Chit Chat Stocks - Dissecting Hotel and Casino Stocks (Hilton, Marriott, MGM, and Wynn)

Episode Date: August 26, 2026

On this episode of Chit Chat Stocks, we dive into a new sector coverage of hotels and casinos. We discuss: (00:00) Introduction (02:28) Initial thoughts and biases about the sector (11:53) Marriott's business model and history (25:50) Wynn Resorts: A luxury casino case study (32:50) MGM Resorts: Transition to asset-light model (43:53) Risks and challenges in the casino sector (50:05) Future outlook for hotels and casinos ***************************************************** Subscribe to our newsletter, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

For the past three years, Interactive Brokers' individual clients averaged 24.3% annually, beating the S&P 500. Lower costs and access to 170-plus global markets matter. Visit ibkr.com slash performance. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome into the Chitchat Stocks podcast, a podcast to help you find your next

great investment. Today, we are doing another sector overview, and we are covering a small niche industry, at least in the broad sense of the global stock market, hotels and casinos. It's a fascinating market. There are a bunch of big players, a lot of well-known brands. We're going to cover a few of them with some case studies to see if there are some interesting investing opportunities. As always, I'm here with Ryan Henderson. My name is Brett Schaefer. housekeeping items before we get started. We like to talk about these on these episodes. If you haven't, please give us a five-star review on either Spotify or Apple Podcasts. It is the best way to support this ad-supported podcast. You can also subscribe to the newsletter and chat

community within the show notes. That is the Emerging Modes newsletter. We talk all things in the Substack chat there about the show, podcast, all investing stuff. Whether Stan Druckenmiller wrote his op-ed using AI, things of that nature, all things related to financial markets. And lastly, follow the show wherever you get your podcasts, YouTube, Spotify, or Apple Podcasts. We're going to dive into the episode. We will not be covering some of the ancillary platforms that are popular among, say, our type of investing audience, Booking Holdings, Airbnb, American Express, but they will come up throughout the episodes. These are hotel and casino owners or operators. Ryan, before I get into the sector size and overview, did you have any initial

thoughts before researching or any, say, biases, prejudices on the hotels and casino resort market as an investor? Yeah, this was my first time taking a true look at the hotel and casino space. i own airbnb and i own some businesses that are sort of travel ancillary but this was the first time really looking at hotels and casinos and coming into this research i thought what probably most investors think which is that these are capital intensive businesses and they you know they own expensive buildings they operate them whether they're you know serving uh higher end customers lower end customers whatever um and i could not have been more wrong honestly like truly the businesses uh we're going to talk about some of the case studies today marriott hilton uh some

of the casino operators completely different business models than i thought and honestly much better businesses than I expected. All right. I think that's a good tease. I hope the listeners will enjoy this episode. We're going to do, let me just say the case studies. We're doing Marriott, Hilton, MGM, and Wynn Resorts, kind of some of the bigger players. I know we're missing something like Las Vegas, Sands, and Caesars. Before we get into that, I want to talk about the sector itself. There are 11 different stock market sectors. There's things like financials, energy, communications, and there's one called consumer discretionary. Within these are subsectors. Perhaps the biggest subsector for consumer discretionary is travel. And within travel,

some of the largest players are hotel and casino operators. They can be brand plays or real estate plays or both, right in the growth of the travel market. Travel, for anyone that doesn't know, has grown at a faster rate than overall GDP, which I think is quite intuitive when people will have their basic needs met, they have more and more discretionary income to spend on anything. And many people seek out experiences around the world or just within their own country that they couldn't afford previously. Six trillion dollars was spent on travel globally in 2025. That is both international and domestic trips. It's estimated that spending on international travel has grown at an 8% annual rate for the last 50 years. Could this continue, Ryan, for the next

50 years. I think maybe a slightly lower rate, but I think above GDP growth is probably fine. Maybe it's less important. The North Americans, Europe's are less important. It's more going to be, all right, do some of those emerging regions, get wealthier customers that can do domestic travel, kind of similar to how China has grown in the last few years. But if anything, if the world gets richer, which who knows what the next 50 years hold, but if the world does get richer, i think there will be more money spent on travel do you agree yeah for sure obviously uh if more consumers in emerging markets are able to participate more in consumer discretionary spending uh all around the world travel will benefit the i don't know if it'll be able to

grow at 8% necessarily like it has over the last 50 years. But I do believe this will grow faster than GDP. 5% to 6% annually seems achievable. I think looking at that, it makes hotels and casinos potentially an attractive industry. I think humans lounging, taking time off and humans gambling is very lindy, which for anyone that doesn't know, it means that it's something that has been around a long time, so it's probably going to be around for a long time in the future. I think in 2026, there are a few dynamics. Well, some of this is kind of perpetual with travel, but there are a few dynamics to think about with spending on hotels and casinos in the modern age. One, smartphones changing the game for customers. This is really about gambling on your phone or

an app like Robinhood or CalShear or something like that can turn into a gambling app. And maybe if you can find different lodging through mobile phone enabled platforms like Airbnb or booking second, I think people should remember investors should remember that this is a discretionary purchase. If people feel richer, like in 1999 2006, the more of them want to spend money at hotels and casino resorts. If people feel feel poor, like in 2010, they will not. And then there's also physical locations that can be a benefit or risk. Some locations out there are tried and true, like a Paris. I think a top-notch hotel, I have no idea what the boulevards are, but close to the Eiffel Tower, let's say, in Paris, is always going to do well. While others can fall out of favor for whatever reason. Acapulco in Mexico used to be the prime kind of Cancun-style destination. It got overrun by, I think, drug crime.

