filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This management’s discussion and analysis of financial condition and results of operations includes discussion as of and for the year ended December 31, 2019 compared to December 31, 2018. Discussion of our financial condition and results of operations as of and for the year ended December 31, 2018 compared to December 31, 2017 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2019.
Executive Overview
Our primary business is the ownership and operation of casino resorts, which offer gaming, hotel, convention, dining, entertainment, retail and other resort amenities. We own or invest in several of the finest casino resorts in the world and we continually reinvest in our resorts to maintain our competitive advantage. Most of our revenue is cash-based, through customers wagering with cash or paying for non-gaming services with cash or credit cards. We rely heavily on the ability of our resorts to generate operating cash flow to fund capital expenditures, provide excess cash flow for future development and repay debt financings. We make significant investments in our resorts through newly remodeled hotel rooms, restaurants, entertainment and nightlife offerings, as well as other new features and amenities.
Our results of operations are affected by decisions we make related to our capital allocation, our access to capital and our cost of capital. While we continue to be focused on improving our financial position and returning capital to shareholders, we are also dedicated to capitalizing on strategic development or initiatives.
The Las Vegas Strip segment results of operations are heavily impacted by visitor volume and trends. During the year ended December 31, 2019, Las Vegas visitor volume increased 1% compared to the prior year period according to information published by the Las Vegas Convention and Visitors Authority. The Las Vegas market is growing and diversifying with the addition of new sporting events and venues, the expansion of convention centers, as well as music and entertainment events.
The MGM China segment results of operations also are heavily impacted by visitor volume and trends. During the year ended December 31, 2019 Macau visitor arrivals increased 10% compared to the prior year period according to statistics published by the Statistics and Census Service of the Macau Government. In early 2020, the rapid spread of a respiratory illness caused by a novel coronavirus (Covid-19) identified as originating in Wuhan, Hubei Province, China led to certain cities in China being placed under quarantine and citizens across China were advised to avoid non-essential travel. Certain countries, including the U.S., have restricted inbound travel from mainland China to mitigate the spread of the virus. In addition, China implemented a temporary suspension of its visa scheme that permits mainland Chinese to travel to Macau, and on February 4, 2020 the Hong Kong SAR government temporarily suspended all ferry service from Hong Kong to Macau, until further notice. The Macau Government Tourism Office disclosed total visitation from mainland China to Macau decreased 83% and total visitor arrivals decreased 78% during Chinese New Year as compared to the same period in 2019. On February 4, 2020, the government of Macau asked that all gaming operators in Macau suspend casino operations for a 15-day period that commenced on February 5, 2020. As a result, MGM Macau and MGM Cotai suspended all operations at their properties other than operations that were necessary to provide sufficient non-gaming facilities to serve any remaining hotel guests. Operations at MGM Macau and MGM Cotai resumed on February 20, 2020; however, there are currently limits on the number of gaming tables allowed to operate and restrictions on the number of seats available at each table, and the temporary suspension of the visa scheme and ferry service to Macau remains in place. As a result of these measures, we expect material declines in MGM China’s operating results during the first quarter of 2020 and potentially thereafter. Additionally, to the extent that the virus impacts the willingness or ability of customers to travel to our properties in the United States (due to travel restrictions, or otherwise), our domestic results of operations could also be negatively impacted. We are continuing to evaluate the nature and extent of the impacts to our business, which could have a material effect on our consolidated operating results for the first quarter of 2020 and potentially thereafter. Given the uncertain nature of these circumstances, the related impact on our results of operations, cash flows and financial condition cannot be reasonably estimated at this time.
Our results of operations do not tend to be seasonal in nature, though a variety of factors may affect the results of any interim period, including the timing of major conventions, Far East Baccarat volumes, the amount and timing of marketing and special events for our high-end gaming customers, and the level of play during major holidays, including New Year and Lunar New Year. While our results do not depend on key individual customers, a significant portion of our operating income is generated from high-end gaming customers, which can cause variability in our results as evidenced by the recent weakness in Far East baccarat, which we expect to continue in 2020. In addition, our success in marketing to customer groups such as convention customers and the financial health of customer segments such as business travelers or high-end gaming customers from a specific country or region can affect our results.
As of December 31, 2019, pursuant to a master lease agreement with MGP, we lease the real estate assets of The Mirage, Mandalay Bay, Luxor, New York-New York, Park MGM, Excalibur, The Park, Gold Strike Tunica, MGM Grand Detroit, Beau Rivage, Borgata, Empire City, MGM National Harbor, and MGM Northfield Park. See Note 1 in the accompanying consolidated financial statements for information regarding MGP and the Operating Partnership, which we consolidate in our financial statements. All intercompany transactions, including transactions under the master lease with MGP, have been eliminated in consolidation. As further discussed below, pursuant to a lease agreement with the Bellagio BREIT Venture, we lease the real estate assets of Bellagio.
In July 2018, MGP completed its Northfield Acquisition for approximately $1.1 billion. In April 2019, we acquired the membership interests of Northfield from MGP and MGP retained the real estate assets. We then rebranded the property to MGM Northfield Park, which was then added to the existing master lease between us and MGP. See Note 4 and Note 18 in the accompanying financial statements for information regarding this acquisition.
Also, in January 2019, we acquired the real property and operations associated with Empire City in Yonkers, New York for consideration of approximately $865 million. Subsequently, MGP acquired the developed real property associated with Empire City from us and Empire City was added to the existing master lease between us and MGP. In addition, pursuant to the master lease amendment, we agreed to provide MGP a right of first offer with respect to certain undeveloped land adjacent to the property to the extent that we develop additional gaming facilities and choose to sell or transfer such property in the future. See Note 4 and Note 18 in the accompanying consolidated financial statements for information regarding this acquisition.
In March 2019, we entered into an amendment to the existing master lease between us and MGP with respect to investments made by us related to improvements at Park MGM and NoMad Las Vegas. See Note 18 in the accompanying financial statements for information regarding this transaction with MGP, which is eliminated in consolidation.
In November 2019, we completed the Bellagio Sale-Leaseback Transaction, pursuant to which we formed the Bellagio BREIT Venture, which acquired the Bellagio real estate assets from us and entered into a lease agreement to lease the real estate assets back to us. The Bellagio lease has an initial term of 30 years with two subsequent ten-year renewal periods, exercisable at our option. The lease provides for initial annual rent of $245 million with a fixed 2% escalator for the first ten years and, thereafter, an escalator equal to the greater of 2% and the CPI increase during the prior year, subject to a cap of 3% during the 11th through 20th years and 4% thereafter. We received $4.25 billion consideration for the sale, which consisted of a 5% equity interest in the venture with the remaining consideration of approximately $4.2 billion in cash. We also provide a shortfall guarantee of the principal amount of indebtedness of the Bellagio BREIT Venture’s $3.01 billion of debt (and any interest accrued and unpaid thereon). As a result of the sale, we recorded a gain of approximately $2.7 billion. See Note 1 and Note 12 in the accompanying financial statements for information regarding this transaction and lease agreement.
In December 2019, we sold Circus Circus Las Vegas and adjacent land for $825 million, which consisted of $662.5 million paid in cash and a secured note due 2024 with a face value of $162.5 million and fair value of $133.7 million. In connection with our review of the carrying value of assets to be sold due to the offer for sale received during the third quarter of 2019, we recorded a non-cash impairment charge of $219 million. Upon completion of the sale in the fourth quarter, we recorded a loss of $2 million. See Note 1 and Note 16 in the accompanying financial statements for information regarding this transaction.
