties under that triple-net lease REIT; therefore, the management team of MGM Resorts stays the same. However, there will be management that will be brought on to MGM Growth Properties to manage its own affairs, so there will be a new CEO, a CFO, and probably one or two other executives that work solely at the pleasure of the Board of MGM Growth Properties, because we want to set that company up to forge its own path, that grows rapidly as it sees fit. Initially, because MGM Resorts is managing these assets that we currently own, and MGM Resorts will own the majority of the economic interests in MGM Growth Properties, you will see some commonality of board members. However, you will also see new faces particularly on MGM Growth Properties, but likely also on MGM Resorts as well as we want to continue to educate ourselves in real estate.

Follow-up question is just the growth path for each of the separated companies, if you could touch on that? And then the last question is, can you talk about your expectations in Vegas for 2016? Thanks.

Well, I will talk about the growth path of MGM Resorts, wherein MGM Growth Properties is in a quiet period. I’ve got three lawyers who are shooting daggers at me right now talking about that, so I’ll try to talk around that and talk about MGM Resorts. So Las Vegas obviously surprised folks in terms of the strength of the business. I am very happy to say that this is continuing into the current quarter. The real driver of this accelerated growth for us is the convention business. Dan alluded to the fact that convention mix is improving. It is remarkable to us that a convention expansion was just completed at Mandalay Bay. It is already fully occupied for next year. We’re taking an inventory of all of our convention and conference space; we have a very talented team led by Mike Dominguez that is out in the marketplace moving business around—basically trying to find greater utility and efficiency, because we have so much demand and as much space as we have, we don’t have enough. That’s why we talk about REVPAR growth of 8% in the fourth quarter; we’re really excited about Las Vegas in general in 2016. On the convention side, it should be our best year ever. Added to that, I don’t want to minimize the impact of the Arena that opens up in April. Imagine a 20,000-seat Arena opened. We’ve already programmed a couple of dozen dates into that Arena of just A-list acts. That will accrue to the benefit of all of our properties, particularly the ones that are nearby: Monte Carlo and New York-New York. I would expect our properties to see the biggest delta of growth in our portfolio in the convention-oriented properties as well as the ones that are hovering around this Arena and theater. On top of that, I would expect the profit growth plan to lead to an acceleration of our earnings. The big initiatives are being deployed now, much of that is in Las Vegas and all of that will be completed by the end of next year. So you’ll see a lift-off, I think, of profitability as a result of the macrochanges and as a result of the internal plans that we have underway. Our regionals are excellently managed. I think they are on track to do the business they have been doing. They’re profit and market leaders and they’re going to outperform the market relatively stable, I would say. For MGM Resorts, its growth initiatives, which are the interactive business, which we don’t talk about much, are growing for us in terms of cash flows and customer acquisition. It leads to National Harbor, which we believe will be the most profitable resort outside of Las Vegas in North America when it opens next year, in the fourth quarter. And it leads up to Springfield, Mass, which opens in 2018. So MGM Resorts has many tools at its disposal right now to accelerate its earnings growth and participate in a rapid deleveraging story because of the dividends we expect to get in the future at MGM China as well as at CityCenter. CityCenter itself is accumulating cash as we speak and we will likely dividend out money to its owners by the end of the year. As it relates to MGM Growth Properties, I’m not allowed to give specific guidance on them as an entity. But considering where they are, and the fact that our core properties, much of which are in MGM Growth Properties construct, core properties are outperforming the luxury properties, and we’ll do best in a rising convention market and have been the beneficiary of the substantial amount of capital, which is why they are outperforming their peers. So the combination of solid regional cash flows and a Las Vegas presence, which skews to the benefit of our core properties would likely lead some to conclude that that portfolio could outgrow the MGM Resorts’ existing portfolio, given the assets that are in MGM Resorts.

Just from a very simplistic income statement perspective, could you guys kind of think or maybe talk through how the MGM Resorts’ income statement will change? Obviously, in the case of Penn, you just add a line of rent, etc. How are you thinking about that? And obviously, with the 70%, I assume the accounting treatment will be similar to that of MGM China? And then just as a follow-up, could you provide some color as it pertains to the lease payment? Whether that will be fixed or variable, and how we should think about that?

Hi Carlo, it’s Dan. I’ll take a shot at that. The accounting is spot on; it will be much like it is for MGM China. When you look at MGM Resorts’ financial segments on a go-forward basis, it will be a fully consolidated entity, and then we will record whatever that minority equity interest is of the portion we don’t own of the REIT company, so a lot of the REIT-type accounting will be eliminated in consolidation and will come through as 100% on an entity with the minority interest, much like MGM China today. As far as the lease structure itself, it will be a triple-net lease, as Jim mentioned earlier, and not too dissimilar to what is out there in the market in terms of coverage from the lease perspective.

