Q3 2023 Mohegan Gaming & Entertainment Earnings Call

Participants

Carol K. Anderson; Senior VP & CFO; Mohegan Gaming & Entertainment

Jody Madigan; COO; Mohegan Gaming & Entertainment

Raymond Pineault; President & CEO; Mohegan Gaming & Entertainment

Thayne D. Hutchins; Treasurer & Member of Management Board; Mohegan Gaming & Entertainment

David Levine; VP; MidOcean Partners LLP

David Richard Hargreaves; Research Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division

Luis Ricardo Chinchilla; Research Analyst; Deutsche Bank AG, Research Division

Presentation

Operator

Greetings. Welcome to Mohegan's Third Quarter 2023 Earnings Call. (Operator Instructions) Please note this conference is being recorded. At this time, I'll now turn the conference over to Thayne Hutchins, Treasurer for the Mohegan Tribe. Thayne, you may now begin.

Thayne D. Hutchins

Thank you, Rob. Good morning, everyone, and thank you for participating in our call. Joining me today are Ray Pineault, our CEO; Jody Madigan, our COO; and Carol Anderson, our CFO.
Before we begin, I would like to remind everyone that our comments today may contain forward-looking statements made under the safe harbor provisions of the federal securities laws, and actual results may differ materially from any predictions contained in these statements.
In addition, our comments may refer to non-GAAP financial measures. A reconciliation of these measures to our corresponding GAAP financial measures can be found in our press release, which is available on our website under the Investor Relations section at www.mohegangaming.com.
On behalf of the Mohegan Tribal Council and management board, I would like to congratulate the Mohegan team on another outstanding quarter. Our properties performed well, and our digital operations continued to exceed expectations. I would also like to thank all our team members for helping Mohegan achieve the rank of 85th on Newsweek's 2023 Global Top 100 Most Loved Workplaces list. The results were determined after serving more than 2 million team members in analyzing businesses around the globe.
The five critical areas measured to gauge team member segment were: how positive workers feel about their future at the company, career achievement, how much employer values align with employee values, respect at all levels and the level of collaboration at the firm.
In addition, areas such as inclusion, diversity, equity and belonging, career development and company leadership were identified and analyzed.
It's an honor to be included on the list, which reflects the workplace culture and environment guided by the spirit of (inaudible) that we strive to embody at Mohegan.
With that, let me turn the call over to our CEO, Ray Pineault.

Raymond Pineault

Thank you, Thayne. Good morning, everyone, and thank you for joining our fiscal 2023 quarter earnings call. After I provide a few brief opening remarks, I'll turn the call over to Jody to provide a review of our operating results. Carol will then provide a financial update. We will then open up the call for questions.
First, I'd like to express my thanks and gratitude to our best-in-class hard-working and dedicated team without whom we would not have achieved tremendous recognition, Treasurer Thayne Hutchins acknowledged.
Earlier today, we posted the earnings release and the supplemental earnings deck for the quarter ended June 30, 2023, on our website. As for our results, I'm extremely pleased with the performance of all our entities. Although Jody will detail a slight year-over-year decline, we did experience quarterly sequential growth while facing exceptionally difficult year-over-year comparison with the prior year quarter, representing our highest quarter adjusted EBITDA in the history of the organization.
Despite the difficult comparison, we still achieved adjusted EBITDA of $108.7 million, our third best quarter in our history. As I mentioned, Jody will provide you with greater details in a few moments.
Our digital operations continued to help drive Mohegan's growth. Mohegan Digital, Connecticut's online net casino gaming win was $42.8 million this period compared to $26 million in the prior year, an increase of approximately 65%.
In addition, adjusted EBITDA was $12.1 million for the period, an increase of $4.2 million from the prior year.
Mohegan Digital Connecticut achieved strong growth over the prior year, which included the benefit from a one-time cumulative update to the revenue share allocation from our digital partner.
In Canada, registrations on our digital platform increased 40% on a quarterly sequential basis, and gross gaming revenue increased 20% for the same period. The monthly average revenue per user also continues to outperform the Ontario market average.
In addition, work continues on our Momentum Reward program, which will allow iGaming customers to earn rewards that can be redeemed at our bricks-and-mortar casinos, creating a substantial competitive advantage for Mohegan in the Ontario iGaming market.
In South Korea, construction of Mohegan INSPIRE continues to progress well. Project completion was approximately 89% at the end of June. Procurement of major trades and long lead items is 99% complete. We anticipate project completion and non-gaming opening in the latter part of 2023 with the casino opening shortly thereafter upon licensing.
Turning to New York. As mentioned on our previous call, Mohegan has partnered with Solo VF Group in a bid for a casino license in New York City. The proposed development known as Freedom Plaza is located on Manhattan's East side and is intended to become an entertainment district offering a world-class casino, a luxury hotel, residential towers and other exciting amenities.
If our joint bid is successful, Mohegan will be responsible for co-developing and operating the casino and resort portion of the project.
As noted in the past, due to our confidentiality commitment to our partner, we cannot discuss any details regarding the deal structure. However, we will disclose more information in the coming quarters as we were able to.
With that, I'd like to turn it over to Jody.

