Boyd Gaming
Coverage Initiation: Gaming Sector Overview Part 2: Red Rock Resorts’ 2028, 2031 Bonds Relatively Attractive Given Deleveraging Plan, Cash-Generative Business Model
Wed 07/26/2023 08:00 AM
Part II of Reorg’s gaming initiation is focused on relative value analysis, as well as financial and industry fundamentals. Part I of our discussion was centered on industry trends and aimed to provide an overview of the assets within our comp set.
In Part I, we noted that Red Rock Resorts lacks diversification. Nevertheless, we believe the Red Rock 4.5% 2028 and 4.625% 2031 bonds are the most attractive in the comp set, followed by Caesars’ 4.625% notes due 2029 and Wynn Las Vegas’ 5.25% notes due 2027.
Key Takeaways
Additional key takeaways are as follows:
-
- Spreads have tightened, caution warranted: Boyd, Caesars, MGM, Red Rock and Wynn’s bonds have seen spreads tighten by 100 bps to 200 bps over the last 12 months. Although gaming industry unit economics have improved and the sector is performing well, there are signs of regional weakness and continued labor inflation which could pressure cash flows, given higher interest rates.
- MGM, Boyd: MGM has the highest-quality assets, but with a loan-to-value ratio of about 60%, we do not believe a 57 bps pickup in yield relative to the C0A4 (BBB high-yield index, as of July 24) adequately compensates investors. Although Boyd’s net leverage is about 3 to 4 turns lower than the comp set, Boyd’s notes are yielding 65 bps above BBB credits.
- Wynn Las Vegas, 2027s: The Wynn Las Vegas notes trade about 60 bps tighter than the Wynn Resort Finance notes, in part, we believe, because the Wynn Las Vegas notes have a first priority pledge by WLV Holdings of its equity interests in Wynn Las Vegas. Although the collateral consists of equity stakes and not land or buildings, the equity pledge, 2027 maturity and yield pickup versus Boyd’s 2031 and MGM’s 2029 notes are the reasons we like Wynn Las Vegas’ 5.25% notes due 2027 more than Boyd or MGM’s on-the-run bonds.
- Caesars’ Red Rock’s attractive capital allocation policies: We believe Caesars’ and Red Rock’s 2029 and 2031 bonds are more attractive than Wynn’s, because Caesars’ and Red Rock’s management teams have been vocal about deleveraging.
- Caesars, Red Rock 2024 cash flow catalysts:
- Red Rock anticipates net leverage returning to 3.3x as free cash flow accelerates once it completes developing the Durango Casino and Resort (anticipated opening in the fourth quarter of 2023).
- Caesars may receive a $2.5 billion payment related to a call option requiring VICI Properties to purchase and lease back Harrah’s Hoosier Park gaming and racetrack facilities.
- Caesars’ balance sheet: About 63.5% of Caesars liabilities are linked to the consumer price index or floating rates. Caesars' leases with VICI Properties have annual fixed rent payments, subject to annual escalation provisions based on CPI and a 2% floor.
- Red Rock’s business model is more defensive: We also believe Red Rock’s portfolio geographic concentration could work in its favor if there is an economic downturn, because its business model is oriented toward local visitors, whereas MGM, Caesars and Wynn are more tourist-driven. About 80% to 85% of Red Rock’s revenue is derived from slots, which is a cash-based business. (Its three-year unlevered free cash flow - UFCF - margin averaged 52.7%).
Relative Value
Comparables are shown below:
(Click HERE to enlarge.)
WRF is not a guarantor of Wynn Macau Ltd., or WML, obligations. WRF’s standalone total debt to EBITDAR is about 6.8x, compared with 6.6x net debt to EBITDAR for Caesars and 7x net debt to EBITDAR for MGM:
Source: Fundamentals by Reorg
However, the notes’ investment-grade covenant package lacks restrictions with regard to investments, or dividends, so cash leakage to Wynn Macau entities is a risk (the risk is mitigated by Macau's gaming sector recovery). On June 14, 2022, Wynn Resorts agreed to provide a $500 million, two-year revolving credit facility to Wynn Macau.
