Analysts are differing on Venetian’s future

Gary Thompson

Thursday, Dec. 16, 1999 | 11:03 a.m.

Despite improved operating results at the Venetian, an advisory service said the Strip resort's mortgage notes are overvalued and should be sold.

Chicago-based KDP Investment Advisors Inc. said the Venetian's $425 million of 12.25 percent mortgage notes, currently trading at 87, should be priced at 80. The notes have a par value of 100.

But a competing advisor noted the mortgage notes have climbed back up from the high 70s recently as the $1.5 billion Venetian has begun to show improved operating results after a dismal opening.

"Several positive things have eased investors' trepidation about the project," John Leupp, a high-yield bond analyst for Donaldson, Lufkin & Jenrette, said today.

Leupp said Venetian owner Sheldon Adelson "was true to his word and opened his wallet, contributing significant amounts of capital to the property to fund debt service and working-capital requirements early in the fourth quarter."

Leupp also cited improved operating results for the first two months of the fourth quarter. "The property is well on its way to meeting or exceeding my estimate for the quarter of $31.7 million of cash flow," he said.

The Venetian posted $18.3 million of cash flow in the third quarter en route to an $18.2 million quarterly loss on revenue of $100.3 million.

The DLJ analyst said that for the year 2000, he expects the Venetian to generate $143 million of cash flow. That's a critical number, as Leupp estimates interest and principal payments on debt next year will total $130 million and that the resort will need to spend another $15 million on normal maintenance.

KDP, however, said it believes the Venetian will generate just $108 million of cash flow next year. It said that wouldn't be enough to cover what it estimates as $150 million of debt service, plus the potential liabilities from construction liens filed against the property.

Moody's Investors Services, a bond-rating agency, has estimated the Venetian's 2000 cash flow will range from $120 million to $140 million.

KDP said the Venetian also could be liable for about $100 million of disputed construction costs, plus another $25 million of current construction payments.

"It is our belief that the banks, for which the company has already tapped out on its lines, will not offer repayment relief without meaningful debt reduction," KDP said in an analysis.

"All told, based on our valuation, we continue to recommend investors sell the 12.24 (notes)," KDP said.

DLJ's Leupp said the critical issue for the Venetian is whether the recent improved operating results can be sustained.

"The fourth quarter is a seasonally strong quarter for the Venetian because of the significant amount of convention business in October and the first part of November," he said. "Because of its reliance on the convention business, the Venetian's quarterly volatility will be higher than that of the average hotel-casino.

"We're still waiting to see if the trends are sustainable, but we expect the Venetian to have a good first quarter. I think it will take time to see whether improved results will continue to materialize."

KDP said the longer-term outlook for the Venetian is stable -- after the resort restructures its debt.

"The property can continue to improve its overall cash flow" once the debt load is eased and disputes over who is liable for construction cost overruns are resolved, KDP said.

The Venetian and Lehrer McGovern Bovis Inc., general contractor overseeing construction of the 3,000-suite hotel-casino, are suing each other over responsibility for cost overruns.

"We believe the resort's strong real estate position on the Las Vegas Strip, as well as the above average product offering, should help mitigate some of the impact" that increased marketing costs will have on operating results, KDP said.