New Vegas resort delayed

David Strow

Wednesday, Jan. 17, 2001 | 11:30 a.m.

One of the most talked-about projects proposed for the Las Vegas Strip has been MGM MIRAGE's plan to build a resort south of the Bellagio on its Boardwalk site catering to "Generation X."

But that resort won't be going forward, at least any time soon. This morning, MGM MIRAGE announced it will delay plans to build on the Boardwalk land, moving forward instead with a new resort in Atlantic City.

The move will result in an accounting change at MGM MIRAGE, one that will reduce company earnings by as much as 25 cents per share in 2001. The announcement of this earnings reduction sent MGM MIRAGE stock down 75 cents this morning to $28.56.

No size, price or theme was revealed for MGM MIRAGE's proposed Atlantic City project, which will be built next to the $1 billion Borgata in Atlantic City's marina district. The 2,000-room Borgata, a joint venture between Boyd Gaming Corp. and MGM MIRAGE, is slated for a 2003 opening.

"The thinking is really straight-forward," said MGM MIRAGE spokesman Alan Feldman. "Our properties in Las Vegas are doing very well, and we probably have the best collection of brands in this market. As we look to the future, moving forward in Atlantic City does two things. One, the market is still underdeveloped. And second, by doing this project, it will underscore the future success of the Borgata as well."

Analysts generally believe that the decision to place Atlantic City on the top of the priority list was a good one for MGM MIRAGE.

"For them, it's a smart play because they definitely have dominance in the Atlantic City market," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. "They've been looking for the longest time to be able to do something in Atlantic City, and (until recently) they didn't have the unencumbered land to do that. This ... gives them a chance to create more geographic diversity."

The move will reduce earnings by 20 cents to 25 cents per share a year starting in 2001, and continuing "until the development process for the Las Vegas site is further advanced."

MGM MIRAGE, as a result of the decision not to move in the near-term on the Las Vegas land, stopped a process called "capitalization of interest" on the 55-acre parcel. This process is typically done when a gaming company takes on debt to build a new project, and interest payments from the debt used in its construction aren't immediately recognized on the company's income statement, and are deferred.

CIBC World Markets gaming analyst William Schmitt called the decision to do this on the Boardwalk land -- a project that hadn't even entered the formal design phase -- an "aggressive" one. He viewed MGM MIRAGE's decision to capitalize interest on the Boardwalk as redirecting interest expenses from MGM Grand Inc.'s $6.4 billion takeover of Mirage Resorts Inc.

"They paid a little bit too much for Mirage. That's the way I look at it," Schmitt said. "They were taking off interest payments that were really associated with the purchase of Mirage. The accountants obviously said, 'You can't do that."'

J. Cogan, gaming analyst with Banc of America Securities, took a more accepting view. "It doesn't have any impact on the way the company is operating fundamentally. It's more of an accounting issue."