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Rod Smith

The Strip: Caesars Detail Tower Plans

28 October 2003

LAS VEGAS -- Caesars Palace broke ground for its new tower Monday, hoping to entice enough added guests to return casino play to historic standards.

The $376 million expansion with its 26-story, 949-room luxury hotel tower is planned to increase operating margins from their recent 15 percent range to the 20 percent range enjoyed by Caesars' Strip peers.

It is also expected to generate enough added room demand to increase occupancy and room rates after it opens in 2005, as was the case when the last tower opened at Caesars Palace in November 1997.

"This new room tower will allow people the one product they've been asking for," Caesars Palace President Mark Juliano said. "People want to stay at Caesars Palace."

Park Place President Wally Barr said Caesars' 2,400 rooms compare unfavorably with the more than 5,000 at the MGM Grand, although the two have comparable casino space.

"We just don't have the room count to support the casino side of the business," Barr said.

Harry Hagerty, chief financial officer at Park Place Entertainment Corp., the holding company for Caesars Palace, said the limited number of rooms has constrained operating margins at Caesars.

He said Park Place is projecting an increase in operating margins from about 18 percent to 20 percent or more with the opening of the new tower.

Barr said that as more high-revenue amenities are added, margins will rise further and Caesars will deliver added cash flow to Park Place's bottom line.

Year-to-date, Park Place has set room rate records each month except for February and August. The new tower will pick up the pace when it opens, giving Caesars Palace the chance to reprice its rooms.

Deutsche Bank analyst Andrew Zarnett said the added tower is a logical development in completing the master plan for Caesars Palace.

"If you're going to spend as much money as they have, adding rooms to generate more (traffic) flow through the casino makes complete sense," he said.

Deutsche Bank analyst Marc Falcone said the hotel tower addition should revitalize Caesars in Las Vegas.

"It's the last key element in making (Caesars) a more competitive factor on the Strip," he said. "If history predicts (anything), the new property will also stimulate visitation in Las Vegas. Caesars should help that process with visitation around the opening of Wynn Las Vegas."

But other Wall Street analysts were skeptical.

One analyst who asked not to be identified said Park Place has invested significant money in its real estate at that corner without seeing spectacular returns.

"Although we doubt this new hotel tower will right the ship in and of itself, perhaps getting the construction completed will put the company in a position to focus on operations," the anonymous analyst said.

The analyst pointed out that Bellagio, MGM Mirage's upscale property occupying one of the other four corners at the Strip and Flamingo, generates more cash flow than Park Place generates from its Western region including its properties at the other three corners of the Strip and Flamingo.

In addition to boosting the room count at Caesars Palace to 3,357, George Markantonis, senior vice president of hotel operations, told press conference attendees on Monday the addition will create 700 new jobs at the resort.