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Kerzner Reports Q2 Results

PARADISE ISLAND, The Bahamas -- (PRESS RELEASE) -- Kerzner International Limited (NYSE: KZL), a leading international developer and operator of destination resorts, casinos and luxury hotels, today reported results for the second quarter of 2005. The Company reported net income in the quarter of $10.5 million compared to net income of $30.1 million in the same period last year, resulting in diluted net income per share of $0.28 compared to diluted net income per share of $0.94 in the same period last year.

Adjusted net income in the quarter was $37.0 million compared to $29.7 million in the same period last year. Adjusted net income per share in the quarter was $0.98 compared to $0.92 in the same period last year. Adjusted earnings per share primarily excludes $25.0 million, or approximately $0.67 per share, attributable to an impairment charge against the Company's subordinated notes receivable from the entity that owns the One&Only Maldives at Reethi Rah Island.

Adjusted net income also excludes $1.4 million of pre-opening expenses, most of which is associated with the opening of Marina Village at Atlantis ("Marina Village"). Adjusted net income includes a $4.8 million, or $0.13 per share, provision that the Company has taken to reflect a new claim from a supplier with respect to a period covering the last five years.

Butch Kerzner, Chief Executive Officer of the Company, commented, "I am pleased to report that EBITDA in the quarter was $56.0 million, a 10% increase over the same period last year. This increase was largely attributable to Atlantis, Paradise Island and our One&Only operations. Collectively, the Paradise Island properties achieved record second quarter EBITDA of $51.2 million in the quarter. One&Only Resorts achieved EBITDA of $4.4 million in the quarter compared to $1.6 million during the same period last year, with the increase driven largely by the outstanding performance of the One&Only Palmilla."

Mr. Kerzner further commented, "We recently introduced two additions to Atlantis, Marina Village, a 75,000 square foot restaurant, retail and entertainment zone surrounding our marina, and the next phase of Harborside at Atlantis, our timeshare product. Marina Village has been extremely well received by our customers, adding an exciting new venue to Paradise Island. I am pleased that in our effort to continue to look toward further development of Paradise Island, we acquired for $23 million the Hurricane Hole Marina, which is in close proximity to Marina Village and includes frontage on the Nassau Harbour. We expect to upgrade this marina significantly and bring it into our product offering, as during many times of the year, we face capacity constraints at our marina. The acquisition also gives us a further seven acres of land for new development. We are confident that with all we are doing at Atlantis, our undeveloped land will continue to appreciate in value and will provide us with many years of future development potential."

Destination Resorts

Atlantis, Paradise Island

Atlantis, Paradise Island reported net revenue and EBITDA in the quarter of $145.0 million and $53.2 million, respectively, as compared to $140.7 million and $49.6 million in the same period last year. These results represent 3% and 7% increases in net revenue and EBITDA, respectively. As noted above, the Atlantis, Paradise Island results include a provision of $4.8 million, or $0.13 per share, related to a new claim from a supplier with respect to a period covering the last five years. The Company is currently negotiating this claim with the supplier.

Atlantis's revenue per available room ("RevPAR") for the quarter was $256 as compared to $243, representing a 5% increase over the same period last year. In the quarter, Atlantis achieved an average occupancy of 87% and a $294 average daily room rate ("ADR"), which compares to an average occupancy of 89% and an ADR of $273 in the same period last year. Atlantis benefited from strong booking patterns and leisure travel demand, resulting in an 8% increase in ADR. The improved room pricing environment on Paradise Island yielded an increase in profitability, as the EBITDA margin for the properties (including the One&Only Ocean Club and excluding the aforementioned $4.8 million provision) increased to 38.2% from 35.5% in the same period last year. Despite the timing of Easter, which fell in the first quarter of 2005, and a major group booking that did not repeat in 2005, occupancy decreased by only 2% in the quarter.

At the Atlantis Casino, slot win for the second quarter increased by 33% over the same period last year, as the property benefited from improved levels of play owing to the positive reception of the new slot games and the ticket-in-ticket-out system, both of which were introduced last year. In the quarter, table win decreased by 11% over the same period last year due primarily to a decrease in rated play and a lower table hold.

Howard Karawan, President of the Company's Destination Resorts segment, commented, "These second quarter results demonstrate the combined effect on profitability that strong leisure demand, constrained room supply and an increase in flight options to the destination have on our business. Hotel and casino margins were up over the same period last year, which reflects the improved pricing dynamic for the business and continued operating improvements."