Historical spreads are below:
Source: Cbonds
Capital Structures
Boyd Gaming
|
03/31/2023 |
EBITDA Multiple |
|||
|---|---|---|---|---|
|
(USD in Millions) |
Amount |
Maturity |
Rate |
Book |
|
|
||||
|
$1.45B Senior Secured Revolving Credit Facility 1 |
269.0 |
Mar-02-2027 |
USD SOFR + 1.750% |
|
|
Senior Secured Term Loan 2 |
836.0 |
Mar-02-2027 |
USD SOFR + 1.750% |
|
|
Finance Leases |
0.6 |
|
|
|
|
Total Secured Debt |
1,105.6 |
0.8x |
||
|
4.750% Senior Unsecured Notes due 2027 |
1,000.0 |
Dec-01-2027 |
4.750% |
|
|
4.750% Senior Unsecured Notes due 2031 |
900.0 |
Jun-15-2031 |
4.750% |
|
|
Operating Leases |
835.1 |
|
|
|
|
Total Unsecured Debt |
2,735.1 |
2.7x |
||
|
Total Debt |
3,840.8 |
2.7x |
||
|
Less: Cash and Equivalents |
(263.5) |
|||
|
Net Debt |
3,577.3 |
2.5x |
||
|
Plus: Market Capitalization |
7,060.0 |
|||
|
Enterprise Value |
10,637.3 |
7.5x |
||
|
Operating Metrics |
||||
|
LTM Revenue |
3,658.6 |
|||
|
LTM Reported EBITDAR |
1,418.8 |
|||
|
|
||||
|
Liquidity |
||||
|
RCF Commitments |
1,450.0 |
|||
|
Less: Drawn |
(269.0) |
|||
|
Less: Letters of Credit |
(13.8) |
|||
|
Plus: Cash and Equivalents |
263.5 |
|||
|
Total Liquidity |
1,430.7 |
|||
|
Credit Metrics |
||||
|
Gross Leverage |
2.7x |
|||
|
Net Leverage |
2.5x |
|||
|
Notes: Market capitalization as of May 12, 2023. LTM EBITDAR reported as adjusted. The company has the option of adding additional term loans and/or RCF commitments by up to $1B, subject to certain conditions. 1. Interest rate is SOFR plus a range of 1.25% to 2.25%, based on the company's consolidated total net leverage ratio. Includes a $100M sublimit for letters of credit and a $200M sublimit for swingline loans. As of March 31, 2023, $49M were outstanding under the latter. The interest rate above reflects the average margin due to limited disclosure. 2. Interest rate is SOFR plus a range of 1.25% to 2.25%, based on the company's consolidated total net leverage ratio. Requires quarterly amortization payments of 1.25% of the original principal amount. The company is required to use a portion of its annual excess cash flow to prepay loans outstanding if the total net leverage ratio exceeds certain thresholds. The interest rate above reflects the average margin due to limited disclosure. |
||||
Caesars Entertainment
|
03/31/2023 |
EBITDA Multiple |
|||||||
|---|---|---|---|---|---|---|---|---|
|
(USD in Millions) |
Amount |
Price |
Mkt. Val. |
Maturity |
Rate |
Yield |
Book |
Market |
|
|
||||||||
|
5.750% CRC Senior Secured Notes |
989.0 |
97.9 |
968.0 |
Jul-01-2025 |
5.750% |
6.631% |
||
|
CEI Term loan A |
740.0 |
|
740.0 |
Jan-31-2028 |
USD SOFR + 2.250% |
|
||
|
CEI Term Loan B |
2,500.0 |
|
2,500.0 |
Jan-31-2028 |
USD SOFR + 3.250% |
|
||
|
Total Secured Debt Through Subsidiary Properties |
4,229.0 |
4,208.0 |
1.1x |
1.1x |
||||
|
Baltimore Revolving Credit Facility |
- |
|
- |
2022 |
USD LIBOR + 6.000% |
|
||
|
Baltimore Term Loan |
266.0 |
|
266.0 |
2024 |
USD LIBOR + 4.000% |
|
||
|
CEI Revolving Credit Facility |
- |
|
- |
Jun-2025 |
