3 Things Las Vegas and MGM Resorts International Investors Should Know Right Now

By Markets Fool.com

MGM Resorts International has seemed like one of the best bets in the gaming industry for the last three quarters. WhileLas Vegas Sands and Wynn Resorts each suffered from their heavy bets in Macau -- where recent gaming revenue growth has declined dramatically -- MGM experienced increased revenue in its largest segment, Las Vegas.

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As we wait for these major industry players to report their Q1 earnings in the coming weeks, prudent gaming investors should especially keep their eyes and ears open to three specific issues facing MGM in the year ahead.

1. The next Las Vegas trend
Gaming companies have been making headlines recently with their plans to convert their properties into more tax-efficient real estate investment trusts(REITs). REITs don't pay income taxes like regular companies, and instead can send more of their EBITDA to net income and back to shareholders. In fact, they are required to pay 90% of income to shareholders, meaning these conversions could be pretty lucrative for investors.

The Las Vegas behemoth Caesars Entertainment is currently undergoing bankruptcy proceedings for its largest operating segment, and part of the restructuring plan (still pending legal approval) is to convert many of the company's properties into a separate REIT. This conversion would allow the REIT subsidiary to then lease those properties back to the parent company for regular casino and resort operations.

Other companies in the industry have made recent announcements and offers to do similar conversions, and now some MGM investors, with plenty of public voice, want the same thing. On March 17, MGM shares got a small boost when one of the company's activist investors started publicly encouraging MGM management to discuss turning the company's land assets into a REIT. Even though this particular investor is a small player with around 1% stake of the company, the report caused enough stir in the press and stock price to show that this is more than just outside noise.

In fact, MGM management has already been considering this kind of action , and CEO James Murren even talked about REITs in the most recent earnings call actually stating that its something he and his management team have discussed and considered. However, as of now there has been nothing definitive on the subject.

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Because REIT conversions are becoming more of a Las Vegas trendand could potentially drive share prices higher, this is definitely a story current and potential investors will want to watch in the next earnings calls.

2. The new casino in Maryland coming soon -- but with too much debt
Las Vegas has started to emerge once again as an industry growth driver partially due to an improving U.S. economy, with rising consumer spending up2.2% year over year in 2014. In fact, MGM experienced record-setting visitation in 2014 at its Las Vegas properties as leisure travel spending increased, too.

A rendered view of what the National Harbor resort will look like. Source: MGM Resorts.

To capitalize further on these spending trends, MGM is making its next big bet not in Las Vegas, but in Maryland. MGM's comingNational Harbor resort will reside on a 1.7-million-square-foot property not far from Washington D.C.

This expansion comes with a hefty price tag, and one key metric to watch in the coming quarter and year is how much more debt MGM will assume with this project and its other near-future expansions. The company has already taken on extra debt during Q4 last year, making it the most highly leveraged gaming company in the industry (second to Caesars now).

With this new Maryland casino, a new one coming to Macau, and still another one planned for Massachusetts in 2017, investors should consider what more expansion means for the company's overall debt load and track earnings to ensure that MGM is not taking the same dangerous path as Caesars.

3. Can MGM make the right move in Macau?
Poor gaming revenues stemming from a crackdown on corruption and money laundering in Macau have been a major drag on the entire industry in the second half of 2014. Las Vegas Sands and Wynn Resorts have especially suffered since both receive nearly two-thirds of their revenue from Macau. Fortunately for now, only a third of MGM's global revenue comes from Macau, so MGM has taken less of a beating.

Despite recent declines, Macau still looks very promising for these companies in one aspect: Whereas the VIP gaming segment has historically been the main revenue driver in Macau, the mass market in Macau, driven by the growing middle class in China, continues to grow.

In the most recent quarter, MGM had already converted much of its gaming focus in Macau to mass-market gaming, now with about 50% of its gaming tables geared toward mass-market consumers. As MGM prepares to bring its newest Macau resort online next year, investors should track if MGM can catch this growing mass-market trend by reporting rising mass-market revenue increases there.

So is MGM a good bet now?
These three issues will make for an interesting MGM story this year as we watch REIT interest grow and wait for more news from Macau and its mass market. However, investing in MGM now, before these potentially interesting things actually pan out, might be too risky of a bet. With high levels of debt and uncertainty as to how well the company's new U.S. resorts will do, not to mention MGM's very high price-to-earnings ratio (55 times earnings) compared to Wynn (18 times earnings) and Las Vegas Sands (just 15 times earnings), MGM looks like a company to watch now for a future bet instead.

The article 3 Things Las Vegas and MGM Resorts International Investors Should Know Right Now originally appeared on Fool.com.

Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool is short Caesars Entertainment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.