On February 14, 2020, we completed the MGP BREIT Venture Transaction pursuant to which the real estate assets of MGM Grand Las Vegas and Mandalay Bay (including Mandalay Place) were contributed to MGP BREIT Venture, owned 50.1% by the Operating Partnership and 49.9% by a subsidiary of BREIT. In exchange for the contribution of the real estate assets, MGM and MGP received total consideration of $4.6 billion, which was comprised of $2.5 billion of cash, $1.3 billion of the Operating Partnership’s secured indebtedness assumed by MGP BREIT Venture, and the Operating Partnership’s 50.1% equity interest in the MGP BREIT Venture. In addition, the Operating Partnership issued approximately 3 million Operating Partnership units to us representing 5% of the equity value of MGP BREIT Venture. In connection with the transactions, we provided a shortfall guaranty of the principal amount of indebtedness of the MGP BREIT Venture (and any interest accrued and unpaid thereon). On the closing date, BREIT also purchased approximately 5 million MGP Class A shares for $150 million.
In connection with the transactions, MGP BREIT Venture entered into a lease with us for the real estate assets of Mandalay Bay and MGM Grand Las Vegas. The lease provides for a term of thirty years with two ten-year renewal options and has an initial annual base rent of $292 million, escalating annually at a rate of 2% per annum for the first fifteen years and thereafter equal to the greater of 2% and the CPI increase during the prior year subject to a cap of 3%. In addition, the lease will require us to spend 3.5% of net revenues over a rolling five-year period at the properties on capital expenditures and for us to comply with certain financial covenants, which, if not met, will require us to maintain cash security or provide one or more letters of credit in favor of the landlord in an amount equal to the rent for the succeeding one-year period.
In connection with the MGP BREIT Venture Transaction, the existing master lease with MGP was modified to remove the Mandalay Bay property and the annual rent under the MGP master lease was reduced by $133 million.
Also, on January 14, 2020, we, the Operating Partnership, and MGP entered into an agreement for the Operating Partnership to waive its right to issue MGP Class A shares, in lieu of cash, to us in connection with us exercising our right to require the Operating Partnership to redeem the Operating Partnership units we hold, at a price per unit equal to a 3% discount to the applicable cash amount as calculated in accordance with the operating agreement. The waiver terminates on the earlier of 24 months following the closing of the MGP BREIT Venture Transaction and us receiving cash proceeds of $1.4 billion as consideration for the redemption of our Operating Partnership units.
In January 2019, we announced the implementation of a company-wide business optimization initiative (the “MGM 2020 Plan”) to further reduce costs, improve efficiencies and position us for growth, which yielded over $130 million of Adjusted EBITDAR uplift in 2019 compared to 2018 results. We expect the initiatives associated with the MGM 2020 Plan to exceed Adjusted EBITDAR uplift of $200 million by the end of 2020 compared to 2018 results, which includes operating model changes to improve efficiency. We currently anticipate achieving this target. As part of the second phase, we plan to invest in our digital transformation to drive revenue growth through a customer-centric strategy aimed at increasing customer spend, increasing our wallet share, and attracting our most valuable customers.
Key Performance Indicators
Key performance indicators related to gaming and hotel revenue are:
| • | Gaming revenue indicators: table games drop and slots handle (volume indicators); “win” or “hold” percentage, which is not fully controllable by us. Our normal table games hold percentage at our Las Vegas Strip Resorts is in the range of 25.0% to 35.0% of table games drop for Baccarat and 19.0% to 23.0% for non-Baccarat; and |
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| • | Hotel revenue indicators: hotel occupancy (a volume indicator); average daily rate (“ADR,” a price indicator); and revenue per available room (“REVPAR,” a summary measure of hotel results, combining ADR and occupancy rate). Our calculation of ADR, which is the average price of occupied rooms per day, includes the impact of complimentary rooms. Complimentary room rates are determined based on standalone selling price. Because the mix of rooms provided on a complimentary basis, particularly to casino customers, includes a disproportionate suite component, the composite ADR including complimentary rooms is slightly higher than the ADR for cash rooms, reflecting the higher retail value of suites. |
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Additional key performance indicators at MGM China are:
| • | Gaming revenue indicators: MGM China utilizes “turnover,” which is the sum of nonnegotiable chip wagers won by MGM China calculated as nonnegotiable chips purchased plus nonnegotiable chips exchanged less nonnegotiable chips returned. Turnover provides a basis for measuring VIP casino win percentage. Win for VIP gaming operations at MGM China is typically in the range of 2.6% to 3.3% of turnover. |
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Results of Operations
The following discussion is based on our consolidated financial statements for the years ended December 31, 2019, 2018 and 2017.
Summary Financial Results
The following table summarizes our operating results:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Net revenues | $ | 12,899,672 | $ | 11,763,096 | $ | 10,797,479 | ||||||
| Operating income | 3,940,215 | 1,469,486 | 1,712,527 | |||||||||
| Net income | 2,214,380 | 583,894 | 2,088,184 | |||||||||
| Net income attributable to MGM Resorts International | 2,049,146 | 466,772 | 1,952,052 |
Summary Operating Results
Consolidated net revenues in 2019 increased 10% compared to 2018 due primarily to continued ramp-up of operations at MGM Cotai following its opening in February 2018, a full year of operating results at MGM Springfield, which opened in August 2018, the acquisition of Empire City in January 2019, a full year of operating results at MGM Northfield Park, which MGP acquired in July 2018, and an increase in revenues as a result of the ramp-up of operations at Park MGM, partially offset by a decrease in casino revenues at certain of our other Las Vegas Strip Resorts.
Consolidated operating income increased $2.5 billion to $3.9 billion in 2019, compared to $1.5 billion in 2018. The current year included a $2.7 billion gain related to the Bellagio Sale-Leaseback Transaction, a $220 million loss related to the sale of Circus Circus Las Vegas and adjacent land, included in property transactions, net, as well as $92 million in restructuring costs related to severance, accelerated stock compensation expense and consulting fees directly related to the operating model component of the MGM 2020 Plan. In comparison, consolidated operating income in 2018 included a $45 million gain related to the sale of Grand Victoria and $24 million in business interruption insurance proceeds primarily at Mandalay Bay. During 2019, consolidated operating income was positively impacted by the increase in net revenues described above and a decrease in preopening and start-up expenses, partially offset by increases in general and administrative, depreciation and amortization, and corporate expenses, further discussed below. Preopening and start-up expenses decreased by $144 million in 2019 compared to 2018 due primarily to the openings of MGM Springfield and MGM Cotai and the completion of the Park MGM rebranding project. Corporate expense, including share-based compensation for corporate employees, increased $45 million compared to the prior year period. The current year period included $20 million of Empire City acquisition costs, primarily related to transfer taxes and advisory fees, $29 million in costs incurred to implement the MGM 2020 Plan, of which $12 million is included in the restructuring costs discussed above, and $11 million in finance modernization initiative costs. The prior year period included $27 million of corporate brand campaign expenses, $19 million in transaction costs, and $8 million in costs incurred to implement the MGM 2020 Plan and finance modernization initiatives. Depreciation and amortization expense, and general and administrative expense increased compared to the prior year due primarily to the operations of MGM Cotai, MGM Springfield and Empire City.