So if we thought about it that way, it would be in the realm of a 1.8, 1.9 times coverage ratio?

It’s in that realm.

Just a follow-up on a couple of the questions on the OpCo side. So, again, I think we’re starting to get a better picture of the structure. But maybe you could help us understand: do you anticipate post-IPO that the transaction is going to be sort of leverage neutral, either for the—well, it should be de-levering for the consolidated entity, but for the OpCo specifically, do you see that leverage neutral to where MGM Resorts sits today?

Yes, from an OpCo standpoint, it would continue to be de-leveraging, even in an OpCo perspective.

Okay. So do you leverage your…

Yes. Remember, we’re going to be doing an IPO so there will be new equity that will be raised in the first quarter.

And will those proceeds—so a portion of those proceeds may be shared with OpCo in addition to simply paying down some of the $4 billion of debt that goes to PropCo?

No, remember the assets and the $4 billion of debt go down into PropCo. So then PropCo will go out and raise its debt and equity capital markets transactions at the OpCo level.

At the PropCo level, okay I follow, and then second question is that just given how GLPI has traded and been received by the dedicated community. It's a little hard, obviously, with these types of processes. Do you have any feedback or have you had any conversations at a high level with your general views on how you think such an IPO would be received by a new investment audience?

Yes, obviously their transaction was different as you well know Shaun, in that it was a spin. So the existing shareholders were given the new equity of this spin, so obviously if the investors were going to hold to it, it’s hard for new investors to come in. In this dynamic, it’s different, where we will be IPOing directly out to REIT investors and potential new REIT investors as well as existing gaming investors. So it is a little bit different in terms of the comparison between the two approaches, and I think we’ll have a really good audience considering the asset quality and the type of REIT we will have on day one out to all those investor pools.

Yes, and maybe, Dan, I would just add, it’s Jim. We thought about this. This is obviously going to be up to you all to decide how this is valued, but we were very thoughtful in putting together a portfolio of assets and brands that are scalable. Mandalay Bay is a scalable enterprise, one of the premier convention center hotels in the United States. These are powerful brands, and so we believe there will be an emphasis placed on not only the quality of the portfolio but also in the construct of hospitality broadly and the convergence of gaming and non-gaming hotels. The ability for this company to be one of the premier gaming owners in the world is certainly highly unique, which will set itself apart from the competition mentioned and really anyone else that has tackled this issue.

And my last question would just be, I'm familiar with one other one of these sort of internal REIT structures, and in that case, they have to maintain more than 50% ownership in the REIT to keep some of their tax features. I'm curious if the same is true with this structure. So would you have to keep the tax benefits that you guys have structured here; do you have to always own more than 50%? Or is there an ownership threshold that you have to keep in the REIT over time?

No, Shaun, there is not a threshold that will just be in the future up to the Board of the property company and the facts and circumstances at that time.

Congratulations on this announcement, I’m sure it took a lot of work. So two questions from me. First, Grant, you have been quiet; obviously, Studio City just opened. Any initial thoughts on that? And how's the competitive environment in general? And then my second question: I feel a bit greedy asking this question. You guys have talked about potentially selling Crystals in the past. Is that off the table now? Thank you.

You want me to go first, Jim? Then I will turn back to Crystals? Studio City had a good opening; it’s obviously a pretty impressive property. I think anything new, any additions to the market is a good thing about creating opportunities. But I think they would acknowledge themselves, they still have some work to do as we all do in terms of performance, but I think they did a nice job. It demonstrates that when existing operators are opening to a market they are used to, they have a bit of a talent pool. Some of the service issues that you normally would have experienced in properties you didn’t see on this occasion. I think they did a very nice job. I think it will certainly create noise for all of us, and we are optimistic that it provides an inflection that we are all looking to drive traffic and build quality people who want to come and spend. Diversifying into a non-gaming area is important because we are actually attracting customers who want to buy non-gaming services, and I think that all of us coming on stream in the future will be very excited about the quality of the project we are going to deliver; it’s making people spend money on non-gaming services to support the investment we’re making. I think that’s probably enough. Jim, I will turn it back to you.

Well, thank you, Grant. The answer is yes. We have had a significant amount of interest in Crystals as an asset. We have been fielding a variety of qualified inbound calls. We have evolved this to a point where we have expert advisory help sorting through principal investors that are interested in buying all or a part of Crystals. The Board of CityCenter has been evaluating what is thankfully becoming a rapidly appreciating and highly coveted asset. I think we last checked in, I said that it is certainly on the table. We think it’s worth over a billion dollars. I am more confident of that than I’ve ever been in the past, given the amount of efforts that are already taking place here. At the right valuation, Crystals is an asset that would be sold to the benefit of its owners, Infinity World and MGM Resorts.

