Friday, May 7, 2010

Canary in the US Discretionary Spending Coal Mine

City Center Resort's Performance Indicating the Current Health of Las Vegas

By ALEXANDRA BERZON, Wall Street Journal

Las Vegas's City Center resort, the most expensive hotel-and-casino development to date, bled cash during its first full quarter of operations.


The $8.5 billion City Center, jointly owned by MGM Mirage and Dubai World, struggled to fill its 4,000-room luxury hotel after opening in December. It has only been able to finalize sales of about 100 of its 2,400 luxury condominiums. And it is enmeshed in a dispute with its chief contractor, Perini Building Co., over about $500 million in construction fees.

In the first quarter, City Center recorded an operating loss of $255 million. That includes a $171 million write-down in the value of the project's condos. The company took back $24 million from buyers who forfeited their deposits on condos. Before accounting for the write-downs or other charges, City Center incurred a loss of $32 million.

City Center President Bobby Baldwin joked during a conference call with analysts Thursday that if the trend doesn't improve by next quarter, "I won't be on the call."The success of City Center has implications for the rest of Las Vegas. Other properties along the Las Vegas Strip have always worried that if City Center's occupancy rates remain low, the resort might be forced to discount heavily, sparking a price war that could drag down the broader market.

But he and other MGM Mirage executives remain upbeat about the long-term prospects for City Center and insist that it is poised to benefit as Las Vegas rebounds from a deep downturn. Already, the number of people occupying hotel rooms is showing signs of improvement.

MGM Mirage Chief Executive Jim Murren said that the company expected to have a tough first quarter amid the recession. "But the trends have been moving sequentially in the right direction," he added during a conference call.

Mr. Murren conceived of the City Center project six years ago as a way to create a new urban center for Las Vegas. He shepherded it through to completion, even as its prospects grew dimmer. The project consists of six towers filled with luxury condos, a 150,000-square-foot casino and three hotels, in addition to a mall designed by Daniel Libeskind.

The construction costs were so massive, that at one point last year City Center narrowly avoided bankruptcy.

On Thursday, MGM Mirage reported a first-quarter loss of $96.7 million compared with a profit of $105.2 million a year earlier. Much of the loss was caused by City Center. The company released preliminary results last month.

The centerpiece hotel and casino, Aria, had an occupancy rate of 63% for the first three months of the year, 22 percentage points below the 85% rate for MGM Mirage's nine other Las Vegas Strip casinos during the first quarter.

So far, investors have been patient, expecting that the property—and the company—will benefit from a Las Vegas recovery. The region continues to lag other big hotel markets.

Las Vegas Sands Corp., which also reported its first-quarter earnings Thursday, offered an indication that the picture in Las Vegas may be improving. The company posted its first profit in two years as its earnings rose 62% in Las Vegas and quadrupled in Macau.

Like Messrs. Murren and Baldwin of MGM Mirage, Las Vegas Sands CEO Sheldon Adelson said he was encouraged by increased group bookings in Las Vegas. But while leisure rates have appeared to jump during the past four-to-six weeks, group rates haven't shown signs of improvement, Las Vegas Sands executives said.

Large Las Vegas resorts like City Center often report higher-than-normal expenses in their first quarter as they ramp up business.

Analysts say the property's true potential and success won't be measured until after a Las Vegas comeback fully takes hold.

"City Center is a worry," said Sanford C. Bernstein analyst Janet Brashear. "MGM obviously has high hopes and we know the market is going to recover, but the casino world is fickle."

In an interview, MGM Mirage Chief Marketing Officer Bill Hornbuckle said he is planning new marketing campaigns and will continue to use lower rates and promotions to boost occupancy. "Like anything in gaming, luck always becomes a factor," he said. He added that he expects occupancy and room rates to stabilize as the group-sales business picks up. "All signs are good. Remember, the cure-all here is simply time," he said.

Though the construction cranes have gone, City Center is still embroiled in a $500 million dispute with Perini over how much responsibility the contractor should bear for the Harmon Hotel, where serious construction problems occurred. As a result of the discovery of defects there that needed to be remedied, the Harmon building is half as tall as originally planned. Now its opening is delayed indefinitely.

It also remains unclear how much money City Center's condos will eventually bring in. At the height of the market, condo proceeds were expected to bring in $2.7 billion. Now, the number of buyers who will ultimately close on a condo sale is uncertain.

New-home prices in Las Vegas are down about 40% from their peak in 2006, with the luxury condo market experiencing larger declines. The company reduced condo prices at City Center by 30% and has closed on the sales of 109 units so far, for $119 million. City Center provided the loans for those sales. Around an equal number of condo buyers have chosen to forfeit their deposit and walk away from the deal, said Tony Dennis, executive vice president for MGM Mirage's residential-sales division. Mr. Dennis said an additional 600 buyers are in the loan-approval process.

—Kathy Shwiff contributed to this article.
Write to Tess Stynes at tess.stynes@dowjones.com