CityCenter at center stage for Strip

Insiders, analysts say MGM Mirage's bold new
project is a sign of what's to come in LV

November 14, 2004 - With its announcement last week of an 8,000-room "urban village" in the heart of the Strip, MGM Mirage is moving boldly where no casino company has gone before to define the future for Las Vegas and the gaming industry, industry insiders and analysts said Friday.

MGM Mirage Chairman Terry Lanni said the key to Project CityCenter is that it will make his company the "first to market" with a product never before seen in Las Vegas, in the best location on the Strip and one of the best in the world and offering the highest quality in product and service.

"Others will follow, but no one else will have the critical location -- and we'll have the chance to snag the best in terms of hotel brands and retailers," he said. "Having the best gives us a chance to trump -- you'll excuse the expression - anyone else who comes to market (with similar concepts)."

The project will be developed over time on the 66 acres with 1,130 feet of Strip frontage between Bellagio and Monte Carlo. The Boardwalk will be razed to make room for the new development.

The project's first phase, scheduled to be completed in 2010, will include a 4,000-room hotel-casino, three boutique hotels with 1,200 rooms run by operators with no Las Vegas presence, and 1,650 condominiums, hotel-condos and private residence club units.

"It's a bold play. It's for more than dominance, it's for eminence," University of Nevada, Las Vegas history department Chairman Hal Rothman said.

The recent spate of mergers, merger agreements and merger rumors had already turned the real estate on the Strip into a giant Monopoly board with larger and larger stakes on the table.

Rothman said MGM Mirage, with its new move, is showing what a player can do when all but a few of the minor holdings on one side of the board - in this case, the Strip from Mandalay Bay to Bellagio - are consolidated into one.

"It consolidates the whole area and MGM Mirage will show us what an urban village in Las Vegas can be. It's going to draw off Wynn (Las Vegas, which is set to open in April), the Palazzo at The Venetian (opening in 2007) and even the Forum Shops, but it'll also add visitors and residents to the Strip," he said.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said the project represents the next phase and evolution of Las Vegas Strip development: urbanized mixed-use development of hotel-casino real estate.

"The aim is to create a city within a city," he said. "We expect Wynn Resorts, over time, to do a similar project on its property (on the former Desert Inn site across the Strip from Fashion Show mall)."

Rothman said the MGM Mirage project is not a response to the megamergers or potential competition from Wynn Las Vegas or The Venetian.

"It's not about that. It's about what MGM Mirage should do. They don't see their competition as setting the agenda. They see the market responding to them. They're not responding to the market; they're defining it," he said.

Las Vegas developer Steve Wynn said whatever the motivations, whether to lead the field or respond to competitive pressures, "any factors that cause people to build, to reach higher, to invest capital and to build anything fanciful make the town stronger and all the developers are better off."

Although the lure of new development concepts may boost the casino industry's business overall, there's a downside. Some current operators will suffer from the added competition. Economists call this idea "creative destruction."

"Demand is not totally elastic. Owners at the bottom suffer. That's competition. But new projects breathe life into the city. They complement projects like Wynn Las Vegas. They give people another reason to come and it makes the midway (we know as the Strip) more exciting," Wynn said. "Do the benefits spread evenly? Absolutely not. There's no more reason for people to go to second-rate projects. But they do create excitement and given (even) more people to come here."

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, said the CityCenter project will redefine Las Vegas as a destination "once again."

"MGM Mirage is bringing a unique concept to the core of the Las Vegas Strip that hasn't been done before, anywhere," he said. "The condominium concept of selling off a piece of Las Vegas Boulevard to individual owners is going to drive significant benefits to the company and drive people to their facilities, people with the wherewithal to afford that standard of living and to support their facilities."

Lanni said the plan was developed to "get added people - visitors and residents both - who otherwise wouldn't be coming in."

He said the concepts of offering condominiums on the Strip combined with high-visibility boutique hotel operators were intended to accomplish exactly that.

Lanni said the company decided to focus on developments in Nevada, New Jersey and Mississippi because of their favorable tax and regulatory environments. Continue »

An artist's rendering shows MGM Mirage's proposed Project CityCenter. The project's first phase will include a 4,000-room hotel-casino, three boutique hotels with 1,200 rooms, and 1,650 condominium, hotel condominium and private residence club units. Courtesy MGM Mirage.

In addition, this project trumped alternatives in the other destinations because of the continuing population growth of Las Vegas and soaring real estate values on the Strip.

Susquehanna Financial Group gaming analyst Eric Hausler said the CityCenter project is a sign of things to come for Las Vegas.

"It's not enough to build boxes anymore," he said. "This is what Las Vegas will be in the future. And it also monetizes (and establishes a fair market value for) all this fabulous real estate you have floating around Las Vegas."

Sources said the company is confident it can achieve an 18 percent return of earnings before interest, taxes, depreciation and amortization over cost in the first year, and that the pay off will accelerate after that. That compares with industrywide yields which lately have run between 9 percent and 15 percent.

Greff said the big concern is how this capacity, combined with projects other companies have on the drawing boards, will be absorbed on the Strip.

"Given that the aim of this new development is to capture and bring a new market to Las Vegas, we think this new capacity could be absorbed (with relative ease) -- and we're talking about 2010 new capacity anyway," Greff said.

However, the lag time from announcement to occupancy tempered Wall Street reaction.

UBS Warburg analyst Robin Farley said Wall Street has anticipated the project, so it was a question of when, not if the project would happen. But because the proposed project is bigger, more expensive and set to open later than expected, it could add $6 a share to the value of MGM Mirage stock, or $2 a share to UBS Warburg's target price of $63 a share to $64 a share.

However, Deutsche Bank analyst Marc Falcone said for Wall Street, the project underscores the escalating value of Strip real estate.

"We expect that MGM Mirage will begin capitalizing development costs in the current quarter, which would have a positive impact on earnings per share," Falcone said.

"Also, we would not be surprised to see a cash infusion from (Kirk Kerkorian's Tracinda Corp.), MGM Mirage's largest shareholder, as an additional financing," he said.

Greff said the project will not be expensive for MGM Mirage in the short run, with only $50 million committed in 2005 and $200 million in 2006.

Instead, the company is expected to use most of its projected $700 million in free cash flow to pay down debt following the closing of its $7.9 billion acquisition of Mandalay Resort Group, he said.

How much of the expected $4 billion cost ultimately will be borne by MGM Mirage and how much by third parties has yet to be determined, but Greff said interest from third-party investors so far has been significant.

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