MGM Slides Closer to the Abyss

This past week saw the release of official corporate financial statements for the 1st Quarter of 2010, including financial statements for MGM Mirage (or whatever they call themselves this year), Las Vegas Sands (owner of Venetian and Palazzo), and Wynn Resorts (owner of, well, Wynn and Encore). Since Harrah's Entertainment went private, financial reporting is still available, but the data is more limited.

I discussed the Aria financial picture a month ago, when MGM issued an advisory warning of projected poor first quarter financial results, primarily related to the City Center project. None of the final numbers reported last week are significantly different than the advisory numbers.  However, it appears that Aria's gambling revenues are fairly solid, at $75.9 million.  But the occupancy issue at Aria (a mere 63%) remains a serious issue going forward:

[MGM Mirage CEO Jim] Murren said CityCenter's non-gambling revenue—which he told Nevada gambling regulators last year could end up being four times greater than its casino revenue—will take longer to grow.

"That side takes longer to build unless you just want to give away the store and be highly promotional and lower the room rates," Murren said. "That would be, we believe, very damaging long term, and unnecessary.

"We fortunately have the luxury of time to allow Aria and CityCenter to build in a graceful, logical fashion," he said. "We're not in a crisis mode where we need a certain amount of money on a daily basis or a weekly basis because of some financial covenant."

....

Murren said Aria's bookings are improving for the rest of the year for conferences, which generate higher room rates than leisure travel. He expects that to help occupancy.

—Oskar Garcia (AP), in The Tacoma News Tribune (5/6/10) (emphasis added).

The problem with Murren's statement is that, at least to my eye, Aria's marketing blitz the past month or so has been directed to individual gamblers, via emails to MGM slot club members and internet ads targeted to gaming related websites.  This is hardly the higher-revenue conference-attending crowd that Murren claims is vital to Aria's survival.  More to the point, the email and online ads are for greatly reduced rates, usually around $109 for weekdays, $139 on weekends.  This is certain to undercut Aria's intended price point which is meant to compete with the $200+ average daily rates (ADR) of Bellagio, Wynn/Encore, and Venetian/Palazzo.

Also of note is that MGM failed to release a Revenue Per Available Room (REVPAR) figure for Aria, a standard metric for measuring revenue in the casino business.  MGM provided REVPAR data for all of its other properties.  As a reference point, Bellagio had an ADR of $199 and a REVPAR of $181 for the quarter, which appears a fairly standard ratio for the higher end Strip properties—the ADR/REVPAR figures for Venetian ($202/$180), Palazzo ($214/$201), and Wynn/Encore ($203/$181) are in the same general range as Bellagio.  Presumably, Aria's REVPAR is embarassingly low, or it would have been reported.

While digging through some older Las Vegas Sands financial statements, I discovered that the Palazzo, which opened in December 2007, had first quarter 2008 occupancy of 79.1%, ADR of $244, and REVPAR of $193.  I tried to find first quarter data for Encore following its opening in December 2008, but Wynn Resorts does not separate out the two Vegas properties in its financial reports.  However, the joint Wynn/Encore figures for that first quarter of 2009 reflect an occupancy rate of 89.5%, ADR of $222, and REVPAR of $199, almost identical to Palazzo's performance that same period, and slightly ahead of Venetian.  Given that Aria is running 16 points behind Palazzo's post-opening first quarter occupancy rate, and has a substantially lower ADR ($194), the REVPAR for Aria seems highly likely to fall below $150.  If so, those results have to be greatly disappointing for MGM.

While looking through the financial statements, I put together a few spreadsheets analyzing past year trends, as well as comparing trends from the peak market of 2007 through present (you can review the spreadsheets here).  I also put together some interesting charts from the financial data.  Unfortunately, the Harrah's Entertainment financial data I was able to locate was not particularly helpful, as it didn't break the data out in as detailed a fashion as the other major Strip players.  In fact, for Harrah's, occupancy rates, ADR, and REVPAR are not reported, nor are most categories of revenues and expenses (Harrah's reports casino revenue, and lumps all other revenue streams into an "other" category).  But, let's take a quick look at what the data show (you can click on any chart for an enlarged version).