Net Revenues by Segment
The following table presents a detail by segment of net revenues:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Las Vegas Strip Resorts | ||||||||||||
| Table games win | $ | 789,330 | $ | 949,055 | $ | 931,508 | ||||||
| Slots win | 1,193,607 | 1,140,269 | 1,106,192 | |||||||||
| Other | 64,834 | 62,249 | 67,150 | |||||||||
| Less: Incentives | (751,601 | ) | (743,840 | ) | (668,020 | ) | ||||||
| Casino revenue | 1,296,170 | 1,407,733 | 1,436,830 | |||||||||
| Rooms | 1,863,521 | 1,776,029 | 1,778,869 | |||||||||
| Food and beverage | 1,517,745 | 1,402,378 | 1,410,496 | |||||||||
| Entertainment, retail and other | 1,153,615 | 1,130,532 | 1,119,928 | |||||||||
| Non-casino revenue | 4,534,881 | 4,308,939 | 4,309,293 | |||||||||
| 5,831,051 | 5,716,672 | 5,746,123 | ||||||||||
| Regional Operations | ||||||||||||
| Table games win | 827,155 | 793,754 | 722,966 | |||||||||
| Slots win | 2,362,638 | 1,947,325 | 1,784,452 | |||||||||
| Other | 313,710 | 108,690 | 92,377 | |||||||||
| Less: Incentives | (965,723 | ) | (822,844 | ) | (764,992 | ) | ||||||
| Casino revenue | 2,537,780 | 2,026,925 | 1,834,803 | |||||||||
| Rooms | 316,753 | 318,017 | 319,049 | |||||||||
| Food and beverage | 494,243 | 428,934 | 410,143 | |||||||||
| Entertainment, retail and other | 201,008 | 160,645 | 145,725 | |||||||||
| Non-casino revenue | 1,012,004 | 907,596 | 874,917 | |||||||||
| 3,549,784 | 2,934,521 | 2,709,720 | ||||||||||
| MGM China | ||||||||||||
| VIP table games win | 1,237,297 | 1,235,387 | 1,099,303 | |||||||||
| Main floor table games win | 1,906,600 | 1,391,454 | 1,044,415 | |||||||||
| Slots win | 286,939 | 284,919 | 180,500 | |||||||||
| Less: Commissions and incentives | (821,030 | ) | (716,616 | ) | (582,583 | ) | ||||||
| Casino revenue | 2,609,806 | 2,195,144 | 1,741,635 | |||||||||
| Rooms | 142,306 | 118,527 | 54,824 | |||||||||
| Food and beverage | 127,152 | 114,862 | 51,330 | |||||||||
| Entertainment, retail and other | 26,158 | 21,424 | 10,371 | |||||||||
| Non-casino revenue | 295,616 | 254,813 | 116,525 | |||||||||
| 2,905,422 | 2,449,957 | 1,858,160 | ||||||||||
| Reportable segment net revenues | 12,286,257 | 11,101,150 | 10,314,003 | |||||||||
| Corporate and other | 613,415 | 661,946 | 483,476 | |||||||||
| $ | 12,899,672 | $ | 11,763,096 | $ | 10,797,479 |
Las Vegas Strip Resorts
Las Vegas Strip Resorts casino revenue decreased 8% in 2019 compared to 2018, primarily due to a 17% decrease in table games win resulting from a 9% decrease in table games drop, driven by Far East baccarat, and an increase in incentives, partially offset by a 5% increase in slots win.
The following table shows key gaming statistics for our Las Vegas Strip Resorts:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||
| (Dollars in millions) | ||||||
| Table Games Drop | $3,526 | $3,857 | $3,777 | |||
| Table Games Win % | 22.4% | 24.6% | 24.7% | |||
| Slots Handle | $12,874 | $12,569 | $12,396 | |||
| Slots Hold % | 9.3% | 9.1% | 8.9% |
Las Vegas Strip Resorts rooms revenue increased 5% in 2019 compared to 2018, primarily due to a 4% increase in REVPAR.
The following table shows key hotel statistics for our Las Vegas Strip Resorts:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||
| Occupancy | 91% | 91% | 91% | |||
| Average Daily Rate (ADR) | $167 | $161 | $160 | |||
| Revenue per Available Room (REVPAR) | $153 | $147 | $146 |
Las Vegas Strip Resorts food and beverage revenue increased 8% in 2019 compared to 2018 due primarily to the ramp-up of newly opened outlets at Park MGM and NoMad Las Vegas and an increase in catering and banquets revenue driven by the completion of the expansion of MGM Grand’s Conference Center in 2019.
Las Vegas Strip Resorts entertainment, retail and other revenue increased 2% in 2019 compared to 2018 due primarily to an increase in entertainment revenue related to events at Park Theater, partially offset by a decrease in revenue from Cirque du Soleil production shows.
Regional Operations
Regional Operations casino revenue increased 25% in 2019 compared to 2018 primarily due to the acquisition of Empire City in 2019, for which its video lottery terminal revenue is included in other casino revenue, the acquisition of MGM Northfield Park’s operations from MGP, and a full year of operations at MGM Springfield.
The following table shows key gaming statistics for our Regional Operations:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||
| (Dollars in millions) | ||||||
| Table Games Drop | $4,226 | $4,038 | $3,872 | |||
| Table Games Win % | 19.6% | 19.7% | 18.7% | |||
| Slots Handle | $25,031 | $21,468 | $19,634 | |||
| Slots Hold % | 9.4% | 9.1% | 9.1% |
Regional Operations food and beverage revenue increased 15% in 2019 compared to 2018 due primarily to full year of operations at MGM Springfield, the acquisition of Empire City, and the acquisition of MGM Northfield Park’s operations from MGP.
Regional Operations entertainment, retail and other revenue increased 25% in 2019 compared to 2018 due primarily to entertainment revenue at MGM Springfield and MGM Northfield Park, ATM fees from the operations of MGM Springfield, Empire City and MGM Northfield Park, and parking fees from the operations of Empire City.
MGM China
The following table shows key gaming statistics for MGM China:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||
| (Dollars in millions) | ||||||
| VIP Table Games Turnover | $38,071 | $40,599 | $34,533 | |||
| VIP Table Games Win % | 3.2% | 3.0% | 3.2% | |||
| Main Floor Table Games Drop | $8,252 | $7,566 | $5,159 | |||
| Main Floor Table Games Win % | 23.1% | 18.4% | 20.2% |
MGM China net revenue increased 19% in 2019 compared to 2018 primarily as a result of the continued ramp-up of operations at MGM Cotai and an increase in main floor table games win percentage. Main floor table games win increased 37% compared to the prior year due to the addition of 25 new-to-market tables at MGM Cotai in 2019 and a 472 basis point increase in win percentage. VIP table games win increased slightly in 2019 compared to 2018 due to the opening of VIP junket rooms at the end of the third quarter of 2018 at MGM Cotai and an increase in the VIP table games win percentage, offset by a 34% decrease in turnover at MGM Macau.
Corporate and other
Corporate and other revenue includes revenues from other corporate operations, management services and reimbursed costs revenue primarily related to our CityCenter management agreement and $68 million in net revenues from MGP’s Northfield casino, which represents revenues prior to our acquisition of MGM Northfield Park’s operations from MGP on April 1, 2019. Corporate and other revenue for 2018 included $133 million in net revenues from MGP Northfield’s casino. Reimbursed costs revenue represents reimbursement of costs, primarily payroll-related, incurred by us in connection with the provision of management services and was $437 million, $425 million and $402 million for 2019, 2018 and 2017, respectively. See below for additional discussion of our share of operating results from unconsolidated affiliates.
Adjusted EBITDAR
The following table presents a detail of Adjusted EBITDAR. We use Adjusted Property EBITDAR as the primary profit measure for our reportable segments. See “Non-GAAP Measures” for additional information.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Adjusted EBITDAR | ||||||||||||
| Las Vegas Strip Resorts | $ | 1,643,122 | $ | 1,706,315 | $ | 1,781,390 | ||||||
| Regional Operations | 969,866 | 781,854 | 754,597 | |||||||||
| MGM China | 734,729 | 574,333 | 535,524 | |||||||||
| Reportable segment Adjusted Property EBITDAR | 3,347,717 | 3,062,502 | 3,071,511 | |||||||||
| Corporate and other | (331,621 | ) | (224,800 | ) | (213,908 | ) | ||||||
| $ | 3,016,096 | $ | 2,837,702 | $ | 2,857,603 |
Las Vegas Strip Resorts
Adjusted Property EBITDAR at our Las Vegas Strip Resorts decreased 4% in 2019 compared to 2018 due primarily to a decrease in casino revenue, as discussed above, and the inclusion of $24 million in business interruption insurance proceeds at Mandalay Bay in the prior year. Adjusted Property EBITDAR margin was 28.2% in 2019, a 167 basis point decrease compared to 2018.
Regional Operations
Adjusted Property EBITDAR at our Regional Operations increased 24% in 2019 compared to 2018 and benefitted from a full year of operations at MGM Springfield, the acquisition of Empire City, and the acquisition of MGM Northfield Park’s operations from MGP. Adjusted Property EBITDAR margin was 27.3% in 2019, a 68 basis point increase compared to 2018, primarily as a result of the inclusion of Empire City and MGM Northfield Park.