And then Cancun took over the last 30, 40 years. Could the next 30, 40 years be worse for Cancun? I know they're having terrible, I believe it's like seaweed issues on the beaches, things like that in certain parts of the area. So who knows, like 30, 40 years from now is Cancun, not nearly as big. There are benefits and risks to certain locations. And Las Vegas here is an interesting example. In 1970, there was only $370 million spent on tourism in Las Vegas each year. That number grew to 19 billion dollars in 1990 and 55 billion dollars in 2024 so you could say that it was kind of a i don't want to call it hipster but it was more of a backwater place in the 70s and

80s it kind of became more mainstream in the 90s and it's stuck there through to this day you know there's more of the entertainment and sports aspect and more of the partying and less of the gambling although there still is plenty of gambling as we'll get into the numbers and i think vegas and the people in power around it, you know, the hotel, casino brands, politicians, all that stuff, they really hit the mark in making it a global travel destination. This has given some of the premier spots on the Las Vegas Strip a captive audience. And I think the durable growth and the lindiness of the travel market makes it attractive to look at. I think the last question I have here, Ryan, because those are kind of the two things I like, is there anything else that

you like that piques your interest when looking at hotels and casinos as a potential investment opportunity? No, I think we're going to talk about the, how the business models actually operate. And there's a lot, there's a lot of businesses that we aren't going to talk about today that are spinoffs of the businesses we are going to discuss. So for, for example, There's a lot of REITs, real estate investment trusts, in this industry, especially as the last 20 years have sort of created a big fragmentation between the brands and the actual land. There's also timeshare spinoffs of some of these brands. So you may have seen like Hilton Grand Vacations is a publicly traded company. I think Marriott has a vacations business too.

So today we are focusing primarily on the big names and some of the most successful brands and recognizable companies out there. But just know it's a pretty big world and there's a lot of players in the casino and hotel space. okay let's get to case study number one ryan you have this one marriott international before i ask we talked about this before the show a little bit are you a marriott or hilton leader i'm going for hilton for my case study if you had two equivalent hotels what would you lean to i think i'd probably lean marriott okay again a lot a lot of these are very uh it's very regional so you might recognize brands depending on where you're at more so for example if you live in virginia chances are you probably have a higher probability of being a marriott bonvoy member or having more points

with marriott bonvoy uh than hilton i don't know where hilton's based but i know marriott was was founded in arlington so um again there are a lot of different brands even under the marriott portfolio and the hilton portfolio so it can be kind of regional specific but uh today marriott is the largest marriott international again there's i think there's been a couple of spinoffs So when I say just Marriott, I'm referring to Marriott International. It is the largest hotel chain in the world by total number of rooms. They have more than 1.8 million total rooms as of the latest quarter across more than 10,000 total properties. The majority of those rooms are in the U.S. and Canada, but about 40% are outside of North America.

And that figure has grown a lot. So if you look at total rooms in 2012, it was at about 600, 700,000. So it's almost tripled. There's been there was a massive acquisition during that time as well. But usually you get mid single digit unit growth annually. And I mentioned this as we're kicking things off. But as I was starting this research, I was expecting to find a low-margin business, one that was capital-intensive, and one where they've kind of willed their way to success just by pure execution. And maybe they've been like great hotel operators, and that's why they've been able to get to where they are.

And I was totally wrong. Marriott International, the world's largest hotel chain, actually owns very few hotels. the before i go through kind of how they make money i think the best way to show how they've gotten to where they're at today is to walk through some of the history so marriott a lot of the the original roots don't really matter that much but they were founded in 1927 almost their 100 year anniversary uh in washington dc as a root beer stand needless to say the business has evolved. In 1957, 30 years after the Root Beer Stand was founded, they opened their first hotel called the Twin Bridges Motor Hotel in Arlington, Virginia. And up until pretty much the 1990s,

their business model was probably exactly what you're imagining, exactly what I was imagining, which was they were the owners of expensive buildings. It was cyclical. It was very leveraged to occupancy and it was very susceptible to economic downturns however in the early 1990s during there was a early 1990s real estate bust marriott almost went under so they recognized that something needed to change and in 1993 the company split into two separate businesses host marriott which is actually still publicly traded re under the name host hotels and resorts i think it's based in southeast asia for some reason uh not totally sure why but that host marriott kept the buildings and the debt as well that comes with those buildings marriott

international kept the brands the management contracts and the fee streams this made the core marriott business very asset like they didn't own any buildings they didn't own any real estate for the most part there's still a handful of of hotels that they own outright but it's very few and this freed up more money for buybacks as well as acquisitions and that's exactly what they did in 1995 they acquired the rich carlton uh in 2016 they acquired starwood hotels and resorts that was their largest and by far most important acquisition of all time this year they acquired citizen m which i think was like a 300 million dollar deal pretty small but they've had some acquisitions throughout their history the most transformative was that starwood acquisition in 2016 today

marriott is a collection of 30 to 40 different brands or banners that cater to basically every single type of customer imaginable the luxury customers you got the ritz-carlton uh premium customers i guess you could call it premium you've got marriott westin sheridan uh cheaper side you've got the courtyard fairfield aloft so they've got the real discount hotel banners and then they've got the premium and the ultra high end as well importantly they do not own any of these properties as i mentioned for the most part nor do they employ the people operating these hotels so you might show up to a courtyard by marriott and the person working the front desk will have a courtyard by marriott little pin they are not employed by marriott the owner of the

hotel which is typically a real estate investor or a real estate investment trust they own the building they own the land i think they usually own the land they employ the people working at the hotel um and they just slap a marriott banner on it and we'll talk about why that is in a second but here's how marriott makes money first is franchise fees the hotel owner uh which will have the property hire the staff pay the bills pays the brand marriott courtyard west end roughly four to 6% of room revenue for the name, the booking engine and the loyalty traffic. So keep in mind, Marriott is probably sourcing a lot of the stays. So the customers that end up coming to a courtyard location, maybe discover it through Marriott's marketing, maybe they go through the

Marriott Bonvoy app, whatever it is. In exchange for that, the hotel owner is kicking back four to 6% of the cost of that room for the night. The other part is management fees. So this is a smaller piece of the pie, but every once in a while, the property will actually be managed by Marriott as well instead of the hotel owner. So in that case, they'll get an additional two to three percent revenue and there's usually some profit hurdles as well the third one and this is this one's a little less obvious i didn't realize they earned money this way credit card points whenever someone swipes a marriott co-branded card and i think i think the only ones out there are american express and chase they have marriott co-branded cards the issuing bank so mary uh so

chase or american express buys bonvoy buys bonvoy points from marriott to award to the cardholder marriott sells these points at a wholesale rate which is uh slightly cheaper but it's above the cost of future guest redemptions and then they take the spread as revenue this little credit card fee generates one billion dollars roughly in pure margin revenue and it's it really is a wonderful business and oftentimes they never get redeemed people die with their points which this is my uh my plea to everyone listening to this use your points yeah always use them it's free float right yeah seriously um and then the fourth one is timeshare residence licensing So I kind of mentioned this earlier, but in 2011, Marriott spun off their vacation ownership division into its own publicly traded business.

