Magazine

The Biggest Bet in Vegas


MGM Mirage's 67-acre CityCenter is the ultimate test of Sin City's bigger-is-better business model

Every Friday morning, James J. Murren heads to the Las Vegas Strip in his chauffeur-driven SUV to check on the status of his dream project. "Look at that," says the chairman and CEO of MGM Mirage (MGM), pausing inside the Aria Resort & Casino. "The marble, the vaulted ceiling—it looks like the Vatican."

Not everyone shares Murren's enthusiasm. Aria is one of four hotels in MGM's CityCenter resort, which will start opening its doors to the public in December. The $8.5 billion development is the debut that every casino manager in Vegas dreads. It will add 4,800 new hotel rooms to one of the country's most saturated markets, not to mention 2,400 condo units and a Cirque du Soleil tribute to Elvis Presley. With luxury rooms in Vegas already approaching roadside motel prices, many worry that the tsunami of fresh supply will drown the city's nascent recovery. And the biggest victim of CityCenter's launch may prove to be MGM itself, which dominates the Vegas landscape with nine other casinos and is staggering under $12 billion in debt.

CityCenter isn't just another real estate development in danger of flopping. It's the largest privately funded construction project in the U.S. and could prove to be a barometer of the health of the overall economy. It's also the ultimate test of a business model that has guided Sin City for decades: that building bigger and flashier resorts will bring ever more visitors and keep Vegas competitive with rival destinations. Even Murren, 47, predicts that "there won't be another property built like this for a long time."

Although advertised as a high-end destination, CityCenter has rooms starting at $129 a night, about $40 less than the lowest rates at competing properties such as the Wynn and the Venetian (LVS). "They'll end up cannibalizing themselves," predicts David Baron, a casino analyst at Baron Funds, a major shareholder of rival Wynn Resorts. (WYNN) Vegas tourism is down 6% this year while the convention business has dropped by almost a third. Meanwhile, average room rates are down 25% and casino revenues continue to drop. Matthew Jacob, a gaming analyst with Majestic Research, predicts CityCenter will "prolong the recovery" for practically every operator.

Murren argues that CityCenter's unique attractions could draw a new breed of visitors. Some of the world's top architects are involved in the project, including Daniel Libeskind, César Pelli, and David Rockwell. Sculptures by Henry Moore and Maya Lin line its air-conditioned walkways. As an environmentally friendly touch, MGM will whisk high rollers around in natural-gas-powered limos.

A SCRAMBLE FOR FUNDS

For Murren, who once dreamed of becoming an architect, the project is the culmination of a life goal. After working for 14 years mostly as a casino analyst at what is now Deutsche Bank Securities, Murren joined MGM in 1998. In 2004, as president, he came upon the chance to develop 67 acres on the Strip that contained a parking lot, vacant land, and the low-rent Boardwalk Hotel. Murren wanted to create a development that connected parks, residential towers, and shopping so that guests could feel like they were going someplace new even if they weren't leaving the property. "There are 2 million people in Las Vegas," he says, "and there's been no urban planning."

Kirk Kerkorian, MGM's largest shareholder, was enthusiastic when Murren presented his plans. But then the financial crisis hit. After the banks cut off lending, MGM's 50/50 partner in CityCenter, the Dubai World investment firm, sued to limit its contributions. MGM'S stock fell from more than $16 to less than $2 in the first three months of 2009 as occupancy rates crashed and investors grew pessimistic about the company's fortunes. Murren had to scramble to raise funds to continue construction, including selling MGM's Treasure Island casino and raising $1 billion in a new stock offering. Through it all, he says, Kerkorian reassured him and took the younger man under his wing. He told Murren to make sure to spend more time with his wife and nagged him to get enough exercise to relieve stress. Murren says the 92-year-old investor is convinced that both Las Vegas and CityCenter will thrive.

Yet CityCenter's opening comes at a time when MGM is still vulnerable. The company's cash flow has slid from about $2.4 billion in 2007 to an estimated $1.4 billion this year. With $5.8 billion in debt coming due in 2011, MGM is in danger of default if profits slide further, says Michael Paladino, a casino analyst at Fitch Ratings. On Oct. 20 the company took a $1 billion write-off on CityCenter. Kerkorian announced on the same day that he's considering "strategic options" for his 37% stake in MGM. Valued at $15 billion two years ago, his shares are worth $1.6 billion today. Kerkorian said in a filing that he is considering bringing in outside investors to unlock "substantial unrecognized value." Analysts speculate that he may be trying to drum up interest in the company's beleaguered stock, which is now at about $9.60.

OLD-SCHOOL VEGAS

The immediate priority is making sure that CityCenter's rooms are filled once it starts opening its doors. In October, MGM sent teams of sales people out to visit meeting planners around the country. Part of their pitch: Vegas is suddenly the great value-for-money destination. Moreover, they're also being told to say, booking an event at CityCenter is good for the economy because the project is creating 12,000 jobs.

Many think the days of $1,000-a-night suites and $400 bottles of tequila are over, with Vegas likely to return to its roots, offering cheap rooms and all-you-can eat buffets. "We were Bargain City, U.S.A.," says William Thompson, a professor of public administration at the University of Nevada at Las Vegas and a longtime observer of the casino business. Timothy Arnold, a meeting planner in Dallas, just booked a group of 150 at the Bellagio next door to CityCenter for $129 a night—with free meeting space. "Vegas is so full of deals now that I'm directing a lot of my clients there."

For MGM, the challenge is to make sure those clients are profitable. Its four-star MGM Grand, down the street from CityCenter, offers $79 rooms with $35 in food credits. Murren says that kind of bargain makes Vegas irresistible: "Doesn't it make you feel lucky?" But Alex Yemenidjian, a former president and COO of MGM who remains close to Kerkorian, says Murren is in a tough spot: "This is the very first time that Vegas finds itself with supply increasing while the market is contracting."


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