USD LIBOR + 3.250% |
|
||
|
6.250% CEI Senior Secured Notes |
3,400.0 |
97.7 |
3,320.8 |
Jul-01-2025 |
6.250% |
7.222% |
||
|
Convention Center Mortgage Loans |
- |
|
- |
|
7.850% |
|
||
|
CEI 7% Secured Notes due 2030 |
2,000.0 |
|
2,000.0 |
Feb-15-2030 |
7.000% |
|
||
|
Total Secured Debt |
5,666.0 |
5,586.8 |
2.5x |
2.5x |
||||
|
8.125% CEI Senior Unsecured Notes |
1,611.0 |
98.0 |
1,578.3 |
Jul-01-2027 |
8.125% |
8.659% |
||
|
4.625% Senior Unsecured Notes |
1,200.0 |
80.1 |
961.2 |
Oct-15-2029 |
4.625% |
8.472% |
||
|
Special Improvement District Bonds |
47.0 |
|
47.0 |
|
|
|
||
|
Long-Term Notes and Other Payables |
2.0 |
|
2.0 |
|
|
|
||
|
Total Total Unsecured Debt |
2,860.0 |
2,588.5 |
3.3x |
3.2x |
||||
|
Operating lease |
12,648.0 |
|
12,648.0 |
|
|
|
||
|
Total Operating Leases |
12,648.0 |
12,648.0 |
6.5x |
6.4x |
||||
|
Total Debt |
25,403.0 |
25,031.3 |
6.5x |
6.4x |
||||
|
Less: Cash and Equivalents |
(965.0) |
(965.0) |
||||||
|
Net Debt |
24,438.0 |
24,066.3 |
6.3x |
6.2x |
||||
|
Plus: Market Capitalization |
12,420.0 |
12,420.0 |
||||||
|
Enterprise Value |
36,858.0 |
36,486.3 |
9.4x |
9.3x |
||||
|
Operating Metrics |
||||||||
|
LTM Revenue |
11,359.0 |
|||||||
|
LTM Reported EBITDAR |
3,905.0 |
|||||||
|
|
||||||||
|
Liquidity |
||||||||
|
RCF Commitments |
2,220.0 |
|||||||
|
Less: Drawn |
(48.0) |
|||||||
|
Less: Letters of Credit |
(82.0) |
|||||||
|
Plus: Cash and Equivalents |
965.0 |
|||||||
|
Total Liquidity |
3,055.0 |
|||||||
|
Credit Metrics |
||||||||
|
Gross Leverage |
6.5x |
|||||||
|
Net Leverage |
6.3x |
|||||||
|
Notes: $48mm of revolver capacity committed as regulatory requirement; $965mm cash, cash equivalents excludes $258mm of restricted cash. On May 1st the company fully redeemed $400mm mortgage note due 2025. |
||||||||
MGM Resorts
|
03/31/2023 |
EBITDA Multiple |
|||
|---|---|---|---|---|
|
(USD in Millions) |
Amount |
Maturity |
Rate |
Book |
|
|
||||
|
$1.25B MGM China First Unsecured Revolving Credit Facility 1 |
879.0 |
May-15-2024 |
HIBOR + 2.188% |
|
|
$400M MGM China Second Unsecured Revolving Credit Facility 2 |
- |
May-15-2024 |
HIBOR + 2.188% |
|
|
5.375% MGM China Senior Unsecured Notes, due 2024 |
750.0 |
May-15-2024 |
5.375% |
|
|
5.250% MGM China Senior Unsecured Notes, due 2025 |
500.0 |
Jun-18-2025 |
5.250% |
|
|
5.875% MGM China Senior Unsecured Notes, due 2026 |
750.0 |
May-15-2026 |
5.875% |
|
|
4.750% MGM China Senior Unsecured Notes, due 2027 |
750.0 |
Feb-01-2027 |
4.750% |
|
|
Total MGM China Unsecured Debt |
3,629.0 |
0.9x |
||
|
$1.675B Revolving Credit Facility 3 |
- |
Nov-24-2026 |
USD SOFR + 1.875% |
|
|
Finance Leases |
140.0 |
|
|
|
|
Total MGM Resorts International Secured Debt |
140.0 |
1.0x |
||
|
LeoVegas Senior Unsecured Notes, due 2023 4 |
36.6 |
Dec-10-2023 |
STIBOR + 5.500% |
|
|
6.750% Senior Unsecured Notes, due 2025 |
750.0 |
May-01-2025 |
6.750% |
|
|
5.750% Senior Unsecured Notes, due 2025 |
675.0 |
Jun-15-2025 |
5.750% |
|
|
4.625% Senior Unsecured Notes, due 2026 |
400.0 |
Sep-01-2026 |
4.625% |
|
|