MGM China
MGM China’s Adjusted Property EBITDAR increased 28% in 2019 compared to 2018 due primarily to the ramp-up of operations at MGM Cotai, and an increase in main floor table games win percentage, as discussed above. Excluding intercompany license fees of $51 million and $43 million for the years ended December 31, 2019 and 2018, respectively, Adjusted Property EBITDAR increased 27% compared to 2018. Adjusted Property EBITDAR margin was 25.3% in 2019, a 185 basis point increase compared to 2018.
Corporate and other
Adjusted EBITDAR related to corporate and other in 2019 decreased compared to the prior year due primarily to $14 million of non-recurring charges including certain management termination fees and other fees, an increase in corporate expense as described in “Summary Operating Results,” a decrease in income from unconsolidated affiliates, as discussed below, and a decrease in Adjusted EBITDAR related to MGM Northfield Park’s operating results from $45 million in 2018 compared to $23 million in 2019.
Operating Results – Details of Certain Charges
Preopening and start-up expenses consisted of the following:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| MGM China | $ | 2,619 | $ | 64,341 | $ | 86,970 | ||||||
| MGM Springfield | — | 60,787 | 22,881 | |||||||||
| Park MGM rebranding | 2,245 | 22,569 | 6,498 | |||||||||
| Other | 2,311 | 3,695 | 2,126 | |||||||||
| $ | 7,175 | $ | 151,392 | $ | 118,475 |
Preopening and start-up expenses decreased in 2019 due primarily to the opening of MGM Springfield and the final phase of MGM Cotai, as well as the completion of the Park MGM rebranding project.
Property transactions, net consisted of the following:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Loss related to sale of Circus Circus Las Vegas and adjacent land | $ | 220,294 | $ | — | $ | — | ||||||
| Gain on sale of Grand Victoria | — | (44,703 | ) | — | ||||||||
| Other property transactions, net | 55,508 | 53,850 | 50,279 | |||||||||
| $ | 275,802 | $ | 9,147 | $ | 50,279 |
See Note 16 to the accompanying consolidated financial statements for further discussion of property transactions, net.
Operating Results – Income from Unconsolidated Affiliates
The following table summarizes information related to our income from unconsolidated affiliates:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| CityCenter | $ | 128,421 | $ | 138,383 | $ | 133,400 | ||||||
| Other | (8,900 | ) | 9,307 | 12,822 | ||||||||
| $ | 119,521 | $ | 147,690 | $ | 146,222 |
In 2019, our share of CityCenter’s operating results, including certain basis difference adjustments, was $128 million compared to $138 million in 2018. The prior year period included a $12 million gain on the sale of Mandarin Oriental related to the reversal of basis differences in excess of our share of the loss recorded by CityCenter. The current year period included $12 million in charges related to restructuring costs and certain one-time management agreement termination fees. At Aria, casino revenues decreased 5% in 2019 compared to 2018 primarily due to a decrease in table games win, driven by baccarat. CityCenter’s non-casino revenues increased 4% in 2019 compared to 2018 primarily related to an increase in food and beverage revenue due to the opening of a new outlet, and a 3% increase in rooms revenue due primarily to a 4% increase in REVPAR at Aria.
Non-operating Results
Interest expense. The following table summarizes information related to interest expense, net:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Total interest incurred | $ | 853,007 | $ | 821,229 | $ | 779,855 | ||||||
| Interest capitalized | (5,075 | ) | (51,716 | ) | (111,110 | ) | ||||||
| $ | 847,932 | $ | 769,513 | $ | 668,745 |
Gross interest expense in 2019 increased $32 million compared to 2018 due to an increase in the average debt outstanding under our senior notes, and an increase in the weighted average interest rate related to our senior credit facilities, which was partially offset by a decrease in the average debt outstanding under our senior credit facilities and a decrease in the weighted average interest rate of our senior notes. Capitalized interest was $5 million and $52 million during the years ended December 31, 2019 and 2018, respectively. The decrease in capitalized interest was due primarily to the completion of MGM Springfield, which opened in August 2018, and the completion of MGM Cotai, which opened in February 2018. See Note 9 to the accompanying consolidated financial statements for additional discussion on long-term debt and see “Liquidity and Capital Resources” for additional discussion on issuances and repayments of long-term debt and other sources and uses of cash.
Other, net. Other expense, net in 2019 increased $165 million compared to 2018 due primarily to a $198 million loss incurred on the early retirement of debt related to our senior notes and senior credit facility, the Operating Partnership’s prepayments on its senior credit facility, and the early retirement of debt related to MGM China’s senior secured credit facility, partially offset by a $11 million remeasurement gain on MGM China’s U.S. dollar-denominated senior notes and a $9 million increase in interest income. Refer to Note 9 for further discussion on long-term debt.
Income taxes. The following table summarizes information related to our income taxes:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Income before income taxes | $ | 2,846,725 | $ | 634,006 | $ | 960,790 | ||||||
| Benefit (provision) for income taxes | (632,345 | ) | (50,112 | ) | 1,127,394 | |||||||
| Effective income tax rate | 22.2 | % | 7.9 | % | (117.3 | )% | ||||||
| Federal, state and foreign income taxes paid, net of refunds | $ | 28,493 | $ | (10,100 | ) | $ | 181,651 |
Our effective tax rate for 2019 is driven primarily by the $2.7 billion gain recorded on the Bellagio Sale-Leaseback Transaction. Income tax expense recorded on this gain results in our effective tax rate approximating our federal and state combined statutory rate and minimizes the impact of other items. Our effective tax rate for 2018 was favorably impacted by the reversal of Macau shareholder dividend tax that was accrued in 2017 upon receipt of the extension of the annual fee arrangement and income tax benefit recorded on our Macau operations, partially offset by measurement period tax expense related to the U.S. Tax Cuts and Jobs Act (the “Tax Act”).
Cash taxes paid increased in 2019 compared to 2018 due to federal taxes paid on the liquidation of MGP OH, Inc., a consolidated subsidiary directly owned by MGM Growth Properties Operating Partnership LP, and an increase in state taxes paid in 2019 compared to 2018. In addition, we received a refund in 2018 of taxes paid with respect to our 2017 federal income tax return.
Non-GAAP Measures
“Adjusted EBITDAR” is earnings before interest and other non-operating income (expense), taxes, depreciation and amortization, preopening and start-up expenses, gain on Bellagio transaction, restructuring costs (which represents costs related to severance, accelerated stock compensation expense, and consulting fees directly related to the operating model component of the MGM 2020 Plan), NV Energy exit expense, rent expense associated with triple net operating and ground leases, income from unconsolidated affiliates related to investments in REITs, and property transactions, net. We utilize “Adjusted Property EBITDAR” as the primary profit measures for our reportable segments and underlying operating segments. Adjusted Property EBITDAR is a measure defined as Adjusted EBITDAR before corporate expense and stock compensation expense, which are not allocated to each operating segment, and before rent expense related to the master lease with MGP that eliminates in consolidation. We manage capital allocation, tax planning, stock compensation, and financing decisions at the corporate level. “Adjusted Property EBITDAR margin” is Adjusted Property EBITDAR divided by related segment net revenues.