These first two charts show the trend by revenue category for MGM Mirage's Strip properties, comparing first quarters from 2007-2010.  Essentially, MGM's net revenues are down 30%-48% in all categories (see the spreadsheets for detailed breakdown). 

The next chart compares ADR and REVPAR data for MGM Mirage Strip properties, Wynn/Encore (combined), and the Venetian (the Palazzo data is similar, and was omitted to make the chart clearer).  Harrah's does not report ADR and REVPAR figures, but their financial statements indicate that both statistics continued to decline; I suspect their figures would fall near or below the MGM Mirage line given their stable of "value" oriented resorts.  In fairness to MGM, the Bellagio's ADR/REVPAR stats would be quite close to the Venetian and Wynn numbers.  The problem is that MGM needs Aria to be another Bellagio (or better), while it seems more likely to perform as another Mandalay Bay or Mirage.

 

The final four charts compare four categories of revenues for MGM Mirage Strip properties, Las Vegas Sands, and Wynn Resorts.  Harrah's Entertainment has been added into the chart for casino revenue, the only category where reliable data could be found.  For the retail/entertainment category, the two categories were combined to enable apples to apples comparisons across the different reporting methods; however, the general ratio of retail to entertainment revenues is roughly 60/40.  Given MGM Mirage's stranglehold on the Cirque du Soleil shows, as well as any number of other shows, the poor performance in the entertainment revenue category is rather curious.

 

From the data, it looks like MGM is still struggling, with the revenue decreases flattening out, but still continuing to decline across all categories.  Harrah's is showing an uptick in casino revenues, but the financial statements indicate that revenues overall are down 4.4%; with non-casino revenues comprising about 2/3 of overall revenues, it's apparent that non-casino revenues declined at a greater rate than 4.4%.  For Sands Las Vegas and Wynn Resorts, however, it looks like they have hit bottom and are starting to climb back out of their recent financial hole, with Sands Las Vegas doing better than Wynn Resorts.  One interesting side note is that Sands Las Vegas got more bang for their buck with Palazzo (opening December 2007) than Wynn Resorts did with Encore (opening December 2008).

One interesting piece of information I came across in the Sands Las Vegas and Wynn Resorts financial statements was the slot "hold" rate.  Sands Las Vegas routinely reports a slots hold of 7.0%-7.8% (increased from 6% in 2008), while Wynn Resorts reports a lower hold of 4.5%-5.5%.  So, if you're looking for the best bang for your buck, at least at the ritzy casinos, you may want to make the walk over to Wynn or Encore instead of sticking around the Palazzo or Venetian.

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* UPDATE (10 May 2010):  Harrah's Entertainment released a quarterly report today (May 10, 2010), which provided additional financial data that has been incorporated into the Casino Net Revenue chart and accompanying discussion.

The City Center Pit of Despair

Count Rugen:  Ah. Are you coming down into the pit? Westley's got his strength back. I'm starting him on the machine tonight.

Prince Humperdinck:  Tyrone, you know how much I love watching you work, but I've got my country's 500th anniversary to plan, my wedding to arrange, my wife to murder, and Guilder to frame for it; I'm swamped.

Count Rugen:  Get some rest. If you haven't got your health, then you haven't got anything.

—The Princess Bride

In the movie The Princess Bride, the villain Count Rugen tortures the hero Westley in the "Pit of Despair" with a machine that sucks out a person's remaining years of life, causing them to scream in horrendous anguish.  The screeching and wailing you heard yesterday likely was from investors in MGM Grand-Mirage (MGM) as its stock price fell on MGM's reports of dismal first quarter earnings projections, as the CityCenter project is quite literally sucking out all of MGM's current and future profits.