5.500% Senior Unsecured Notes, due 2027 |
675.0 |
Apr-15-2027 |
5.500% |
|
|
4.750% Senior Unsecured Notes, due 2028 |
750.0 |
Oct-15-2028 |
4.750% |
|
|
7.000% Debentures, due 2036 |
0.6 |
Feb-15-2036 |
7.000% |
|
|
Operating Leases |
25,202.2 |
|
|
|
|
Total MGM Resorts International Unsecured Debt |
28,489.3 |
8.2x |
||
|
Total Debt |
32,258.3 |
8.2x |
||
|
Less: Cash and Equivalents |
(4,505.3) |
|||
|
Net Debt |
27,753.0 |
7.1x |
||
|
Plus: Market Capitalization |
16,091.0 |
|||
|
Enterprise Value |
43,844.0 |
11.1x |
||
|
Operating Metrics |
||||
|
LTM Revenue |
10,699.1 |
|||
|
LTM Reported EBITDAR |
3,933.1 |
|||
|
|
||||
|
Liquidity |
||||
|
RCF Commitments |
1,675.0 |
|||
|
Less: Letters of Credit |
(29.0) |
|||
|
Plus: Cash and Equivalents |
4,505.3 |
|||
|
Total Liquidity |
6,151.3 |
|||
|
Credit Metrics |
||||
|
Gross Leverage |
8.2x |
|||
|
Net Leverage |
7.1x |
|||
|
Notes: LTM EBITDAR reported as adjusted. Market cap is reported as of 06/13/2023. RCF commitments only include borrowing capacity under the MGM Resorts International RCF. As of March 31, 2023, cash and cash equivalents of $468M were held by MGM China. 1. Interest rate is HIBOR plus a range of 1.625% to 2.75% based on MGM China's leverage ratio. Interest rate above reflects average margin due to limited disclosure. 2. May be increased up to $500M. This facility may be drawn once MGM China's first RCF has been fully drawn. Interest rate is HIBOR plus a range of 1.625% to 2.75% based on MGM China's leverage ratio. Interest rate above reflects average margin due to limited disclosure. 3. Interest rate is SOFR plus a range of 1.50% to 2.25%, based on a rent adjusted total net leverage ratio. Interest rate above reflects average margin due to limited disclosure. Includes a $1.35B sublimit for letters of credit. 4. Principal amount denominated in SEK. Option to increase issuance from SEK 700M to SEK 800M. Interest rate is Stockholm Interbank Offered Rate (STIBOR) plus 5.5%. |
||||
Red Rock
|
03/31/2023 |
EBITDA Multiple |
|||
|---|---|---|---|---|
|
(USD in Millions) |
Amount |
Maturity |
Rate |
Book |
|
|
||||
|
$42.8M Secured Term Loan & Other Debt 1 |
40.6 |
Nov-2025 |
3.800% |
|
|
Total Unrestricted Subsidiary Debt |
40.6 |
0.1x |
||
|
$1.031B Secured Revolving Credit Facility 2 |
222.5 |
Feb-07-2025 |
USD LIBOR + 1.625% |
|
|
Secured Term Loan A 3 |
159.7 |
Feb-07-2025 |
USD LIBOR + 1.625% |
|
|
Secured Term Loan B 4 |
1,450.2 |
Feb-07-2027 |
USD LIBOR + 2.250% |
|
|
Total Secured Station LLC Debt |
1,832.3 |
2.5x |
||
|
4.50% Senior Unsecured Notes due 2028 5 |
685.4 |
Feb-15-2028 |
4.500% |
|
|
4.625% Senior Unsecured Notes due 2031 5 |
494.6 |
Dec-01-2031 |
4.625% |
|
|
Total Unsecured Station LLC Debt |
1,180.0 |
4.0x |
||
|
Total Debt |
3,052.9 |
4.0x |
||
|
Less: Cash and Equivalents |
(107.7) |
|||
|
Net Debt |
2,945.2 |
3.9x |
||
|
Plus: Market Capitalization |
5,300.0 |
|||
|
Enterprise Value |
8,245.2 |
10.9x |
||
|
Operating Metrics |
||||
|
LTM Revenue |
1,695.8 |
|||
|
LTM Reported EBITDAR |
759.3 |
|||
|
