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Gaming Guru

Rod Smith

MGM Project Gets Costlier

10 February 2006

LAS VEGAS -- MGM Mirage raised the price tag on its Project CityCenter by $2 billion Thursday as part of its plans to upgrade and expand what was already the largest privately financed development project in the U.S. hospitality industry's history.

The Strip development is now projected to cost $7 billion, largely because of plans to enhance the project's hotel operations, add a new monorail component, expand its residential component and upgrade construction quality, MGM Mirage President Jim Murren said. Escalating material and labor costs are also playing a role in the higher price tag, he said.

The MGM Mirage board of directors on Wednesday approved the final design for many elements of the project, which will include a 4,000-room luxury hotel-casino; two 400-room, nongaming boutique hotels; more than 470,000 square feet of retail, dining and entertainment space; and 2.3 million square feet of residential space.

The driving force behind the project's rising cost is not construction but the decision to develop a luxury-class hotel and increase the scope and quality of the retail operations, Murren said.

"We're particularly excited about the Cesar Pelli (and Associates) component, which we believe will become the leading hotel product (in Las Vegas)," he said.

Cesar Pelli is the lead architect on the 4,000-room hotel-casino, which had been planned as a midrange hotel-casino. Rafael Vinoly Architects of New York, which designed Philadelphia's Kimmel Center, is designing the condominium-hotel towers. Amsterdam-based Gensler is the executive architecture firm overseeing design of CityCenter, and Perini Corp. will be the general contractor.

With construction starting in mid-2006, Murren said the board set a hard opening date of November 2009.

Murren also said MGM Mirage will seek to get the project a Leadership in Energy and Environmental Design designation from the U.S. Green Building Council, a first for Las Vegas.

The designation will require the project to meet a stringent set of construction standards requiring reduced electrical use, wastewater recycling and use of costlier but environmentally correct building materials that will benefit the community, he said.

The expanded plan includes improved vehicle and pedestrian traffic patterns that will increase its cost, Murren said.

The monorail, a state-of-the-art people mover system connecting all elements in the project, will cost $150 million to $200 million, he said.

Wachovia Securities analyst John Mulkey said in an investor advisory that the project's expansion and increased cost is consistent with the continuing "condo craze" in Las Vegas, and that further enhancements or cost increases would not be surprising.

Deutsche Bank analyst Marc Falcone said: "The design process remains fluid, and we would not be surprised to see more changes in the future."

And Murren conceded the project could go over budget if there are delays, although it has remained on schedule so far.

The new price does not include preopening costs, which analysts said could be $500 million, and land costs for the urban development located on approximately 66 acres between Bellagio and Monte Carlo.

MGM Mirage, the world's second-largest casino company, will kick in approximately $4.5 billion of the total cost; the remainder will be come from an expected $2.5 billion in proceeds from the sale of residential units.

"We also continue to explore potential partnerships and other financing vehicles to ensure the most efficient use of capital," he said.

MGM Mirage Chairman Terry Lanni said the market for hotel-casinos and vertical residential space in Las Vegas remains very robust.

"Our board and management believe that Project CityCenter will be the catalyst for a new kind of experience on the Las Vegas Strip, and forever change the way we view Las Vegas," he said.

Wall Street was more skeptical of the announced expansion.

Goldman Sachs analyst Steve Kent said MGM Mirage's estimates of proceeds from residential sales are based on selling prices of more than $1,000 per square foot, which he viewed as aggressive in an "extremely tenuous real estate market."

"Recently a major Las Vegas condo development project, Icon, was shelved and others are reportedly seeing demand trail off," Kent said. "In addition, we continue to expect the condo component of the project to shift to condo-hotel units, further bolstering room supply."

Mulkey said that although MGM Mirage contends sales and pricing trends at its Signature condo-hotel in the MGM Grand are strong and will carry over to Project CityCenter, the condominium market in Las Vegas is cooling quickly.

"With that said, we believe the best capitalized builders on or around the Strip should remain successful in the current market," he said.

MGM Mirage shares closed Thursday at $38.20, down 24 cents, or 0.62 percent, on normal trading volume of 1.49 million shares.