Adjusted EBITDAR information is a valuation metric, should not be used as an operating metric, and is presented solely as a supplemental disclosure to reported GAAP measures because we believe these measures are widely used by analysts, lenders, financial institutions, and investors as a principal basis for the valuation of gaming companies. We believe that while items excluded from Adjusted EBITDAR, Adjusted Property EBITDAR, and Adjusted Property EBITDAR margin may be recurring in nature and should not be disregarded in evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods because these items can vary significantly depending on specific underlying transactions or events that may not be comparable between the periods being presented. Also, we believe excluded items may not relate specifically to current trends or be indicative of future results. For example, preopening and start-up expenses will be significantly different in periods when we are developing and constructing a major expansion project and will depend on where the current period lies within the development cycle, as well as the size and scope of the project(s). Property transactions, net includes normal recurring disposals, gains and losses on sales of assets related to specific assets within our resorts, but also includes gains or losses on sales of an entire operating resort or a group of resorts and impairment charges on entire asset groups or investments in unconsolidated affiliates, which may not be comparable period over period. In addition, we changed our non-GAAP measures in the fourth quarter of 2019, including recasting prior periods, as a result of the Bellagio real estate transaction, to exclude rent expense associated with triple net operating leases and ground leases. We believe excluding rent expense associated with triple net operating leases and ground leases provides useful information to analysts, lenders, financial institutions, and investors when valuing us, as well as comparing our results to other gaming companies, without regard to differences in capital structure and leasing arrangements since the operations of other gaming companies may or may not include triple net operating leases or ground leases. However, as discussed herein, Adjusted EBITDAR and Adjusted Property EBITDAR should not be viewed as measures of overall operating performance, considered in isolation, or as an alternative to net income, because these measures are not presented on a GAAP basis and exclude certain expenses, including the rent expense associated with our triple net operating and ground leases, and are provided for the limited purposes discussed herein.
Adjusted EBITDAR, Adjusted Property EBITDAR or Adjusted Property EBITDAR margin should not be construed as alternatives to operating income or net income, as indicators of our performance; or as alternatives to cash flows from operating activities, as measures of liquidity; or as any other measure determined in accordance with generally accepted accounting principles. We have significant uses of cash flows, including capital expenditures, interest payments, taxes, real estate triple net lease and ground lease payments, and debt principal repayments, which are not reflected in Adjusted EBITDAR, Adjusted Property EBITDAR or Adjusted Property EBITDAR margin. Also, other companies in the gaming and hospitality industries that report Adjusted EBITDAR, Adjusted Property EBITDAR or Adjusted Property EBITDAR margin information may calculate Adjusted EBITDAR, Adjusted Property EBITDAR or Adjusted Property EBITDAR margin in a different manner and such differences may be material.
The following table presents a reconciliation of net income attributable to MGM Resorts International to Adjusted EBITDAR:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Net income attributable to MGM Resorts International | $ | 2,049,146 | $ | 466,772 | $ | 1,952,052 | ||||||
| Plus: Net income attributable to noncontrolling interests | 165,234 | 117,122 | 136,132 | |||||||||
| Net income | 2,214,380 | 583,894 | 2,088,184 | |||||||||
| Provision (benefit) for income taxes | 632,345 | 50,112 | (1,127,394 | ) | ||||||||
| Income before income taxes | 2,846,725 | 634,006 | 960,790 | |||||||||
| Non-operating expense | ||||||||||||
| Interest expense, net of amounts capitalized | 847,932 | 769,513 | 668,745 | |||||||||
| Non-operating items from unconsolidated affiliates | 62,296 | 47,827 | 34,751 | |||||||||
| Other, net | 183,262 | 18,140 | 48,241 | |||||||||
| 1,093,490 | 835,480 | 751,737 | ||||||||||
| Operating income | 3,940,215 | 1,469,486 | 1,712,527 | |||||||||
| NV Energy exit expense | — | — | (40,629 | ) | ||||||||
| Preopening and start-up expenses | 7,175 | 151,392 | 118,475 | |||||||||
| Property transactions, net | 275,802 | 9,147 | 50,279 | |||||||||
| Gain on Bellagio transaction | (2,677,996 | ) | — | — | ||||||||
| Depreciation and amortization | 1,304,649 | 1,178,044 | 993,480 | |||||||||
| Restructuring | 92,139 | — | — | |||||||||
| Triple net operating lease and ground lease rent expense | 74,656 | 29,633 | 23,471 | |||||||||
| Income from unconsolidated affiliates related to investments in REITs | (544 | ) | — | — | ||||||||
| Adjusted EBITDAR | $ | 3,016,096 | $ | 2,837,702 | $ | 2,857,603 |
The following table presents Adjusted Property EBITDAR and Adjusted EBITDAR:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Bellagio | $ | 465,194 | $ | 490,702 | $ | 506,526 | ||||||
| MGM Grand Las Vegas | 282,609 | 371,566 | 344,685 | |||||||||
| Mandalay Bay | 237,472 | 265,741 | 258,471 | |||||||||
| The Mirage | 153,838 | 131,864 | 176,996 | |||||||||
| Luxor | 125,758 | 120,749 | 126,650 | |||||||||
| New York-New York | 147,179 | 137,622 | 135,036 | |||||||||
| Excalibur | 117,774 | 111,255 | 113,561 | |||||||||
| Park MGM | 65,983 | 14,290 | 49,191 | |||||||||
| Circus Circus Las Vegas | 47,315 | 62,526 | 70,274 | |||||||||
| Las Vegas Strip Resorts | 1,643,122 | 1,706,315 | 1,781,390 | |||||||||
| MGM Grand Detroit | 193,971 | 195,817 | 176,280 | |||||||||
| Beau Rivage | 111,101 | 105,493 | 89,319 | |||||||||
| Gold Strike Tunica | 66,712 | 52,081 | 52,882 | |||||||||
| Borgata | 206,812 | 203,945 | 286,690 | |||||||||
| MGM National Harbor | 215,962 | 210,729 | 149,426 | |||||||||
| MGM Springfield | 34,349 | 13,789 | — | |||||||||
| Empire City Casino | 71,013 | — | — | |||||||||
| MGM Northfield Park | 69,946 | — | — | |||||||||
| Regional Operations | 969,866 | 781,854 | 754,597 | |||||||||
| MGM Macau | 458,099 | 478,121 | 535,524 | |||||||||
| MGM Cotai | 276,630 | 96,212 | — | |||||||||
| MGM China | 734,729 | 574,333 | 535,524 | |||||||||
| Unconsolidated resorts | 122,598 | 147,690 | 146,222 | |||||||||
| Management and other operations | 24,773 | 74,790 | 26,838 | |||||||||
| Stock compensation | (68,289 | ) | (68,211 | ) | (60,936 | ) | ||||||
| Corporate | (410,703 | ) | (379,069 | ) | (326,032 | ) | ||||||
| $ | 3,016,096 | $ | 2,837,702 | $ | 2,857,603 |
Liquidity and Capital Resources
Cash Flows – Summary
Our cash flows consisted of the following:
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | |||||||||||
| (In thousands) | |||||||||||||
| Net cash provided by operating activities | $ | 1,810,401 | $ | 1,722,539 | $ | 2,206,411 | |||||||
| Net cash provided by (used in) investing activities | 3,519,434 | (2,083,021 | ) | (1,580,592 | ) | ||||||||
| Net cash provided by (used in) financing activities | (4,529,594 | ) | 389,234 | (568,778 | ) |
Cash Flows
Operating activities. Trends in our operating cash flows tend to follow trends in operating income, excluding non-cash charges, but can be affected by changes in working capital, the timing of significant interest payments, tax payments or refunds, and distributions from unconsolidated affiliates. Cash provided by operating activities increased to $1.8 billion in 2019 from $1.7 billion in 2018. Operating cash flows increased in the current year period compared to the prior year period due to increases in our operating income primarily from our Regional Operations and MGM China, as discussed above, partially offset by an increase in cash paid for interest, as discussed in “Non-operating Results” and an increase in cash paid for taxes. In addition, operating cash flows in the current year period were negatively affected by a decrease in working capital primarily related to a decrease in gaming deposits. Operating cash flows in the prior year period were negatively affected by a decrease in working capital primarily related to the timing of significant chip purchases by gaming promoters at MGM China.
Investing activities. Our investing cash flows can fluctuate significantly from year to year depending on our decisions with respect to strategic capital investments in new or existing resorts, business acquisitions or dispositions, and the timing of maintenance capital expenditures to maintain the quality of our resorts. Capital expenditures related to regular investments in our existing resorts can also vary depending on timing of larger remodel projects related to our public spaces and hotel rooms.
