Las Vegas Sun

March 28, 2024

Too many rooms to fill: CityCenter’s opening felt, even as visitor volume grows

City Center

steve marcus / las vegas sun file

Fireworks soar over Aria in December at CityCenter. Gamblers make up about 30 percent of hotel guests, which is a higher percentage than at other company properties, MGM Resorts CEO Jim Murren says.

CityCenter Construction Timelapse

CityCenter first broke ground on April 3, 2006 on a 67-acre site between the Monte Carlo and Bellagio. The Boardwalk Casino was later imploded on May 9, 2006 to make room for the $8.5 billion project. The first hotel opened on Dec. 1, 2009, marking the first phase of completion of nearly three and a half years of construction.

Aria Opening

CityCenter President and CEO, Bobby Baldwin, bottom center, speaks during the opening of Aria at CityCenter in Las Vegas on Wednesday, Dec. 16, 2009. Launch slideshow »

CityCenter grand opening

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

CityCenter's Aria Makes Debut

CityCenter's Aria makes it long awaited debut to the public.

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.

With more hotel rooms in Las Vegas than bodies to fill them, the evidence is growing that CityCenter is stealing more business from other resorts than it is creating.

The news might be worse for competitors than it is for MGM Resorts International, which owns the largest share of Strip resorts, including CityCenter, co-owned by Dubai World. Single-property resorts such as the Tropicana and Riviera have potentially more to lose because they are generating less cash to fall back on and lack a massive customer database to draw from.

Also, many customers are choosing to stay at fancier hotels that have lowered rates to maintain occupancy over budget properties that aren’t much cheaper.

Still, the $8.5 billion CityCenter is probably taking business from some of its less-opulent sister properties, CEO Jim Murren says.

“Would we be up more year over year if CityCenter wasn’t open? Probably yes,” Murren said, referring to the company’s market share. “But we are up nonetheless.”

Here are the basic numbers: Visitation to Las Vegas grew by 1.5 percent from January through May compared with a year earlier, but the number of rooms rose by 5.6 percent. And citywide room occupancy was 80 percent through May, down from 90 percent when Las Vegas tourism peaked in 2007.

Murren said his company’s share of the Las Vegas market, not including CityCenter, is slightly larger than it was a year ago, before CityCenter opened. However, CityCenter is still struggling to turn a profit after opening in December, and its operating loss of $128 million dragged down MGM’s earnings in the second quarter. Although the entire Strip is performing badly, MGM thinks competitors are losing further ground in such areas as gambling and room revenue.

Murren said MGM has tapped its customer database “extensively” to benefit Aria, which is why gamblers make up about 30 percent of the resort’s guests. This is higher than the typical 15 to 20 percent of MGM hotel guests who are gamblers, he said, and was intended to make up for a lack of convention business booked in time for the property’s debut.

These gamblers typically belong to MGM’s loyalty program and receive mailers with room discounts and other offers. Its overall casino revenue was down 6 percent in the second quarter from a year ago, although Aria is increasing its share of the Strip’s high rolling baccarat play.

At the Tropicana, which was acquired out of bankruptcy last year by debtholders Onex Corp. and is in the midst of a $165 million renovation, net revenue fell 44 percent in the first quarter versus a year ago. The property posted a net loss of $9.9 million versus a loss of $4.5 million a year earlier.

Management blamed lower room rates and occupancy on a “supply versus demand imbalance” triggered by CityCenter.

At the Riviera, net revenue fell 16 percent in the first quarter, and earnings before interest, taxes, depreciation and amortization — a key profit indicator — plummeted 57 percent, contributing to its parent company’s overall net loss of $4.5 million. Average daily hotel rates fell 20 percent to $55.69 although occupancy rose 5 percentage points to 82 percent, which is well below occupancy rates in the mid- to high-90s Las Vegas hotels enjoyed for many years before the recession.

“Leisure and convention segment demand continues to soften primarily due to increased competition as a result of additional hotel room and convention space supply and the weak economy,” Riviera Holdings noted in its first-quarter earnings report, before it filed for Chapter 11 bankruptcy protection in July.

MGM touts Bellagio as the best example of a resort that is doing better than most despite the opening of CityCenter next door. Bellagio was one of only two MGM resorts that reported an increase in room rates in the second quarter versus a year ago, although earnings fell 25 percent in that period.

But MGM has plenty of challenges in the coming years, beginning with $13 billion in debt. It has just enough cash to fund its obligations through the end of next year, although a planned initial public offering of its Macau assets and the required sale of its stake in the Borgata in Atlantic City will “supplement that liquidity and get the company more easily through until 2012,” Credit Sights bond analyst Chris Snow said in a research note last week.

The company expects to receive $73 million for the land under the Borgata and anticipates raising money to build a second resort in Macau, where its MGM Grand generated relatively small, though growing, earnings of $18.7 million in the second quarter.

MGM has chipped away small chunks of debt in recent months while raising money to fund operations. It has bought back debt on the open market, refinanced some of its debt and has issued bonds at reasonable rates.

MGM’s $2 billion in liquid cash is “more than adequate” to satisfy financial obligations over the next two years, Murren said. “I don’t think that’s a front of mind issue for investors as it was two years ago” when the company nearly filed for bankruptcy, he said.

“We expect the company to be in a vastly better position two years from now,” he said. “There’s a minority view that we’ll double dip into recession. The majority feel 2010 is a transition year in the U.S. economy and next year will be better.”

By the Las Vegas Convention and Visitors Authority’s measure of supply and demand, 2010 appears to be a slight improvement from last year’s 3 percent decline in visitor traffic, coupled with a 6 percent increase in rooms. This out-of-whack scenario is a result of an overheated economy cut short — a process that happened too fast for spendthrift, overleveraged Las Vegas resort giants to react quickly enough to changing market conditions.

The recession hit Las Vegas with brute force in 2008, which reported the worst supply-demand balance in recent years: a 6 percent increase in rooms atop a 4 percent drop in visitors. In the years after the 9/11 attacks, visitation grew faster than rooms, although both leveled off in 2007.

Hotels are performing a balancing act to optimize profit. Aria was 80 percent occupied at an average rate of $178 per night — both measures falling short of high-end competitors Wynn Resorts and Las Vegas Sands, which achieved occupancy in the 90-percent range and average daily rates of $184 to $202.

Despite signs of improvement and a potentially growing share of the Las Vegas market, MGM, which expected CityCenter to make money in the second quarter, still suffers from a case of too many rooms and not enough visitors to fill them.

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