Out with the old not always the answer

By Liz Benston

Wednesday, May 10, 2006 | 7:29 a.m.

Tuesday's demolition of the kitschy Boardwalk hotel triggers the question, which Strip resort might be next?

It's the kind of question that can only be raised in Las Vegas, a city of disposable architecture.

In any other city, it would be unthinkable to tear down a 15-year-old hotel tower to make way for something new - which is what Boyd Gaming Corp. will do next year when it razes the Stardust and begins construction on the $4 billion Echelon Place complex.

MGM Mirage imploded the remains of the aging and inefficient Boardwalk to make way for the country's most expensive resort complex. The Boardwalk was doomed the day that MGM Grand acquired it in 2000. The site of the carnival-themed hotel was destined for bigger things.

What's the fate of one of its cousin properties, the distinctive Circus Circus?

The 3,770-room property, which opened in 1968, is MGM Mirage's oldest functioning casino.

Caesars Palace creator Jay Sarno opened the casino, which originally had no hotel, under a circus tent. Years later operators moved the circus acts upstairs from the casino pit and the property was marketed as a family-oriented, budget attraction.

MGM Mirage says it's not ready to introduce it to a wrecking ball.

"It won't be imploded in my lifetime, and I plan to live a long time," said Jim Murren, MGM Mirage's president and chief financial officer. "We may tear pieces of it down and rebuild, but as a property, it will be around forever."

The decision about whether to tear down older properties depends on a host of variables such as land prices, profitability and competition.

Even as MGM Mirage aims to create a new urban hub in Las Vegas with its upmarket $7 billion CityCenter resort and residential complex at the Boardwalk site, the company sees opportunity in maintaining older Strip facilities for years to come.

"Who is going to be competing with Circus Circus and Excalibur if the competition is going to be torn down?" Murren said. "We see a huge upside by improving them while their competitive set is shrinking and demand is not."

Circus Circus makes close to $80 million a year - tens of millions more than the publicly traded Stardust, Riviera and Tropicana hotels.

A hotel that good, you don't tear down all at once, Murren said.

Circus Circus can also serve as an anchor property for the 30 underused acres surrounding it, Murren said. Much of the land is now used as an RV park and for low-rise hotel buildings.

Circus Circus is seen by its owners as filling the needs of value-oriented customers in search of room rates below $100 a night.

"The number of casinos catering to that market will dramatically decline over the next few years," Murren said. "In the next five to 10 years Circus Circus will effectively have that market to itself."

MGM Mirage might renovate and expand the property during that period, he said.

"With all that we have on our plate right now, it's not a matter of 'if ', it's a matter of 'when,' " Murren said. "The 'if ' is how big do we make it and what do we do with it."

In terms of corporate strategy, Circus Circus allows MGM Mirage - which owns more than half of the Strip's hotel rooms - to tap the lower-end marketplace.

"MGM Mirage wants to be able to offer something for everyone," said John Maxwell, a bond analyst with Merrill Lynch. While most of the company's revenue is generated by its largest and most modern properties, "Las Vegas needs properties for a mass-market type of customer," Maxwell said.

Single-property owners such as the Sahara and Tropicana are forced to spend money on enhancements to show significant improvements in profit year after year, he said.

In the casino business, operators typically spend millions of dollars each year just to maintain market share. Spending more, like the hundreds of millions MGM Mirage pours into its casinos, generates bigger profits in the long run by attracting new customers and keeping regulars.

MGM Mirage expects to spend more than $70 million improving its oldest properties this year, including Circus Circus, Luxor, Excalibur and Monte Carlo.

Circus Circus is at risk if its budget-minded customers start gravitating to more elaborate resorts, said Dennis Forst, a stock analyst with KeyBanc Capital Markets.

Forst is bullish on the property's present but said it is likely to give way to high rises - a function of the hefty profits luxury resorts can obtain relative to their land costs.

For most companies, maintaining properties that are several decades old doesn't make financial sense.

The Stardust, a historic Strip casino, only makes a fraction of the typical modern megaresort.

Boyd Gaming decided it was more economically feasible to raze the Stardust and build anew on the 63-acre property than to renovate it.

Casino operators such as Boyd would rather capture a piece of the growing segment of affluent customers than invest in the less-profitable market of budget customers.

Budget tourists, said one research expert, are a "dying breed" on the Strip.

"There's a core audience that likes old Las Vegas - they will go back to the same property again and again in spite of the fact that it doesn't have any of the offerings that new casinos have," said Jim Medick, chief executive of Las Vegas research firm MRC Group. "But it's a small percentage and an unprofitable percentage."

Some real estate experts believe the remaining single-property owners of old hotels will sell out to high-rise developers over the next five years because of the improving development potential of Strip property.

Likely candidates for near-term redevelopment include the Tropicana, currently in the midst of a high-priced bidding war, and the Sahara, which is exploring a host of offers with the help of a gaming broker.

Harrah's Entertainment, the Strip's No. 2 operator, is expected in July to announce the future of its aging Imperial Palace.

Experts believe it will become part of a large, luxury resort complex such as MGM Mirage's CityCenter.

The owners of the Riviera recently signed a deal to sell the company and flagship property to a group of real-estate investors who intend to redevelop instead of implode the property. The proposed buyers want to spiff up the casino and promote the nostalgia of the Riviera brand - a strategy some experts believe will only last in the short term.