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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for participating in the Fourth Quarter 2020 Earnings Conference Call of Melco Resorts & Entertainment Limited. At this time, all participants are in a listen-only mode. After the call, we will conduct a Q&A session. Today's conference call is being recorded.
I would now like to turn the call over to Mr. Timothy Mazik. Thank you. Please go ahead sir.
Thank you for joining us today for our fourth quarter 2020 earnings call. On the call today are Lawrence Ho; Geoff Davis; Evan Winkler; and our Property Presidents in Macau, Manila and Cyprus.
Before we get started, please note that today’s discussion may contain forward-looking statements made under the Safe Harbor provision of Federal Securities Law. Our actual results could differ from our anticipated results. In addition, we may discuss non-GAAP measures; a definition and reconciliation of each of these measures to the most comparable GAAP financial measures is included in the earnings release. Finally, please note that our supplementary earnings slides are posted on our investor relations website.
With that, I’ll turn the call over to Lawrence.
Alright, thank you, Tim and hello everyone. During the fourth quarter, our integrated resorts continued to experience a gradual recovery in business levels despite increasing COVID cases throughout the world, thanks to both the Macau and the Mainland Chinese government measures and prudent approach towards border reopening. We have not seen any locally transmitted COVID cases in over 300 days.
Benefitting from the resumption of visa issuance, our Macau mass table games operation which contributed the vast majority of our EBITDA in pre-COVID times saw notable sequential improvements from third quarter to the fourth quarter. We reported all top positive property EBITDA for both Macau operations and our overall global operations.
We remain optimistic on the recovery in Macau and continue to expect increased visitation in the near-term. Earlier this week, with the renewal of the remaining two cities on the Macau’s medium risk list, all quarantine restrictions were lifted for those traveling from Mainland China to Macau. More notably, there are no quarantine restrictions for those Mainland Chinese citizens who are returning from Macau.
In Macau, while we continue to see improvements in our business volume, ensuring the safety and well-being of our colleagues, customers, and the communities in which we operate remains our highest priority. We continue to expect a faster rebound and faster growth in both the premium mass and premium direct segments which will benefit Melco’s portfolio of luxury integrated resorts.
Our current expectation is that we will begin to see the benefits of pent-up demand starting in mid-to-late March. Business trends continue to improve in the Philippines and City of Dreams Manila, generated positive property EBITDA without gaming or hospitality operations running on a limited trial run bases as authorized by PAGCOR.
While there was a swift return of the domestic gaming demand at Cyprus casinos in the third quarter of 2020, an increasing number of COVID cases that the Cyprus government to announce a second lockdown during the fourth quarter. This resulted in a partial closure of our casinos from November 13th and a full closure from December 1st.
Despite the global pandemic, Melco remained committed to its global development program. Our next major project in Macau is Studio City Phase 2 where construction is ongoing. Upon completion, the Phase 2 expansion will increase Studio City's hotel room inventory by approximately 60% with two new hotel towers offering approximately 900 luxury hotel rooms and suites.
Gaming spaces will be expanded and new non-gaming attractions will also be added including a Cineplex, one of the world's largest indoor outdoor waterpark, fine-dining restaurants, and state-of-the-art MICE space.
To further strengthen our competitive edge in between the MICEspaceand Macau our upgraded works continue at City of Dreams and the fully renovated Nuwa is expected to open at the end of March.
We plan to close the countdown in the near to medium-term reducing the detail and transforming the tower into an all three five star product with a targeted reopening in 2023. The renovation at the countdown will give us five star offerings across all towers at City of Dreams further enhancing our position as the leading premium property in Macau.
In Cyprus our developmental City of Dreams Mediterranean continues to progress. After completion, it will be Europe's largest integrated resort with over 500 luxury hotels rooms approximately 10,000 square meters of MICE space, an outdoor amphitheater, a family adventure park, and a variety of fine-dining outlets and luxury retail.
Turning to Japan, we want to highlight our commitment to bringing a world-leading IR there and continue to pursue opportunities within the market. While the process in Japan has been delayed and remains complex, it has renewed momentum as jurisdictions again initiating RFC processes.
