Las Vegas Sun

March 29, 2024

Money management giant has faith in MGM Mirage

T. Rowe Price has bet $277 million on casino company’s future

CityCenter grand opening

Steve Marcus

Fireworks explode over the Aria hotel-casino during the official opening Wednesday, Dec. 16, 2009. Aria is the centerpiece of the $8.5 billion CityCenter project, which is a partnership between MGM Mirage and Dubai World.

CityCenter grand opening

Guests enter the Aria hotel-casino for the first time Wednesday, Dec. 16, 2009. Launch slideshow »

MGM Mirage properties

The Bellagio hotel-casino on the Las Vegas Strip. Launch slideshow »

Aria opens its doors to the public

CityCenter's Aria has opened its doors to the public. Fireworks exploded over the centerpiece of the $8.5 billion CityCenter project, and people eagerly awaited to be the first inside Aria, which is a partnership between MGM Mirage and Dubai World.

Although short sellers were betting on the demise of MGM Mirage last year, portfolio manager Joseph Fath of T. Rowe Price was buying shares of Nevada’s largest casino company.

The Baltimore-based money management giant — the largest outside shareholder of MGM Mirage, with 7 percent of the company’s stock — has found itself increasingly alone in thinking things can only get better for the gaming giant.

Fath’s optimism for MGM Mirage is mainly based on macroeconomic trends, such as recent growth in the gross domestic product, rather than any grand company strategy. Lately, he has been poring over such mind-numbing statistics as retail inventories and manufacturing shipments — data that seem far removed from the glitz and salesmanship of the Strip.

In a phone interview, Fath said he thinks the figures serve as signals of business demand and an eventual indicator of whether Joe and Jane Pittsburgh — or their counterparts in, say, China — will splurge in Las Vegas.

“I feel better than I ever have this year,” Fath said with an audible sigh of relief that sounded out of place on the other end of the phone line, in the nation’s foreclosure capital.

“Things are absolutely better than they were six months ago. Job losses are slowing and home foreclosures are starting to clear. This will be a delayed recovery. But it’s a question of how fast things pick up and what that looks like.”

Some have made similar comments. But what sets Fath apart from the many skeptics who fear for MGM Mirage and Las Vegas tourism in general is his continued belief in a tenet of American culture: “This is a consumption nation. As people’s balance sheets get better, they will spend more.”

This view of business cycles was the conventional wisdom until this recession, when people pulled back on spending to an extent not seen since the Great Depression. This led some to predict the downturn would change the nation’s spending habits for a long time to come.

In Fath’s opinion, the view that people will continue to spend less even as the economy improves is an understandable, although fallible, herd mentality. “It’s easy to be negative, just like it was easy to be positive when times were good,” he said.

Fath’s outlook is, of course, one man’s opinion — although one backed by a $277 million bet on MGM Mirage.

Despite the size of that investment, he is no gaming industry cheerleader.

Even as his company benefited from the leveraged buyouts of Harrah’s Entertainment and Station Casinos, companies taken private with debt-financed purchases of stock at high prices, Fath thought the deals were too risky. Piling billions in debt onto otherwise healthy companies, even at cheap interest rates, made them vulnerable to economic whims.

Station has filed for bankruptcy protection, while Harrah’s has so far avoided bankruptcy by negotiating alternative deals with lenders.

Click to enlarge photo

Sheldon Adelson

Fath’s bankruptcy prediction for Las Vegas Sands has not yet been proven correct. He sold his stake in the company in 2008, unwilling to bet that majority owner Sheldon Adelson would continue to bail out his company.

Instead, Las Vegas Sands has chipped away at its debt by leveraging its lucrative casinos in Macau. In the race for wealth during the credit boom, Sands was the biggest gambler of all, developing multiple resorts in Macau before getting the financing necessary to finish them.

MGM Mirage made the same mistake with CityCenter, although not on so grand a scale, as it was mostly financed with its own cash and that of business partner Dubai World.

On the subject of CityCenter, which many analysts think will hurt Las Vegas more than it will help, Fath has mixed emotions.

CityCenter made more sense at $4 billion, when tourism was booming and all indications were that people were eager to buy condos on the Strip, a self-financing strategy that helped offset some of the sticker shock. As the construction budget soared, Fath and other financial minds privately expressed alarm.

CityCenter wasn’t a great investment at $6 billion and certainly not at $8.5 billion, he says. “As the (budget) started to creep up, I got more and more nervous. I should have rung the alarm bell sooner than I did.”

But investors are perpetually betting on the future, making the past moot. MGM Mirage had to finish what it started. And Fath, now that the economy appears to be bottoming, is hopeful for CityCenter’s future.

Although the lackluster openings of Palazzo and Encore on the Strip involved resorts that were more like hotel expansions than unique attractions, CityCenter is “clearly different” from the competition, Fath said.

Given lowered financial expectations for CityCenter, the property, he said, only has to generate a modest profit for MGM Mirage stock to benefit. CityCenter will hurt the lowest-performing and least competitive properties, which isn’t necessarily a bad thing for the Strip or MGM Mirage, which owns several of the Strip’s more profitable resorts, he added.

Click to enlarge photo

Kirk Kerkorian

Thus, Fath willingly bought additional MGM Mirage stock at $7 a share in May, when the company raised $1 billion in stock and $1.5 billion in bonds to shore up its debts. (At that price, MGM Mirage’s largest shareholder Kirk Kerkorian also pulled out the checkbook, investing $100 million for a now-diluted stake of 39 percent.) MGM Mirage trades at more than $9 per share, 44 percent under its 52-week high but rebounding from a low of $1.81 in March, when bankruptcy appeared imminent.

MGM Mirage will seek to refinance its heavy debt load, while likely taking cash out of CityCenter in exchange for debt on the mostly equity-financed project, Fath said. “There’s still heavy lifting to do, but the nasty stuff is done.”

This year will be bumpy, he warns, with business likely to grow in the second half of the year and into next year. “The average Joe needs to feel better about things and for that to happen, things like employment and housing prices need to pick up.”

And yet, many Strip resorts, especially those owned by MGM Mirage, have been able to maintain high occupancy rates by offering unprecedented deals. Thirty-five million visitors flocked to Las Vegas this year in a crummy economy.

“The demand is there. They need to book business at higher rates. But a lot of operators are scared to raise rates,” Fath said.

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