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Gaming Guru

Howard Stutz

Citycenter development: Financing fears 'overdone'

6 August 2008

LAS VEGAS, Nevada -- Wall Street's concerns about MGM Mirage's delay in completing financing for its massive CityCenter development are overblown, MGM Mirage executives said Tuesday.

During the company's second-quarter earnings conference call, in which MGM Mirage reported a 68 percent decline in net profits, company officials said they had secured commitments for $1.65 billion of the necessary $3 billion in financing and said they would complete it by the end of September, if not sooner.

MGM Mirage is working on obtaining the rest with Dubai World, its joint venture partner in CityCenter.

"I think it's been overdone in terms of interest on this," MGM Mirage President and Chief Operating Officer Jim Murren said in response to one of several questions about the financing for the $9.2 billion CityCenter. Murren said MGM Mirage could have closed the financing earlier, but not at terms the company was willing to pay.

"We have firm commitments; we're in the home stretch and that's why we believe it will close this quarter," Murren said.

MGM Mirage said the lead banks include Bank of America, Royal Bank of Scotland, UBS, BNP Paribas and Sumitomo Mitsui. CityCenter has also received commitments from Deutsche Bank, Morgan Stanley and the Bank of Nova Scotia.

Even when the financing is complete, MGM Mirage and Dubai World, the investment arm of the Persian Gulf state, will have to split the funding of an additional $2 billion next year.

MGM Mirage officials said some of the funds may come from the closing of sales of the more than 2,400 residential units at CityCenter, rather than cash reserves. CityCenter will include a 4,000-room hotel-casino, multiple boutique hotels and high-rise condominiums, retail, entertainment and dining on a 77-acre Strip site.

MGM Mirage said its net income in the second quarter that ended June 30 was $113.1 million, or 40 cents per share, compared with $360.2 million, or $1.22 per share, in the same quarter a year ago. Analysts polled by Thomson Financial expected net income of 42 cents per share.

Revenue declined 2 percent, to $1.9 billion from $1.94 billion a year earlier.

A year ago, MGM Mirage's results included $63 million earned from residential sales at the company's Signature high-rise condominiums at the MGM Grand. In the 2008 second quarter, MGM Mirage recorded $19 million of insurance recovery income related to the Monte Carlo fire in January.

In a statement, the company said the overall trends it experienced at its 10 Strip resorts were similar to those experienced during the first quarter of 2008. Visitors continued to stay at MGM Mirage properties in large numbers, but room rates were lower and the current economic conditions led to lower visitor spending.

Company officials told analysts they expect similar numbers in the third quarter, but key indicators, such as hotel room and convention bookings, show that fourth-quarter results could surpass the rest of the year.

Several Wall Street analysts said they were still cautious.

"While Las Vegas operating results were better than we expected, we continue to think that the Strip is in for a tough time as the economy continues to struggle and the gaming supply increases dramatically over the next 18 months," Goldman Sachs gaming analyst Steven Kent said in a note to investors.

The quarter did have some bright spots for MGM Mirage. Bellagio, which opened 10 years ago, reported its highest-ever quarterly revenue and led the Las Vegas market with property cash flow.

In an interview following the company's earnings call, MGM Mirage Chairman and Chief Executive Officer Terry Lanni said he remembers when bad times in the gaming industry meant casino companies were reporting losses.

"You can take a look at us and our competitors," Lanni said. "We're still making money, although not as much as we have in the past."

Murren said the results of MGM Mirage's cost-cutting measures are also being realized. He said the company will save $200 million annually through various initiatives, which will be reflected in net income in coming quarters.

"We understand that certain properties will be finished and cost cutting initiatives should take form," said Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said. "We are taking a wait-and-see attitude as the market environment is still tough to forecast."

Wall Street responded positively to earnings. Shares of MGM Mirage were up $4.85, or 15.7 percent, on the New York Stock Exchange to close at $35.85. Over the past year, the company's shares have traded from a high of $100.50 on Oct. 10 to a low of $21.65 on July 15.

"Do we believe our company is far more valuable than what the Street has placed on us?" Lanni said. "Absolutely."

Most of the interest by analysts focused on the CityCenter financing. Lanni said the lack of available capital in the credit markets could turn out to be a positive for MGM Mirage in the long term.

The company won't move as quickly to build other developments, such as its joint venture with Kerzner Holdings and Dubai World at the north end of the Strip. Instead, MGM Mirage will spend more time in design and planning for the resort, which could give the company a clearer picture of the expected costs when it does go out for financing.

"We'll be better able to ascertain the cost of a project so we won't run the risk of added costs," Lanni said. "I think the banks will use this time to clean up their balance sheets. When they are ready to lend again, they will be smarter and more careful than they have in the past. They will work with companies that have a good track record of development."

Lanni spent a good portion of his prepared remarks discussing the company's MGM Grand Macau, which opened in December. The resort reported an operating loss of $5 million and MGM Mirage has moved to shore up the sagging results, such as nearly doubling the number of high-limit gaming tables to increase its share of the high-end junket business.

Lanni said MGM Mirage had about 8 percent of the Macau market in the second quarter which had increased to about 9.5 percent in July.

"We're not pleased with our past performance and we've had disappointing results," he said. "We've taken the necessary steps to improve the property."

Citycenter development: Financing fears 'overdone' is republished from