We remain convinced that Japan represents the best potential new gaming market globally. At the same time, we remain patient and will maintain our disciplined approach with respect to all development activities including Japan.
Finally, I remain confident in Macau’s medium and long-term growth prospects. I believe Macau is still the most attractive integrated resort market in the world. Our balance sheet was further strengthened by our recent capital market transactions enabling us to overcome near-term challenges while investing for the future.
With that, I'll turn the call over to Geoff to go through some of the numbers.
Thanks, Lawrence. In the fourth quarter of 2020, we reported group wide property EBITDA of approximately $53 million, while luck-adjusted EBITDA came in at $49 million. A favorable VIP win rate positively affected EBITDA at COD Macau and COD Manila by approximately $9 million and $1 million respectively.
At Studio City and Altira, EBITDA was negatively affected by an unfavorable VIP win rate by approximately $4 million and $1 million respectively. On a consolidated basis, overall results were positively impacted by approximately $5 million. Details of these adjustments can be found in the supplementary earnings slides posted on our Investor Relations website.
In addition to the VIP win rate fluctuation, our performance was also affected by our bad debt provision. During the fourth quarter of 2020, we incurred a bad debt charge of approximately $23 million as compared to a bad debt charge of approximately $12 million in the fourth quarter of 2019. On a year-over-year basis, the change in the bad debt provision negatively affected EBITDA by approximately a $11 million. Additionally, our fourth quarter 2020 EBITDA was positively impacted by a $16 million bonus reversal.
Turning to our balance sheet, to optimize our capital structure, in January, Studio City issued $750 million of 5% senior notes due in 2029. The proceeds were used to refinance the $600 million of 7.25% senior notes due in 2024 with the remainder of the proceeds raised to be used for Phase 2 CapEx and general corporate purposes.
The transaction reduced our average borrowing rate and extended our maturity profile with Studio City's next material debt maturity not until 2025. Also in January Melco utilize favorable market conditions to tap the 5.375% senior notes due 2029 for an additional $250 million. The tap was priced at 103 and a quarter of par which resulted in an effective borrowing rate of approximately 4.9%.
At the end of December, we had approximately $1.8 billion of cash on-hand. Pro forma for the capital markets transactions in January, our cash balance would have been approximately $1.9 billion, when combined with our undrawn revolver facilities in Macau and Manila of approximately $2 billion. This implies pro forma available liquidity of approximately $3.9 billion at the end of December.
To provide more clarity on our capital structure, Melco excluding our operations at Studio City, the Philippines and Cyprus had cash of approximately $900 million and gross debt of approximately $4.1 billion at the end of the fourth quarter of 2020.
As we normally do, we'll give you some guidance on non-operating line items for the upcoming quarter. Total depreciation and amortization expense is expected to be approximately $145 million to $150 million. Corporate expense is expected to come in at approximately $20 million to $22 million and consolidated net interest expense is expected to be approximately $94 million to $98 million, which includes finance lease interest of $11 million relating to City of Dreams Manila, and $4 million of capitalized interest.
This concludes our prepared remarks. Operator back to you for the Q&A.
Certainly. [Operator Instructions] We have the first question from the line of Joe Greff from JP Morgan. Please go ahead.
Good evening to you guys. Thank you for taking my question. Lawrence, you're telling today is probably at least to us is the most optimistic and end of this year and your comments about your expectations for increased visitation in the near-term. And more recovery in the mid-to-late part of March has caught our attention.
Can you talk about what's ruining this increased optimism relative to just three months ago? And how much I mean, we obviously had some clear positives recently travel restrictions easing, how much of this optimism is rooted in I guess more traction or ease coming from visa issuance from Mainland China?
Sure. Hi, Joe. Why don’t I give like the high level and I'll pass it on to David so it should give more of the details. I think our optimism can really come from seeing what happened with the tail end of Chinese New Year. And seeing how strongly that kinds of demand was coming back even last week. And also as there are no more cities on the quarantine with from Mainland China.
And beginning of March is always the major political two session meetings. I think after that, there are just many pieces that are getting incrementally better. And with the vaccine roll-out happening in China and the rest of the world, I honestly see -- I think a year ago when we did this call for the Q4, 2019 we were the very first one to say this is going to be very slow and very gradual.