So Marriott Vacations Worldwide builds and sells timeshares. That's the vacation business. And then they pay 2% of their sales to Marriott in exchange for the brand name. So kind of taking a step back, looking at Marriott overall, there are a couple things that make this business truly exceptional, but it all sort of ties into their loyalty network. So Marriott Bonvoy has more than 295 million members. These are people that have built up points with Marriott and are unlikely – well, they might have multiple accounts, but generally there are some switching costs for whoever you have the most points with. It's really – this loyalty program has ripple effects all throughout the business. So, for example, more than two thirds of Marriott's room nights are booked by members. This giant member base means that hotel owners want to work with Marriott because occupancy rates will be higher.

So if I'm starting a hotel from scratch or I got some money, I want to invest in real estate, I buy a hotel, I want to slap a Marriott banner on the building because I've got all those loyalty members that will automatically see my space and my occupancy rate is going to be drastically higher. The second reason, banks are more likely to lend to hotel owners if they have a Marriott brand because the occupancy rates are higher and Marriott has this data of all these successful hotels that have their banners already. So they get cheaper financing. They get financing. A lot of places can't get financing if you don't have sort of a notable name to begin with. It's a lot harder to do a startup hotel as opposed to one with an existing banner. And then third, because members book directly with Bonvoy, they don't have to go through the aggregators and pay a 20% fee to booking Holdings or Expedia. So that loyalty member base is huge. It's a massive advantage for Marriott. And it has ripple effects all throughout the like, not supply chain, but value chain. you know, banks more likely to lend hotel owners need to slap the logo on there. There's probably pricing power associated with that too. The recipe for growth is really simple. And Hilton actually laid this out in their, I think, investor day deck. To grow revenue, you have to have a combination of two things. You want revenue per available room to increase. That is a function

of the price per night times the occupancy rate you also want your number of rooms to grow so that's room growth plus revenue per room since pre-covid total rooms have grown by about four percent a year and revenue per available room has grown by about three percent a year so total annual revenue growth of call it seven to eight percent now you think about it from marriott's perspective. There is no additional cost to service those rooms. They don't build the building. They don't maintain the staff. All their costs are at corporate. It's personnel, tech, marketing expenses. So operating profits should grow slightly faster than revenue. So you're going to get slight margin increase, and then they spend most of their cash flow on buybacks.

So earnings per share will grow even faster than that. So 7% to 8% revenue growth, 9% to 10% operating margin, maybe 11% to 12% operating profit growth, and then 11% to 12% earnings per share growth. the only caveat here and so again i looked at this i was blown away by the quality this is a much better business than i thought way more durable than i expected it has business travel it's got consumer travel it's not tied to any single location it's not tied to any individual brand they it's very durable the business quality has been pretty well recognized by this point by investors so today the business trades at a forward ebit multiple of around 22 times 10 years ago it traded at more of a mid-teens forward multiple so they've it trades at more of a premium today but yeah that's kind of the the marriott business and uh i was i was much

more impressed than i thought i'd be you research your investments you analyze markets you manage risk but have you researched your broker for the past three years interactive brokers individual clients averaged an annual return of 24.3 percent compared to 23.1 percent on the s p 500 ibkr's lower trading costs competitive rates efficient execution and access to 170 plus global markets help investors keep more of what they earn and put more capital to work over time the broker you choose matters interactive brokers member sipc if you care about performance find out why the best informed investors choose Interactive Brokers at ibkr.com slash performance. Again, visit ibkr.com slash performance. Yeah, I'll talk about Hilton. Maybe we'll save that for my second case study

since it is so similar to Marriott. I'll maybe try to mix in some other parts of the business model. But I will mention here, I have the chart pulled up from our friends at fiscal.ai. Use our link fiscal.ai slash chitchat get 15 off any paid plan marriott stock since i believe this would be the spinoff 1993 it has generated an annual total return of 15 which means over 30 ish years right 30 plus now that's a 100 bagger pretty darn good um yeah it there are some downsides with this business model things are mismanaged but i think i'll maybe save that for the hilton discussion ryan i do have uh maybe we have to get moving here but they have the marriott bonvoy uh bonvoy brilliant american express card and you can currently get it for 150 000 points and a 250

dollar statement credit so are you in it's a 650 annual fee though so you got to be kind of Spending a lot, I think, on Marriott. I think I'll probably stick with the airline car. It's the – Six X-backs on hotels. Yeah. Unless you're a really hotel-heavy traveler with business and stuff, the hotel ones, at least these premier American Express ones, don't make too much sense. The one thing I'll add here too is when you're looking at the financial statement, they recognize revenue, but the accounting is a little wonky.

You'll want to basically use gross profit as sort of the top line for Marriott. Almost a TPV or gross payment volume thing is what I'm seeing. Yeah, and it's complicated because there's properties that have a different structure versus royalty versus actually managing the property, that kind of thing. But yeah, I would just use gross profit as sort of the main metric to follow. And they've got about $5 billion, just over $5 billion in gross profit over the last 12 months. Operating profit is about $4 billion. So it is a very profitable business, especially on those properties that they don't manage. Yeah, a lot of that top line growth falling straight to the bottom line.

