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October 20, 2014

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Higher hotel room inventory felt

MGM Mirage affected by number of rooms to fill in the first quarter

Las Vegas is going to need more visitors to fill all the new hotel rooms in the city and those in development.

That reality was confirmed April 14 when MGM Mirage issued first-quarter statistics showing its revenue fell on a year-to-year basis, even after the opening of its $8.5 billion CityCenter on the Strip.

MGM Mirage’s net revenue of $1.36 billion in the first quarter of 2010 fell 4 percent from the first quarter of 2009. This decline was a factor in the company’s expected loss for the quarter of $96.7 million or 22 cents per share.

Things would have been worse if not for a turnaround in Macau, where MGM Mirage said its joint venture generated operating income of $49 million versus an operating loss of $5 million in 2009’s first quarter.

At first glance, the disappointing Las Vegas results were surprising given recent increases in visitation and gaming win in Southern Nevada. Visitation to the city during January and February was up 2 percent from the same period in 2009. And gaming revenue on the Strip during this two-month period was up 13.4 percent to $1 billion.

But, looking at the bigger picture, the first quarter numbers for MGM Mirage were in line with warnings issued by analysts over the past year that CityCenter would likely cannibalize existing MGM Mirage properties because of a shortage of visitors needed to fill the city’s 148,891 hotel rooms.

That room count is up 5.8 percent from February 2009 and is likely to grow again when the 2,995-room Cosmopolitan begins to open in December.

Because of all the extra rooms and the recession keeping some visitors away, citywide hotel occupancy in February fell 4.2 percentage points from a year ago to 79.7 percent, while the average daily room rate fell 3.7 percent to $97.21.

“We continue to be concerned by the excess supply in the Las Vegas market, which we believe will cannibalize existing Las Vegas Strip operators including properties owned under the MGM portfolio,” Deutsche Bank analyst Andrew Zarnett said in a report on MGM Mirage’s preliminary first-quarter results.

“We believe that MGM Mirage’s first quarter preliminary results were a precursor to what investors can expect from the Venetian Las Vegas and Wynn Las Vegas. Thanks to easy comparables (to 2009), it may seem that business conditions are getting better in Las Vegas,” Zarnett wrote. “However, we remain cautious of the supply additions made to the Las Vegas Strip, which we believe continue to exert downward pressure on Las Vegas room rates.”

Zarnett’s analysis of the MGM Mirage numbers indicated that on a comparable basis, excluding Treasure Island (sold in 2009) and excluding an $86 million impairment charge to reflect lower valuations for CityCenter’s condominiums and hotel-condomonium units, first-quarter EBITDA for MGM Mirage fell on a year-over-year basis 17.4 percent to $274.5 million.

EBITDA is a profitability measure meaning earnings before interest, taxes, depreciation and amortization.

EBITDA fell as MGM Mirage won less at its casinos — table game hold was 20 percent versus 22 percent in 2009’s first quarter — and as the company endured disappointing business volumes in Las Vegas, with the company’s revenue per available room on the Strip falling 8 percent year over year to $94.

Zarnett noted the CityCenter “cannibalization effect” was in play. MGM Mirage’s wholly owned Strip properties — excluding CityCenter — generated first-quarter EBITDA of $205.1 million — down 24.2 percent from 2009 and missing Zarnett’s estimate of $224 million.

“All properties posted declines in EBITDA during the latest quarter, most notably Mandalay Bay (minus 40.4 percent), MGM Grand (minus 15.2 percent), Bellagio (minus 9.2 percent), Luxor (minus 34.1 percent), Monte Carlo (minus 70.4 percent) and Circus Circus (minus 73 percent), which we believe was primarily due to reduced business volumes in Las Vegas and a lower table hold. In addition, results were also affected by the opening of CityCenter, which we believe cannibalized first quarter 2010 results at the Bellagio and MGM Grand,” Zarnett wrote.

“In Las Vegas, the domestic gaming business was very weak,” MGM Mirage Chairman and CEO Jim Murren told Bloomberg News in an interview about the first-quarter results.

“Las Vegas is slowly recovering,” Murren told Bloomberg. “We were so devastated by the economy in 2008 and 2009 that we’re pulling ourselves out of a big, big hole.”

MGM Mirage room revenue will decline again by a mid-single digit percentage in the second quarter in Las Vegas and turn positive in the second half, Murren told Bloomberg.

At CityCenter, Aria’s occupancy was 63 percent with an average daily rate of $194, the company said. Aria occupancies will be higher than 80 percent by the end of the year, Murren said.

Sterne, Agee analyst David Bain agreed with the view that business will improve at CityCenter over time.

“Lower than anticipated results at MGM Mirage’s CityCenter were the main reason for the company’s (first-quarter) shortfall versus our expectations,” Bain said in a report.

“While we are more cautious on CityCenter given initial results, we do expect sequential improvements at the property for the next several quarters as brand awareness rises and the consumer environment potentially rebounds,” Bain wrote.

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