Jody Madigan

Thank you, Ray, and good morning, everyone. In Mohegan Sun in Connecticut, net revenues of $230.7 million, decreased $5.8 million or 2.5% from the prior year. Gaming revenues decreased $9.5 million or 6% compared with the prior year, primarily due to lower slot and table gaming volumes, which were partially offset by strong non-gaming growth during the period.
Non-gaming revenues increased $3.7 million or 4.7% over the prior year, primarily driven by food and beverage revenues, which increased $1.7 million or 7.5%; and entertainment revenues, which increased $1.4 million or 13.2%.
The growth in entertainment revenues reflects a higher average ticket price and the quality acts that performed in the arena during the period that included Kenny Chesney, Thomas Watt, Brian Adams and Chicago.
Hotel revenues increased by $381,000 or 1.6% over the prior year, and the hotels achieved a quarterly ADR of 157 and occupancy of 96%. The property generated adjusted EBITDA of $68.5 million and an adjusted EBITDA margin of 29.7%.
At Mohegan Pennsylvania, net revenues of $65.2 million decreased $1.5 million or 2.3% from the prior year. The decrease was primarily attributed to lower slot and table winnings volumes and partially offset by stronger non-gaming growth.
Non-gaming revenues increased 9.4%, driven by higher food, beverage and hotel revenues.
Adjusted EBITDA was $14.1 million with an adjusted EBITDA margin of 21.6%.
The Niagara Resorts generated net revenues of $81.1 million and grew $1.5 million or 1.8% compared with the prior year. Gaming revenues, which were net of gaming taxes, were $54 million, a decrease of 8.8% while non-gaming revenues of $27.1 million increased [13.8%] over the prior year. The strong non-gaming growth is attributed to the continued ramp of non-gaming amenities, including the recently opened OLG Stage entertainment venue.
Niagara Resort's adjusted EBITDA was $14 million for the quarter with an adjusted EBITDA margin of 17.3%.
At Ilani in Washington, net revenues were flat to prior year. Gaming revenues were down 1.1%, primarily due to a decrease in slot volumes during the period. As a result, slot revenues decreased 3.4%. However, a 3.6% increase in table game revenues helped to offset the slot volume impact. Non-gaming revenues grew 6.4%, primarily due to the continued growth in food and beverage revenue in the addition of ilani's new hotel, which opened in April.
Atlantic City Resorts Casino's hotel net revenues decreased 2.1% compared to prior year as the property experienced a slight decrease in gaming volume, which was partially offset by increase in non-gaming revenues. Lower table hold compared with the prior year period also contributed to the decrease in gaming revenues.
The increase in non-gaming revenues were primarily driven by growth in food, beverage and hotel revenues.
At Mohegan Casino Las Vegas, net revenues were down $1.3 million or 16.3% compared with the prior year, primarily due to unfavorable table game hold percentage. Adjusted EBITDA of $389,000 was down $375,000 or nearly 49.1%.
With that, I will now hand it over to Carol for a review of some of our other financial information.