All right, let's move on. Well, let's hit Wynn Resorts. We're going to hit more of some of the casino resort combinations here that are a bit different of a business model than Marriott or Hilton. And Wynn Resorts is actually a younger company than many people think. Maybe people know this, but I didn't. Steve Wynn, he was a casino magnate, well, still is, he's 84 years old, that sold his Mirage Hotel to MGM in 2000, which Ryan might cover in his MGM segment up next.

Within the next few years, he wanted to get back in the casino game, and he founded Wynn Resorts in 2002, buying a casino and hotel on the Las Vegas Strip and revamping it to create Wynn Resorts. It opened in April 2005. And when Macau opened for the Chinese market in 2006, for people that don't know, Macau is sort of, you know, there's different economic and political things, but it's kind of a special economic zone within China. It used to, I think, be a Portuguese colony. And it's almost the Las Vegas for the Chinese market. So, you know, similar things. Maybe that's where a lot of the Western companies can come operate. I believe MGM has a resort there. but Wynn opened both of these right around the same time, right before the great financial crisis. But the stock actually IPO'd in late 2002. I'm sure he could use his pedigree to raise money. And it was a huge winner in anticipation of opening of the two first resorts. It was a 10

bagger from 2002 to, I think, late 2007. And up to today, we can talk about the business model, the Wynn Resorts, both of those, including the other brands like the Encore. And I think there's the Wynn Palace in Macau. It's considered kind of an ultra-luxury hotel and casino resort. It's getting to rich people, international travelers, you know, someone such as a heavy gambler from Asia and Europe coming to Vegas, or maybe Asia, you're going to more to Macau, but maybe you like Vegas. The cheapest room, I guess I was going to have the listeners try to guess on this, but Ryan can probably see it here. The cheapest room that I checked this morning is $600 a night, and the most expensive is a three-bedroom villa, $12,500 a night, although I think those are

probably getting comped to entertainers and the heavy gamblers. The stock did, as I mentioned, phenomenally well from the IPO through the breaking of the GFC over a 10-bagger in that time. However, since then, the peak of the pre-great financial crisis crash, it is really back where it traded at in 2007. On a total return basis, it is barely up. The question is why? We had the great financial crisis killing a lot of consumer discretionary spending. There was a sexual misconduct scandal with Steve Wynn that led him to leave the business that probably I'm guessing that we haven't read every single conference call, but I think it probably left management in a bit of disarray and they're probably still getting on their

footing here, but that was right before COVID. So you had COVID throw a whole disruption into the mess. And at the same time, the company has not opened much besides his two flagship properties to date. There is a Boston complex that is tiny to the overall picture, as well as in addition to the Macau site. The question, though, is whether that is about to change, which I'll get to at the end here. um if we look at the actual financials i have a chart here that the way i made it look kind of ugly but using the fiscal ai kpis i can see that if you line up the different revenue segments they have uh gambling they have room nights uh what is it entertainment and then food and beverage i

think those are the three if you stack up nights food and beverage and entertainment it is still smaller than casino revenue. So that is what's most important here. If you look at casino revenue on its own, which is just gambling intake, which is just, I think, less than five properties worldwide, it was $4.4 billion in 2025, which I think is quite crazy. So you could have a single property such as the Wynn, I believe it's called the Palace in Macau. They have all these KPIs on fiscal AI. You can look at it in more detail. I think it was at over $2 billion from a single hotel for gambling in Macau. And revenue from Macau was actually higher than Las Vegas at $3.7 billion in 2025 versus $2.6 billion in Vegas. Property level earnings are close to the same.

So I would think that the headwind from the Chinese consumer bus that started in kind of the 2018 timeframe, you know, the stock market bust there, and it was accelerated by the property and housing bust. The largest one in history in 2022 has really hurt that business. Perhaps now we're getting to some normalization there, but that has been a headwind. Now, looking to the future, Wynn Resorts has contributed $1 billion to Wynn Al Marjan Island, a resort and casino in the uae using its branding that win owns 40 of unfortunately and i have a screenshot of google maps here ryan you can see it is not in the ideal location is actually north of dubai and i think it's more than 10 miles but on this map looks pretty dang close to the strait of hormuz that

is not some unfortunate timing because it is slated to open in september of 2027 um if there is it a war going on there? I would assume there's going to be a lot of spending from Gulf states at this property because for, I think many people know, you know, in some of these areas, you know, things like gambling, drinking, stuff like that can be highly illegal. So if these are these special economic zones where you can do all this, that's great. And you almost have a monopoly on this really, really nice looking resort. Uh, if we get down to kind of the earnings here, uh, maybe Ryan, you have any follow-up questions here, but I think the business models are fairly simple. You get people into the luxury resorts. You get them to the casino.

They spend a ton of money. That's really it. The company had GAAP operating profit of $1.16 billion over the last 12 months. Coming out of the pandemic, they've been fairly profitable, and they should soon get above the peak years of 2013 to 2014 at $1.2 billion. But you can see it hasn't really grown earnings much in the last few years. There is some debt on the balance sheet at $10 billion, but that can be netted out with $6.6 billion in land values at Macau and Vegas. I would be a little worried about monetizing land in Macau because of the, let's say, trickiness of operating with the Chinese government. And there is also $1.46 billion in cash as of year end. So unlike what Ryan is going to talk about with the leaseback

agreements with MGM, Wynn still holds a lot more of the real estate, which may be good for Las Vegas and Macau, but it's also a little bit more of a risk. Because who knows whether the land values in Vegas are going to grow or not, whether, as people say, oh, bachelor parties are going somewhere else or something like that. I don't think that's going to happen, but it's possible. And you're putting more of your chips, ironically, into the Las Vegas Strip and the land values there. So either way, I would kind of napkin map the enterprise value at $12 billion versus a $10 billion market cap today. And you can look at that versus in trailing operating earnings. It's not very expensive. If you kind of look at really the

