Las Vegas Sun

March 28, 2024

Bellagio is shattering industry profit records

A resort built at a cost of $1.6 billion has a very high bar to surpass before it can live up to its potential.

Now in its third year, it appears that the Bellagio resort on the Las Vegas Strip is finally living up to that promise.

In its earnings report last week, MGM MIRAGE said the Bellagio produced $93.5 million in cash flow for the three months ending March 31, a record for any Las Vegas property and probably the highest profit ever produced by a hotel-gambling property worldwide. And it represented a 45 percent increase over the year-ago quarter.

"Cash flow" is the standard measure of hotel-casino profitability. It represents profits before payment of taxes and interest and before factoring in noncash costs such as depreciation.

The Bellagio has broken its own cash flow record two straight quarters. Prior to the Bellagio, the quarterly record for cash flow was believed to be held by the Mirage, which recorded $74.9 million in cash flow in the third quarter of 1997.

But the Bellagio's run has been more than just a one-quarter quirk. Over the 12 months ending March 31, the Bellagio recorded $323.5 million in cash flow. That equates to a return on investment of more than 20 percent annually. Analysts also believe it makes the Bellagio the most profitable gaming resort on the planet, slightly ahead of Connecticut's giant Foxwoods resort casino.

"The low 20s (in return on investment) is certainly respectable," said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno. "It could be that property is hitting its stride."

And things could get better, company officials say.

"We're just beginning to see how powerful this resort can become," said Jim Murren, MGM MIRAGE president and chief financial officer. "It has by no means reached its full potential yet."

It wasn't always this way for the Bellagio, which opened in October 1998. Its price tag was more than any casino in Las Vegas history. But its creator, Mirage Resorts Inc. Chairman Steve Wynn, always insisted it could produce more than $300 million a year in cash flow.

That didn't happen in 1999, its first full year of operations. The property finished the year with $260 million in cash flow -- not nearly enough to keep investors happy. Making matters worse, some of its business was simply being redirected from its sister property, the Mirage.

"The Bellagio was a disappointment," Eadington said. "When you packed in the ($200 million) art collection, it pushed its cost up to $2 billion. That's a return of 12 (percent) to 13 percent, which is hardly above the cost of capital. That was one of the reasons (Mirage's) share price got pushed down."

That depressed stock price was also caused by disappointments at Wynn's luxurious new Beau Rivage resort in Biloxi, Miss.

The low stock price and Wall Street's dissatisfaction with Wynn opened the door for MGM Grand Inc.'s $6.4 billion takeover of Mirage Resorts in May 2000, though Wynn likely could have rebuffed MGM Grand owner Kirk Kerkorian's takeover offer and kept Mirage independent if he had wanted to.

Under the combined MGM MIRAGE, the Bellagio has found its legs. In the three full quarters MGM MIRAGE has owned the property, it produced $8 million more in cash flow than the Bellagio produced for all of 1999.

"(Investors) didn't think it would be as successful as it has become," Murren said. "We acquired Mirage (Resorts) as the plane was taking off the runway."

Some of that is simply good luck, as the Bellagio has been winning more bets than normal. How much better-than-normal luck has affected the Bellagio's earnings isn't known, as MGM MIRAGE doesn't report property-by-property gambling table winnings , though Murren said the Bellagio still would have lived up to expectations had the winnings been normal.

And many analysts are reluctant to place much significance in the performance of any one Las Vegas property in the MGM MIRAGE portfolio, since high-end business can be moved around by the company from property to property.

"We group the three (Bellagio, MGM Grand, Mirage) to evaluate how MGM is doing on the high end," David Anders, gaming analyst with Merrill Lynch, said. "They're truly managing these as a portfolio."

But clearly, the Bellagio is a better performer these days. Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown, believes the Bellagio should be able to produce at least $300 million in annual cash flow, or about $75 million to $80 million per quarter.

"It's performing much better than it did in 1999 because the property has significant cost-containment measures that were implemented mostly in the back of the house," Zarnett said. "They're not visible to guests, but allow the property to shine in terms of (profit) margin."

And though the Mirage has never returned to pre-Bellagio levels, that property's performance is also strengthening. The Mirage produced a strong $172 million in cash flow over the last 12 months, up 21 percent from the comparable year-ago period.