|
||||
|
Liquidity |
||||
|
RCF Commitments |
1,031.1 |
|||
|
Less: Drawn |
(222.5) |
|||
|
Less: Letters of Credit |
(33.5) |
|||
|
Plus: Cash and Equivalents |
107.7 |
|||
|
Total Liquidity |
882.8 |
|||
|
Credit Metrics |
||||
|
Gross Leverage |
4.0x |
|||
|
Net Leverage |
3.9x |
|||
|
Notes: 1. Primarily represents debt issued by 100% - owned unrestricted subsidiary of Station LLC. Principal and interest payments of $0.2M are payable on a monthly basis, with the remaining principal due at maturity. The term loan is secured by the company's corporate office building and is not guaranteed by Station LLC or its restricted subsidiaries under the credit facility. 2. Interest rate: LIBOR + 1.50% - 1.75%. Reported margin of 1.625% is the average of the range. Guaranteed by all of Station LLC's material restricted subsidiaries. 3. Interest rate: LIBOR + 1.50% - 1.75%. Reported margin of 1.625% is the average of the range. Requires quarterly principal payments of $2.4M. Guaranteed by all of Station LLC's material restricted subsidiaries. 4. Requires quarterly principal payments of $3.8M. LIBOR floor of 0.25%. Guaranteed by all of Station LLC's material restricted subsidiaries. 5. Guaranteed by certain of Station LLC's subsidiaries. |
||||
Wynn Resorts
|
03/31/2023 |
EBITDA Multiple |
|||
|---|---|---|---|---|
|
(USD in Millions) |
Amount |
Maturity |
Rate |
Book |
|
|
||||
|
Wynn Macau 4.875% Senior Unsecured Notes, due 2024 |
600.0 |
Oct-01-2024 |
4.875% |
|
|
$1.5B WM Cayman II Senior Unsecured Revolver, due 2025 1 |
1,492.5 |
Sep-16-2025 |
|
|
|
Wynn Macau 5.5% Senior Unsecured Notes, due 2026 |
1,000.0 |
Jan-15-2026 |
5.500% |
|
|
Wynn Macau 5.5% Senior Unsecured Notes, due 2027 |
750.0 |
Oct-01-2027 |
5.500% |
|
|
Wynn Macau 5.625% Senior Unsecured Notes, due 2028 |
1,350.0 |
Aug-26-2028 |
5.625% |
|
|
Wynn Macau 5.125% Senior Unsecured Notes, due 2029 |
1,000.0 |
Dec-15-2029 |
5.125% |
|
|
Wynn Macau 4.5% Convertible Bonds |
600.0 |
Mar-07-2029 |
4.500% |
|
|
Total Wynn Subsidiary Unsecured Debt |
6,792.5 |
6.9x |
||
|
$1B Wynn Resort Finance Senior Secured First Lien Term Loan, due 2024 2 |
825.0 |
Sep-20-2024 |
USD LIBOR + 1.750% |
|
|
$850M Wynn Resort Finance First Lien Senior Secured Revolver, due 2024 |
- |
Sep-20-2024 |
USD LIBOR + 1.750% |
|
|
Retail Term Loan, due 2025 3 |
615.0 |
Jul-24-2025 |
USD LIBOR + 1.700% |
|
|
Total Wynn U.S. and Corporate Secured Debt |
1,440.0 |
8.4x |
||
|
Wynn Las Vegas 4.25% Senior Unsecured Notes, due 2023 4 |
- |
May-30-2023 |
4.250% |
|
|
Wynn Las Vegas 5.5% Senior Unsecured Notes, due 2025 4 |
1,780.0 |
Mar-01-2025 |
5.500% |
|
|
Wynn Las Vegas 5.25% Senior Unsecured Notes, due 2027 4 |
880.0 |
May-15-2027 |
5.250% |
|
|
Wynn Resort Finance 5.125% Senior Unsecured Notes, due 2029 5 |
750.0 |
Oct-01-2029 |
5.125% |
|
|
New Wynn Resort Finance 7.125% Senior Unsecured Notes, due 2031 6 |
600.0 |
Feb-15-2031 |
7.125% |
|
|
Total Wynn U.S. and Corporate Unsecured Debt |
4,010.0 |
12.5x |
||
|
Operating leases |
1,627.5 |
|
|
|
|
Total Long-term operating lease liabilities |