Chinese market recovering, Vegas remaining steady, growing along with inflation, and especially with the luxury gambler probably being a little bit more, I'd say, durable than someone that is scraping together the cheap amount of money to go to Vegas for a cheap trip with the guys. There's also the UAE resort that launches smoothly. I mean, they've already poured $1 billion into this resort, and they only own a 40% stake. So they poured money into that. Hopefully, they finally see a nice return on invested capital. Again, unfortunate timing with the war. But over the long term, things go okay. You could probably see $2 billion in gap operating earnings at some point in the near future and that would make the stock pretty

cheap today it also pays a one and a half 1.8 percent dividend yield they're buying back a little stock i think the question here is what did they do wrong why has this been a poor investment since 2007 which is 20 years now and maybe i'll say the other one uh for the end but ryan what do you see here is why this as opposed to the merits and hilton's has been a bad investment Yeah, kind of hard to say. I mean, it seems like this is maybe you could say it's the capital intensity of their business that's weighed on the stock. I think Wynn Resorts is a good example of why companies try to go with an asset-light strategy and focus on the operations as opposed to owning the land because you can kind of often get bogged down with real estate costs and the value of those assets and whether or not you're in the right spot. I think how much money they've plowed into that facility next to the Strait of Hormuz is a good example of maybe some of the downsides. Even if they were the operator, there'd be downside there too.

But one quick caveat that I would add, I don't know if you mentioned this, but a lot of these business are – a lot of these casino businesses today, the big landmark locations, there's sort of a – there's an accounting distinction where casinos are legally required to report pretty much volume as revenue. So they put – they do it as gross sales where it's net win is sort of the actual revenue that they're generating. So most of these businesses are primarily hospitality-driven at this point. So MGM, for example, only about a quarter of their revenue actually comes from gambling. the majority and it's been skewing more and more towards hospitality over the last five years so the majority of the business today comes from people renting rooms people buying food and drinks at the nice restaurants entertainment that kind of stuff so they are extra consumer discretionary than than they maybe would have been with if if there was primarily gambling driven

So if there's a slowdown in travel or the economy is weak in a certain region or for whatever reason people stop going to – or you're on the Strait of Hormuz, you are susceptible to a big swing in revenue. Yeah. Let me confirm how Wynn does do that. That is a good point. The KPIs just have, they don't have that distinction that maybe MGM makes for investors. They just have casino revenue and they don't have the profit from each of the segments. They said the profit from each property, kind of unfortunate. But while you're talking about MGM, I'll try to confirm for the listeners to make sure we can get everything as accurate as possible. don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions

that didn't end up the way i planned and today i'm still figuring it out somehow things usually get worse before they get better apparently that's how i roll so bundle up and come along for the bumpy ride stream a new episode of north of north tuesdays on cbc gem when west jet first took flight in 1996 the vibes were a bit different people thought denim on denim was peak fashion inline skates were everywhere and two out of three women rocked the rachel while those things stayed in the 90s one thing that hasn't is that fuzzy feeling you get when west jet welcomes you on board here's to west jetting since 96 travel back in time with us and actually travel with us at westjet.com slash 30 years i believe when accounts for it the same

way from a quick ai search um either way it's not going to affect the cash flow so uh the valuation metrics brett gave at the end there are going to be consistent let's talk quickly about mgm because it's a different strategy than what win has employed um even though casinos and hotels seem kind of similar on the surface i was pretty shocked how different the business models are uh so mgm is one of the largest publicly traded casino resort companies in the world they make money from a combination of gaming food and beverage hospitality entertainment and prior to 2015 they looked a lot like win uh or probably what you're imagining where it's uh kind of like the pre-1990s marriott expensive buildings expensive to run very pro-cyclical

However, in 2016, MGM started transitioning to this asset light business model that they run today, where they're basically started selling off their properties and doing lease back agreements. So in 2016, Marriott, not Marriott, MGM transferred 10 of its casino properties into a REIT called MGM Growth Properties that they spun off into its own entity. in 2021 vici properties actually bought mgm growth property so it's no longer publicly traded on its own now mgm resorts the the core mgm that we're talking about here uh pays vici basically rent every year to operate on those properties and these the average lease length is currently 23 years so obviously it's going to be hard to find a new tenant if you're vici and mgm doesn't want to renew i don't know why mgm wouldn't want to renew but it's 23 year average life left on their leases and there's built-in two percent price escalators every year which is pretty good like

for mgm i would say if you're only paying a increase of two percent each year generally below inflation that's that's a pretty good situation to be in the uh like an upstart casino is not going to have those same terms the one caveat i would give is not all aggregators account for the leases in the debt calculation so don't skip over that part this is a huge part of the business. The other distinction is that Marriott, they don't own any of the properties, and they don't pay any of the operating costs. They don't have the employees, anything like that. MGM, on the other hand, they don't own the facilities, but they still operate the business. So they pay the utilities, they pay the employees, they pay for the food and beverage and all of it.

So it's asset light, but not quite as asset light as, say, Marriott. There's four divisions for MGM. There's more, but I think the easiest way to think about it is in sort of four segments. One, Las Vegas, two, regional facilities, three, MGM China, and four, MGM Digital. So let's start with Las Vegas. This accounts for basically half of their revenue. People might not realize it, but if you're walking down the Vegas Strip, a lot of the properties are owned by MGM. So the Aria, the Cosmopolitan, MGM Grand, anything with MGM name on it, Mandalay Bay, Deluxor, Excalibur, I think they have like 11 or so properties that are owned on the Vegas Strip. So today, the majority of that revenue, we just talked about this, comes from hospitality. So about 76%. This is netting out the accounting distinction we were talking about earlier. So the net win is what I'm accounting for in the gambling. Only about 24% is from gambling.

