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StumbleMGM Mirage warns of possible charge to earnings for CityCenter
Thursday, Sept. 17, 2009 | 7:40 a.m.
MGM Mirage today warned it may take a charge against earnings to write down the value of its 50-percent interest in the $8.5 billion CityCenter complex preparing to open in December on the Las Vegas Strip.
At least part of the writedown may be related to the company's need to lower condominium prices at the resort in order to close sales of the condos. There are some 2,400 condominium and condominium-hotel units in multiple towers at the resort.
"The company expects to conduct an impairment analysis of its investment in CityCenter as of Sept. 30," MGM Mirage said in a regulatory filing. "The company believes it is reasonably likely that the outcome of this review may lead to a non-cash impairment charge but cannot reasonably estimate the amount or range of such impairment charge at this time.
"In addition, CityCenter has a significant amount of residential real estate currently under development. Its ability to close out its residential sales program will be based, in part, on future market conditions," the company said.
With luxury condominium sales throughout Las Vegas slumping because of the recession, analysts have suggested MGM Mirage would need to cut prices by 30 percent for some of the unsold condos -- and convert some of the units to hotel units.
MGM Mirage had warned June 30 that CityCenter may incur a non-cash impairment charge if discounts to the prices of residential units prior to their completion led to a conclusion that the carrying value of the residential inventory was not fully recoverable.
"Once the residential inventory is complete, CityCenter will be required to measure such inventory at the lower of a) its carrying value, or b) fair value less cost to sell," MGM Mirage said in a regulatory filing today. "It is reasonably likely that the fair value less cost to sell of the residential inventory at completion will be below the inventory’s carrying value, and that the joint venture will be required to record an impairment charge at that time — which may be in the fourth quarter of 2009 or the first quarter of 2010."
MGM Mirage didn't immediately say whether overall revenue and earnings projections for CityCenter have been revised or would be included in a writedown of the overall project's value. These items would include revenue from gaming, hotel, retail, food and beverage and entertainment operations.
MGM Mirage said it reviewed its CityCenter investment for impairment on March 31 and found an impairment at that time was not necessary.
"The company’s discounted cash flow analysis for CityCenter was based on estimated future cash outflows for construction and maintenance expenditures and future cash inflows from operations and residential sales of CityCenter," MGM Mirage said.
Since March 31, visitor volume to Las Vegas and gaming win on the Las Vegas Strip have continued to decline from year-earlier levels as the U.S. recession deterred travel to the U.S. gambling capital.
CityCenter is widely expected to boost visitation to the city, at least temporarily, as a "must-see" attraction. Some analysts, however, are warning that it will likely cannibalize existing business in Las Vegas -- including business at MGM Mirage properties on the Strip.
Investors didn't seem bothered by today's announcement, with the company's stock trading up about 7 percent at $13.28.
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Mgm is shooting for just a 30% writedown on their condo sales...but in reality, these skyboxes are down at least 50%...so I doubt they will get anyone to bite at the 30% figure. They will be either stuck with these units or try converting them to hotel rentals. That should really make the other poor schmucks who bought their units happy! "Hey look honey a couple of rubes from Idaho with their four kids just move in next door on a coupon weekend special!"
The only option that would make sense for Vdara at CityCenter is if its contract holders are given the option to transfer their deposits to purchase in Veer or Mandarin Oriental or otherwise refund their deposits in full. The reality is that it is nearly impossible to obtain financing on a condo-hotel unit. Those that end up closing will be very few. Price adjustments will spiral downward in an attempt to close more sales penalizing those that honor their contracts and further weakening property values of other units at City Center and other strip properties.
And from MGM Mirage's perspective, running a condo-hotel will prove to be a loss in the long run and is not a viable option for a successfully operating luxury hotel.
The condo-hotel concept was brought to Las Vegas by short term thinking on the behalf of the developer and will end up being a long term liability and ultimately a huge detriment to MGM Mirage.
Those executives that don't see this as the right thing to do, don't fully understand the condo-hotel concept and it's affect on cash flow and operations, as well as the long term negative consequence to CityCenter property values.
Which tower condos in CityCenter is best deal now?
Hey ono17:
The $42,000 ones they have to DUMP, which is 80% of their inventory
go to vdara.com/$42k
Fact.