1,627.5 |
14.2x |
||
|
Total Debt |
13,870.0 |
14.2x |
||
|
Less: Cash and Equivalents |
(3,843.5) |
|||
|
Net Debt |
10,026.5 |
10.3x |
||
|
Plus: Market Capitalization |
12,200.0 |
|||
|
Enterprise Value |
22,226.5 |
22.7x |
||
|
Operating Metrics |
||||
|
LTM Revenue |
4,227.2 |
|||
|
LTM Reported EBITDAR |
977.6 |
|||
|
|
||||
|
Liquidity |
||||
|
RCF Commitments |
2,342.5 |
|||
|
Less: Drawn |
(1,492.5) |
|||
|
Less: Letters of Credit |
(13.0) |
|||
|
Plus: Cash and Equivalents |
3,843.5 |
|||
|
Total Liquidity |
4,680.5 |
|||
|
Credit Metrics |
||||
|
Gross Leverage |
14.2x |
|||
|
Net Leverage |
10.3x |
|||
|
Notes: As of March 31, 2023, WML Cayman II Revolver was fully drawn. In April 2023, WRF repurchased all of the outstanding 2025 WRF Senior Notes using the remaining net proceeds from the issuance of the 2031 WRF Senior Notes and cash held by WRF, at a price equal to 101.938% of the principal amount 1. Consists of two tranches: $312.5M and HK$9.26B (approximately $1.18B). Bears interest at LIBOR or HIBOR plus a margin of 1.875% to 2.875%, based on WM Cayman II's leverage ratio on a consolidated basis. As of December 31, 2022, approximately $312.5M and $1.19B bore interest at a rate of LIBOR + 2.875% and HIBOR + 2.875%, respectively. The company has the ability to upsize the revolver by an additional $1B upon the satisfaction of various conditions. 2. Requires quarterly repayments of $12.5M, with any remaining principal amount outstanding due at maturity. 3. Interest rate collar agreement provides a LIBOR floor of 1.00% and a ceiling of 3.75%. Secured by substantially all of the assets of the retail borrowers (Wynn/CA Plaza Property Owner, LLC and Wynn/CA Property Owner, LLC). 4. Jointly and severally guaranteed by all of WLV's subsidiaries, other than Capital Corp., which was a co-issuer. WLV Senior Notes are unsecured, except by the first priority pledge by Wynn Las Vegas Holdings, LLC ("WLVH"), a direct wholly owned subsidiary of Wynn Resorts Finance, LLC, of its equity interests in Wynn Las Vegas, LLC. If Wynn Resorts receives an investment grade rating from one or more ratings agencies, the first priority pledge securing the WLV Senior Notes will be released. 5. Guaranteed by each of WRF's existing domestic restricted subsidiaries that guarantee indebtedness under the WRF credit agreement, including WLV and each of its subsidiaries that guarantees the WLV senior notes. 6. Proceeds from the offering will be used to refinance its 7.75% notes due 2025 and premium related to the tender offer of such notes. |
||||
Business, Credit Risks and Mitigants
Boyd
Business, Credit Risks:
- Regional weakness: Boyd’s first-quarter 2023 Midwest & South business segment EBITDAR (earnings before interest, depreciation, amortization and rent) margin declined 200 bps year on year to 39%. CFO Josh Hirsberg said Louisiana and Mississippi were responsible for the EBITDAR margin decline, noting that “it does seem to be a little bit more broader-based and economically impacted.”