This business really is dependent on tourism. So if tourism shrinks to Vegas, obviously, MGM is going to be hurting. The second is regional properties. MGM operates seven casino properties in Michigan, New Jersey, Mississippi, Maryland, Massachusetts, New York, and Ohio. These are sort of like local destination locations. Like you would drive an hour if you lived a couple hours away to go to this casino. and this this business unlike the vegas locations is the exact opposite it's majority of the revenue comes from gambling in particular slots so people are like rural michigan driving an hour and a

half to go play slots at this mgm location the we'll talk more about in a second this business has been maybe the most susceptible to online gaming risk because instead of driving that extra hour and a half to play slots you can play slots on your phone or whatever the third division uh mgm china similar to what brett was talking about with win counts for about a quarter of mgm's overall revenue technically it's a separate company it's very weird accounting where mgm china is its own company mgm owns a controlling stake they account for all of the financials on their balance sheet and then they just back out the net or not the balance sheet on the They recognize all the operating revenue and then net out the non-controlling interest. It's a bit bizarre. But anyways, this is two properties, MGM Macau and MGM Kotai. Apparently, 88% of the revenue comes from gaming for this division. I'm not totally sure how this works out.

I would imagine that there's still a big hospitality element based on what Brett was describing where it's sort of like Vegas for China and these are kind of premier locations. But yeah, this business has actually been doing pretty good over the last couple of years. I would just mention the distinction there. China or Macau's percentage of the business is much lower for MGM than it is for Wynn. Yeah. Yeah, and it's an even smaller percentage of earnings. So I think it's maybe 20% of earnings as opposed to Vegas, which I think is like 60% of MGM's earnings. The last division is MGM Digital. This is a consolidated online gaming portfolio of primarily Leo Vegas and BetMGM. Revenue here is generated from digital slots, iGaming, which is kind of like the, I think, online blackjack, basically. or there's there's other games that are more formatted for the iGaming uh medium and then

uh online sports betting so the bet MGM is basically the third largest U.S. iGaming and sports betting operator behind FanDuel and DraftKings but they are like a distant third and there's also i think now you kind of have to factor in polymarket and calci and the prediction markets here like they are competing with all of those not as much on the i-gaming front like the live dealer type of games that evolution sort of facilitates and maybe any other players in there but yeah it's on the online sports betting they are competing with all of those uh players i've got a little chart up here revenue by segment but ultimately the metric to pay attention to i guess there's a couple but the first one is ebit dar which i know listeners are maybe

rolling their eyes when they hear this this is a ridiculous metric it is so it's come up with a different name it it doesn't sound good coming off the tongue yeah you could call it cash available to pay down your debt that's that's really the metric what the metric is so but the fact that they added yet another letter to ebitda is it doesn't sound good but it's basically what is it earnings what is the r uh rent and restructuring which is when you look at it on an ev you know basis it's whatever the this is basically all the cash that they can use to pay down their debt So, for context, and there is a lot of debt, 11 billion market cap company, MGM today, is about 11 billion. They have basically $22 billion in net debt, but it's – the lease accounting is like really tricky because you got to factor in the leases when looking at the business.

But 23-year average lease length with 2% price escalator, it's actually kind of an advantage. So all the aggregators calculated a little differently. I read a good write-up that kind of breaks it down as to $22 billion in net debt. So we're looking at about a $33 billion enterprise value. so ev to ebitdar again i hate letting that word come out of my mouth but it it matters for the debt holders about six times um now for our uh investors that aren't buying the debt cash flow free cash flow is about one and a half billion so it's it's very this is one where like you almost have to look at it totally if you're a bond holder you're you're paying attention to

totally different metrics i know this is kind of always the case but what they have to pay down their debt or their leases example is different than what they're using to buy back shares cash flow around 1.5 billion again the market cap's like 10 billion so they've been using pretty much all their cash flow to buy back stock and they've they have one of the biggest buyback programs i've come across over the last decade it might be the biggest they have reduced their share count by 56 over the last nine years so that's roughly a nine percent annual share count reduction i'll talk about the the future of mgm here in a second but just to highlight the profitability by segment vegas does 2.8 billion in the ebitdar or whatever

so a little more than half regional uh casinos do 1.2 china does 1.2 and then the digital segment loses about 100 million the if you if you believe that cash flow will stay flat over the next decade and the at its current valuation that would mean you're probably going to have cash flow available to shareholders grow at nine percent because they look like they're going to continue reducing share count at about nine percent a year current valuation not bad but i think the question you need to be asking is does does mgm generate more revenue or less revenue in five to ten years and you would think like that should be a pretty easy question to answer but there's a lot to consider because one there's big pricing fatigue in vegas right now you can see this in the

occupancy rates um basically it used to be considered like go there cheap flights cheap hotels lose your money gambling the casinos are happy now it's not that like it's expensive to go more entertainment stuff sports uh what what ufc events concerts so much more outside of gambling than it used to be and mgm is very very centered on the las vegas strip they're the i think the number one player by far for properties maybe caesars i'm not exactly sure it's soon so the largest the largest company is las vegas sands by market yeah by market cap But let me do some digging while you keep talking. What about this Japan one that they're working on?

Honestly, I didn't look too much into it. It's coming out in a few years. I assume that's where a lot of their CapEx is going. But then again, it might be owned by a host. So I'll check on that in a second. But basically, Vegas, I think, is at risk of some flatlining. the regional casinos have gone kind of nowhere in five years because they are probably losing to some online competition and then the digital side is insanely competitive china seems to be

in a decent spot and maybe the they're diversifying outside vegas with the japan location as well so that maybe they're going to grow revenue from those segments but the two questions that i So I pose to you, Brett, do you think Las Vegas will be generating more revenue in five years? And do you think they can effectively compete online? I think yes and no. Online, I don't see them having any sort of edge whatsoever. But maybe, and you mentioned, you know, they're more entertainment focused than they used to be. Yeah, I was running some of the fiscal AI charts comparatively to when they are more entertainment focused, which makes sense. MGM Grand, I think they host like basketball tournaments, all sorts of things at their event center. It's a little bit more entertainment focused as opposed to like a luxury hotel. That might be smarter because the gambling itself could become less and less important in the Las Vegas market,

which I don't know if that means Vegas revenue is going to be lower than that $55 billion I gave out but I think I would just guess from an inflation perspective it's going to be higher and if they can out-compete that 2% lease and labor union contracts maybe they make out okay I know our friend at Asymmetric Investing