Two significant milestones with respect to the Company's Phase III expansion were recently achieved. In July, the Company completed construction of Marina Village, which includes five new restaurants and retail space around the Atlantis Marina. This achievement was followed in August by the completion of the second phase of timeshare development at Harborside at Atlantis. Both of these projects were completed on time and on budget. At Marina Village, all restaurants but one are currently in operation and the remaining location will open in mid-September. The second phase of Harborside at Atlantis, a joint venture between the Company and a subsidiary of Starwood Hotels & Resorts Worldwide, Inc., includes 116 two- and three-bedroom units that increase the number of keys at the development to 392. Sales trends for this second phase have remained strong, as the development is now 27% sold. The joint venture recorded net timeshare sales of $22.5 million during the quarter. Mr. Karawan commented, "Our timeshare development has been performing extremely well. Average sales price per key is up approximately 40% over the first phase of Harborside. Based on current trends, we expect to start the preliminary designs for the next phase of timeshare development by the end of this year."

Planning for Atlantis Phase III was recently finalized and the Company's budget has increased to $730 million (exclusive of the Harborside at Atlantis timeshare projects, the condo-hotel, a proposed golf course on nearby Athol Island and Ocean Club Residences & Marina). Construction is now underway and most aspects of the project, including the 600-room all-suite hotel, are anticipated to open in April 2007.

The Company has recently commenced development of the Ocean Club Residences & Marina project, an 88-unit joint venture condominium project at Ocean Club Estates. The project cost of approximately $130 million is being financed primarily from pre-sales of units. The Company has executed purchase contracts and deposits for 34 of the 44 units currently available for sale. Based on the strong demand for these residences, the Company expects to commence sales of an additional 22 units during the third quarter.

The Company also commenced pre-sales of the condo-hotel units in the second quarter. This development, in which the Company is joint venturing with Turnberry Associates, will include approximately 500 units at a total development cost of approximately $250 million. Mr. Karawan commented, "Although we have not yet begun a comprehensive marketing effort, we have already received deposits on approximately 20% of the units, representing almost $90 million in sales. This is very encouraging, and if we secure sufficient pre-sales, we expect to commence construction of this development in the next few months. The condo-hotel would add yet another product offering to Atlantis."

Atlantis, The Palm, Dubai

The Company and its partner, Istithmar PJSC ("Istithmar"), closed in July a syndicated $700 million, twelve-year term loan facility, which will support the joint venture's construction of Atlantis, The Palm, an approximately 2,000-room destination resort to be located on The Palm, Jumeirah in Dubai. The financing received strong support from the financial community, attracting both local and international banks. The remainder of the estimated $1.2 billion project will be financed through equity commitments from the Company and Istithmar.

The Company's equity commitment to this project is $125 million, representing a 25% equity interest. As part of the transaction, the Company has entered into a long-term management agreement with the joint venture that entitles the Company to receive a base management fee based on the gross revenues generated by Atlantis, The Palm and an incentive management fee based on operating income, as defined. The Company has also entered into a development agreement with the joint venture that entitles the Company to receive $20 million and reimbursement of certain expenses over the development period.

Construction of Atlantis, The Palm is expected to commence by the fourth quarter of this year, with completion scheduled for late 2008. This project is subject to all requisite governmental consents and construction of supporting infrastructure by the developer of The Palm, Jumeirah.

The joint venture partners are currently considering the development of an approximately 900-unit condominium project. The profits from such venture would be used to redeem a portion of Istithmar's investment in Atlantis, The Palm, resulting in an increase in the Company's stake in Atlantis, The Palm from 25% up to a maximum of 50%.

Morocco

In the quarter, the Company entered into a joint venture agreement with Societe Maroc Emirates Arabs Unis de Developpement and Caisse de Depot et de Gestion and related development and long-term management agreements for the development and operation of a destination resort casino. Based on the current preliminary designs for the project, the budget is now anticipated to be approximately $300 million, although a more definitive amount will not be available until further detailed design work has been completed.

The parties anticipate working together over the next several months to arrange debt and equity financing to fund the project. As a result of the budget increase, the need to arrange additional debt and equity financing and the additional design work required for the project, the Company expects that there will be material amendments of the project agreements, and the Company does not intend to proceed with the development of this project unless such amendments are obtained. Construction is now anticipated to commence in the first half of 2006, with an expected completion date during the second half of 2008.

No assurances can be given at this time that either the additional debt or equity financing will be obtained or the likely material amendments to project documents will be agreed, both of which will be necessary in order for this project to move forward to construction.

