Description

Monarch Casino & Resort Inc. (MCRI) operates two regional casino resorts – Atlantis in Reno, NV and Monarch Casino in Black Hawk, CO (37 miles from Denver). MCRI fully owns both properties and has $34 million of net cash. The company is quirky: CEO John Farahi and his two brothers own ~30% of shares outstanding, they don’t have a CFO (not worth the cost), they don’t do earnings calls, rarely show up at conferences, and in recent years have only sporadically updated the investor presentation on their IR page. There’s a decent corporate history video from 4 years ago that details how they built up the company after originally purchasing a roadside motel in Reno: https://www.youtube.com/watch?v=u2UuK2ldLYw

At $66, MCRI trades at 7.0x/14x/12.8x my 2024 estimates of adj. EBITDA, EPS, and FCF. The FCF in particular should improve a fair amount as they finish up significant renovations at Atlantis. The stock trades at a 9.8x multiple of my estimate of 2025 FCF.

But, almost all of the regional gaming names screen very cheaply right now. Absent a meaningful recession, or a change in promo philosophy post-covid, I think you probably do fairly well with any of them. There is some good discussion on the CZR ideas here about this dynamic. MCRI is my favorite of the cheap gaming names for two more unique reasons:

• The Farahis should be sellers in the near future.
  1. John is 73 and has no successor. His son David was COO until September 2021 before stepping down. I understand that David is involved in a few startups, is teaching university courses, and has small children at home. In addition to seemingly not being interested in running MCRI, he also recently has gained experience selling a business as a board member of AGS. This would be valuable for counseling his dad and uncles on the process. John’s other son Daniel is I believe in his mid-30s. He’s involved in the business but not yet a high level exec.
  2. They have been trying to do another acquisition for multiple years but have failed to find a target. The involvement of REITs in the space has fundamentally changed the dynamic between buyers and sellers. Almost every gaming asset transaction recently has included a REIT in the deal (propco), and they’re simply able to pay a higher multiple of EBITDA (for at least a portion of EBITDA) than operators whose own stocks trade at 5-7x, or less.
  3. The most recent REIT transaction in gaming, announced two weeks ago, was GLPI’s purchase of Silverado Franklin Hotel & Gaming Complex and Deadwood Mountain Grand Casino in Deadwood, SD and Baldini’s Casino in Sparks, NV. The cap rate was 8.4% (11.9x multiple) and this is a much worse set of assets than MCRI’s two properties. If you simply apply this same multiple and assume that rent is half of EBITDA (~$89 million), you get proceeds of $1,056 million for MCRI and an implied remaining opco multiple of 2.1x. The REITs in this sector are basically spread players: they buy properties/rent streams at cap rates that are higher than their cost of debt. If and when rates start to go down, the multiple they pay for properties should go up.

• Two interesting pieces of information came out in April and May that went largely unnoticed:
  1. MCRI bought back $19.5 million worth of stock. This is the largest buyback the company has ever done and made up 1.4% of diluted shares outstanding.
  2. They published their first updated investor presentation since August 2023 that showed Monarch Black Hawk’s market share has continued to increase, to 30.4% over the LTM period. This is new information as Colorado doesn’t publish property level information, MCRI doesn’t break out revenue or EBITDA by property, and they don’t do earnings calls. If you look at slide 14 on their presentation, the share keeps going up. Since this is LTM share, Q1 is something decently above 30.4%.

If I’m wrong about them selling the business, I don’t think you get killed in any reasonable downside scenario. Reno is not a great market after the tribes in California have built a number of resorts essentially on the way from the California population centers to Reno, but the population is growing, and MCRI’s Atlantis is positioned in the southern portion of the market and away from the most competitive downtown area. Black Hawk is a completely different beast: the market is supply constrained due to Colorado legislation and the realities of geography in the mountain towns where gaming is allowed, while the Denver metro areas continues growing each year. Read FLL’s latest transcript (always an entertaining read or listen each quarter anyway) for some good discussion of how “undergamed” Colorado is. MCRI’s EBITDA should grow in almost all reasonable economic scenarios in 2024 and 2025, and the CEO is not going to do anything stupid.