And so I think finally, we are seeing the light at the end of the tunnel. And when we look at the consumption behavior in China, it is very impressive given how successful China and also Macau has controlled the virus. So, I think with all of those pieces together and even today there was a little bit of news that Taiwan has resumed it's the route between Taiwan and Macau.
So, all of these little pieces added together and I think the main thing we are seeing how strong the tail end of Chinese New Year was. I don't know David?
Yes. And there are couple of things. I think one of the things as Lawrence mentioned the tail end of Chinese New Year. Going in we have pretty well expectations on what's going to happen because of the restrictions that Macau has put out there. As these restrictions started dropping, we just the late arrivals that came in for Chinese New Year, it's pretty incredible much more than we thought was going to happen.
And then the quality of play that we started seeing for Chinese New Year. So, we were seeing a build-up in the fourth quarter, then the restrictions started pointing up right after that first week of January, we started seeing it kind of drop-off. But how fast to return once those restrictions drop and how fast the play started coming down.
As IVS comes back, and that are -- and these and other things start coming into play more -- the customers want to come, I just want to reiterate that really made us pretty happy that we started seeing a lot more customers coming in some Guangdong in that region, which we hadn't seen before. We also saw customers that we hadn't seen before and pretty indirect for atleast ayear.
So, we know the demands out there with people who want to come here. So, if these things continue to improve, like we think they're going to, as the vaccine roll-out, as the number of travelers are able to come and starting to make it so it's easier for them to come, we know that the things are going to improve. So again, we think that hopefully we turned a corner here.
So and Joe, one more thing I'll add on to David reminded me of something. And then speaking to various levels of the government, they are very proactively talking to China and the relevant bureau in terms of restarting the e-channel for the visas, restarting group tours.
So, there's a lot of incremental positive that they're working on. And with the -- with COVID being under control in China, we do think that once visitation returns and it's easier for people who get into Macau, the appetite is definitely there. And we saw it sort of then lastly.
Great. Thank you very much for the thoughts.
Thank you. We have our next question from the line of the Billy Ng from Bank of America. Please go ahead.
Hi, good evening, and thanks a lot for hosting the call. And I think just want to follow-up with the previous comment regarding the order normalization. I know the situation is still quite fluid but Lawrence would you mind to give us some your personal thoughts about like the following border normalization timing of the following border of normalization, including the e-channel that you mentioned, Hong Kong, Macau reconnection and also like other types of visas, including group travel and transit visa.
What should we expect in terms of seeing a bit more relaxation? Will that be a bit like the next couple months or it will be more realistically is still three to six months away?
I again -- Billy I think we were very -- we've been the most realistic. And for the last year, we probably feel like the most pessimistic and Debbie Downer. But I honestly believe seeing how the vaccine roll-out in China, Hong Kong. And at the end of the day, you look at Macau, Greater China, Hong Kong, Macau, Taiwan, and China is over 90% of all business.
So, I think that's the key to restart. I feel like the restarting some of e-channel stuff, I -- and again, this is ultimately up to the discussion between Macau and the Chinese government. But assuming vaccine roll-out is going smoothly in Macau, it started at Hong Kong, it started -- I do think is really two or three months rather than for the last year we've been looking longer and longer.
So, I do think it's probably two or three months. So, hopefully sometime in Q2 maybe end of Q2 we'll see some normalization. And Macau, Hong Kong, and China has taken a very scientific approach. So even Hong Kong, which is about 20% -- over 20% of our business, yes I think the Macau has clearly told Hong Kong that if they start having a health code, the thing that Macau and China is sharing right now and that they have fewer than I think 10 daily local transmitted cases.
I think that code will reopen. And so there are a lot of incremental positive because Hong Kong is really close to that number now. So again, I -- for the first time in nearly 12 months, we see a lot more positive than negative.
Thanks. That's very helpful. And my second question is just want to get a bit more color about the Chinese New Year traffic. And as you guys just mentioned, you see some of the new customers are or customers that haven't been back for quite some time, and also their spending power.