The numbers for Aria are shockingly bad:  a $66 million operating loss ($54 million of which is depreciation), and a pathetic 63% occupancy rate.  As I wrote in a recent review of City Center, the Aria casino seems designed to eschew luring in walk-by customers from the Strip in favor of trapping its hotel guests inside.  This strategy obviously won't be successful if you aren't getting any hotel guests.

Even worse news for City Center comes from their residential condo units.  According to an article by Howard Stutz at the Las Vegas Review-Journal:

• MGM took an "approximately $171 million noncash impairment charge related to the development's 2,400 residential units";
• MGM recorded "revenues of $24 million related to forfeited residential deposits"; and,
• Only "25 condominium sales had closed by March 31 with a combined sales price of $38 million".

Let's unpack this data a bit.  Getting $24 million in bonus cash from forfeited deposits sounds great—for this quarter.  I don't know how much of a deposit was required per condo, but those canceled sales have to affect hundreds of condos, and City Center won't be getting any revenue from those condos in the near future.  Based on the closings reported, each condo is averaging around $1.5 million, so the canceled condos translate into hundreds of millions in deferred revenues that probably won't be recouped for more than a year, if not significantly longer.  Now, City Center will save some money in the short term by not having to finish all of those condos, but selling those condos was a key part of their financing plan.  But at least they've closed on a whopping 25 out of 2,400 condos, so they've got that going for them, which is nice.  Even assuming another couple of hundred condos have been sold and will close later in the year, it looks like City Center still will have a glut of unsold condos to carry into the next few years—if they have the cash to do so.

Speaking of cash, digging into the financial statements themselves is kind of interesting, in a Discovery Channel show about vultures and dung beetles sort of way.  First, the gaming industry has definitely not recovered from the recession:

Total casino revenue is expected to be approximately 5% lower than the prior year, with slots revenue down approximately 1% for the quarter. The Company's table games volume, excluding baccarat, was down 4% in the quarter, but baccarat volume was up 17% compared to the prior year quarter. The overall table games hold percentage was lower in 2010 than the prior year quarter; in the current year first quarter the hold percentage was near the midpoint of the Company's normal 18% to 22%, while in the 2009 quarter it was at the top end of the range.

The increase in baccarat volume likely means marketing efforts have been focused on Asian high-rollers, something all the major casinos probably have been making a priority now that the great American home equity rave is over.  Also, the MGM house has been experiencing a little negative variance on the table games, meaning we can all expect more 6/5 payout, eight deck, continual shuffle blackjack tables.  Poker isn't broken out separately from the pit games, but I suspect poker is holding its own; poker players might drop down stakes in a recession, but the volume of games seems about standard on my recent trips, and rake is more about volume than game size.  Still, it wouldn't surprise me if the MGM family took a look at Harrah's and made a move to $5 maximum rake.

The other interesting information is the breakdown of operating income by casino.  Now, the financial statements also show a breakdown of earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a useful and meaningful figure for certain accounting purposes.  But, let's focus on the operating income portion of earnings, which is the actual hard cash coming in the door, and compare it to the first quarter of 2009 (all figures in thousands of dollars):

It seems that business is down across the board for the MGM family of Strip casinos, but the drag of City Center is quite obvious.  Also, although the financial strength of previous MGM family flagship Bellagio is no surprise, the strong performance of New York New York relative to its MGM siblings was a major surprise.  The sharp drop off for Mandalay Bay is puzzling, although that might be related to reduced numbers of conventions (Mandalay Bay has a large convention area).  The Monte Carlo numbers are almost certainly skewed by the fire last year; insurance proceeds for business interruption were discussed in the financial statements, but they seem to be accounted for separate from operating income.*  It's also pretty obvious that Circus Circus should be imploded, except what could be done with that crappy property in the current economy?

