Wednesday, November 3, 2010

Las Vegas, Lagging Economic Indicator

BUSINESS

Rolling Dice on Giant Casino Complex

NOVEMBER 2, 2010

By ALEXANDRA BERZON, Wall Street Journal

The massive City Center casino complex opened in Las Vegas last December amid the steepest decline in tourism there in decades. Now, its owners are still scrambling to figure out how to fix the 67-acre development's financial problems.


The $8.7 billion project, with its hotels, condominiums, casino and giant mall designed by Daniel Libeskind, is the largest privately funded construction project in the U.S. It was supposed to usher in a new era of sophistication and urban living in the gaming capital. But it almost collapsed before it opened, and because of its huge scale, its fortunes and those of Las Vegas are closely linked.

Over the summer, executives of Dubai World and MGM Resorts International, which jointly own the project, studied and rejected closing two of the site's three hotels and the Viva Elvis Cirque du Soleil show, according to documents reviewed by The Wall Street Journal.

The documents show that the partners have also outlined a plan to seek relief on the terms of the complex's $1.8 billion loan, which requires the joint venture to earn far more cash than currently seems feasible. If they can't renegotiate the terms, City Center could be in default on the loan as early as mid-2011.

"It is the duty of a board to look at everything," says Jim Murren, chief executive of MGM Resorts, referring to the joint venture's internal deliberations. "We throw out many ideas to see if they're feasible, productive or destructive.… I'm proud of what we did. We have cut costs in a variety of ways at City Center."

Dubai World declined to comment separately from Mr. Murren, who said he was speaking for the City Center board.

Between Jan. 1 and Sept. 30, MGM Resorts reported publicly, City Center had a net loss of nearly $1 billion, including $600 million in write-downs. The resort's value has dropped from about $5 billion a year ago to about $2.4 billion.

In the second quarter, MGM Resorts has disclosed publicly, both MGM and Dubai World had to contribute an additional $32.5 million just to keep operations at City Center going. Recently, MGM Resorts also had to spend hundreds of millions of dollars to close out the construction, and there are still construction liens against the property, which are being litigated.

In July, the resort's executives predicted substantial improvement next year. Already, according to a preliminary earnings report released in October, City Center is doing better, though It is still on track to violate loan rules.

The venture had already planned to approach its lenders to address the problem by the end of this year and to work on restructuring the loan next spring or summer. Mr. Murren says that's still the plan.

Nonetheless, the issue of cost controls appears to have reignited some of the simmering tensions between the partners, according to the minutes. (The documents reviewed by the Journal included minutes from City Center Joint Venture board meetings on July 28 and Aug. 5, financial reports and plans in a briefing book for a later board meeting.)

On July 28, Christopher O'Donnell, chairman of Dubai World's Infinity World Development Corp. subsidiary, and George Dalton, group general counsel of Dubai World, expressed concern that MGM Resorts "always seems to be reducing" its forecasts for revenue, according to the minutes. Mr. O'Donnell added that "if certain operations are not making money, we should close them."

MGM Resorts' Bill McBeath, who oversees Aria, the main casino hotel at City Center, responded that "we need to keep operating our venues [because] our high-end international customers expect superior service."

A week later Mr. Murren returned with a plan to cut $800,000 from the staffing for table games and $200,000 from the buffet-food offerings, but Mr. O'Donnell initially expressed disappointment with the size of the cost savings, according to the minutes.

Another major concern for Mr. O'Donnell was disappointing numbers from Mandarin Oriental, the highest-end hotel at City Center and the only one managed by an outside luxury hotel chain. At the July 28 meeting, Mr. O'Donnell suggested that City Center not pay its management fee or executive salaries "to get their attention."

At the Aug. 5 meeting, Mr. McBeath said that he had told Mandarin management that the City Center board had "drawn a line in the sand" and that it would wait until it heard back before taking "more drastic action." Mandarin Oriental officials from the Las Vegas property and the parent company didn't respond to several requests for comment.

Mr. Murren said last month that the company never contemplated any legal action against Mandarin and that Mandarin's performance has improved.

Another issue facing City Center executives is what to do with the roughly 1,950 condos they're stuck with as the sales process winds down. At one time the project's 2,400 condos were expected to bring in $2.7 billion, but now total sales are just $372 million, including $163.5 million from deposits that were collected long ago, when the value of the Las Vegas real-estate market was more than 50% higher.

Many of the unsold units are back in the pool of available hotel rooms at Vdara, a condo hotel building. But just holding on to the roughly 530 condos that are likely to still be unsold next year will cost the company around $11 million a year, the documents indicate.

City Center hopes to make back some of its costs by leasing about 200 of the units. Another plan, which hasn't been implemented yet, calls for making City Center more "livable," including installing a grocery store.

Mr. Murren chalks up the disappointment with City Center to the slower-than expected recovery nationally and in Las Vegas, and to the time it takes for a new resort to gain traction.

But the project's unusual design and huge scale have produced other complaints, say casino insiders and frequent visitors. MGM is working on fixing some of the problems, such as dark lighting in the casino.

According to the documents and Mr. Murren, the company also plans to change the decor in the buffet upstairs, which is "too cold," at a cost of $1 million. It has also spent $5 million to plant more trees and plants at Aria, and it has reconstructed the high-stakes gamblers room.

By the end of the Aug. 5 meeting, Dubai World's Mr. O'Donnell, who had earlier demanded dramatic cuts, concluded: "You can only cut expenses so much" and "what is needed is for us to build revenue."