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Best of Liz Benston

Gaming Guru

Liz Benston

MGM Mirage To Spend 'Hundreds of Millions' on Property Upgrades

28 July 2005

LAS VEGAS, Nevada -- MGM Mirage executives said today the company will embark on an aggressive capital spending program to upgrade its newly purchased Mandalay Resort Group casinos by adding noncasino attractions such as restaurants, retail stores, lounges and entertainment venues as well as upgrading casino floors and hotel rooms.

After announcing the company's second-quarter earnings report, MGM Mirage President and Chief Financial Officer Jim Murren said the company expects to spend "hundreds of millions of dollars" over the next several years as part of a "long-term commitment" to upgrade the Mandalay properties.

Executives are "taking input from employees" to evaluate what form the upgrades will take and will likely have more information in the coming months, Murren said.

The company has already begun the process of installing new slot machines and slot software systems at Mandalay properties, a process that will be largely in place by the end of March. Only about 24 percent of machines at Mandalay Bay, Luxor and Excalibur were outfitted to accept and dispense paper tickets instead of coins, an upgrade favored by players, executives said. Close to 20 percent of the slots at those properties were at least five years old, they said.

MGM Mirage's April acquisition of Mandalay Resort Group helped boost the company's profit by 35 percent in the second quarter, though executives said the company's previously-owned properties are benefiting from improvements and strong business trends in Las Vegas.

MGM Mirage has also squeezed a higher profit out of the Mandalay properties by using its larger and more aggressive sales and marketing team to attract customers, Murren said.

"We saw an immediate stimulation in revenues and profits," including 50,000 more occupied room nights at Mandalay hotels in the second quarter than the 2004 quarter, he said.

The company reported profit of $141.2 million or 48 cents per share in the second quarter compared with earnings of $104.7 million or 35 cents per share a year ago.

Excluding certain one-time costs unrelated to management performance, the company reported earnings per share of 46 cents compared with 37 cents a year ago. Analysts expected the company to earn 44 cents in this year's quarter.

MGM Mirage said its adjusted quarterly earnings were the highest in company history.

Executives said Strip room prices are expected to rise in the third quarter, resulting in further profit increases down the road. The company has identified at least $100 million in cost savings, they said.

Revenue in the second quarter rose 60 percent to $1.7 billion from a year ago. Excluding the Mandalay casinos, revenue was up 11 percent to $1.2 billion. Those figures include promotional expenses.

Casino revenue rose 39 percent to $764.4 million and non-casino revenue was up 83 percent to $951.6 million. Excluding Mandalay properties, casino revenue rose 4 percent and non-casino revenue rose 19 percent.

Slot revenue was up 7 percent, excluding the Mandalay assets. Bellagio's slot revenue rose about 30 percent and MGM Grand's slot revenue rose 13 percent.

MGM Grand, the company's largest resort, recently added three high-end gambling areas and two upscale restaurants.

Of non-casino revenue, hotel revenue excluding the Mandalay assets rose 23 percent because of the opening of a second hotel tower at Bellagio in December and strong increases in room rates.

Executives said the company's main convention centers at MGM Grand and Mandalay Bay have been reporting their best hotel booking trends for convention-goers in history.

Earnings before interest, taxes, depreciation and amortization -- a key profit indicator defined as operating cash flow -- rose 48 percent at the property level to $567 million.

That figure rose 60 percent to $443.9 million on the Las Vegas Strip.

MGM Mirage said occupancy on the Strip was relatively flat with last year at 97 percent. Average daily hotel rates on the Strip rose $2 to $149 in the second quarter.

The company has reduced debt by $513 million since the close of the Mandalay deal, which ended up costing about $7.3 million. It also invested $121 million of capital in its resorts in the second quarter and an additional $177 million in its part-owned MGM Grand resort in Macau.

Bellagio's performance has improved since the April debut of Wynn Las Vegas nearby, executives said. Room rates were up in the quarter and gambling volume at baccarat, a game favored by high-rollers, was the strongest in history, they said.

"It's done as we expected and it's obviously grown the market," Murren said of the Wynn resort. "The customers are speaking very loudly that they love MGM Mirage on the high end."

High-rollers typically visit up to three properties during their stay, which means some are visiting Wynn Las Vegas but are returning to MGM Mirage properties, Chief Executive Terry Lanni said. The company is aiming to keep customers at its high-end properties, which now include Mandalay Bay in addition to Mirage and Bellagio, he said.

Bellagio, which recently expanded and upgraded its poker room, is expected to open a new high limit table game area in a few months. A high limit table area at the Mirage opened in June and two high-end restaurants and a nightclub are underway.

MGM Mirage has historically been more aggressive about capital investments than Mandalay Resort Group, Murren said.

"I would look at MGM Grand as a template," Murren said. "We have totally repositioned that property" and changed out what was formerly offering "fairly mediocre" restaurant and retail offerings.

The company has spent about $2 billion on upgrades since it acquired Mirage Resorts in 2000, most of it at Mirage properties.

MGM Mirage To Spend 'Hundreds of Millions' on Property Upgrades is republished from