No matter how you slice it, City Center is appearing more and more like a boondoggle.  Maybe MGM was part of a covert government plan to bankrupt Dubai by sucking them into this money pit ... Ya never know!

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* ADDENDUM (18 April 2010):  Looking back at the financial statements, the Monte Carlo fire insurance proceeds were accounted for as follows:

The prior year [2009] results include the $190 million pre-tax gain on the TI sale as well as $15 million of Monte Carlo business interruption insurance recovery income (recorded as a reduction to general and administrative expense) and $7 million of Monte Carlo property damage insurance recovery income (recorded as property transactions, net).

However, I forgot that the fire was in January 2008, not last year.  So, the 2009 and 2010 figures cited above are both from full operations.  From the financial statements in the recent press release, it's unclear whether the $15 million in business interruption insurance proceeds were included in the 2009 operating income figure.  Even assuming insurance proceeds were included (making the 2009 operating income exclusive of insurance proceeds something closer to $8 million), the Monte Carlo's operating income for this year is still significantly reduced.  Makes you wonder if City Center is sucking its neighbor dry.

An Aria for Aria—Is a Fat Lady Singing for City Center?

Last week, I stayed at Aria at the new City Center for the first time, and also attended a conference at Vdara, another City Center hotel.  Vdara certainly has its own distinct personality, very much in keeping with its "spa" mentality; think "quiet plus flowers".  Vdara might be a good place to stay if you go to Vegas with your wife who wants to avoid the typical casino atmosphere.  It's easy to get from Vdara to Bellagio, but remarkably inconvenient to travel between Aria and Vdara.  There is a tram, but I prefer to walk, and one thing the City Center layout does is strongly discourage walking anywhere.

The Aria rooms were nice, smaller than Bellagio, about on a par with Wynn for size and decor.  Aria aims for and mostly hits the same level of quality as the other five-star resorts on the Strip (Wynn, Venetian, Bellagio).  Although the room is fully automated from a central control panel by the bed, you can't check out from your room.  The check out lines were long, but Aria did have people posted in the lobby to take down email addresses for guests who wanted to check out without reviewing their bill.  I took this option, but the email of my bill did not show up in the promised 30 minutes, nor at all even six days later.  Kind of an annoying glitch for a hotel aiming for "elite" status.

I played several sessions at the Aria poker room in my past two trips this month, as well as a few sessions during mid-December right after the room opened.  On my recent trips, the crowds have predictably thinned as the novelty has worn off.  Instead of 'round the clock games, the room was dark most mornings with cash games starting between 11:00 am and 1:00 pm.  The daily tourneys at 1:00 and 7:00 pm were fairly well attended (30-40 runners seemed typical), and offer good structures for the $100+$20 buy-in.  But by late afternoon, there are usually at least five 1/3 NLHE (increasing in the evenings), with a couple of 2/5 NLHE games also running most evenings.  There seemed to be regular 4/8 LHE and 4/8 Omaha8 games, along with occasional 9/18 Omaha8, 9/18 LHE, and 2/5 PLO games.  The room is offering double hourly comps (triple during early morning hours) until June 1.  Overall, the poker room is one bright spot in the Aria experiment.

I did enjoy playing at the Aria poker room.  Management still seems to be going the extra mile to keep players happy, opening new games quickly, advertising for players for games with interest lists, and generally being attentive and friendly.  The dealers are a mixed bag, with several entertaining and highly competent dealers, and a handful who give the attitude they would rather be elsewhere.  I posted one particularly vexing experience at All Vegas Poker, but I'll repost it here as well:

Overall I like the [Aria poker] room, but I had one terrible dealer experience around 3:30 or 4:00 am. A female dealer was having a very animated and lengthy conversation with a player at the table who was also a dealer and at least a casual friend. I get AK in EP, raise, and get called by the button and also her buddy in the big blind. Flop is Ace high with a couple os small suited cards. Buddy checks, and I take some chips and begin cutting them next to the rail as I debated the amount of the raise. Next thing I know, dealer says, "checks around" and begins to burn and turn. I immediately say, "wait, I haven't acted." Dealer says, " you checked" and makes a gesture with all five fingers in a claw shape tapping the table. Now, my only hand on the table always had chips, was by the rail, and never tapped anything. I said, "I was cutting chips." Dealer's buddy piped up, "that was an obvious check," but other guy in the hand said he didn't know, and nobody else at table saw a check. Buddy pipes up again, "you checked" and dealer backed her buddy. I was as furious as I can remember being at a poker table, but I knew it was pointless to ask for a floor. The turn was an offsuit Jack, I bet it in a very deliberate manner, and took down the pot.

In 7+ years of playing live poker in casinos, I've never failed to tip a dealer (except by accident). I tipped on this hand as well, but it was the first time I had to think about it.

Although I very much liked Aria and Vdara from a design and "vibe" perspective, I'm not certain the City Center concept will ultimately prove successful. Back in mid-December, just after Aria opened, the casino was fairly busy while the poker room was hopping at all hours, despite being a typically slow pre-holiday week on the Strip as a whole. But in my two recent visits in March, the casino was notably less busy than other Strip properties. For example, mid-week, Bellagio seemed busy, but they were offering some $10 minimum tables in the pits. Bally's and Planet Hollywood were also very busy. Aria had all $25 minimum tables, and few gamblers. The Aria sportsbook was dead in early March, and moderately busy for the opening rounds of the NCAA tourney, but it was a ghost town compared to the crowds at Mirage, Caesars Palace, Bally's, and Bellagio.  Crystals, the upscale mall in City Center, has been desolate every time I've walked through.

I think a big part of the problem is that the City Center design is not conducive to walk-by traffic from the Strip.  City Center seems designed to be a self-contained resort, where the flies get caught in the web and don't leave until they are sucked dry.  As noted above, it is remarkably inconvenient to get into the complex while walking the Strip, and even more inconvenient to leave on foot.  But a major attraction of the Strip is the ability to walk from casino to casino.  Tourists like to be able to walk from Bellagio to Caesars to Mirage, or from TI to Venetian to Wynn, or from Bally's to Paris to Planet Hollywood.  Tourists do not like to be tied to only one casino for entertainment, no matter how ritzy that casino might be.  Just think of the typical Vegas day—lay by the pool at your hotel, shopping at Caesars Forum Shops or Fashion Mall, drinks at one casino, dinner at another resort, show at still another resort, and drinks/gambling/poker at yet another casino.  The City Center simply makes that experience inconvenient.  Plus, with less "walk-by" traffic, the casino seems less "fun" for those who do walk in, making it less likely they'll stay.

I stayed at Aria on an email offer sent to MGM-Mirage players card holders.  I'm about as low a level players club member as you'll find, and I got a rate of $109/night as an "introduction to Aria".  Fair enough, they want to get people in the doors the first few months.  But a couple of days ago, I got another offer for the summer busy season, still at $109/night.  Now, I'm not complaining, I like a good deal.  But I'm not getting comparable offers for Bellagio, which is also an "elite" MGM-Mirage property right next door.  I'm certainly not getting similar offers from Venetian, Wynn, or Caesars Palace, purportedly Aria's competition.  I can only surmise Aria is having trouble attracting hotel customers while the other elite properties are pretty much in a "business as usual" mode. 

Maybe City Center's business will pick up with more marketing (I've seen a lot of online ads for Aria recently) and the approach of the busy tourist season.  Maybe Aria's target audience is already satisfied with the other elite casinos on the Strip and sees no need to make the switch to Aria.  Maybe it's a matter of bad timing, opening an upper-class casino in the midst of an economic downturn.  All I know is that, with billions in financing to pay back, Aria is going to need something more to keep the circling vultures at bay.  In fact, I suspect Aria needs what every aria needs:

More cowbell.