Wednesday, June 2, 2010 | 2:01 a.m.
- Investors betting on future of Las Vegas casinos (5-6-2010)
- MGM Mirage shares drop on earnings news (4-15-2010)
- With revenue down, MGM Mirage to report loss (4-14-2010)
- Moody’s: Debt rating outlook for MGM Mirage is stable (3-18-2010)
- Asian casino operator invests in MGM Mirage (3-17-2010)
Slam-dunk profits are a foreign concept in Las Vegas these days — which is why Nevada’s largest casino company is pursuing success abroad.
MGM Mirage has been forced to downsize, and it reported a first-quarter loss of $97 million. It has more than $12 billion in debt that will come due over the next several years under the looming shadow of the recession. Meanwhile, one of its subsidiaries has quietly generated millions in annual profit in the two years since it set up shop.
The subsidiary, MGM Mirage Hospitality, manages luxury hotels in foreign cities with growing wealth and has signed 17 agreements in countries such as China, India, Vietnam, the United Arab Emirates, Egypt and Morocco.
The business plan — hire a team of top-flight hotel managers from the nongambling world, leverage the MGM Grand and Bellagio brands and increase the corporation’s worldwide exposure by operating hotels in emerging markets that lack Las Vegas-style entertainment — has worked even better than the company and analysts expected and in a recession, no less.
With 50 full-time managers and six global offices, the subsidiary has been working independently of MGM Mirage and therefore can move more quickly to secure contracts than a company of MGM’s size can, says Gamal Aziz, MGM Mirage Hospitality president and CEO.
The expectation is Aziz’s operation will generate more than $100 million in revenue over the next five years, with an anticipated 42 hotels under contract worldwide over the next decade.
Of the 17 hotels under development, 11 are under construction, including MGM Grand Ho Tram in Vietnam and a Bellagio-branded hotel at the yet-to-be-completed Dubai Pearl, a mixed-use, 20 million-square-foot integrated development in the United Arab Emirates.
Some of the MGM Mirage Hospitality deals are development contracts, meaning the company is pocketing advisory fees during design and construction, and the money will continue to roll in after MGM installs management teams and line workers to run the hotels.
Longer term, after the subsidiary is generating sufficient profit, MGM Mirage will spin it off into a separate public company, executives say. Investors have historically valued the stock of hotel management companies, relative to what those companies earn, more highly than stock of casino companies. Investors view casinos as more risky and complex enterprises, dependent on the ups and downs of the gaming business.
The foreign locales MGM Mirage is focusing on have escaped the worst of the recession. These Western-style resorts, which will feature spas, night life and other showy amenities typical of casino resorts, mirror the growing wealth and demand for conspicuous entertainment in Third-World countries with growing, rather than decelerating, economies. Eight hotels, with opening dates of 2011 through 2015, are in China, including one in the nouveau riche region of Chengdu.
Many foreigners associate the MGM Grand and Bellagio brands with “great energy and entertainment,” says Aziz, who also serves as president and CEO of MGM Grand.
Being managed by MGM Mirage Hospitality makes a hotel stand out in cities where “there’s a saturation of traditional hotel offerings,” he says.
Developers have sought out MGM Mirage because owners want more than a hotel with standard amenities such as a restaurant, bar and meeting space, he says.
These deals represent a rare pocket of low-risk money for MGM Mirage. Over time, such transactions might make the company a safer bet for investors and countless stakeholders back home, including employees and vendors.
Although resorts cost millions, even billions, to finance and build, managing hotels for companies that develop and own them requires no cash outlay other than the expertise to oversee the design of such projects and to run them after they open. Companies that run hotels for owner-developers, such as Four Seasons and Ritz-Carlton, generate low but steady profit margins.
That’s a dramatic departure from the way business is done in the casino industry, where companies shoulder big financial risks to build and buy resorts for the potential of generating double-digit profit margins on gambling and other amenities.
Hotels also have lower political risk than casinos, which are still controversial in many parts of the world, in addition to being heavily regulated. Many lawmakers view gambling as addictive and subject to high “sin taxes” relative to earned profits.
MGM Mirage’s hotel management deals don’t include casinos except for in Vietnam and Egypt, where gambling is legal. These properties will reflect local and regional demand, as the Vietnamese project will have a major casino with Las Vegas-style amenities and the Egyptian hotel will include a small casino catering mostly to tourists, with a few hundred slot machines and fewer than 20 table games.
Most of the 17 hotels under development are MGM Grands. Three include a Skylofts-branded penthouse level with large, luxury suites similar to those in Las Vegas. Another three — in Marrakech, Mumbai and Dubai — are Bellagio-branded hotels. Many of these carefully selected locations already feature a Four Seasons or similar five-star brand, Aziz says.
All this international business, by spreading the company’s brands worldwide, will ultimately benefit Las Vegas, he says.
“Increasing exposure to our international customers can be an extraordinary advantage for us.”
Sun reporter Amanda Finnegan contributed to this story.