Mandalay mall back on track

David Strow

Monday, June 18, 2001 | 10:56 a.m.

Mandalay Resort Group executives announced to shareholders Friday that the Las Vegas gaming giant is once again moving forward with plans to develop a retail center between its Mandalay Bay and Luxor hotel-casinos on the Las Vegas Strip.

"We recently changed plans ... that should allow us to have this fully leased and open to the public by late 2002," said Mandalay Chairman and Chief Executive Mike Ensign.

But details of what this retail center will finally look like were difficult to come by. In a meeting with reporters following the annual shareholders' meeting, Mandalay President Glenn Schaeffer declined to reveal details about the mall's developer, its anchors or its size, saying those details would be announced in the near future.

Schaeffer disclosed the project will cost between $75 million and $100 million, construction will start this summer and British retailer Harrods -- which had been in talks with Mandalay to anchor the mall -- will not be a part of the project.

"It will be a destination retail location with a high-fashion theme," Schaeffer said.

Mandalay talked about a 1.2 million-square-foot mall two years ago. George Connor, senior vice president of retail properties for Colliers International in Las Vegas, said it's very difficult to estimate whether Mandalay could build such a mall with $75 million to $100 million.

"It depends on what they're building," Connor said. "There's a huge difference between building a big box and an indoor, themed specialty mall."

With so many new retail outlets on the Strip aiming at the high-end, Connor said Mandalay might get more bang for its buck by aiming for the middle market shopper.

"If they go to the middle market, there's certainly some depth there ... that's a board spectrum of people that come to Las Vegas," Connor said. "If (Mandalay) made it intriguing, so people would want to go down there, they'll spend.

"If they build it right, something that would attract people, it could be very successful. I certainly don't think we've built too much retail here."

General Growth Properties of Chicago, which was to be Mandalay's partner in the project, declined to comment on the mall or whether it was still involved.

General Growth, which owns Meadows and Boulevard malls in Las Vegas, is the company's second partner in the mall project. The first partner, Westcor Partners of Phoenix, pulled out in 1999, placing the mall's development on indefinite hold.

The retail center fits in with Mandalay's strategy of continued development of the "Mandalay Mile" -- the casino complex south of Tropicana Avenue that includes the Excalibur, Luxor and Mandalay Bay, as well as about 70 acres of undeveloped land south of Mandalay Bay. Schaeffer termed it "a Strip within the Strip," and said it was the key to future growth for Mandalay.

"The next step is to fill in the pieces on the Mandalay Mile," Schaeffer said. "That can yield us additional customer demand in ever-increasing numbers."

Recent projects along this strategy include the construction of the $50 million "Shark Reef" aquarium at Mandalay Bay, which has already opened, and the building of a $225 million, 1.8 million-square-foot convention center at the hotel-casino that's set to open in mid-2002.

Each is reflective of Mandalay's new emphasis as a resort company, rather than a company so dependent on casino revenues, Schaeffer said.

"Total spending per room is the most important metric in the gaming industry," Schaeffer said, regardless of whether those dollars come from gambling or not.

When non-gambling spending is thrown in, the Las Vegas Strip produces $9.7 billion per year in revenues, "more annual revenues than all of Hollywood," Schaeffer said.

"We find ourselves in the right place at the right time," Schaeffer said.

However, Schaeffer wouldn't rule out the possibility that Mandalay would expand internationally in either Mexico or Taiwan, two nations that are now considering legalizing gambling. This potential has captured the interest of a number of gaming companies.

"We are interested in new opportunities that offer an attractive rate of return, but you can only respond as opportunities become real," Schaeffer said.

What is unlikely in the near-term is the construction of "Project Z," a long-discussed fourth hotel-casino that would be built on the vacant land south of Mandalay Bay.

"We have no immediate plans to develop a new property, but that's certainly an option in the future," Ensign said.

Nor is the company planning to build new hotel rooms on the "Mandalay Mile" at this time, Schaeffer said. That's primarily because few additional hotel rooms are being planned for the Strip in the near-term, creating favorable increases in demand for the company.

"The situation's the best it's been in recent memory," Schaeffer said. "We will build more rooms at some point, but we have no plans to do that yet."

Instead, the company appears most committed to buying back its own stock from its growing free cash flow. In fiscal 2001, the company reported $363 million in free cash flow, just under $5 per share. Free cash flow is up 64 percent over the last two years.

"Free cash flow ... was the missing element in the bubble stock market of the late 1990s," Schaeffer said. "This is money that can be used to pay down debt, build new properties, and give cash back (to shareholders) through dividends or share repurchases. Our company's stock price does not accurately reflect the fact that you have $5 per share in (free cash flow)."

Mandalay's stock is valued at roughly five times free cash flow per share; Schaeffer said he believes a more accurate measure would be 10 times, in keeping with the average for companies in the entertainment industry.

Schaeffer told investors he anticipated Mandalay's free cash flow would grow at a rate of 15 percent a year for the foreseeable future.

"Only about 10 percent of American companies will grow at a rate of 15 percent (a year) or higher," Schaeffer said. "Mandalay can conceivably grow its free cash flow per share at a double-digit (annual percentage) rate. We can show you the money."

Mandalay has been churning most of this money into its own stock. From Jan. 31, 2000 to April 30, 2001, Mandalay spent a total of $264.5 million to buy 15.4 million shares of its own stock, including 855,300 shares purchased over the three months ending April 30, 2001. In keeping with this strategy, Mandalay announced shortly after its shareholders meeting that its board had authorized the additional purchase of up to 15 percent of the 78.1 million shares it now has outstanding.

This strategy is far preferable to seeking out and making acquisitions, Schaeffer said.

"It turns out that share repurchases work about 90 percent of the time," Schaeffer said. "Acquisitions by one company by another company fail 80 percent of the time. We like our odds."

Other expansion opportunities remain available for the company. One could be Internet gambling.

On Thursday, Gov. Kenny Guinn signed Assembly Bill 466, empowering the Nevada Gaming Commission to allow Nevada's casino companies to offer gambling over the Internet when the commission felt the business could be properly regulated and controlled.

"We don't believe it's the right public policy to bring gambling into people's homes unless proper regulatory models have been proven," Schaeffer said, adding that this hasn't happened yet. Schaeffer did, however, say Mandalay sold a higher percentage of hotel rooms on the Internet than any other hotel company.

"I can foresee a day when this company will sell air, car and hotel room in a single package on-line at a mark-up," Schaeffer said.

One shareholder, however, pressed the question. If Internet gambling becomes legal, would Mandalay participate?

"We need to have a lot more information before our company can support legalized Internet gaming," Ensign said. "But if it is to become legal, we will react very quickly."