New building boom on Strip foreseen

David Strow

Thursday, Feb. 10, 2000 | 11:19 a.m.

The Venetian became the latest casino company Wednesday to join the Las Vegas expansion announcement boom, saying it hopes to start building a second tower this year.

Sheldon Adelson, owner of the 3,000-suite resort that opened last May on the Las Vegas Strip, said he hopes to break ground by fall on a second 3,000-suite tower there.

Separately, Harrah's Entertainment Chief Executive Phil Satre told analysts the company has vacant land near the Rio for expansion of that property when the timing is right. But he emphasized there are no current expansion plans, a Harrah's spokesman said today.

"They're focusing on the Rio for development because they have the extra land (there)," Joe Coccimiglio, gaming analyst with Prudential Securities, said. "It's certainly not a part of their 2000 plans."

With the announcements, the two companies became the third and fourth casino operators to publicly discuss expansion possibilities this year.

First to announce a possible expansion was Mirage Resorts Inc., which said it is considering adding 1,300 rooms and convention space to the Bellagio. If Mirage Resorts moves forward, the $250 million expansion would begin this summer and be complete in 24 months.

Next to join in the expansion game was Park Place Entertainment Inc. Less than a week after Mirage Resorts announced its Bellagio plans, Park Place Chief Executive Arthur Goldberg announced the company was looking at adding a 1,500-room tower to Caesars Palace, acquired Dec. 29. Goldberg provided few details on the project, saying only that "we're not ready to begin it at this time."

"They're all talking about (expansion) to send feelers out, but I don't expect you'll see any immediate movement," Coccimiglio said. "This is the key year ... we'll be able to see what (long-term) visitor growth is."

Since all four expansions are still "on the drawing board," without firm start dates, it will probably be at least 2003 before the expansions actually start adding to Las Vegas's room inventory, said Dave Ehlers, chairman of Las Vegas Investment Advisors.

"It is very early to consider (the impact)," Ehlers said.

But by that date, airline capacity to Las Vegas could grow substantially, Ehlers said.

"We're extremely constructive on the world's ability to finance a Las Vegas vacation, and the world's ability to get suitable air transportation to Las Vegas," Ehlers said.

Speaking at the American Gaming Lodging & Leisure Summit in Las Vegas, Adelson said strong demand for rooms and conventions at the Venetian and its adjacent Sands Expo Center spurred his plans to expand.

"The demand is justifying it (the expansion)," Adelson said. "Our strategy is justifying it. The satisfaction level of our customers and the execution of our strategy is high.

"I don't have a starting month ... it is in the planning process. We'll be able to break ground before the end of the year, assuming the (bond) markets are good."

The proposed second tower, called the Lido, would add 300,000 square feet of convention space to the already massive Venetian complex. The Venetian, together with the Sands Expo and Convention Center, features 1.3 million square feet of convention center space and 500,000 square feet of meeting space.

Adelson said the second tower will cost $800 million to $1 billion and would take 24 months to build. That's below the $1.5 billion it cost to build the first phase, but Adelson said costs would be lower because much of the infrastructure needed to build a second tower is already in place.

Adelson said he's studying how to finance it. Options include a bond offering or an initial public offering of stock.

"It has always been my intention to be a publicly traded company. But we could do phase 2 without going public," Adelson said, noting his large personal equity stake in the project.

Adelson said the Venetian's gross revenue in January was $55 million. That compares to revenues previously reported by the resort of $45.5 million in October, $43.3 million in November and $36.5 million in December.

Adelson said the average daily room rate was $204 in January. That's up from the previously reported rates of $184 in October, $191 in November and $150 in December.

"If the price people are willing to pay for our rooms is any indication, we are doing very well," Adelson said.

But a high-yield bond analyst doubts that the tower project will materialize.

"Given (the Venetian's) current leverage, it's highly unlikely he'd be able to raise the capital to build the second tower, unless he puts in a significant amount of his own equity," said Andrew Zarnett, bond analyst with Deutsche Bank Alex. Brown.

The Venetian's mortgage bonds, carrying a 12.25 percent rate, now trade at 83 1/2, well below the 106 the bonds started at when the resort opened. That puts the yield on the bonds at 17.6 percent, Zarnett said.

"The performance there has been better lately, but it's still significantly below the initial and revised expectations," Zarnett said. "They're going to have to show some sustained improvements, not only in room rates, but in other factors of a casino's profitability, such as table play and slot play."

Adelson is also mired in litigation with his Venetian construction manager, Lehrer McGovern Bovis.

The builder is suing the Venetian over allegedly unpaid bills, while the Venetian accuses Bovis of delays and mismanaging the project.

Subcontractors and Bovis filed liens against the Venetian totaling about $300 million, forcing Adelson to "bond around" them in order to avoid foreclosure proceedings while the claims are sorted out.

Adelson brushed off concerns that expansions could cause the Las Vegas market to become overbuilt.

"We have heard a lot about Las Vegas being overbuilt," Adelson said. "But for the (demand seen by) the last four hotels, Las Vegas has clearly not been overbuilt."

But the only way the expansions will work is if the companies add "demand-generating" elements to the expansion, Coccimiglio said. Mirage, for example, plans to add a second theater to the Bellagio with its expansion.

"It has to be something that makes visitors come to Las Vegas," Coccimiglio said. "Adding another 1,000 rooms to Caesars Palace is a dumb idea, if (visitors) have nothing new to see."