Gaming

Connecticut

In the quarter, results for the Company's Gaming segment were primarily derived from Mohegan Sun, which reported second quarter slot revenue of $220.3 million, up 6% over the same period last year. Slot win per unit per day was $390 for the quarter, a 6% increase over the same period last year. For the quarter, Mohegan Sun's share of the Connecticut slots market was 51%.

Under a relinquishment agreement between Trading Cove Associates ("TCA") and the Mohegan Tribe, TCA, an entity 50%-owned by the Company, receives payments from the Mohegan Tribal Gaming Authority of 5% of the gross operating revenues of Mohegan Sun. The Company recorded relinquishment and other fees from TCA of $9.7 million in the quarter as compared to $9.0 million in the same period last year.

BLB Investors, L.L.C.

The Company owns a 37.5% interest in BLB Investors, L.L.C. ("BLB"), a joint venture with Starwood Capital Group Global, L.L.C. and Waterford Group, L.L.C. On July 18, 2005, BLB completed its approximately $464 million acquisition of Wembley plc's ("Wembley") U.S. operations, which include the Lincoln Park racino in Rhode Island and three greyhound tracks and one horse racing track in Colorado. Lincoln Park generates approximately 85% of the U.S. operations' revenue.

BLB exchanged its 22% interest, acquired in 2004 and valued at $116 million, in Wembley as partial consideration for the acquisition. The balance of the acquisition price was financed on a non-recourse basis by a consortium of banks that underwrote a $495 million senior secured credit facility, which includes a $125 million revolving credit facility that will be used primarily to finance a proposed redevelopment of Lincoln Park.

BLB will operate Lincoln Park under a master video lottery contract with the state of Rhode Island that was recently authorized by legislation passed by the Rhode Island General Assembly. Lincoln Park currently has 3,002 video lottery terminals ("VLTs"). Under its contract, BLB will be entitled to increase the number of VLTs to 4,752. The contract provides for up to a 15-year term during which Lincoln Park will be entitled to 28.85% of the net terminal income on the existing 3,002 VLTs and 26% on the additional 1,750 VLTs.

BLB is planning to commence the redevelopment of Lincoln Park as promptly as possible, following receipt of all local governmental approvals to which the redevelopment is subject. BLB expects the redevelopment to be completed in 2007 at a cost of $125 million.

In the quarter, the Company recorded a $5.3 million decrease to its investment in BLB and a corresponding decrease to shareholders' equity. This unrealized loss primarily reflects the change in fair value of the Company's share of Wembley's stock held by BLB and is classified as other comprehensive loss, a separate component of shareholders' equity.

The Company accounts for the results of operations from BLB under the equity method.

One&Only Resorts

In its luxury resort segment, the Company's One&Only Resorts operations reported net revenue of $36.1 million and EBITDA of $4.4 million in the quarter compared to net revenue of $26.5 million and EBITDA of $1.6 million in the same period last year. On a combined basis for the seven branded resorts, One&Only Resorts produced RevPAR of $307 in the quarter, a 9% increase over the same period last year. On the same basis, One&Only Resorts achieved second quarter average occupancy and ADR of 75% and $411, respectively. The primary reason for the significant increase in EBITDA during the quarter was the strong performance of the One&Only Palmilla.

The One&Only Ocean Club achieved record second quarter RevPAR of $811, a 28% increase over the same period last year, mainly driven by the continued success of the property's three luxury villas and strong demand for the property. The resort achieved second quarter average occupancy and record ADR of 86% and $942, respectively, compared to average occupancy and ADR of 81% and $782, respectively, in the same period last year. EBITDA at the property was $4.2 million during the quarter, an increase of 45% over the same period last year.

The One&Only Palmilla had a very good second quarter, with RevPAR of $523, a 70% increase over the prior year period. The resort achieved second quarter average occupancy and ADR of 87% and $604, respectively, compared to average occupancy and ADR of 60% and $508, respectively, in the same period last year. EBITDA during the quarter was $5.2 million compared to $1.0 million last year. Although the third quarter is traditionally a low occupancy period for this market, demand for the resort has continued to be robust, and the business is performing well ahead of the Company's expectations.

The One&Only Maldives at Reethi Rah Island, the Company's newest One&Only-managed property in the Maldives, opened on May 1, 2005. This new 130-key all-villa resort, located on a private island in the Indian Ocean, compliments the Company's other managed resort in the region, the One&Only Maldives at Kanuhura Island. The development of this property resulted in the reclamation of a substantial portion of the island, increasing its size from approximately 20 acres to over 100 acres. Along with the 130 villas, the resort features 40 swimming pools, 37 of which are private villa pools with carved lava stone aqua beds overlooking the sea, a world-class spa, an orchid farm and several fine dining options. Unfortunately, due to the effects of the tsunami in December 2004, construction was delayed and the property opened during the low season. Consequently, results of operations are expected to remain soft until the high season begins in October.

