Tropicana’s owners take first steps toward redevelopment

By Liz Benston

Thursday, Jan. 12, 2006 | 7:42 a.m.

The man who developed the Rio and built Bellagio and Wynn Las Vegas has been hired by the Tropicana's owners to design and price a redevelopment of the prime Strip property.

Working with Tony Marnell's Marnell Corrao Associates is the latest sign that Tropicana owner Aztar Corp. is closer to tearing down the aging property, which sits on a prized corner of the Las Vegas Strip across from Mandalay Bay, observers say. Marnell Corrao is still working on a final cost estimate for the project, according to informed sources. In addition to building two of the Strip's highest-end properties, Marnell also developed and owned the Rio before selling it to Harrah's Entertainment for $888 million in 1999.

Representatives for Aztar and Marnell Corrao declined comment.

The Tropicana's room reservation department also has stopped accepting reservations beyond April 14 -- another indicator that a major redevelopment is under consideration. Hotel properties don't pass up future revenue without a good reason.

In a Securities and Exchange Commission filing last week, Aztar amended severance agreements with its top executives that will provide cash payments for all outstanding stock options -- whether or not the options have vested -- should the executives be terminated.

Sweetening the company's "golden parachutes" for executives is a way for the company to prepare for a more uncertain future should a major project move forward, observers say.

The moves don't guarantee that the Tropicana is history, experts say. The company had previously blocked convention reservations while it was considering redevelopment, only to begin accepting them after deciding to delay plans to build a new megaresort.

Aztar has weighed the prospect of redeveloping the Tropicana site for years but has held off on a decision, saying the company needed more time to fully evaluate where the rapidly evolving Las Vegas market was headed.

For the past several months the company has declined to comment on its Tropicana options, even after it filed detailed plans for a 2,550-room resort with Clark County planners. While the silence has frustrated some investors, insiders say the uncertainty is related to the fact that the company has a difficult decision to make and is taking its time to carefully weigh various options for the site -- none of which may make shareholders happy.

Some believe Aztar could settle on a middle-market property rather than a more expensive, super-luxury casino that would compete with the likes of Wynn Las Vegas, Bellagio and the Venetian.

Aztar has faced increasing pressure from Wall Street to redevelop the site, with investors concerned that the property is becoming less able to hold its own against more luxurious properties on the Strip.

"The Tropicana is just not competitive anymore given the growth of Las Vegas," said John Maxwell, a bond analyst at Merrill Lynch.

Some also fear a new project could be lost in the shuffle by the time the latest building boom -- which promises more than $15 billion in new projects by 2010, including at least four major casino resorts and several condominium towers -- is complete.

Others say Aztar's cautious approach makes sense given the circumstances.

Rather than plunging ahead, Aztar has spent the past year steadily paying down debt, using cash generated by an expansion at the company's flagship resort in Atlantic City.

Any kind of redevelopment -- regardless of its timing -- presents a significant risk for Aztar.

It almost certainly would require the company to close the Tropicana and could take up to two years before Aztar could begin making money again, experts say.

Aztar's major Strip competitors are bigger companies that can better absorb disruptions at single properties. To compete with the big boys, Aztar is facing the prospect of spending in the neighborhood of $2 billion, some experts say.

"The cost of competing on the Strip has gone up," bond analyst Maxwell said. "A billion dollars certainly doesn't get you a top-tier property."

With a low ratio of debt to equity compared with other casino companies, Aztar is in a strong financial position to be able to build a major resort, Maxwell said. The company still faces tough questions about whether the project will be able to compete with a flood of new projects, he said.

In a research note to investors this week, Bear Stearns & Co. stock analyst Joe Greff downgraded shares of Aztar to "underperform" based on a variety of factors including the prospect of redevelopment.

Greff doubts the project's ability to achieve an adequate return -- a key measure that moves share prices -- not to mention the fact that it will hurt profit and raise debt in the short term.

"We continue to see considerable risk in the redevelopment of the (Tropicana)," Greff wrote.

Investors are concerned about whether Las Vegas will be able to fill thousands of hotel rooms and condos planned for the Strip in the coming years and whether resorts can continue raising room rates as new competitors emerge.

With labor costs and prices for raw materials on the rise, companies must spend more than they initially expected, recouping even less of their investment than hoped and scaring off investors seeking higher returns, experts say.

The choice of Marnell Corrao to plan a new resort is a selection likely to inspire confidence on Wall Street.

Marnell will be building the upcoming M Resort along Las Vegas Boulevard South in Henderson and is now working on a variety of other projects, including luxury condo towers at MGM Grand, an upgrade of the Mirage's showroom and a commercial center near McCarran International Airport.

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