Carol K. Anderson

Thank you, Jody, and good morning, everyone. I would like to start with a few highlights from our operating results for the quarter. Consolidated net revenues of $415.4 million decreased 0.4% and consolidated adjusted EBITDA of $108.7 million decreased 9.5% year-over-year. Our consolidated adjusted EBITDA margin of 26.2% was 268 basis points higher than the pre-COVID June 2019 quarter and 262 basis points lower than the prior year quarter.
At our Connecticut property, the adjusted EBITDA margin of 29.7% was 289 basis points higher than the pre-COVID June 2019 quarter and 232 basis points lower than the prior year quarter.
In Pennsylvania, the adjusted EBITDA margin of 21.6% was relatively flat at 26 basis points lower than the pre-COVID June 2019 quarter and 81 basis points lower than the prior year quarter.
Niagara Resorts adjusted EBITDA margin of 17.3% was 175 basis points higher than the pre-COVID June 2019 quarter and 732 basis points lower than the prior year quarter, reflecting the continued ramp of non-gaming amenities that operate at a lower margin.
Before going over the balance sheet summary, I would like to mention the recent refinancing transaction related to our Canadian operations. On August 8, we completed an extension of the Niagara Resorts credit agreement. The new facility size is CAD 265 million and the maturity has been extended to August [2026]. That facility is comprised of a CAD 85 million revolving facility, which includes a $15 million swing line component and a $35 million letter of credit issued to the Ontario Lottery and Gaming Corporation. It also includes an CAD 80 million term loan and a new CAD 100 million return of capital loans.
A portion of the proceeds from this transaction were used to provide a return of capital payment of CAD 60 million or approximately USD 45 million directly back to Mohegan. The return of capital to Mohegan represents a repayment of substantially all of its initial investment in the Niagara Resorts.
Additionally, these funds will provide a direct benefit to the restricted group and will help mitigate the remaining investment in Mohegan INSPIRE.
In relation to this transaction, on July 31, the convertible debenture holder exercised its option under the convertible debenture to convert that loan into a 40% equity ownership in MGE Niagara Entertainment, Inc. which is the legal entity that operates the Niagara Resort.
On the balance sheet. At quarter end, cash and cash equivalents totaled $188.2 million. Total debt including capital leases and excluding unamortized debt issuance cost and discounts was $3.1 billion, up $218.7 million from $2.88 billion in the March quarter. The increase primarily relates to the financing activity for the development of Mohegan INSPIRE, including additional draws under the project finance facility.
The total leverage ratio under the Mohegan credit agreement was 5.14x, a decrease of 0.02x from the end of the March quarter.
We had $32 million drawn on our $263 million revolver. And after factoring in approximately $2.8 million in outstanding letters of credit, we had approximately $228 million available for borrowing under the Mohegan credit facility.
As previously announced, we agreed to make additional investments of up to KRW 155 billion or approximately USD 119 million in the aggregate to fund costs to complete Mohegan INSPIRE. Approximately KRW 30 billion or USD 24 million was contributed in June, and we anticipate making the remaining investments of up to KRW 89 billion or approximately USD 67 million in the near term.
From a cash flow perspective, distributions to the Tribe totaled $17.5 million for the quarter.
And capital expenditures totaled $273.1 million for the quarter with the majority related to development costs of Mohegan INSPIRE.
I'm also very pleased to announce that we issued our inaugural environmental, social and governance report in June. The report provides an overview of our ESG Committee and framework and includes spotlights on key areas of our ESG strategy, such as sustainability initiatives, community involvement, inclusion programs and responsible gaming practices. The ESG report is available on our website at www.mohegangaming.com/esg.
Lastly, I would like to announce that we are planning to host an Investor Day on Thursday, September 21, at Mohegan Sun in Connecticut. A live video broadcast of the event will also be available for streaming. The registration link will be provided to investors along with further details in the coming weeks.
Now we will open up the call for questions. I'll turn things over to Rob, our operator.

Question and Answer Session

Operator

(Operator Instructions) And our first question is comes from the line of Ricardo Chinchilla with Deutsche Bank.

Luis Ricardo Chinchilla

Congrats on the refinancing on the Canadian facility. On that front, could you please comment on the ability, given the new debt there to send distributions to support the restricted group, if there are any limitations that we should be aware of? And if you guys have decided on any distribution policy with your partner over there?
And given that effectively on July 17, you lost your line of credit and there will be a step-down on the revolver commitment next year, if you guys are looking for additional means of liquidity or if you guys feel like you're okay with what you would have next year?

Carol K. Anderson

Sure. I will take all of those components, Ricardo. Hopefully, I've caught all of them on the Niagara front. We are no longer subject to that 4-quarter test period that was previously blocking distributions out of Niagara as we came out of the post-COVID ramp. Right now, the governors are in relation to pro forma compliance with the financial covenants contained in that credit agreement, which includes total leverage ratio and a fixed charge coverage ratio.
I think from an overall cash flow perspective, we continue to see positive signs from the Niagara property. So we will look to take cash out of the Niagara properties when it is prudent to do so.
From a line of credit perspective, that line of credit, I would describe it as a link into the revolving credit facility itself, almost effectively utilized as a swing line component of that revolver.
From an overall liquidity perspective, right, given the drawn position that we're in and given the cash back to the restricted group that we just received from the Niagara refinancing transaction as well as our forecasted needs for the future in terms of working capital, CapEx and investments, we don't have any concerns at the time from an overall liquidity perspective as we do still have a significantly undrawn portion of the revolver.
Did that answer everything for you, Ricardo?