Some of that is the result of staff reduction, primarily through attrition. Earlier this month, MGM MIRAGE said it had reduced Mirage Resorts' full-time equivalents by 1,300, or about 5 percent of payroll. Full-time equivalents are a measure of hours worked, rather than a specific number of employees.

Efficiency through size is another advantage, Murren said. Rolling the Bellagio into MGM MIRAGE's portfolio means savings in purchasing, and it also means many customer support systems can be consolidated into a central location. The Bellagio also benefits from the combined marketing organization created by combination of MGM Grand and Mirage Resorts.

"We credit (Mirage Resorts Chief Executive) Bobby Baldwin with (cost-control efforts) ... he has taken a considerable amount of cost out of the Bellagio," Murren said. "That was happening before MGM acquired Mirage, and has accelerated since then."

Accounting for a big chunk of fixed costs at Bellagio, the fine art collection assembled by Wynn has largely been sold and replaced by traveling exhibits.

Nongaming operations, including hotel rooms, restaurants, entertainment and retail, remain huge cash generators for the resort. Randy Morton, vice president of hotel operations at the Bellagio, said nongaming revenues account for at least half of the resort's revenues.

Those revenues have been pushed up by the Bellagio's growing reliance on the upper end of the "free and independent traveler" market (FIT). Morton said the FIT share of the Bellagio's overall business is up 12 percentage points over last year. While many of these travelers come from California, a growing portion are also coming from Europe and Asia, Morton said.

Compared to conventioneers and other group and comped business, FITs are financially attractive customers. Morton said they pay premium rates, and are more likely to patronize the Bellagio's casino, restaurants, shops and entertainment offerings. Their growing importance to the Bellagio was a key reason the 3,005-room hotel's average daily rate rose 14 percent to $195 in the March 2001 quarter, despite a two percentage point dip in hotel occupancy. Revenue per available room was up $20 to $189.

The Bellagio is aiming for a mix of about 40 percent FIT, 20 percent convention, 20 percent tour and travel and 20 percent casino guests, Murren said.

"The Bellagio's FIT customer is a great customer ... maybe not as great on the casino floor as a casino customer, but great everywhere else," Murren said.

Although the Bellagio is now more than two years old -- and four big Strip properties have opened since it opened -- it still generates significant demand primarily because of return visits and word of mouth, Morton said.

To spur FIT business even further, Morton's goal is to achieve a five-star rating for the property through intensified customer service efforts.

The Bellagio holds a four-diamond rating from AAA, and a four-star rating from Mobil Travel Guide. The Four Seasons Las Vegas, where Morton formerly served as general manager, is the only Las Vegas hotel to hold a five-diamond AAA rating.

"Bellagio has incredible FIT demand ... no hotel (in Las Vegas) has ever experienced this kind of demand," Morton said. "Our guests could stay at the Beverly Hills Hotel, the Ritz-Carlton in San Francisco. We see those as competitors for FIT guests."

Because of demand, Wynn had been discussing the construction of a new 1,200-room, $250 million tower at the Bellagio prior to the MGM takeover. That would have given the Bellagio 4,200 rooms, making it the third-largest hotel in Las Vegas, trailing only the MGM Grand and the Luxor.

MGM Grand put this project on hold when it bought Mirage Resorts, but the Bellagio's rising fortunes are making it a possibility once again.

"It's a very appealing project for us, one that is definitely worth considerably study, and we're a company of significant financial resources," Murren said. "We haven't made a decision on that yet, but it would certainly be on top of a list of things we should consider doing."

Obviously, MGM MIRAGE's sales pitch to investors about such an expansion would be easier if the Bellagio's strong performance continues. But many believe Wynn could benefit from his creation's strong performance as well.

Wynn, now the owner of the Desert Inn, is trying to find financing to build a billion-dollar-plus hotel-casino at the site of the shuttered resort. Some have speculated Wynn has been having some difficulty finding this financing. Now that the Bellagio is roaring ahead, this task might become easier.

"It really does prove that, while the Year 1 return might not be as strong as historical levels, the Year 3 return is significantly better, and encourages those who want to make large (gaming) investments with multi-year returns," Zarnett said. "Maybe it helps Steve Wynn the most, because it's still sort of his property. It shows there's the capability from the properties he creates and develops to generate these absolutely spectacular returns that are seen nowhere else in the gaming industry."

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