Cash provided by investing activities was $3.5 billion in 2019 compared to cash used in investing activities of $2.1 billion in 2018. The change was due primarily to $4.2 billion of proceeds received related to the sale of Bellagio, $652 million of proceeds received related to the sale of Circus Circus Las Vegas and adjacent land, the inclusion of the $1.0 billion outflow for MGP’s acquisition of Northfield Park in 2018, and a decrease of $748 million in capital expenditures, partially offset by a $536 million outflow for the acquisition of Empire City and a $222 million decrease in distributions from unconsolidated affiliates. Distributions from unconsolidated affiliates in 2019 included our $90 million share of a $180 million dividend paid by CityCenter in 2019. Distributions from unconsolidated affiliates in 2018 included our $313 million share of a $625 million dividend paid by CityCenter. The decrease in capital expenditures primarily reflects substantial completion of our development projects at MGM Cotai, MGM Springfield, and the rebranding at Park MGM, as discussed in further detail below.
Capital Expenditures
In 2019, we made capital expenditures of $739 million, of which $146 million related to MGM China. Capital expenditures at MGM China included $118 million related to projects at MGM Cotai and $28 million related to projects at MGM Macau. Capital expenditures at our Las Vegas Strip Resorts, Regional Operations and corporate entities of $593 million included $49 million related to the construction of MGM Springfield, $52 million related to the Park MGM rebranding project, as well as expenditures relating to information technology, the expansion of the convention center at MGM Grand Las Vegas and various room, restaurant, and entertainment venue remodels.
In 2018, we made capital expenditures of $1.5 billion, of which $376 million related to MGM China, excluding development fees and capitalized interest on development fees eliminated in consolidation. Capital expenditures at MGM China included $340 million related to the construction of MGM Cotai and $36 million related to projects at MGM Macau. Capital expenditures at our Las Vegas Strip Resorts, Regional Operations and corporate entities of $1.1 billion included $368 million related to the construction of MGM Springfield, $228 million related to the Park MGM rebranding project, as well as expenditures relating to the expansion of the convention center at MGM Grand Las Vegas and various room, restaurant, and entertainment venue remodels.
Financing activities. Cash used in financing activities was $4.5 billion in 2019 compared to cash provided by financing activities of $389 million in 2018. The change was due primarily to net debt repayments of $4.1 billion in 2019 compared to net debt borrowings of $2.2 billion in 2018, partially offset by proceeds from MGP’s issuances of Class A shares in 2019 of $1.3 billion and a decrease of $252 million in share repurchases.
Borrowings and Repayments of Long-term Debt
In 2019, we repaid net debt of $4.1 billion which consisted of the repayment of our $850 million 8.625% notes due 2019, the repayment of an aggregate $2.8 billion of our senior notes, as described below, $750 million of net repayments on our senior credit facility, $1.1 billion of net repayments on the Operating Partnership’s senior credit facility, and $1.8 billion of net repayments on the current and previous MGM China senior secured credit facilities, partially offset by our issuance of $1.0 billion of our senior notes, the Operating Partnership’s issuance of $750 million of senior notes, and MGM China’s issuance of $1.5 billion of senior notes.
In April 2019, we issued $1.0 billion in aggregate principal amount of 5.5% senior notes due 2027. We used the net proceeds from the offering to fund the purchase of $639 million in aggregate principal amount of our outstanding 6.75% senior notes due 2020 and $233 million in aggregate principal amount of our outstanding 5.25% senior notes due 2020 through our cash tender offers. In December 2019, we used a portion of the net proceeds from the Bellagio Sale-Leaseback Transaction to redeem for cash the remaining $267 million principal amount of its outstanding 5.25% senior notes due 2020, the remaining $361 million principal amount of its outstanding 6.75% senior notes due 2020, all $1.25 billion principal amount of its outstanding 6.625% senior notes due 2021, permanently repay the $750 million outstanding on our term loan A facility, and fully repay amounts outstanding under our revolving credit facility.
In May 2019, MGM China issued $750 million in aggregate principal amount of 5.375% senior notes due 2024 and $750 million in aggregate principal amount of 5.875% senior notes due 2026 and used the proceeds to permanently repay approximately $1.0 billion on its term loan facility with the remainder used to pay down its revolving credit facility under its prior senior secured credit facility. In August 2019, MGM China entered into a new $1.25 billion senior unsecured revolving credit facility, on which it drew $776 million and used the proceeds to fully repay the borrowings outstanding under its previous senior secured credit facility.
In November 2019, the Operating Partnership used the proceeds from its November 2019 Class A share issuance to prepay $65 million on the term loan A facility and $476 million on the term loan B facility, which reflects all scheduled amortization plus additional principal, and fully repaid the outstanding balance on its revolving credit facility. The proceeds from the Operating Partnership’s issuance of $750 million 5.75% senior notes due 2027 in January 2019 along with the proceeds from MGP’s January 2019 Class A share issuance were primarily used to finance MGP’s acquisition of the real property associated with Empire City and finance the Park MGM Lease Transaction.
In 2018, we borrowed net debt of $2.2 billion which primarily consisted of the issuance of $1.0 billion 5.75% senior notes due 2025, $368 million of net borrowings on our senior credit facility, $137 million of net borrowings on the MGM China credit facility, and $728 million of net borrowings on the Operating Partnership senior credit facility. Additionally, we paid $77 million of debt issuance costs related to the amendments of the Operating Partnership’s senior credit facility in March and June 2018, the amendment of MGM China’s credit facility in June 2018, the amendment of our senior credit facility in December 2018, and the issuance of the $1.0 billion 5.75% senior notes.
Dividends, Distributions to Noncontrolling Interest Owners and Share Repurchases
In May 2018, our Board of Directors authorized a $2.0 billion stock repurchase program and completed the previously announced $1.0 billion stock repurchase program. In 2019, we repurchased and retired $1.0 billion of our common stock pursuant to our current $2.0 billion stock repurchase plan. In 2018, we repurchased and retired $1.3 billion of our common stock pursuant to our current and prior stock repurchase plan. The remaining availability under our $2.0 billion stock repurchase program was approximately $357 million as of December 31, 2019.
In 2019, MGM China paid dividends of $62 million, of which we received $35 million and noncontrolling interests received $27 million. In 2018, MGM China paid dividends of $78 million, of which we received $44 million and noncontrolling interests received $34 million.
During 2019, we paid dividends each quarter of $0.13 per share, totaling $271 million for the year. During 2018, we paid dividends each quarter of $0.12 per share, totaling $261 million for the year.
The Operating Partnership paid the following distributions to its partnership unit holders during 2019 and 2018:
| • | $534 million of distributions paid in 2019, of which we received $372 million and MGP received $162 million, which MGP concurrently paid as a dividend to its Class A shareholders; |
|---|
| • | $454 million of distributions paid in 2018, of which we received $333 million and MGP received $121 million, which MGP concurrently paid as a dividend to its Class A shareholders. |
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Other Factors Affecting Liquidity
Anticipated sources and uses of cash. We require a certain amount of cash on hand to operate our resorts. In addition to required cash on hand for operations, we utilize corporate cash management procedures to minimize the amount of cash held on hand or in banks. Funds are swept from the accounts at most of our domestic resorts daily into central bank accounts, and excess funds are invested overnight or are used to repay borrowings under our credit facility. We have significant outstanding debt, rent payments, interest payments, and contractual obligations in addition to planned capital expenditures (and required capital expenditures pursuant to the terms of our long-term leases). In addition, we plan to repurchase our outstanding debt and equity securities subject to limitations in our credit facility and Delaware law, as applicable.
We held cash and cash equivalents of $2.3 billion at December 31, 2019, of which MGM China held $420 million and the Operating Partnership held $202 million. At December 31, 2019, we had $11.3 billion in principal amount of indebtedness, including $1.7 billion outstanding under the $3.1 billion Operating Partnership credit facility, and $667 million outstanding under the $1.25 billion MGM China revolving credit facility. We expect to meet our debt maturities and planned equity repurchases and capital expenditure requirements with future anticipated operating cash flows, cash and cash equivalents, proceeds from the MGP BREIT Venture Transaction, MGP’s cash redemption of our Operating Partnership units, and available borrowings under our credit facilities. We expect to make domestic capital investments at our resorts and corporate entities of $410 million to $420 million. Additionally, we expect to make capital investments at MGM China of $195 million to $205 million.