Can you tell us a bit more have you seen like the reason traffic and compared to the Golden Week, do you see they spend a lot more or is the same type of customers. But they just spend, that behavior change a bit or is a different type of customers. Any color that you can share will be appreciated?
I think let David go into the details. I think we compared very favorably to Golden Week surprisingly, especially the last week but --.
Yes, we definitely due to the Golden Week in October 2020, I think maybe a couple of things to take away. Obviously, this is being led right now because by our premium segments both our premium mass and our premium direct. We've not seen the mass/mass return yet, you can see that obviously in the visitation numbers that the government has posted. But it's been on the premium.
I think one maybe one other thing to take away from this is, if you look at the room nights, we weren't sold out in our hotels. But if you look at our occupied room, I feel that the theoretical per room and the players that we had coming in, it's the best we've seen since the fourth quarter of 2019. So again, we're optimistic as we look out into the future here, we think things are freeing up more and more.
Like I said, before, many calls, we know that customers want to come. We know the demand is there. They just need to be allowed to come and we think things will just jump from there. So, it was pretty amazing when we go back and look as they started dropping the number of cities and provinces as they started moving them off the list. And the number of people that came in. Traditionally, Macau has got a very late booking window.
We've had so many day of arrivals and players that have either cancelled or said they weren't coming but ended up coming; it was pretty extraordinary for us. So again, we weren't sold out, it wasn’t like it normally was it for Chinese New Year but it was much better than we've seen at the October a Golden Week. And we think there's again room for optimism as we go forward here. We know customers want to come.
Thank you. Again, that's very helpful.
Thank you. We have our next question from the line of Praveen Choudhary from Morgan Stanley. Please go ahead.
Thank you. Hi Lawrence, hi Geoff, and also hi David. Quick question from me. One is on Hong Kong opening, which I think is obviously the most important in the near-term to help Macau. And then second, I have some numerical questions.
On Hong Kong opening, in December we were trying to open up with Singapore and there were some comments made that Hong Kong needs to show zero number of local cases for a consecutive seven days before either Macau or China opens up. Could you just update us if that's changed or things are looking a lot better because of vaccination? And what's your realistic assumption of all the people of Hong Kong and Macau getting vaccinated. Is that when we get a full-fledged easy access to these two reasons, please. And then I have some numerical questions.
Hey, Praveen, I didn't hear the question perfectly. But so let me try to guess what. I think what has changed between Hong Kong Macau is from Macau's angle and in my prepared remarks, Macau is nearing the first anniversary of zero locally transmitted cases. So, from Macau government and I am a 150% agreement with them is that the most important lot line lifelines in Macau is obviously the Mainland Chinese market.
And so Macau is not going to risk that with Hong Kong. And the definition in Asia in Greater China about controlling COVID is very different from the west; controlling COVID in this part was almost the elimination of it. In the west, I think it's always going to be like a cold or flu. So, even though Macau -- I mean, even though Hong Kong had under a 100 cases, that was considered way too much for both China and Macau. And so Macau isn't going to risk closing the China portal for Hong Kong that way.
But I think given some of the more drastic measures that the Hong Kong government has taken in the last few months to control their so called fourth wave, I think now that the numbers are coming down and that's why Macau and Hong Kong are having those discussions. And again as I reiterated, is a very scientific approach in terms of how they look at it.
So, again given the numbers and hopefully Hong Kong does not have any other major outbreaks and with the vaccination program started, I think that addresses what David talked about, which is if people can come, it certainly is apparent to us now that they will come. So, there isn't any permanent change in behavior, people are still longing for that excitement and entertainment that Macau has to offer.
That's great, thanks Lawrence and then I agree with you on that point. And sorry, greetings to Evan as well. So, my question on the numbers for Geoff would be three questions. Could you talk -- tell us about the cash flow from Manila, I would assume that even that’s EBITDA positive, maybe the cash flow is negative?
The second question was OpEx number for fourth quarter versus third quarter, is it does it have to go up as volume goes up? And the third question is, not every company reports bad debt number but you do. Although these numbers look a little bit on the high side, can you just explain why are these numbers on a sequential, I mean, in the last three four quarters have been a bit on the high side? Thank you, so much.