Travis Hoyum has covered the Japanese hotel he's quite bullish on that or it's resort casino hotel i think it's in osaka that uh could be beneficial but i believe it's not opening for maybe maybe four to five years from now if anything i'll plug our friend and go read his newsletter to check out some of that detail work yeah i kind of played devil's advocate here because vegas it almost seems like mgm almost feels too simple like if cash flow grows from here this is going to be a great investment because you're going to get eight to nine percent share count reduction annually and free cash flow growth you don't even need that much free cash flow growth yeah

But I do think there's some legitimate questions around maybe tourism saturation with Vegas, but if they can diversify outside of it, I think they're going to be all right. My guess is that you get low to mid-single-digit growth across the business plus the buyback. I think you get more than a 10% return annually from here for MGM shareholders. Yeah, you'd probably do fine. I would just note for any listeners, you can only do leasebacks once. so that might have been a nice financial move but yeah it's it's something yeah you can't do every time like they don't unfortunately for them they they locked in 30-year leases or whatever so yes that's pretty good but again a two percent hurdle on say rev par whatever metric you want

to use that's not sometimes vegas goes into a massive downturn so that could be a headwind in certain years i think you know the reliability of the brand is good um but i agree i think it'll do just fine over the long term yeah i guess that's that's your hurdle rate for vegas if if you can't grow more than two percent that's that is an issue for the for your leases yeah Yeah, that's probably your cost of capital, I guess, if maybe you could spin it that way. All right, let's close out with Hilton. This is a similar company to Marriott,

so I'm not going to go through the exact details. I'll let Ryan talk about that at the beginning of the show. I'll go through maybe the timing of what happened when they IPO'd and kind of the business model and what I kind of think of this franchising model. Unfortunately, some of the other hotels out there, such as Four Seasons, which I think is a fascinating business, are not public anymore. And I enjoyed the book

from the founder of the Four Seasons quite... I thought it was really, really well. It was actually an old Motley Fool recommendation, but taken private. Hilton Worldwide was actually taken private by Blackstone in a deal valid at $26 billion in 2007. Two Blackstone references with MGM being

part of that private equity... What is it? REIT deal. But $26 billion deal in 2007. Maybe some lucky timing there from Hilton shareholders at the time. 2013, it went public in another IPO and is today valued at a market cap of $74 billion, an EV slightly higher. It has generated a total return of 18% per year since the IPO, which is pretty dang good. Earnings per share has grown at a 15% annual clip since 2011. As Ryan mentioned, Hilton does not own any

real estate, which I will say is the perfect start to a viral AI slop tweet. Sorry, my little light here fell over. Okay. But Hilton, as Ryan mentioned, simply utilizes and license its brand to hotel owners. In return, it gets a similar total 9% of gross room revenue and collects some fees from ancillary charges like food and beverage or spas. Sometimes the real estate owner doesn't want to manage the hotel, so Hilton will do that for them. They give that extra 3% comparatively for the numbers here. Hilton has, you know, if you want to remember the Marriott has over 10,000 properties. Hilton has 8,000 franchise properties, 873 that it manages and just 46 that it owns. And I have the chart below here. I guess there has been an

acceleration in acquisitions over the last few years. For any listeners, you can look at this chart on Fiscal AI. They have grown, you know, along with growth in Revpar, they should drive durable revenue growth. As Ryan mentioned, you have the need for increasing the rooms and increasing the revenue per available room. That's kind of the easy formula you want here. You want to increase occupancy. You want to get more rooms available under the brand because you're not capital intensive. The more revenue that comes in, it's going to fall straight to the bottom line. They've had management and franchise revenue growing at 8.5% and total EBIT growing 7% annually in recent years they've worked to acquire more hotels including the graduate hotels i know

you know ryan mentioned this with marriott there's like 30 brands under some of these umbrellas and it's kind of hard to say well which one's better is the graduate better than what is the marriott ones like the the courtyard or the regular merit are they better brands i don't know but they also hilton does has a large partnership now the group of boutique hotels and more of a focus on converting existing hotels. I actually saw an interesting article in the Wall Street Journal this week about how there's a lot of kind of degraded

or unkept-up hotels in mid-sized towns, downtown areas that aren't as popular anymore, some of the changes post-COVID, where the owners don't have the capital to reinvest, so they want to sell and have it partner with a Hilton or Marriott, most likely, and then you refurbish the brand you reopen you probably get better you know under a hilton garden inn or something like that uh the key here as ryan mentioned as well this is a very very similar

business model is the hilton honors program they uh have a partnership with you know american express they're actually an exclusive partner with american express so i'd say for them they're a deeper partner than marriott is who also works with chase um hammocks has been the card partner for 31 years now. There are 260 million Hilton honors members, so a little lower than Marriott. I've used the app before to book. It's a solid experience. If anyone wants any anecdotal evidence, what works mostly well, and I think the key here is the scale globally, because when a member logs into the app, and remember, you don't need the credit card or anything like that. You can be a free member. You still get points on night stays. It's kind of, if you're going to book a hotel,

You probably want to have one of these programs, but you want to service hotels from medium to luxury tiers in a city or any location around the world. Like if someone says, I want to go to X destination or I'm traveling to Rapid City, maybe not Rapid City is a small place, smaller place. I'm traveling to Tulsa. I want one option in the market. And then if you're in a New York City or Los Angeles, you're gonna have a ton of options. But you want something that is a flagship Hilton, but also a solid choice of the Hampton or something else, you know, that's kind of a mid-sized international group joining the network if you're outside of the country. And I think when someone logs in, they don't feel the need to go to a Google Hotels, Expedia, or Booking because you have that trusted Hilton brand. Again, similar to Marriott, it will provide a solid service and deliver to the customer.

