An $800 million spring cleaning

By Liz Benston

Tuesday, Feb. 28, 2006 | 7:32 a.m.

You've got to spend money to make money. And with more than $30 billion in high-end development expected on the Strip over the next several years, MGM Mirage will try to keep pace by shelling out big bucks on upgrades this year.

MGM Mirage, in its first full year owning more than half of the Strip's hotel rooms, will spend an estimated $800 million on upgrades. That is on top of the $7 billion it will spend to build Project CityCenter at its Boardwalk site.

The idea is to continue to attract big spenders.

"When you get better people in your buildings from a profit perspective, you see great results in your food and beverage, entertainment and gaming," Jim Murren, MGM Mirage president and chief financial officer, said.

Last week MGM Mirage reported a 60 percent increase in Strip revenue and a 57 percent increase in operating cash flow for 2005 compared to 2004. Operating cash flow, often defined as earnings before deducting interest, taxes, depreciation and amortization, is a leading profit indicator for hotels.

Not counting the Mandalay Resort Group properties, acquired in April, revenue across the company rose 11 percent last year, and operating cash flow rose 10 percent over the previous year.

Some Wall Street analysts applauded the company's results but expressed concerns about the competitive environment in Las Vegas, which will experience its biggest building boom over the next five years.

MGM Mirage shares fell 4 percent Thursday after the company's earnings report because of investor concerns that business volume in the coming year - including hotel rates - won't be as robust.

Last year's strong profit growth will be hard to sustain, especially as companies spend more to maintain their competitive position, experts say. Rising construction costs also make it difficult for gaming companies to generate the same level of returns on investment for new projects that the industry enjoyed in recent years.

"Overall, we continue to like the story despite the appearance of investor concern with MGM Mirage's being too Las Vegas-centric and the expectations of slower growth from the market," CIBC World Markets stock analyst William Schmitt wrote to investors Friday.

"We fully acknowledge that growth levels on the Strip are expected to level off, given the difficult comparisons year over year. That said, we don't expect business levels in Las Vegas, or for that matter in the rest of the country, to fall off a cliff."

MGM Mirage's spending plans won't necessarily prevent the company from pursuing other development projects on the Strip in tandem with CityCenter, expected to open by 2010, Murren said.

The company spent about $916 million last year on a variety of upgrades and new developments. That included upgrading a hotel wing at MGM Grand and building about 50 high-end suites, Skylofts, on the top two floors of the hotel. Also last year, the company added two restaurants from Chef Joel Robuchon at MGM Grand.

MGM Mirage also spent some of that money on its upcoming MGM Grand Macau resort and a revamped MGM Grand in Detroit.

About $100 million went toward upgrades at Mandalay Bay, and MGM Mirage expects to spend $80 million this year at the property, the flagship of the former Mandalay Resort Group.

Renovation work has begun at Mandalay Bay's outdoor pool and beach area, including the addition of deck space, cabanas and bars. In the second quarter, the company also will remodel the property's Rumjungle bar and restaurant and revamp its 3950 restaurant, installing a celebrity chef.

"It's a good fight getting a lounge chair at Mandalay in the summer," Murren said. "We need more cabanas, bars and service areas. These kinds of investments have a high return and are great for customer service."

At Luxor, the company will begin construction by June on a new nightclub, replacing the longstanding RA.

In the coming months, the company expects to move the Excalibur's race and sports book and its poker room to make way for a new restaurant and bar.

"Given Excalibur's location on the Strip, we feel there's tremendous upside by making more moderate improvements," John Redmond, president and chief executive of the company's MGM Grand division, said last week during the company's fourth-quarter conference call.

Last year MGM Mirage replaced about 1,900 older slot machines at Excalibur, Luxor and Mandalay Bay with new, ticket machines. The company said those upgrades helped generate higher slot revenue at those properties, including record slot revenue for Luxor and Excalibur in the fourth quarter.

The company will replace an additional 500 machines at Mandalay Bay this year and is working to integrate Mandalay Resort Group's player tracking system into its own.

One of the company's single biggest upgrades will be a Cirque du Soleil show inspired by the music of the Beatles. The performance, expected to debut in May at the Mirage, would replace the defunct "Siegfried & Roy" show.

The new show would conclude a series of upgrades at the Mirage, including a new high-limit casino, three new restaurants and a nightclub, the Jet, which cost about $1.5 million and generated about $600,000 in revenue in its opening weekend on New Year's Eve.

A Japanese restaurant is still to come at Mirage this summer.

The company's middle-tier and budget hotels also will receive needed upgrades.

The Luxor will receive more than $30 million in improvements, Excalibur and Monte Carlo would get more than $25 million and Circus Circus would get more than $10 million.

That compares to the roughly $50 million per year that Mandalay Resort Group spent to maintain those properties, Murren said.

Returns at MGM Mirage properties, excluding the Mandalay Resort Group hotels, were up in the fourth quarter and driven in part by upgrades, executives said.

Overall revenue for those properties was up 11 percent over 2004 levels, with hotel revenue 20 percent higher and food and beverage revenue up 17 percent.

The company expects revenue per room to rise again in the first three months of this year - the 11th consecutive quarterly increase. Slot revenue - which rose 11 percent in the fourth quarter - also is expected to go up as customers are attracted to new amenities, Murren said.

Physical upgrades alone aren't responsible for driving earnings growth, he said.

"It starts with management and employees and employee morale," Murren said. "We are trying to make the work environment more appealing. That includes the back of house, hallways and service areas and front of house."

Besides upgrades inside the properties, MGM Mirage is eyeing potential developments that could be built on existing resort land.

Not including the 66-acre Boardwalk site that will become CityCenter, MGM Mirage owns about 100 acres along the Strip and about 200 additional acres of what Murren called underdeveloped land. That includes property with low-rise buildings and parking garages.

The latest example of a high return on investment is Bellagio's 928-room "spa tower," a master-planned project that cost $387 million, executives say. The hotel tower helped boost Bellagio's operating cash flow last year by $90 million more than the previous four-year average, they said.

Work is expected to begin in May on the casino resort at CityCenter. The company will put a condo sales center between New York-New York and Monte Carlo. It is to open by late September.

MGM Mirage will build nearly 2,800 residential units at CityCenter, up from initial plans for about 1,650 units. The expansion has raised doubts about the level of demand for luxury, high-rise condos on the Strip.

But MGM Mirage executives say their research shows strong demand for upmarket condos and that buyers are flocking to its condo towers at MGM Grand, where prices are on the rise.

About 1,500 of CityCenter's residential units are condo-hotel rooms - about the number of residential units at MGM Grand that have already sold "at very strong prices," Bobby Baldwin, president and chief executive of the company's Mirage Resorts division, said during last week's conference call.

The first tower at MGM Grand, expected to open in May, sold units at prices that were $788 per square foot. The second tower is scheduled to open in December at $940 per square foot. The third tower, which has sold more than 430 of its 575 units, is expected to be complete by the end of June 2007 at prices of more than $1,000 per square foot.

For the two-week period ending Feb. 6, units in that tower were selling for an average price of $1,263 per square foot, executives said.

Liz Benston can be reached at 259-4077 or at [email protected].