Monarch Casino Resort (Black Hawk, CO)

The original Monarch property opened in 2000 as Riviera Black Hawk before being acquired by MCRI in April 2012. In conjunction with acquiring the casino property for $76 million (7.4x trailing adj. EBITDA), MCRI covertly purchased a contiguous 1.5 acre parcel from a different seller that would allow for future expansion of the Riviera property. This expansion eventually opened in phases from 2020-2022, and the result has been a home run as show below.

The Black Hawk and Central City markets did a total of about $922 million of gaming adjusted gross proceeds (AGP – drop minus payouts), so this market share represents about $280 million of AGP attributable to Monarch. Note this is about in line with MCRI’s entire reported gaming revenue, so after factoring in promos, the Black Hawk property is likely doing somewhere around 75% of the company’s gaming revenue. Of ~$175 million of adj. EBITDA for 2024, I believe Black Hawk is doing $105-110 million.

Qualitatively, Monarch is by far the nicest casino in the market. PENN has an Ameristar property on the far end of the main drag of Black Hawk from Monarch. This is a decent property that’s now showing its age after being built in 2001. CZR owns two subpar properties across the street from Monarch – Lady Luck and Horseshoe. BALY owns a hodgepodge of three buildings that are technically casinos but I think two of them are actually just old houses with some slots in them. The Lodge is locally owned and competes more on an “everyone knows your name” basis, with a generous buffet to match. It’s tough to tell the disparity in quality between the competitors just by looking at a map and the basic stats (rooms, slots, tables, etc.), but spend a few hours walking Black Hawk and it will be obvious why they are taking so much share. Also, it is worth mentioning that this is a very tough labor market due to a lack of local housing – the nicest, busiest property disproportionately attracts quality labor when a large chunk of your income is from tips.

Atlantis

The last time MCRI disclosed revenue and EBITDA by property was 2013, when Atlantis did $36.4 million of EBITDA. Since then, Washoe County gaming revenue has gone from $728 million to $981 million (+35%) in 2023. Atlantis picked up ~150bps of market share over that time but has leveled off in recent years. MCRI has found ways to keep the property somewhat fresh – upgrading hotel towers, adding restaurants, etc. – but this is a mature property in a competitive market. Splitting the portfolio in a sale process may be difficult, but this asset probably isn’t worth a ton more than the value to a REIT (11-12x a rent stream of $25-30 million).

Putting it together

You have a reasonable set of multiples for a business that is growing profits and FCF. More importantly, the Black Hawk asset is worth a significant premium to the Atlantis asset, and the business will continue to shift toward the higher quality property. Colorado is significantly undergamed and only in the past three years have table game bet limits been eliminated. I believe Black Hawk has many years of mid single digit plus growth ahead of it. For an acquiror of the business, the Monarch is a crown jewel-type regional casino asset, and Atlantis could either be kept as a cash cow or easily monetized.

A DCF valuation with ~4-5% EBITDA growth over the next five years, then low single digit growth beyond, supports a fair value of ~$88.

Capital allocation

As mentioned, the Farahis are owner-operators. The current dividend yield is a reasonable 1.8%, and they paid a $5 a share special dividend in March 2023. Absent an acquisition, you should expect another one of these within 12 months. John is not a huge fan of leverage but does recognize that the appropriate leverage on the business is not zero. There is existing authorization to repurchase an additional 2.5 million shares (~$170 million). The stock trades 95k shares a day.

Capex has averaged $81 million a year over the last six years, but only $45 million in the last three. It’s important to note that most of this capex was spent on the Monarch expansion. New casinos typically need minimal capex until years 4-5 or beyond, so cash conversion from EBITDA should average north of 60% for the next 2-3 years or so.

Catalyst

Sale

Buybacks/special dividend