Luis Ricardo Chinchilla

Yes, that was great. And if I could do a follow-up. Obviously, we have seen among your peers that second quarter for you guys, the third quarter comps were pretty tough and the reason behind, some of the negative comps. So I was wondering if you could comment what you have seen so far on the fourth quarter in July. And how does volumes trend versus the prior year just for us to kind of assess how the top line is, how tough the comps in the next quarters you're going to read this versus what you're currently seeing? And I acknowledge that everybody of your peers are saying that the markets -- the regional markets continue to be stable. And if you could also comment on any cost escalations or anything from the margin side that will make you worried not to be within your expected margin targets, particularly for the Connecticut property.

Jody Madigan

Thank you, Ricardo. This is Jody. So I'll say that, obviously, we don't generally give forward-looking statements, so I don't want to talk in total for the fourth quarter. I will say, though, for the month of July, our volumes were pretty similar to what we saw for June time frame, I would say.
I think from a fourth quarter perspective, our prior year comps don't look too difficult to achieve. So I'm not too concerned about it from that perspective.
I think on a margin perspective, we anticipate seeing consistent with what we've got now, which we're giving guidance that you should expect mid-20s as an organization and upper 20s for Connecticut. I don't see anything to tell me to believe that's not going to be the case. So hopefully, that gives you enough answer there.

Operator

Our next question comes from the line of David Levine with MidOcean Partners.

David Levine

First question, I just wanted to confirm on Digital. You said that there was a catch-up in EBITDA in the quarter -- In last year's quarter, I think. Did that same catch-up happen this year? I'm just trying to understand or peel back to some of the underlying trends. Is the point that without the catch-up from last year, the comp would have been even stronger? Or did that catch-up also happen this quarter?

Jody Madigan

So David, I think a simple answer to your question is yes. The quarter would have been stronger absent the onetime catch-up last year.

David Levine

Interesting. Okay. And can you guys just speak a little bit more qualitatively to what you're seeing in Mohegan in Connecticut Digital. I think you mentioned that Niagara is ramping, but I think most of the EBITDA in digital came from Connecticut this quarter still. And if I'm not incorrect, it almost looks like -- is the LTM EBITDA from Connecticut Digital now $40 million, so which is just pretty strong.
So can you just kind of speak qualitatively to what you're seeing, why the trends have been so good? And kind of your just your outlook without obviously giving forward guidance. I know you guys don't give that. But just a little bit more color around that.

Jody Madigan

Well, I'm glad you said that, David, because that was going to be my first comment. We can't give you forward-looking guidance. I will tell you that the EBITDA is primarily coming from Connecticut, as you indicated. I will tell you we're only in completion of the year 2 of Digital operations. We are not in full maturity mode as yet, and we still anticipate continued growth to the business to -- if you want to do comparisons, you can go look at kind of New Jersey and their ramp, although their's was somewhat impacted by COVID and ours won't be.
We do not believe we've reached maturity. We continue to see ramp and we continue to be bolstered by the strength of the business.

David Levine

Okay. Excellent. And then just in Korea, you guys gave the completion percentage numbers and expectation to be open in Q4 of this year. Can you talk about level of comfort that you can kind of open on time and any risks at this point to kind of a delayed opening or increased funding necessary just because we're -- as investors, we're not around the project. So can you just kind of speak to the risks at this point? Or you think like most of those risks are negligible.

Jody Madigan

So I'll go second first. On a funding perspective, we feel very confident that we've built in all the costs to get the property opening complete construction and get it loaded in and open and operating.
As for timing, there's a typhoon today. We believe that it's not impactful. Thank God we spent the day yesterday buttoning down everything at the property and securing it and everything as well, and we've actually had someone out there looking at the property and believe the majority of the storm is passing by.
We don't anticipate anything in our current view that's going to delay our opening. As we've said from the get-go, we've got to open the hotel and the non-gaming amenities to get our rating on the hotels, to get the casino license, which will follow the opening of the non-gaming amenity, which we still anticipate in the fourth quarter this year. And we're very close to that. So it'd be something really abnormal to come up to prevent us from achieving that goal.