Sure. So, for the last one first, on our bad debts. As you know, we provide that every quarter just to provide some transparency to you and our investors. And yes, it's definitely elevated from what you can call maybe normal levels. And that's just a reflection of the operating conditions we have on the ground in Macau over the last year. As you know it's been very challenging. So, I would say that we'll begin to normalize that bad debt provision going into 2021 and over the course of 2021. I think your second question was on Macau OpEx, right?
Yes.
So, the daily OpEx number in the third quarter was approximately $1.7 million. That did increase as volumes returned into the fourth quarter at about $1.9 million. And, as -- with a backdrop that was provided recently by Lawrence, as the business continues to improve, yes, I would expect OpEx to continue to increase as the volume returns. And some of those variable business driven costs come back into the system.
And then there was last question on cash flow from Manila. Thank you.
So, cash flow from Manila, you're right the property level number of about $17 million once you get through some of the charges against that, rent payments, et cetera. Yes, after that the net number after the recharges property or rental, et cetera, that is slightly less than breakeven.
Great. Thank you, so much.
Yes, like its all way minimal.
Yes, thank you.
Thank you. We have next question from the line of Simon Cheung from Goldman Sachs. Please, go ahead.
Hi, everyone. Thanks for taking my question. I have two questions. One, Lawrence, you sounds quite optimistic and given all the trouble, potentially trouble restriction relief. Obviously, normalization is one thing. But wanted to get a sense how you think about the pent-up demand.
If you were to put a number in a reassessment of the pent-up demand, but we see maybe some of the loss gaming demand would have like what 20% going to be coming back or 30% then maybe coming back, that's the first question. And then the second question and given the also the current situations, how will you think about the Studio City Phase 2? Are you having any flexibility to speed up the constructions and see whether you have any update on that as well? Thank you, thanks a lot.
Yes Simon, let me answer your second question first. So, for Studio City Phase 2, we haven't slowed down at all. Because we do think that around the end of 2022 beginning of 2023 that the market would have been fully recovered and then so on. And so we think that's a great timing to open a new property. And so we haven't slowed down, we're committed to working with the government on the development period given the COVID delay.
So, we're very happy with it. And then, if anything, that building is the two help ours already up to seven floors. And so hopefully, by the end of 2021 before the end of 2021, we will top up the building and we'll spend the bulk of 2022 doing all the interior setup. So, we're very happy on that front.
In terms of the pent-up the return on pent-up demand. Again, I think 2021 is going to be a year of rebuilding and recovery. So, and drudging from COVID and how the success factors that has enabled China and Macau to control the virus, I also don't think that there's going to all of a sudden open the floodgates and let people rush in. So, as David mentioned earlier on, it is really a function of how many people we can get into the property.
And that way, you see more of a segregation as well. And you see it right now, the premium segments are doing better than medium mass segments are doing as well because the sheer number of people allowed to come in isn't that high. And that's why within our own portfolio you are seeing a divergent; City of Dreams is doing very well, Studio City and Altira does not. So, but I do think by the end of 2021, the market should be operating at close to like fourth quarter 2019 levels. Of course, other than the VIP segment which is another story.
Okay, that's very helpful. Thanks, for the insight. I appreciate, thank you.
Thank you. We have our next question from the line Shane Ng [ph] from American Century. Please go ahead.
Hi, thank you for taking my question. Just to follow up on your previous comments about more optimism heading into this year. Could you kind of give us a sense of how you're looking at historical GGRs and annual visitations exiting the circles, thank you.
Geoff, do you want to take that?
Sure. Evan is here if he has anything he can add. We definitely anticipate without a specific number or sort of a run rate or even for full year, we definitely expect over the course of this year both visitation and GGR to ramp up meaningfully from where we are today as part of a continuation of the ramp up that we started to see towards the tail end of last year.
So, with all of the factors that Lawrence has discussed, we absolutely believe that 2021 for the market and for Melco will be a rebuilding year, as we see visitation and GGR ramp up.
Got it. Thank you.
Thank you. There are no further questions. I would like to hand the call back to Tim.
Thank you for participating in our conference call today. We look forward to speaking with you again next quarter.
Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect now. Thank you.