Although the Company does not have any equity ownership interest in Reethi Rah Resort Pvt Ltd ("Reethi Rah"), the entity that owns and operates the One&Only Maldives at Reethi Rah Island, the Company has determined that Reethi Rah is a variable interest entity that is subject to consolidation in accordance with the provisions of FASB Interpretation No. 46® ("FIN 46R"), "Consolidation of Variable Interest Entities." The Company has agreements with Reethi Rah that provide for construction financing and operating loans, as well as management and development agreements. As of May 1, 2005, when the resort commenced operations, the Company became the primary beneficiary of Reethi Rah under FIN 46R, resulting in consolidation of Reethi Rah's financial statements in the consolidated financial statements of the Company.

Reethi Rah incurred net losses totaling $8.2 million for the period from May 1, 2005 to June 30, 2005. Of this amount, $5.0 million exhausted the owners' equity capital (as estimated by the Company as of May 1, 2005) and is included in minority and noncontrolling interests in the accompanying condensed consolidated statements of operations for the three months ended June 30, 2005. The balance of $3.2 million is reflected as a reduction to the Company's consolidated net income for this period. In the near term, the Company anticipates that Reethi Rah will incur additional net losses. In the absence of any increase to the owners' equity capital in future periods, such losses will be reflected in the Company's results of operations. If Reethi Rah realizes net income in the future, the Company will be credited to the extent of the losses previously absorbed by the Company on behalf of Reethi Rah as required under FIN 46R.

In connection with the consolidation of Reethi Rah, the Company recently obtained an appraisal of the resort by a third party valuation firm that led the Company to conclude that its subordinated notes receivable from Reethi Rah were impaired by approximately $25 million, which has been written off in the quarter.

In June 2005, the One&Only Maldives at Kanuhura Island closed for an extensive, four-month renovation, which will include the redevelopment of the resort's 18 water villas and two grand water villas and enhancements to its existing beach villas, bars, restaurants, public areas and spa. The resort is expected to re-open in mid-October 2005.

Liquidity

At the end of the quarter, the Company held $378.6 million in cash and cash equivalents, short-term investments and restricted cash. This amount consisted of $243.0 million in cash and cash equivalents, $119.4 million in short-term investments and $16.2 million in restricted cash. Restricted cash includes $12.5 million of deposits related to the Ocean Club Residences & Marina condominium project. Total interest-bearing debt at the end of the quarter was $819.9 million, comprised primarily of $400 million of 8 7/8% Senior Subordinated Notes due 2011, of which $150 million is currently swapped from fixed to variable interest rates, $230 million of 2.375% Convertible Senior Subordinated Notes due 2024, as well as $110 million of financing related to the One&Only Palmilla and approximately $78.9 million of debt associated with Reethi Rah. The non-affiliated debt associated with the One&Only Palmilla and Reethi Rah is consolidated under FIN 46R and there is recourse to the Company only to the extent of $29 million with regard to the Reethi Rah debt.

At the end of the quarter, the Company's Revolving Credit Facility was undrawn. The Company currently has approximately $500 million in availability under this facility. In determining the credit statistics used to measure compliance with the Company's financial covenants under this facility, the incremental debt and interest expense associated with the consolidation of Reethi Rah and the 50%-owned One&Only Palmilla are excluded.

In the quarter, the Company incurred $31.3 million in capital expenditures, related primarily to Paradise Island. Total capital expenditures included capitalized interest of $2.6 million. In the third quarter of 2005, the Company expects to spend between $95 million and $100 million on Paradise Island capital expenditures and the acquisition of the Hurricane Hole Marina assets and related real estate ("Hurricane Hole"). In August, the Company completed the approximately $23 million acquisition of Hurricane Hole.

In the quarter, the Company advanced $28.0 million in the form of mezzanine financing related to Reethi Rah, resulting in total advances, net of repayments, as of June 30, 2005 of $97.5 million. This total does not reflect the previously discussed $25.0 million impairment charge. The Company expects to fund approximately $7 million of additional subordinated debt financing related to operating loans in 2005.

In the quarter, the Company invested $16.4 million in Atlantis, The Palm. The Company has already funded approximately $7 million in the third quarter of 2005 and does not currently anticipate any further investments this year as the project begins to use its recently-arranged credit facilities.

As of June 30, 2005, shareholders' equity was $1,178.2 million and the Company had approximately 36.3 million Ordinary Shares outstanding.

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