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MGM Resorts: Huge upside potential despite gloomy 4Q14 results

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Part 4
MGM Resorts: Huge upside potential despite gloomy 4Q14 results PART 4 OF 9

MGM’s hotel revenue was driven by higher convention mix

Hotel performance

Key performance indicators for the hotel industry are occupancy rate, ADR (average daily room rate) and RevPAR (revenue per available room). These indicators are important for casino players like MGM, Las Vegas Sands (LVS), Melco Crown Entertainment (MPEL), and Wynn Resorts (WYNN). They derive a significant portion of their revenue from hotel operations.

Investors could have a diversified portfolio in all of these companies through ETFs like the Markets Vector Gaming ETF (BJK) and the Consumer Discretionary Select Sector SPDR Fund (XLY).

MGM’s hotel revenue was driven by higher convention mix

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MGM Resorts (MGM) derives ~18% of its revenue from its hotel or room services. Hotel revenue at MGM’s wholly owned domestic resorts for the three months ending December 31, 2014, increased 6% year-over-year, or YoY, with a 7% increase in the Las Vegas Strip’s RevPAR.

At Las Vegas Strip properties, occupancy was 88% in 4Q14—up from 85% in the same period last year. The ADR stood at $138—compared to $133 in the same quarter last year.

RevPAR is the most important of all the performance metrics used in the hotel industry. It captures both room rates and occupancy levels. In short, RevPAR is actually the occupancy rate times the ADR.

Key takeaways from the 4Q14 earnings call

Daniel J. D’Arrigo, MGM’s CFO and executive vice president, said, “Our properties continue to benefit from increased occupancy, up three percentage points year-over-year, driven by a higher convention mix in the quarter… 2014 was our highest convention mix ever in the history of our company with slightly over 17% our room nights in 2014… Looking at the first quarter, we expect RevPAR growth of approximately 2% to 3%. This is a significant accomplishment given we are growing over the 14% RevPAR growth in the prior year’s quarter.”

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