As part of the MGP BREIT Venture Transaction, the consideration to us for the real estate assets of MGM Grand Las Vegas included, among other things, $2.4 billion of cash. Further, in connection with the waiver agreement signed in February 2019, we have the ability to exercise our right to receive cash for up to $1.4 billion of our Operating Partnership units. With the proceeds from the MGP BREIT Venture Transaction and the cash we expect to receive for redemption of the Operating Partnership units, we plan to repurchase debt and equity securities, as discussed further below. Additionally, in connection with the MGP BREIT Venture Transaction, we entered into an unsecured credit agreement, comprised of a $1.5 billion unsecured revolving facility that matures in February 2025.
Subsequent to the year ended December 31, 2019, we repurchased 11 million shares of our common stock pursuant to our $2.0 billion share repurchase program at an average price of $32.57 per share for an aggregate amount of $354 million. Repurchased shares will be retired.
On February 12, 2020, we announced that our Board of Directors adopted a $3.0 billion stock repurchase program. On February 13, 2020, we announced cash tender offers to acquire up to $1.25 billion in aggregate purchase price of our issued and outstanding common stock through a modified “Dutch auction” tender offer at a price not greater than $34 nor less than $29 per share, in cash, less any applicable withholding taxes and without interest, upon the terms and subject to the conditions described in the offer to purchase dated February 13, 2020, and in the related letter of transmittal and other related materials. The tender offer is scheduled to expire on March 12, 2020, unless extended or terminated.
On February 18, 2020, we commenced cash tender offers to purchase up to $750 million in aggregate principal amount of our outstanding 5.75% senior notes due 2025, 4.625% senior notes due 2026, and 5.5% senior notes due 2027. Holders of notes that are tendered by March 2, 2020 will receive the tender offer consideration plus an early tender premium. The tender offers will expire on March 16, 2020, unless extended or earlier terminated by us. We intend to fund the tender offers with the net cash proceeds from the MGP BREIT Venture Transaction, and, if necessary, cash on hand or borrowings under our revolving credit facility.
On February 12, 2020, the Board of Directors approved a quarterly dividend to holders of record on March 10, 2020 of $0.15 per share, which will be paid on March 16, 2020. In January 2020, the Operating Partnership paid $147 million of distributions to its partnership unit holders, of which we received $94 million and MGP received $53 million, which MGP concurrently paid as a dividend to its Class A shareholders.
As discussed in Executive Overview, due to of the outbreak of a novel coronavirus (Covid-19) primarily concentrated in China and the resulting impacts on visitation to Macau, we expect material declines in MGM China’s operating results during the first quarter of 2020 and potentially thereafter. Additionally, to the extent that the virus impacts the willingness or ability of customers to travel to our properties in the United States (due to travel restrictions, or otherwise), our domestic results of operations could also be negatively impacted. We are continuing to evaluate the nature and extent of the impacts to our business, which could have a material effect on our consolidated operating results for the first quarter of 2020 and potentially thereafter. Given the uncertain nature of these circumstances, the related impact on our results of operations, cash flows and financial condition cannot be reasonably estimated at this time.
Principal Debt Arrangements
See Note 9 to the accompanying consolidated financial statements for information regarding our debt agreements as of December 31, 2019.
Off Balance Sheet Arrangements
As of December 31, 2019, our off-balance sheet arrangements consist primarily of purchase obligations, disclosed below, and our variable interest in unconsolidated affiliates, which is our investment in Bellagio BREIT Venture. See Note 2 to the accompanying consolidated financial statements for additional information relating to our exposure to risks associated with our variable interest.
Commitments and Contractual Obligations
The following table summarizes our scheduled contractual obligations as of December 31, 2019:
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | ||||||||||||||||||||||||||||
| Long-term debt(1) | $ | — | $ | — | $ | 1,000 | $ | 1,649 | $ | 2,467 | $ | 6,155 | $ | 11,271 | ||||||||||||||
| Estimated interest payments on long-term debt(2) | 638 | 638 | 600 | 511 | 378 | 498 | 3,263 | |||||||||||||||||||||
| Construction commitments | 31 | — | — | — | — | — | 31 | |||||||||||||||||||||
| Operating lease liabilities(3) | 346 | 324 | 314 | 316 | 321 | 10,067 | 11,688 | |||||||||||||||||||||
| Finance lease liabilities(3) | 30 | 27 | 25 | 17 | — | — | 99 | |||||||||||||||||||||
| Other long-term liabilities(4) | — | 43 | 7 | — | — | 32 | 82 | |||||||||||||||||||||
| Other purchase obligations(5) | 109 | 35 | 24 | 1 | — | — | 169 | |||||||||||||||||||||
| $ | 1,154 | $ | 1,067 | $ | 1,970 | $ | 2,494 | $ | 3,166 | $ | 16,752 | $ | 26,603 |
| (1) | Reflects scheduled amortization payments and debt maturities. Refer to Note 9 for further information on long-term debt. |
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| (2) | Estimated interest payments, including the impact of interest rate swap agreements, are based on principal amounts and expected maturities of debt outstanding at December 31, 2019. |
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| (3) | Refer to Note 11 for further information on our leases. |
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| (4) | Reflects future expected cash outlays of our other long-term liabilities recorded on our balance sheet as of December 31, 2019, and, accordingly, we have not included such liabilities above that do not have future cash payments, such as deferred rent. We have also excluded contingent consideration related to the Empire City acquisition, general liability and workers compensation insurance claims, deferred income tax liabilities and unrecognized tax benefits from the amounts presented in the table as the amounts that will be settled in cash are not known or contingent upon certain future events occurring, and the timing of any payments is uncertain. |
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| (5) | Our purchase obligations represent minimum obligations we have under agreements with certain of our vendors, primarily advertising and entertainment contracts. Also, although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services, and hence, have not been included in the table above. |
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Critical Accounting Policies and Estimates
Management’s discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements. To prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, we must make estimates and assumptions that affect the amounts reported in the consolidated financial statements. We regularly evaluate these estimates and assumptions, particularly in areas we consider to be critical accounting estimates, where changes in the estimates and assumptions could have a material effect on our results of operations, financial position or cash flows. However, by their nature, judgments are subject to an inherent degree of uncertainty and therefore actual results can differ from our estimates.
Allowance for Doubtful Casino Accounts Receivable
Marker play represents a significant portion of the table games volume at certain of our Las Vegas resorts. Our other casinos do not emphasize marker play to the same extent, although we offer markers to customers at those casinos as well. MGM China extends credit to certain in-house VIP gaming customers and gaming promoters. We maintain strict controls over the issuance of markers and aggressively pursue collection from our customers who fail to pay their marker balances timely. These collection efforts are similar to those used by most large corporations when dealing with overdue customer accounts, including the mailing of statements and delinquency notices, personal contacts, the use of outside collection agencies and civil litigation. Markers are generally legally enforceable instruments in the United States and Macau. Markers are not legally enforceable instruments in some foreign countries, but the United States assets of foreign customers may be reached to satisfy judgments entered in the United States. We consider the likelihood and difficulty of enforceability, among other factors, when we issue credit to customers at our domestic resorts who are not residents of the United States. MGM China performs background checks and investigates the credit worthiness of gaming promoters and casino customers prior to issuing credit. Refer to Note 2 for further discussion of the Company’s casino receivables and those due from customers residing in foreign countries.