David Levine

Okay. Okay. Great. And then, again, I know you guys don't give forward guidance, but just like on Korea, do you expect it to start cash flowing in like soon after you guys open everything? And can you kind of just remind us what kind of fees are available to send back to the Mohegan restricted group, whether it's management fees or free cash flow. I'm not asking for a return on capital projection or anything like that or EBITDA. But just kind of high level, if you expected to start cash flowing and what maybe credit investors can expect next year in terms of what might be able to come back to our credit.

Carol K. Anderson

Yes. Let me try to take that for you, David, from an operating perspective, right? What we're trying to do is employ a prudent ramp strategy. So we're bringing costs into the structure commensurate with what we anticipate from a revenue generation perspective.
In terms of cash back to the restricted group, we will be earning management fees, and we have been earning development fees cash payments of those fees along with other distributions will be subject to compliance with the financial covenants contained in the project finance and the mezz documents, primarily a cap relating to 35% of excess cash flow and pro forma compliance with leverage and debt service coverage ratios.

David Levine

Okay. Great. And great to hear about the Investor Day so thanks a lot.

Carol K. Anderson

We know that folks have been waiting for it. So we're really pleased that we're able to get that announcement out there. And when we do post the registration link on the website, we will also send an e-mail blast to everyone who has signed up for it.

Operator

Our next question is from the line of David Hargreaves with Stifel.

David Richard Hargreaves

Mostly answered already. This is a reach, but because it's kind of far away, but there has been some talk about it. The new Toronto casino, are you feeling any impact from that in Niagara?

Jody Madigan

David, this is Jody. So, so far, very minimal. From everything we've seen from -- and heard from our guests and seen from the processes that everybody seems to be somewhat underwhelmed with the new competition, unfortunately.
But -- so no, honestly, we haven't really seen much of a ramp. They will ramp up, obviously. As you know, properties ramp over the first 2 or 3 years. So we do see -- expect to see some. But so far, we've been pleased with us being able to hold our own with the increased competition.

David Richard Hargreaves

Great. Turning to Korea, looks stunning, by the way. So the $91 million that you're going to be sending out, do you anticipate having to draw on the revolver? I'm just kind of wondering what your minimum cash threshold should be.

Carol K. Anderson

So you're talking about the remaining USD 67 million. It's about KRW 89 billion..

David Richard Hargreaves

I think you gave two numbers.

Carol K. Anderson

So right. The remainder to -- the remainder of the KRW 155 billion that we previously announced is KRW 89 billion, which is approximately USD 67 million. So a combination of cash on hand and revolver borrowings, including the approximate USD 45 million that we received from the Niagara return on capital transaction would be used to fund that.

David Richard Hargreaves

Do you have an idea as to how long you may be operating without the casino? Are you going to open the full project, excluding the casino? And I wonder, are you starting to plan some sort of opening events like concerts or something?

Jody Madigan

So we definitely have to open the property without the casino initially. It was actually a condition of our agreement with the government as far as the property. Obviously, we hope to make it as short a period of time as possible.
We don't control that, although we keep speaking with the agencies that we will be working with to get that casino license to move it forward, but we can't give a definitive date because it's not within our control.
We do have some target dates that we've been communicating with the agencies and trying to narrow those down.
To your second question, we are absolutely 100% planning a grand opening. Time, date and information will be made available in the forthcoming months as we nail that time down.

David Richard Hargreaves

Okay. And then just looking at the size of the facility, are you starting to get an idea for what OpEx per day should look like? I mean we see that with some of the Macau resorts, people come out with an OpEx per day number. I wonder if you have something in mind at this point?

Jody Madigan

David, we actually -- we've gone through -- we have a complete budget. I mean, obviously, we have forecasted revenues, expenses and EBITDA. We're not probably not going to share that at this time, but -- so I get to ask, but unfortunately, we're (inaudible).
But we do -- we obviously have that number. We've gone through the effort of laying all that out.

Operator

At this time, we've reached the end of the question-and-answer session. And I'll turn the call over to Ray Pineault for closing remarks.

Raymond Pineault

All right. Thank you again, Rob, and thank you again, everybody, for joining. I want to reiterate, we are very pleased with our third quarter results and look forward to carrying the momentum through the close of the fiscal year.
Thank you all again, and our team members for the -- thank you to our team members for their hard work and dedication, and thank you all for joining the call today. Have a nice day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.