First-quarter 2023 EBITDAR margin below underscores the divergence between Boyd’s downtown Las Vegas segment and its Midwest & South segment:
Source: Fundamentals by Reorg
- Not as diversified geographically as Wynn, MGM: Boyd lacks international assets, resulting in less geographic diversification.
- EBITDAR margin declining: Boyd’s consolidated EBITDAR margin has been narrowing (see trends below):
Source: Fundamentals by Reorg
Fiscal year 2022 Midwest & South EBITDAR margins fell to 37.8%, from 39.8% in the same period a year earlier.
Risk Mitigants:
- Balance sheet: Boyd has the lowest net leverage in the comp set, at 2.7x.
- Free cash flow: The company has strong free cash flow metrics relative to the peer group. Full-year 2023 capex is expected to be about $350 million, compared with $320 million for the 12 months ended March 31, 2023.
- Digital: Boyd’s digital segment is already generating positive EBITDAR, which helps complement the portfolio’s physical gaming revenue and contributes to EBITDAR growth, helping support Boyd’s best-in-class net leverage. In addition, a robust online gambling offering can help improve customer loyalty and increase brand recognition.
- In the first quarter of 2023, Boyd’s online segment’s EBITDAR was about $20.6 million, compared with $8.9 million in the same period a year earlier. Management said it anticipates $50 million of EBITDAR in 2023, which includes a full year of contribution from FanDuel operations (Boyd owns a 5% stake) in Ohio and Kansas, as well as Boyd Interactive results. More than 34 states and Washington, D.C., have legalized some form of online sports betting.
Financials are below:
Source: Fundamentals by Reorg
Caesars
Business, Credit Risks:
- CPI-linked rent: Caesars leases certain properties from VICI under: i) the regional lease; ii) the Las Vegas lease and iii) the Joliet lease. The lease agreements include: i) a 15-year initial term with four five-year renewal options; ii) $1.1 billion of annual fixed rent payments, subject to annual escalation provisions based on CPI and a 2% floor commencing in lease year two of the initial term; iii) a variable element based on net revenue of the underlying leased properties, commencing in lease year eight of the initial term. Unlike MGM’s CPI-based lease terms, Caesars’ VICI leases have no CPI cap to mitigate inflation exposure.
- The company’s annual report notes that a significant portion of its leases are ground leases, providing Caesars with the right to use the land underlying its Casino properties. Should Caesars default on any of the ground leases, it may lose possession of the affected land as well as any improvements on the land, including the hotels and casinos.
- Net debt / EV: Caesars has the highest net debt / EV in the comp set, at 68%.
Risk Mitigants:
- Deleveraging: The company’s management team is focused on deleveraging. When asked about evaluating retiring debt versus buying back stock, CFO Thomas Reeg said the benefit of paying down debt is that when you do so, there is certainty with regard to outcomes because you are eliminating a future obligation, whereas when you buy back stock you are more subject to market whims. Management said it expects the company to delever by about 1.5 turns in 2024 as digital EBITDAR turns positive. Reeg said he “[doesn’t] think that ends the deleveraging.”
- Digital turning EBITDAR positive: Caesars’ digital segment was EBITDAR breakeven during the first quarter of 2023 and is expected to generate positive cash flow for the full year. Since digital is EBITDAR positive, Caesars can “sweep all brick-and-mortar cash flow towards debt reduction,” CFO Bret Yunker explained on the company’s first-quarter 2023 earnings call.
- VICI call option: Caesars’ regional leases include a put-call option whereby Caesars may require VICI to purchase and lease back Harrah’s Hoosier Park Racing & Casino and Indiana Grand’s gaming and racetrack facilities. The election period started Jan. 1, 2022, and ends Dec. 31, 2024. Reeg said on the company’s third-quarter 2022 earnings call, “that should be a $2.5 billion inflow to us” (emphasis added).
