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Best of Howard Stutz

Gaming Guru

Howard Stutz

Echelon delayed, Boyd decision hailed

5 August 2008

LAS VEGAS, Nevada -- The announcement by Boyd Gaming Corp. on Friday morning that the casino operator will delay construction of its $4.8 billion Echelon project on the Strip for up to a year was met with applause on Wall Street.

Company shares, which have been hammered over the past 12 months, rose more than 20 percent on the New York Stock Exchange. Gaming analysts hailed the move to halt Echelon as a sound business decision by Boyd.

"The Street has become overly negative on Boyd Gaming, and management has made the appropriate decision to protect and reinforce the underlying shareholder value of the core portfolio," Macquarie Capital gaming analyst Joel Simkins told investors Friday morning, shortly after Boyd Gaming announced its decision within the company's scheduled second-quarter earnings release.

Boyd Gaming Chief Executive Officer Keith Smith blamed the weakening credit markets for the unprecedented decision. Other resort projects have stopped and started up again in Las Vegas over the years, most notably the Stratosphere, which changed ownership in midstream and opened in 1994 with fewer hotel rooms than had been planned.

However, a project the size of Echelon, which encompasses 5,000 hotel rooms and suites, including three boutique hotels, a 140,000-square-foot casino, 300,000 square feet of retail, 750,000 square feet of meeting space, 30 restaurants and two theaters, has never been shelved for an extended period of time.

Construction on Echelon began in June 2007. The project's 87-acre site once housed the since-imploded Stardust. When the announcement was made Friday, three of the five Echelon hotel towers were up to the eighth floor.

"This is a delay. We are fully committed to Echelon," Smith said following a conference call with analysts. "It was a decision based on the economic climate for capital. A lot has changed in the last year. The financing is just not there. Looking forward, a lot could change in the next year. This is not a change in strategy for the company."

Boyd Gaming has already spent $500 million on Echelon.

Smith restated several points during his conference call with analysts: Echelon is not for sale, the company has not had any discussions with a potential joint venture partner, and Boyd Gaming plans on resuming construction once the credit markets turn around.

Some analysts were convinced.

"We believe the delay of Echelon indicates the unprecedented downturn that Las Vegas is currently undergoing and the extreme difficulty in securing capital," Goldman Sachs gaming analyst Steven Kent said in a note to investors. "While this delay could be a positive for Boyd's equity value, the underlying problem of a strained consumer and tight capital markets remain. We continue to believe that the downturn should continue throughout the remainder of 2008 and into 2009."

Smith said Boyd Gaming had financed $3.3 billion of Echelon's budget.

The current state of the credit markets, however, made it virtually impossible for two of the company's joint venture partners to obtain financing for their portion of the development. Mall developer General Growth Properties, which was building and will operate Echelon's retail space, and Morgan's Hotel Group, which is contributing the Mondrian and Delano boutique hotels to the development, were responsible for about $1.5 billion of the project's overall cost.

Smith said Boyd executives have been negotiating with joint venture partners for almost two months on how to finance the remaining costs. Boyd Gaming had also planned to refinance a portion of its Borgata resort in Atlantic City, but the credit markets were unable to fund the transaction.

"The dollars just weren't there," Smith said.

Echelon was designed to open in a single phase with all its amenities. Smith said delaying Echelon kept the company from having to spend money redesigning the project.

After Boyd's announcement, Morgans released a statement saying it didn't believe it could secure financing at favorable rates and conditions by September and the hotel operator does not intend to extend the joint venture agreement on its current terms.

Smith said that if Morgans were to drop out of the picture, another hotel joint venture partner could be found.

In a statement Thursday, General Growth said it was delaying development on several of its retail projects across the country, including Echelon.

"We're confident that when the credit markets return, we will be able to secure financing under more favorable conditions," Smith said.

The decision on Echelon sent shares up $2.03, or 20.34 percent, to close at $12.01. Almost 11.2 million shares of the company were traded Friday, roughly four times the average daily volume. Boyd shares continued to rise in after-market trading.

Boyd's stock has been hit hard in the past year, trading from a high of $45.73 in July 2007 to a low of $7.90 on July 16, its lowest price since 2002.

"The stock price does not reflect the long-term value in our company," Smith said. "We're a strong and solid company."

JP Morgan gaming analyst Joe Greff said that if the credit markets don't turn around, Boyd Gaming may have trouble finishing Echelon.

"While management remains committed, we do now see a scenario in which Boyd walks away from the project entirely," Greff said in a note to investors Friday afternoon.

Boyd's issues with the credit markets followed the announcement this week that MGM Mirage and Dubai World had run into delays in obtaining more than $3 billion in financing for the $9.2 billion CityCenter project. MGM Mirage spokesman Gordon Absher said Friday the company still expects to complete its financing package in the next few weeks.

The global credit crisis has caused problems for other Strip projects this year.

Crown Ltd. backed out of a plan to build a mixed-use resort on the old Wet 'n Wild site in a joint venture deal with Texas developer Christopher Milam and private equity firm York Capital Management.

A question mark hangs over the $3 billion Cosmopolitan after Deutsche Bank launched foreclosure proceedings against developer Ian Bruce Eichner after his company defaulted on a $760 million construction loan.

In Las Vegas, political leaders expressed disappointment that Echelon would be delayed. While they were hopeful construction could resume quickly, they were not concerned that the unfinished steel and concrete structure would become a Strip eyesore.

"It's probably a very prudent business decision and I want to work with them to help protect and preserve their steel and what's already been built," said Clark County Commissioner Chris Giunchigliani, who represents the Strip corridor. "It's disappointing, but it's a market correction."

Las Vegas Mayor Oscar Goodman also was not concerned. He spoke with Boyd Gaming founder and Executive Chairman Bill Boyd about the situation.

"There is nothing to be concerned about," Goodman said. "They are a great company and they'll complete what they started. They made a good business decision to build Echelon and they are making a good business decision to delay the project for now."