Park Place says rebound under way

Jennifer Robison and David Strow

Monday, April 22, 2002 | 11:14 a.m.

Despite a drastic decline in Las Vegas business, Park Place Entertainment Corp. today became the latest gaming company to report earnings ahead of Wall Street's expectations.

The Las Vegas-based gaming giant this morning reported net income, before one-time charges, of $40 million, or 13 cents per share, for the quarter ended March 31. This was down 11 percent from the year-ago quarter, but was ahead of the 9 cents per share analysts had expected the company to earn.

Despite word today that Las Vegas business improved in March and that the Forum Shops at Caesars at Park Place's Caesars Palace resort on the Las Vegas Strip will be expanded, investors apparently were not impressed by the results. Park Place stock fell 40 cents to $11.89 this morning.

Revenue was flat at $1.16 billion, while cash flow declined 11 percent to $279 million.

Like Station Casinos Inc. and Harrah's Entertainment Inc., Park Place reported a one-time charge, reflecting an adjustment in goodwill value from earlier acquisitions. This adjustment was required by a change in accounting rules.

However, Park Place's charge was massive compared to its peers. Combined, Harrah's and Station took a charge of $107 million; Park Place's non-cash charge was $979 million. This charge caused Park Place to report a net loss of $939 million, or $3.11 per share.

Two-thirds of the charge related to goodwill taken in the 1996 acquisition of Bally's Entertainment; the final third related to goodwill from the 1999 takeover of Caesars World.

Harry Hagerty, Park Place's chief financial officer, said the company took a conservative approach in arriving at the new valuation of the acquired assets, rather than risk taking a later, second write-off.

"(The size of the writeoff) has nothing to do with the fundamentals of our properties," Hagerty said.

For Park Place, the first quarter represented three very different stories. In Atlantic City, business boomed; in the Midwest, business rose slightly; and in Las Vegas, business was down significantly but rebounded in March.

"Candidly, I believe we're in pretty good shape in the East and the South," said Tom Gallagher, chief executive. "Our major challenge and opportunity is the Western region. We're still a long way from where we want to be."

In the Western region -- which encompasses both Las Vegas and Northern Nevada -- Park Place posted cash flow of $105 million, down 31 percent from the year-ago quarter. However, company officials said business along the Strip rebounded throughout the quarter, and said cash flow levels at Paris, Bally's and Flamingo returned to last year's levels in March.

In January, cash flow was down more than 50 percent from last year's levels in Las Vegas; by March, the gap closed to 16 percent, the company said. In March, the company's hotels ran at 98 percent occupancy, with average daily rates at 99 percent of last year's levels.

"Our results largely fit the pattern we expected -- a slow January, a better February, and an even better March," Gallagher said. "We're very encouraged by the trends we're seeing, and we feel pretty good."

Caesars Palace was clearly the laggard of the quarter, as cash flow plunged 45 percent to $17 million. One of the biggest factors, company officials said, was disruption from construction projects at the Strip resort. With entrances into Caesars restricted by construction projects, Gallagher estimated more than 25 percent fewer pedestrians went into Caesars during the first quarter alone.

That construction is for Caesars' "Colosseum" project, an events arena set for completion next year. Park Place announced construction on a second project will begin soon, as Simon Properties begins construction on the third phase of the Forum Shops. That expansion, once complete, will give Caesars another entrance on the Strip.

Other expansion projects are now being considered at Paris Las Vegas, Bally's Las Vegas and Flamingo Las Vegas, Gallagher said, though he didn't specify what was being considered or when the projects would begin.

"Caesars got hammered," CIBC World Markets gaming analyst William Schmitt said. "When you're under construction, people will stay away until it's done. Until they get everything in working worker, it's going to take awhile to get everything back."

Other Las Vegas and Nevada properties experienced significant business declines as well. Paris and Bally's Las Vegas reported $46 million in cash flow, down 22 percent; the company blamed this primarily on "horrible" table game hold over Chinese New Year in February.

Flamingo Las Vegas saw cash flow decline 24 percent to $22 million, while Park Place's "other" Nevada properties -- Las Vegas Hilton, Reno Hilton, Caesars Tahoe and Flamingo Laughlin -- saw cash flow drop 39 percent to $20 million.

Elsewhere, the results were more encouraging. In Atlantic City, cash flow rose 18 percent to $97 million. The leader was Caesars Atlantic City, which saw cash flow increase 21 percent to $40 million. Higher table game play, slot play, favorable weather and "cost discipline" all helped push results higher at the company's three Atlantic City casinos, Hagerty said.

In the midwest, cash flow was up 4 percent to $70 million. This gain came entirely at Caesars Indiana, where cash flow increased 27 percent to $19 million, thanks to the addition of a 500-room hotel. Cash flow was flat at Grand Gulfport and Grand Tunica in Mississippi, and fell 19 percent to $13 million at Grand Biloxi.

An expansion opportunity could be on the way soon for Park Place; on this morning's conference call, Gallagher said that the company plans to apply for an Internet gaming license in the Isle of Man but has not decided yet whether to actually become an online gambling operator.

Separately, Forum Shops partner Simon Property Group said it will get under way with the Forum Shops Phase 3 expansion this year -- more than two years after it was first announced.

The shopping center's third phase will add 200,000 square feet to its existing 500,000 square feet of retail space. The three-story addition is scheduled to open in 2004, Simon said in a statement.

"Simon's decision to move forward is clearly a reflection of their bullishness on the market, and on that project," said Ross Nussbaum, an analyst with Salomon Smith Barney. "The Las Vegas economy has already started to rebound from last fall, and now Simon is willing to move forward.

"The Forum Shops has always been one of the strongest retail venues in the country. That has really never changed, even with the events of 9/11 or the recession of last year."

Indianapolis-based Simon put plans for the expansion of Forum Shops on hold before the events of Sept. 11, but after a national recession had taken hold of the economy early last year.

"That the project was delayed slightly was a reflection of Simon being more cautious toward new development and allocating new capital," Nussbaum said. "That was really a nationwide strategy. Simon saw the economy slowing, and they responded in kind by slowing down on additional square footage."

The expansion will extend from the shopping center's first phase to the Strip, and will feature Roman-style architecture in keeping with Caesars Palace and the existing space at the Forum Shops.

It is, however, slightly smaller than the original 240,000 square feet Simon had planned two years ago -- Simon didn't explain the change.

One thing that hasn't changed is the shops' emphasis on high-end retail.

The developer has already signed tenants such as Roberto Cavalli, Chopard, Dolce & Gabbana, D&G Sport, Furla, MAC Cosmetics, Donald Pliner, Tod's, Tourneau, Valentino and Louis Vitton. The latter will expand its existing Forum Shops location and relocate it adjacent to Valentino and Tod's.

George Connor, senior vice president of retail and resort properties for local real estate brokerage Colliers International, said the timing of the Forum Shops' Phase III opening in 2004 would be ideal given the nearby Fashion Show mall's expansion.

"Nordstrom (at Fashion Show) will be opening in the fall of this year, and Phase II of the Fashion Show expansion will open in 2003. (2004) will be the perfect time for the Forum Shops to have something new and exciting for people to see."

Local and national representatives of Simon Property Group were unable to be reached for comment regarding the cost and financing of the expansion.

A statement from the company, which opened the Forum Shops in 1992 with 283,000 square feet of retail space, said 20 million visitors a year visit the shopping center.

Nussbaum estimated that the center did more than $1,000 a year per square foot in business in 2001, which would make it perhaps the highest grossing shopping center in the country in sales per square foot.

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