Mandalay Resort Group to sit out expansion boom for now

David Strow

Thursday, Feb. 17, 2000 | 10:36 a.m.

The Las Vegas Strip is abuzz with expansion talk, but Mandalay Resort Group will not join in the potential building spree anytime soon.

The Las Vegas gaming company has been one of the most aggressive builders in the industry in the past six years. In that time, it built the Luxor and Mandalay Bay hotel-casinos on the Strip, opened room expansions at the Luxor and Circus Circus, and built the Gold Strike in Tunica, Miss. Through joint ventures, it also opened the MotorCity in Detroit, the Monte Carlo on the Strip and the Silver Legacy in Reno.

What that means, said Mandalay President Glenn Schaeffer, is that the company needs to take a breather.

"We've spent a lot of money in the last five years refurbishing and refining our product across the board," Schaeffer said in an interview. "Now's the time to harvest.

"Before it's time to search for the next project, we'd like to see growth in our same-store revenues."

Expansion talk has buzzed up and down the Strip since Mirage Resorts Inc. announced in January it was considering adding more than 1,000 rooms to its newest Strip resort, the Bellagio.

Mirage's competitors quickly followed its lead. Since the Bellagio announcement, there's been talk of possible expansion at Caesars Palace, the Venetian, the Rio and MGM Grand.

But Schaeffer doesn't believe that talk to be very serious yet, outside of the Bellagio.

"We (the industry) just completed building the most expensive buildings in the United States, and none of our stocks are higher," Schaeffer said. "You do the math. We need to take time, catch our breath.

"You'll have fixed supply and rising customer counts. That will improve rates of return."

The numbers look promising for both the company and Las Vegas going forward, Schaeffer said. Las Vegas visitor counts rose more than 10 percent in 1999, and the middle-age population -- the city's largest customer base -- is swelling rapidly. Mandalay is positioned to capture that growth on the Strip, particularly since its various resorts cater to practically every segment of the market, Schaeffer said.

"The economy is doing well, and the demographics look promising," Schaeffer said. "Someone will turn 50 in the U.S. every eight seconds for the next 15 years."

In addition, the company expects to start seeing the benefits of the MotorCity casino in Detroit in the first quarter. Analysts anticipate the property -- of which Mandalay owns 53 percent -- could produce $100 million in annual cash flow, numbers Schaeffer said he's comfortable with.

"We don't have a full quarter of experience (in Detroit), but the casino is performing to plan," Schaeffer said. "It's the dead of winter ... so it's not going to be prime-time performance."

Instead of using strengthening cash flow on growth, Mandalay intends to use its cash flow on improving its balance sheet, considering both the repayment of debt and the repurchase of stock.

In its most recent statements with the Securities and Exchange Commission, Mandalay reported long-term debt of $2.46 billion as of October 1999. That's up $670 million from January 1998 -- a 37 percent increase.

That's a course more gaming companies need to consider, Schaeffer said.

Since the decade of massive expansion launched by the opening of the Mirage in 1989, Las Vegas visitor counts have soared as tourists rush in to see the new properties springing up.

But, Schaeffer noted, gaming companies' rates of return have been sliced in half since the end of the 1980s. Growing competition, both in the United States and globally, has a lot to do with that, Schaeffer said.

"The consumer got a great return and always will," Schaeffer said. "The return to investors hasn't kept up that successful pace.

"It's a bigger business today, more complex. The rate of return is acceptable, but it's no longer extraordinary."

The company also has no plans to actively pursue acquisitions or new casino projects -- though Schaeffer said the company will remain "opportunistic" on such possibilities. The company's only currently pending project is a plan to construct a casino in Biloxi, Miss. -- but that project has been stalled by legal challenges.

Much of the recent expansion has been centered on California. Mandalay was a fierce opponent of California Proposition 5, the voter initiative that would have legalized tribal gaming in California, pouring millions of dollars into the effort to defeat it.

Mandalay, like the rest of the city's gaming companies, has not played a role in trying to defeat Proposition 1A, expected to pass easily next month. But unlike Harrah's Entertainment Inc. and Station Casinos Inc., Mandalay has "no current plans" to invest in California, Schaeffer said.

"You invest where you have opportunity," Schaeffer said. "But a Native American casino is no substitute for being fully invested on the Las Vegas Strip."

Mandalay is heavily invested in Jean and Laughlin -- two markets thought to be at risk from the expansion of gaming in California. The company's 1998 annual report indicated 17 percent of its $1.48 billion in revenues came from its four casinos in those cities.

A recent report by Bear Stearns estimated Laughlin could lose 15.8 percent of its expected revenues in 2004 from California gaming.

But Schaeffer believes the effect may be overblown, saying that Laughlin and Jean revenues were up for the first three quarters of 1999.

"Clearly, tribal gaming in California has an effect on all Nevada markets," he said. "It's a fairly sizable market. But the biggest impact has already been felt."

Arguably, Mandalay controls much of the future growth of the Strip, or at least its southern portion. The company owns much of the land along Las Vegas Boulevard between Tropicana Avenue and Russell Road. Schaeffer said it's fair to assume Mandalay will use that land to expand eventually, but not at the moment.

One reason casinos may be wary of expansion in the next few months, Schaeffer said, is the proposal floated by state Sen. Joe Neal to raise the state's gaming tax. Neal is pushing to increase the tax from 6.25 percent of gaming revenues to 11.25 percent.

"An increase in that tax will impact rates of return in the business," Schaeffer said.