MGM Grand’s outlook strong, analyst says

Gary Thompson

Monday, March 29, 1999 | 11:18 a.m.

Improved visitor volume and increased airline seat capacity in Las Vegas have driven MGM Grand's operating results higher so far this year despite a poor table hold percentage in February, a top gaming analyst said.

And the acquisition of Primadonna Resorts Inc. and scheduled opening of a temporary casino in Detroit in August bode well for the Las Vegas-based company, said Jason Ader, senior managing director of Bear Stearns & Co.

"First-quarter trends have been very strong at both the MGM Grand and New York-New York, and the room side of the business couldn't be better," Ader said.

He noted that year-to-date occupancy at MGM Grand is up to 96.5 percent from 90.6 percent in the 1998 first quarter, while room rates are about 8 percent higher.

"More importantly, advance bookings are 100 basis points to 600 basis points higher that last year at this time, which should provide for at least another one to two quarters of positive results," he said.

Ader attributed the increases to the MGM's new conference center, which has helped improve mid-week occupancy at the 5,000-room hotel. He said MGM Chief Financial Officer Jim Murren indicated food and beverage business is up 5 percent from a year ago and that the resort's Studio 54 nightclub is generating three to four times the business it did last year.

"New York-New York is also performing ahead of expectations, with occupancy running 890 basis points higher than last year at 97.8 percent," Ader said.

"Results for the property were originally expected to be down 15 to 20 percent from last year, as a lot of the new room supply entering the market is believed to be targeted at the mid-market properties such as New York-New York. However, the company has not seen any signs of this yet."

On the casino side, MGM Grand had an "outstanding January, but suffered from a poor table hold in February despite good slot play," Ader said. Table drop was also soft in February, but both slot and table drop rebounded in March.

New York-New York continues to achieve solid volume on the casino floor with only a minimal year-over-year decline in slot play, he said.

MGM's recently acquired Primadonna properties are also having a solid March, Ader said. He noted that MGM Grand had tried to acquire the second half of New York-New York for nearly three years and ultimately decided buying its joint venture partner, Primadonna Resorts, was the most cost effective way of getting the Gotham-themed hotel-casino.

"There is still an untold story behind the acquisition," Ader said. MGM immediately benefited from nearly $17 million in pre-tax savings including a $10 million reduction in corporate overhead due to elimination of public company expenses for Primadonna, $5 million in depreciation savings and lower interest expenses.

MGM also sold, within a week of closing the deal earlier this month, nearly $10 million of assets including cars, a plane, a hangar and some insurance policies. It used the proceeds to pay down debt. The combined savings should boost earnings about 8 cents a share through next March, Ader said.

"The Primadonna acquisition is MGM's hidden jewel, expected to contribute close to $60 million in annual cash flow, with additional upside as the company continues to recognize operational savings and effective cross marketing," he said.

Ader also said the late-April opening of the MGM Mansions -- 29 luxury, Tuscan-themed villas costing $150 million to $200 million and aimed at high-end gamblers -- will have a "significant impact on MGM's market share despite the highly competitive baccarat environment."

The analyst also said MGM was "the clear winner out of the starting gate" as it began construction of its temporary Detroit casino in November 1998, several months before its competitors.

The temporary casino is expected to open in August at a cost of about $200 million and will contain 2,350 slots, 87 table games and three restaurants. The company's permanent casino, which will not begin construction until the permanent site is acquired, is projected to cost $800 million.