So what specifically does the Park encompass? I guess that’s what I’m trying to understand. And how much in earnings do you expect it will make in the context of including it in the REIT? And then why is the Arena not included in the REIT? One final thing, I’m not sure if you could answer this yet. Do you need a private letter ruling? Or because it’s a new company, is that not necessary? I’m not that familiar with the legalities of this?

Don’t worry, I will pick a few and then turn it over to Dan or to Shaun. None of our joint ventures are in the REIT, so the Arena is a 50-50 JV with Phil Anschutz’s company and so it does not qualify for what we’re trying to accomplish in terms of the REIT. Only wholly-owned properties are going into the newly formed REIT. And no, we do not require a private letter ruling. This is not a spin-off, and therefore we do not require that. In fact, we went down this path and zeroed in on this option long before the more recent guidance from the IRS, I think that was in relation to Alibaba and Yahoo! I think Dan and maybe a few others. We were down this path of contributing assets and forming a new REIT long before that iteration. You want to take the part two it is the…?

Yes. I mean I think when you look at the Park, it does have some EBITDA contributing factors to it and some restaurant and entertainment venues. But the real rationale is its proximity to Monte Carlo and New York-New York and how that real estate fits into the future of those two properties.

Yes, we knew that as the connective tissue between two large scaled resorts and we believe that it will be a center of gravity for a lot of tourist traffic that will be going to those resorts and to the Arena itself, and so we felt that it should be all part of the same asset package.

But it will be relatively modest contributor of EBITDA then? Okay. Thank you.

Just trying to understand the structure a little bit better because when you look at the EBITDA generated by the 10 properties with real estate you're contributing and what that would suggest they could pay in rent, it doesn't seem like enough to support the $4 billion in debt. I wonder if you could just give a little more color around how much would you hope to be paid down by funds raised during the IPO, just to think about how these ratios can work?

Well, Robin, we can’t get into specifics around the general properties. But the combination of the debt going down from the parent to the property company and the property company then going out and raising IPO proceeds in conjunction with their capital raising efforts, that combination will put the right amount of leverage on the property company moving forward.

Yes, solving for that coverage ratio that you talked about earlier, Dan.

Is there just a kind of debt to EBITDA ratio that you think of being standard for REITs that we could keep in mind when we’re looking at this?

Yes, I think there is enough market precedent out there when you look at kind of triple-net REITs and where they trade from an overall leverage standpoint that would be good proxies to use.

Okay, and then I guess lastly, will there be kind of rent bumps in the agreement that or will it just be kind of a fairly fixed rate going forward?

That will be a fixed and variable rate, but there will be escalators as normally found in triple-net lease structures. As Jim said earlier, we are not looking to reinvent the wheel with respect to the master lease here; it will have characteristics very similar to what exists in the market, and the modifications, if any, will be more around just our assets and our buildings that kind of make them unique to the structure going forward.

I think maybe I would add too, Robin. A big part of this effort was to assure that MGM Growth Properties was on very firm footing right out of the box. Because we’re going to own a substantial interest in this, we wanted to make sure that it is strong from a balance sheet perspective—that it’s transparent and easy to understand from an investors’ perspective—that it has precedent efforts that make it very easy to analyze from a lease perspective and that it has a growth plan that can be articulated. So when that company is out in the market raising money in its IPO, you will have all this information. We're just a little bit handcuffed by the bankers and lawyers in terms of the quiet period that we're in, but I think it’s important for you to at least know the philosophy here. The philosophy is to create a strong, stable, vibrant REIT that will trade well because of its liquidity and the quality of assets, its management team, its sponsorship by MGM Resorts, the brands that it has, and its growth prospects that it uniquely has because of the welfare that I talked about.

And maybe just one final clarification. It sounds like the idea is that MGM Growth Properties will be a single tenant. I mean, in other words, you’re talking about the growth coming from Maryland to Massachusetts. So the idea is for it to remain kind of a single tenant REIT?

No, not necessarily. I’m sorry if I led you to that conclusion. It will go out and seek acquisitions in not only the gaming space, which is obviously its comfort zone, but it will have a mandate to look in hospitality broadly. Clearly, there will be a lot of assets that will trade in the gaming space either as individual properties or as portfolios of properties over the next few years. MGM Growth Properties intends to be in the dialogue in all those discussions and should it be appropriate, reach out to MGM Resorts to manage those assets. But I can’t emphasize that enough. This company’s setup is designed, given the scale of the company, the management team that will be in place, and the balance sheet we will ensure it has, it is designed to grow—not only by virtue of its relationship with MGM Resorts but by virtue of the fact that in and of itself, it will be one of the premier gaming owners in the world.

