April 16, 2010

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!


* 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.


  1. I was wondering where I would get the platform to discuss this - and here it is. Thanks buddy!

    Aria and many of the Vegas resort properties suffer from the same fate of many high end properties around the country. When I was there pre-IMOP in early March, I did a one night test run at Aria based on a decent offer made to me via my MGM players card. A good rate plus $100 gaming credit. Fine.

    When I checked in around 11pm, the process was absurdly slow, with two supervisors talking to each other while two worker bees checked in our short line. Not a great start at a "5 star" hotel. Then, I was not given any sort instructions as to my comp. I asked and the nice but dim witted worker had no idea what I was talking about and couldn't find anything about it in the system. I produced the printed copy of the offer and she said, "Well, I'll have to call the gaming host to help you." I countered with, "Will they be there at this hour?" Her answer was, "Probably not." Ok then...

    So, I didn't get my comp. Fine. But they I attempted to check out via the high tech in room system. Except it didn't work.

    Needing a receipt, I went down to the front desk to check out. There was a long line and only three workers at 9am. The line wasn't moving fast and all of a sudden a nice manager with a clip board walked up and indicated they were having computer problems. He simply asked if I wanted my room on the credit card provided and to be emailed a receipt. I indicated yes and he simply wrote my email address on a blank piece of paper and said, "thanks". Needless to say, I'm still waiting for my receipt 6 weeks later. Is this the 5 star service people pay a premium for? I'm guessing not. I sure won't stay there again when comparable experiences exist at lower prices (or better experiences certainly exist for same prices). Note that Grange had almost the identical experience over two weeks later. What the hell is going on there?

    In a "but they suck too" moment, I just returned from a business trip in the ultimate tourist trap of Orlando. At the brand spankin' new Hilton opposite the convention center, they charged $225/night for average accomodations. Two beers and two glasses of wine resulted in a $40 bill with tip. Lunch with my boss was $50. So, they were hanging their hat on service. Interesting though, that I had to wait for 40 minutes for their security people to meet me to return an item from lost and found after being told it would "be waiting for me" when I got to the desk. I also got to pay $12 per day to self park my car. And they screwed up my "parking pass" twice resulting in the rent-a-cop not letting me out of the parking lot until making a 5 minute phone call to someone who assured them I wasn't trying to steal a beat up Grand Marquis...

    Point is that if any of these places think they can justify price based on service, you actually have to deliver. These sorts of customer service failures are why the business traveler won't piss his company's money away any more - because he or she doesn't get good service! They don't care as much about the price as they do about the relative value since the company is picking it up. But if the service sucks, even us sales scumbags won't spend money at a place that is clearly over charging.

    Hope MGM figures it out. I like their properties, but I'm not going pay for incompetence.

  2. Nice breakdown on Aria and MGM's woes. I definietely could see a bit of it coming, as on my walkthrough I counted 8 $5 BJ tables on the floor, even though it was a Monday, it definitely could not have been what they expected.

    I also think they are working to correct some of the occupancy issues by taking directly from Bellagio, as a low tier player (last on the tier list for MGM comp rooms) I've been flooded with Bellagio offers for the past month. Which leads me to believe that they'll take from the B and prop Aria and then try and fill B from the rest of the conglamorate.

    That doesn't make up for the huge problems with the condos though, which are going to be a huge albatross for quite a while.

  3. @ Michael: I've noticed lots of internet offers for Aria, and I've gotten numerous email offers for both Aria and Bellagio. The Aria offers so far have been cheaper. No matter how you look at it, it seems in the short term MGM is simply robbing Peter to pay Paul, an occupancy Ponzi scheme, almost. Look at the Addendum I just posted re the Monte Carlo figures. Insurance money wasn't skewing the results; Monte Carlo is drastically underperforming this year.

    As for the condos, I'm starting to wonder if they were ever a good idea. I know they were planned at the height of the housing bubble, when everyone in America (or at least the wealthy in Southern California) was buying second homes. But 2,400 condos at an average price well north of $1 million per unit? There's a pretty small market for that kind of vacation home. And a lot of potential buyers are the type who are used to being pampered by the staff in the posh suites at the elite Strip hotels; why buy what you already get for free (or deeply discounted) on your monthly or quarterly Vegas getaway?

  4. As for Santa's point re poor service, I had a nearly identical problem with Aria in mid-March. The promised slot credit never materialized. The front desk only had two people to manage check-in, though our wait was tolerable since we arrived late morning. At checkout, the checkout line was ridicuously long, and again, only two people working the checkout desk despite it being a noon on Saturday. Remembering Santa's checkout story, I looked around and found a lady standing around with a clipboard. I approached her, asked if she was checking people out. She said yes, took my email address, and promised a copy of our bill would be emailed within an hour. A month later, I'm still waiting.

    Look, I liked Aria's hotel rooms, and I like its casino and poker room. In fact, I'd rank most of the MGM family of hotel rooms, casinos, and poker rooms ahead of the Harrah's family of hotels, casinos, and poker rooms. But I have to agree with Santa, if MGM wants to save money by cutting staff, at some point the lack of customer service is going to have a negative impact on business.

  5. FWIW, I think that's a great analysis of the City Center sucking hole at the center of the MGM universe, especially in highlighting the significance of the condos. It seems many who've invested in this company somehow manage to miss that.

    I'd suggest adding the high end retail to the condos in thinking about the financial state of The Behemoth, as that is another important piece of the overall scheme. High-end high-rise second home residential and top 'o market commercial real-estate gonna just pay for it all boys, oh yeah!

    My first visit to your blog, and it looks great. One of the most easy on the eyes I can remember seeing, from the tiny bit I have seen. The inspirational wine recommendation is brilliant.

    Local Rock

  6. Definitely agree Grange, a occupancy Ponzi scheme definitely seems to be the best description. I tend to think that at some point Murren has so much riding on this, he'll cannibalize everything to drive the numbers up at Aria. Even though revenue winds up being flat across the board, if Aria as the crown jewel looks bad, then the stock price gets hit harder. (at least in my opinion)

    And you are right on MC, heck, take a stroll up to Luxor or MB on weeknights or some weekends, the traffic stops at Excalibur. MGM has definitely not figured out how to really utilize their dominance of the strip. I thought they'd hand Harrahs there lunch having higher quality resorts when everyone dropped prices, but things like the resort fee and other choices, seems to keep them struggling still.

  7. @ Local Rock:

    You are dead right about the Crystals shopping center. That place has been dead during all three of my visits since it opened in December. There is simply next to no foot traffic that isn't just passing through on the way to/from the hotels. I don't think I've seen more than a handful of actual shoppers in any of the stores at any time of day. For that matter, it looks like a number of stores are still in buildout mode, or may be vacant entirely.

    A big part of the problem is that the stores they have in Crystals are so high-end, there is a rather small market for their goods. But a lot of the target market for those stores can already shop at Bellagio, Wynn/Encore, or Venetian/Palazzo, wherever they might be staying. Also, I'm not part of the uber-wealthy world, but I suspect most of that crowd already have plenty of high-end shopping available in LA, NYC, or wherever they are from. They aren't going to make a special trip to Crystals from the other end of the Strip just to shop in stores they have back home.

    Finally, if Aria and Vdara are offering steep discounts to fill their rooms, I doubt the people staying in those rooms are going to have the budget to shop at Crystals. They will end up at the Planet Hollywood mall, the Caesars Forum Shops, the Fashion Mall, or the Venetian Grand Canal Shops.

    BTW, glad you like the blog. Hope you stop by from time to time!

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