Financials are below:
Source: Fundamentals by Reorg
MGM
Business, Credit Risks:
- Net debt / EV: MGM’s 60% net debt to EV is the second-highest in the comp set.
- Relatively low EBITDAR margins: MGM’s Las Vegas strip margins are lower than those of its counterparts because of its relative share of non-gaming revenue. Macau EBITDAR margins are in the mid-to-high 20s, which is lower than regional EBITDAR margins for MGM and its peers.
- China: The recovery of Macau’s gaming industry depends on mainland China visitors. China’s GDP grew 0.8% sequentially in the second quarter and 6.3% year on year, below expectations.
Risk Mitigants:
- High-quality luxury assets, geographic diversification: MGM operates high-quality integrated resorts on the Vegas Strip and Atlantic City. The company also has assets in Macau and is developing Japan’s first integrated resort in Osaka Bay. About 19% of first-quarter 2023 revenue was from MGM’s international business line.
- Macau recovery: The Macau segment was EBITDAR negative in fiscal year 2022. Macau has reopened, and that should help boost cash flow.
- EBITDAR margin improving: EBITDAR margin has been improving, led by pricing power at the company’s Vegas Strip assets.
EBITDAR trends are below:
Source: Fundamentals by Reorg
Financials are below:
Source: Fundamentals by Reorg
Red Rock Resorts
Business, Credit Risks:
- Lack of diversification: Red Rock’s portfolio is concentrated in the Las Vegas Valley.
- Net leverage increasing: Net leverage is expected to increase beyond 3.9x because of the development of the Durango Casino and Resort. Fiscal year 2023 maintenance capex is expected to be $70 million to $90 million, with growth capex of about $600 million to $650 million, or 44% to 59% greater than LTM capex of $465 million.
- Floating-rate liabilities: About 59% of Red Rock’s liabilities have floating interest rates.
Risk Mitigants:
- Vegas demographics: There has been an influx of new residents migrating to the Las Vegas Valley, resulting in a higher proportion of salaried employees and more spending power, which could help fuel growth for local gaming operators.
- Focused on deleveraging post Durango: Long-term net leverage target is 3.3x, which the company expects to reach once the Durango project is completed. The company is anticipating a full-year EBITDAR contribution from Durango in 2024. CFO Stephen Cootey said management “expect[s] local casinos [to] typically come out of the box very cash flow positive.” Red Rock will evaluate dividends and share repurchases “as [its] balance sheet becomes stronger.” The company is prioritizing deleveraging to the 3.3x target ahead of returning capital to shareholders; share repurchases have been paused.
- Defensive business model: Red Rock has the highest EBITDAR margin in the comp set, and it runs a largely cash-based business aimed at local customers.
Financials are below:
Source: Fundamentals by Reorg
Wynn
Business, Credit Risks:
- Cash burn: The company is free cash flow negative on an LTM basis.
- China: Consumer weakness in China is more of a risk for Wynn than for MGM because Wynn derives a greater percentage of its revenue from Macau (revenue from Macau accounted for about 24% of net revenue, compared with about 7% for MGM).
Risk Mitigants:
- High-quality luxury assets, geographic diversification: Wynn is similar to MGM in that its assets are geared toward luxury spending. The company is developing the Wynn Al Marjan in Dubai, another asset designed to benefit from luxury spending by consumers.
- Macau recovery, international diversification: Wynn also stands to benefit from a recovery in Macau’s gaming sector.
- EBITDAR margin, free cash flow improving: The chart above shows that the company is free cash flow negative on an LTM basis, but it also underscores the point that free cash flow generation is improving. Free cash flow for the six months ended June 30 was $40 million.
Source: Fundamentals by Reorg
Source: Fundamentals by Reorg
Financials are below:
Source: Fundamentals by Reorg
Full financials for Boyd, Caesars, MGM, Red Rock and Wynn are being updated HERE, HERE, HERE, HERE and HERE, respectively. To request a trial of Fundamentals by Reorg, please email sales@reorg.com.
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