And this drives more bookings, which makes the hotel's owners happy and makes the brand owner happy. and you can get it done where if you say i'm going to the city i need a quick hotel it takes me five minutes to book this online that's such a better experience if you want a hotel for one or two people uh for a business trip or what have you then exploring on expedia does the booking even work airbnb i'm on there for an hour trying to filter through reviews it's a lot different and simpler if you just want something really really basic or you want you know what you want and you're going to get it. And again, this brings in more money that Hilton can keep as a profit. And I think you can understand the idea here if we're talking any sort of competitive advantage

and why Hilton, along with Marriott, have done well is the benefits to scale when dealing with these brands. If I only have the brand available in one city, like this membership program is meaningless, why would Amex even work with me? Why would we have any sort of membership program? I'm like, all right, you have hotels in New York City, that's it, okay. But if there are 20,000 booking options available in 2035 as opposed to under 10,000 today, that is more than double the value one will have compared to right now as long as the quality of the stay stays the same.

I think one concern is spreading the brand too thin. You have other people operating your brand. And I think this is where someone like maybe the Four Seasons, I haven't studied the Hyatt closely, but they maybe shine a little bit more, even if they're on the more expensive side. I remember Ryan and I, we stayed at a bad Hilton in Portland. It was way overpriced.

I mean, it wasn't terrible. It's not like it had cockroaches or anything, but I felt like it wasn't good as an experience. Like, it was fine, but it was way overpriced for the hotels in that area versus any quality that you would want. I don't think it said, all right, the Hilton brand is much better in my mind after that.

I think you have that potential for degradation if more and more people have those experiences. as you scale it gets more difficult to keep all of your locations um kind of on the up and up similar to you know mcdonald's the biggest franchisor i think globally uh it's incredible the quality of standard that they're able to maintain and hilton and marriott they probably need to learn the same lessons i think there's huge growth in licensing that you know could dilute the brand i mean what are the numbers we have here before oh it's too small on the on our screen here, the number of hotels under management, maybe it was like under 5,000.

You've doubled that in a decade. If 500 of those are, let's say, trash, for lack of a better word, that could really risk degradation of the brand is kind of the only downside I have here. and unfortunately the stock is even more expensive than marriott pe of 47 ev to ebit of 30 this is a trailing basis but still going to be more expensive than marriott i don't know exactly why my concluding thoughts like marriott great brand should be inflation protected that's one last thing i'll have here it should be an inflation protected business over the long term with little capital and requirements which is nice if you're getting it get an understandable price um the question is is it such a great business to deserve this multiple and can both of these marriott and

hilton brands durably grow what are your thoughts ryan i i do think it's a really good business uh You bring up a good point about brand damage potentially with this franchising strategy. Something I read is that usually these are long leases that are long – I don't know if lease is the right term. Long brand franchise licensing agreements that are like 20 years. and the only times you'll see churn from hotel owners is typically when marriott gets rid of them like if or marriott or hilton says you guys are underperforming so much we gotta ditch you so you'll see one to two percent of the hotels churn off annually so it's a pretty small piece it's good to do that but you you want the supply like it's a push and pull like you want high

quality but you also want enough supply in basically every decently sized city yeah the other somewhat nice benefit is that if a hotel goes under like if occupancy rates drop it doesn't crush uh hilton doesn't crush marriott right they don't they don't have to pay for the building so they can have hotels underperform and it's not the end of the world is in aggregate do do they raise the revenue per available room and i think given how they're not necessarily tied they're not as cyclical as like casino destinations they're not as tied to consumer discretionary because the business spend as well i think they're in a pretty good spot i think the formula for 10 plus per share earnings growth is really kind of bulletproof but i'm looking

at the forward pe for both of them here hilton 34 marriott 29 they don't really excite excite me at those multiples they're not gonna have they're not hyper growth they're not yeah exactly We're thinking the same thing. Of the four companies today, which one interests you the most? At today's prices or just company-wise? At today's prices. MGM, for sure. The buyback is very attractive.

Wynn is kind of stuck in the mud. They don't have a very high capital returns program, and you have that UAE project that I would be nervous about, whereas Japan I would be less nervous about, even though it's going to be opening later for MGM. And I'd put Wynn slightly higher than Marriott and Hilton just because I think that's a dirt cheap stock. But I kind of look at Hilton and Marriott and say,

you're not growing that quickly. Like, you're going to have, I'd say, like, okay, the 30-year U.S. Treasury is at 5-plus percent. Why would these outperform that? Yeah, I also find it funny. I'm sharing a chart here. Look how much these trade in tandem. Yes.

Every time Hilton goes down, no one goes down. I don't love those here. Great businesses, but right now I think there's still a lot of good opportunities in growth land, in software and tech, and we talk about those. yeah we talk about those all the time on this show that my bar is pretty high for a durable but slower grower so 30 times forward earnings it's not clearing that that bar or that opportunity cost mgm i that one does excite me i don't haven't really made up my mind on total blended growth for the business But the buyback alone is so enticing.

Here's the closing cap or hurdle. I know we're going very long on this episode. Closing hurdle for the hotel and casino market. MGM at whatever price you had, pretty cheap there. Or Amex for PE of 18, kind of as the platform layer. I like there may be the bookings, the Amexes of the world, maybe a little better. But I agree, Hills and Marriott, attractive businesses.

Yeah. Business model-wise, Hilton and Marriott I loved. I was very impressed. And I think – I don't see them being disrupted by Airbnb or Booking or Expedia or anything. They would have been by now. They're disrupting probably the Expedia's and Booking's, at least in the United States, and Booking is a different business worldwide. But yeah, I'd like Hills and Marriott over Expedia and Booking. It's different than Airbnb. But again, what's the purest way to play travel? I think Amex. I'd probably take Amex. But MGM's –

Spencer Price, yeah. I could see MGM really working out over the next five years. I can see it also mid-single digit. So I think it's heads I win, tails I don't lose situation. But yeah, I think I would take American Express over the four we discussed today. Yeah, that is one of the great hurdles. All right.

This is one of our longer episodes, so I appreciate anyone that's tuning in to the end here. This is a disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I am your podcast guest. May old securities discussed in this podcast

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