We maintain an allowance, or reserve, for doubtful casino accounts at all of our operating casino resorts. The provision for doubtful accounts, an operating expense, increases the allowance for doubtful accounts. We regularly evaluate the allowance for doubtful casino accounts. At domestic resorts where marker play is not significant, the allowance is generally established by applying standard reserve percentages to aged account balances. At domestic resorts where marker play is significant, we apply standard reserve percentages to aged account balances under a specified dollar amount and specifically analyze the collectability of each account with a balance over the specified dollar amount, based on the age of the account, the customer’s financial condition, collection history and any other known information. MGM China specifically analyzes the collectability of casino receivables on an individual basis taking into account the age of the account, the financial condition and the collection history of the gaming promoter or casino customer.
In addition to enforceability issues, the collectability of unpaid markers given by foreign customers at our domestic resorts is affected by a number of factors, including changes in currency exchange rates and economic conditions in the customers’ home countries. Because individual customer account balances can be significant, the allowance and the provision can change significantly between periods, as information about a certain customer becomes known or as changes in a region’s economy occur.
The following table shows key statistics related to our casino receivables, net of discounts:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Casino receivables | $ | 394,163 | $ | 419,127 | ||||
| Allowance for doubtful casino accounts receivable | 88,338 | 85,544 | ||||||
| Allowance as a percentage of casino accounts receivable | 22 | % | 20 | % |
Approximately $77 million and $48 million of casino receivables and $16 million and $12 million of the allowance for doubtful casino accounts receivable relate to MGM China at December 31, 2019 and 2018, respectively. The allowance for doubtful accounts as a percentage of casino accounts receivable increased in the current year due to an increase in the age of outstanding account balances at our domestic resorts. At December 31, 2019, a 100 basis-point change in the allowance for doubtful accounts as a percentage of casino accounts receivable would change income before income taxes by $4 million.
Fixed Asset Capitalization and Depreciation Policies
Property and equipment are stated at cost. A significant amount of our property and equipment was acquired through business combinations and was therefore recognized at fair value at the acquisition date. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. When we construct assets, we capitalize direct costs of the project, including fees paid to architects and contractors, property taxes, and certain costs of our design and construction subsidiaries. In addition, interest cost associated with major development and construction projects is capitalized as part of the cost of the project. Interest is typically capitalized on amounts expended on the project using the weighted-average cost of our outstanding borrowings. Capitalization of interest starts when construction activities begin and ceases when construction is substantially complete or development activity is suspended for more than a brief period.
We must make estimates and assumptions when accounting for capital expenditures. Whether an expenditure is considered a maintenance expense or a capital asset is a matter of judgment. When constructing or purchasing assets, we must determine whether existing assets are being replaced or otherwise impaired, which also may be a matter of judgment. In addition, our depreciation expense is highly dependent on the assumptions we make about our assets’ estimated useful lives. We determine the estimated useful lives based on our experience with similar assets, engineering studies, and our estimate of the usage of the asset. Whenever events or circumstances occur which change the estimated useful life of an asset, we account for the change prospectively.
Impairment of Long-lived Assets, Goodwill and Indefinite-lived Intangible Assets
We evaluate our property and equipment and other long-lived assets for impairment based on our classification as held for sale or to be held and used. Several criteria must be met before an asset is classified as held for sale, including that management with the appropriate authority commits to a plan to sell the asset at a reasonable price in relation to its fair value and is actively seeking a buyer. For assets classified as held for sale, we recognize the asset at the lower of carrying value or fair market value less costs of disposal, as estimated based on comparable asset sales, offers received, or a discounted cash flow model. For assets to be held and used, we review for impairment whenever indicators of impairment exist. We then compare the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is recorded based on the fair value of the asset. For operating assets, fair value is typically measured using a discounted cash flow model whereby future cash flows are discounted using a weighted-average cost of capital, developed using a standard capital asset pricing model, based on guideline companies in our industry. If an asset is still under development, future cash flows include remaining construction costs. All recognized impairment losses, whether for assets to be held for sale or assets to be held and used, are recorded as operating expenses.
There are several estimates, assumptions and decisions in measuring impairments of long-lived assets. First, management must determine the usage of the asset. To the extent management decides that an asset will be sold, it is more likely that an impairment may be recognized. Assets must be tested at the lowest level for which identifiable cash flows exist. This means that some assets must be grouped, and management has some discretion in the grouping of assets. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates.
On a quarterly basis, we review our major long-lived assets to determine if events have occurred or circumstances exist that indicate a potential impairment. Potential factors which could trigger an impairment include underperformance compared to historical or projected operating results, negative industry or economic factors, significant changes to our operating environment, or changes in intended use of the asset group. We estimate future cash flows using our internal budgets and probability weight cash flows in certain circumstances to consider alternative outcomes associated with recoverability of the asset group, including potential sale. Historically, undiscounted cash flows of our significant operating asset groups have exceeded their carrying values by a substantial margin. During 2019, we recorded a non-cash impairment charge relating to the carrying value of Circus Circus Las Vegas and adjacent land. Refer to Note 16 for further discussion.
We review indefinite-lived intangible assets at least annually and between annual test dates in certain circumstances. We perform our annual impairment test for indefinite-lived intangible assets in the fourth quarter of each fiscal year. Indefinite-lived intangible assets consist primarily of license rights and trademarks. For our 2019 annual impairment tests, we utilized the option to perform a qualitative (“step zero”) analysis for certain of our indefinite-lived intangibles and concluded it was more likely than not that the fair values of such intangibles exceeded their carrying values by a substantial margin. We elected to perform a quantitative analysis for the Borgata trade name using the relief-from-royalty method, for which the fair value exceeded its carrying value by approximately 11% in 2019. We also elected to perform a quantitative analysis for the Northfield gaming license in 2019 primarily using the discounted cash flow approach, for which the fair value exceeded its carrying value by a substantial margin. As discussed below, management makes significant judgments and estimates as part of these analyses. If certain future operating results do not meet current expectations it could cause carrying values of the intangibles to exceed their fair values in future periods, potentially resulting in an impairment charge.
We review goodwill at least annually and between annual test dates in certain circumstances. None of our reporting units incurred any goodwill impairment charges in 2019. For our 2019 annual impairment tests, we utilized the option to perform a step zero analysis for certain of our reporting units and concluded it was more likely than not that the fair values of such reporting units exceeded their carrying values by a substantial margin. For reporting units for which we elected to perform a quantitative analysis, the fair value of such reporting units exceeded their carrying value by a substantial margin. As discussed below, management makes significant judgments and estimates as part of these analyses. If future operating results of our reporting units do not meet current expectations it could cause carrying values of our reporting units to exceed their fair values in future periods, potentially resulting in a goodwill impairment charge.
There are several estimates inherent in evaluating these assets for impairment. In particular, future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. In addition, the determination of multiples, capitalization rates and the discount rates used in the impairment tests are highly judgmental and dependent in large part on expectations of future market conditions.
See Note 2 and Note 7 to the accompanying consolidated financial statements for further discussion of goodwill and other intangible assets.
Impairment of Investments in Unconsolidated Affiliates
See Note 2 to the accompanying consolidated financial statements for discussion of our evaluation of other-than-temporary impairment of investments in unconsolidated affiliates. Our investments in unconsolidated affiliates had no material impairments in 2019, 2018, or 2017.
Income Taxes
We recognize deferred tax assets, net of applicable reserves, related to net operating loss and tax credit carryforwards and certain temporary differences with a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.
We file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and foreign jurisdictions, although the income taxes paid in foreign jurisdictions are not material. Our income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities. Positions taken in tax returns are sometimes subject to uncertainty in the tax laws and may not ultimately be accepted by the IRS or other tax authorities. See Note 10 in the accompanying consolidated financial statements for a discussion of the status and impact of examinations by tax authorities.
We assess our tax positions using a two-step process. A tax position is recognized if it meets a “more likely than not” threshold and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized. Uncertain tax positions must be reviewed at each balance sheet date. Liabilities we record as a result of this analysis are recorded separately from any current or deferred income tax accounts and are classified as current in “Other accrued liabilities” or long-term in “Other long-term liabilities” based on the time until expected payment. Additionally, we recognize accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Refer to Note 10 in the accompanying consolidated financial statements for further discussion relating to income taxes.
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