A couple of questions, first, as it relates to the name would suggest, MGM Growth. Is it safe to assume that in the early days really the growth is going to be focused on the redevelopment of some of the assets that are going to the portfolio? I think about Monte Carlo, some of you guys have talked about, as well as some of those other assets? And then secondly, just going back to the operations for the Bellagio versus MGM Grand, I see the Bellagio really came alive this quarter. Should we expect to see that continued sort of performance out of the Bellagio? I know it’s had a challenging couple of quarters here as well. If you could just talk about that, that would be great, thank you.

Well, maybe I’ll take the first part and turn it over to any number of the other folks here. I’ve got Corey Sanders to my right and Bill Hornbuckle on my left. So yes, I think the word growth was intentional in a few respects. One is, we think it can grow beyond its current asset base. But within its asset base, we see growth. There is no surprise to you that we are viewing Monte Carlo with a very optimistic lens. The fact that it has 3,000 rooms next to CityCenter embracing a $400 million Arena and a $100 million Park right on the center strip means it clearly can be something more than it is today. We believe that it will and it will be called something else; it will be positioned differently and it will grow its cash flows by virtue of putting in strategic capital into that property. I would have to say that there are other great opportunities that we’re looking at as well. Corey Sanders has got a team looking at Excalibur and recognizing the fact that we have a very underperforming corner of Tropicana in the Las Vegas Boulevard. Why wouldn’t we do what others have done so successfully and draw mid-scale retail into that corner, therefore drawing traffic into Excalibur? We know from our conventions dialogues—we’ve met as recently as last week with conventions people this week—that if we had more convention space for the association business and if we had more concrete space, which is relatively inexpensive to build, we could dramatically increase the cash flows of Luxor as an example. The list goes on and on. We don’t view our portfolio of properties that we’re contributing to as mature properties; we view them as properties with stable and strong cash flows that were up 33% year-on-year in the current quarter but that each and every individual one has its own growth trajectory. What this allows us to do is over the next few months evaluate our portfolio in a very specific way looking at return on investment as the criteria and where we deploy capital in the highest ROI way. As it relates to Bellagio versus MGM, do you want to take that?

And on Bellagio, they actually had their best third quarter since 2006. That even goes back during the peak. They had a tough few quarters on the REVPAR growth, and we’re starting to see the changes we made there and the strategic focus on the convention business there. I would foresee them continuing to perform at the level that they performed in the third quarter.

A couple of quick questions, I guess first, Jim, on Circus Circus. I wanted to understand the rationale of not including that in MGP. I guess would this imply that this is also on that sort of list of potential major redevelopments? And then the second question, I will ask you a non-REIT question while we have you. Love to get your take on DFS, and what this ultimately means in terms of at least having more of a real conversation around sports betting?

Yes. Circus Circus is a really exciting and intriguing longer-term but intriguing opportunity we believe for MGM Resorts. It sits on 100 acres. Can you imagine that? 100 acres. We’ve got a young management team there that is just crushing it right now, and you can see it in the results. They are enthused, they are having fun, they are innovating, and they are a big part of our profit growth plan. Eric Fitzgerald, who runs that property, has been a leader on some corporate initiatives. We feel it’s a smaller property in terms of cash flows, but it’s punching above its weight, and it’s got a lot of potential. Yes, clearly there's an awful lot of opportunity that could go around there. When we did the Rock in Rio music festival, we saw a nice bump. As for the future of Las Vegas, as you know, we are the leaders in that area of bringing music festivals, whether it's EDC or live music, and we will be doing more of that. So yes, it is not a major contributor of cash flows to MGM Resorts, but it is a major contributor of ideas and innovation and it certainly is out there as it relates to growth potential.

Thank you, Jim. And look, obviously with a lot of people, it is something we have all followed with great interest. We will continue to do so. We absolutely want to see the states' rights issue to be clear. It's a program that we—because we do all things in social gaming at some point, we would like to participate. But the states need to opine on the right consumer protections and set up so a company like ours can participate. Right now, obviously it’s in a grey area, and over time and we hope relatively, quickly, because there's been a lot of attention on the space, there will be some clarity around what states like Massachusetts, Illinois, and others that we are in want to do with it. But we are actively engaged in the story; AGA is engaged in the story and following it, and we would like to be participated and helpful because we think it's meaningful in the long run.

And I like sports too, Bill.

Well, thank you everyone for joining and for any follow-up questions please reach out to my office and we’ll get back to any and all of you as quickly as we can today. Thank you.

Thank you very much.