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MGM Mirage (NYSE:MGM)
Q2 2007 Earnings Call
August 2, 2007 11:00 am ET
Terry Lanni - Chairman and CEO
Jim Murren - President, CFO, Treasurer
John Redmond - President, CEO MGM Grand Resort
Aldo Manzini – CAO
Felicia Hendrix – Lehman Brothers
Larry Klatzkin – Jefferies
Robin Farley - UBS
Joseph Greff – Bear Stearns
Steve Kent – Goldman Sachs
Celeste Brown – Morgan Stanley
Harry Curtis – JP Morgan
Good morning, and welcome to the MGM Mirage second quarter conference call. Joining the call from the company today are: Terry Lanni, Chairman and Chief Executive Officer, MGM Mirage; Jim Murren, President, CFO and Treasurer of the MGM Mirage; John Redmond, President and Chief Executive Officer of MGM Grand Resort; Aldo Manzini, EVP and Chief Administrative Officer of MGM Mirage.
(Operator Instructions) Now I would like to turn the call over to Mr. Jim Murren. Go ahead, sir.
Thank you, Robin and good morning everyone. As you know, we’re broadcasting this conference call on the Internet on MGMMirage.com as well as on CompanyBoardroom.com. The replay of the call will be available on our website. We furnished an 8-K press release today with the SEC and additional information was posted on our website which gives very significant detail behind the numbers included in the release.
As you know, we’re obligated to remind you that information that we present in this call may contain forward looking statements as defined by the SEC. Such forward-looking statements are protected by the Safe Harbor amendments of the Private Securities Litigation Reform Act of 1995. You can identify such statements by the use of words like we expect, we anticipate and similar phrases. These forward-looking statements may include information about future periods, expected business developments, anticipated capital expenditures, future financing alternatives or other statements made about future periods. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from estimates. Listeners should also refer to our disclosures about risks and uncertainties made in our filings with the SEC.
With that, I’ll now turn it over to Terry Lanni for discussion of our results.
Thank you very much, Jim. Good morning, everyone. I wanted to start off and let each of you know that Bobby Baldwin and Gary Jacobs will not be on the call this morning. Bobby is on a much-deserved vacation, and Gary is on company business in the People’s Republic of China.
Earlier today, as you note, we reported diluted EPS from continuing operations of $0.62 for the second quarter. This is a record for the second quarter and a 27% increase over the second quarter of last year.
Net income per share on a fully diluted basis was $1.22 compared to $0.50 in the second quarter of ‘06 which was positively impacted by the gains recognized this quarter of sales of Primm Valley Resorts which closed in April and our sale of Colorado, Vail and Edgewater which in turn closed in June of this year.
As far as operating results, net revenues increased 10% to $1.9 billion, up 4% excluding Beau Rivage, an all time revenue quarter for the company. Our fundamentals are clearly strong as evidenced by tremendous hotel results and excellent cash flow results across our portfolio of resorts.
As mentioned in the release, we had an all-time record second quarter property EBITDA of $686 million, which represents a 9% increase over the prior year. Las Vegas Strip occupancy percentage of 97.8% was our company’s highest occupancy since 2000. Combined with a strong average room rate of $162, our Las Vegas Strip RevPAR was up 7%. Demand has remained robust and increased visitor volume to our Las Vegas Strip resorts continues to drive revenues.
MGM Grand Las Vegas earned $108 billion of EBITDA which is an all-time record for any quarter in that property’s history, and a 43% increase from the prior year. TI and Excalibur also earned all-time record property EBITDA. The Mirage earned $59 million, a record second quarter which represented 41% increase over the prior year. New York, New York also had a record second quarter. Bellagio had its second-highest ever second quarter property EBITDA against a very tough comparison to the second quarter of ‘06, despite having an abnormally low hold percentage this year and a high hold percentage last year.
I’ll talk a little bit about recent highlights. Kerzner International you heard an announcement about that, we’ve announced we’ve entered a letter of intent with Kerzner International to form a 50/50 joint venture to build a multibillion dollar integrated resort. We will be contributing 40 acres of land to the joint venture and will be receiving $20 million per acre in contributed value. Kerzner International and one of its financial partners will contribute cash equity.
On CityCenter, construction is progressing nicely for those of you who have to chance to see it from time to time, it is really coming up and out of the ground with each of it’s property development portions of it. We’ve reached the 22nd floor at the CityCenter hotel and casino tower and the resorts show room, convention center and parking garage are well under way. Construction of Vedara the condo hotel has reached 11th floor and the Mandarin Oriental is up to the fifth level. We need 49 more levels to get to my unit, but we’re working on it. Foundation and structural work has commenced on all the other elements, the Harmon Hotel and residences and the crystal’s retail development. We remain on budge and on track for a late 2009 opening.
On the residential front we’ve sold a total of almost $250 million of residential products since our last earnings call for a total of almost $1.4 billion of real estate to date. The Harmon Residences, the final CityCenter residential product will go on sale late this quarter.
The permanent MGM Detroit facility is expected to open in the fourth quarter with which we believe will be Detroit’s finest hotel and casino. John Redmond will be providing more details in his report shortly. MGM Grand Macau is on track for opening as we’ve said all along later this year and we will share more details in its opening on our next quarter’s conference call.
We formed MGM Mirage Hospitality which is headed up by Gamal Aziz who remained as President of MGM Grand Las Vegas. Hospitality will oversee our Foxwoods and development company and the State Guest House partnerships among it’s other activities. We are working on some very exciting projects and look forward to sharing those with you when we’re able to for this new development and new subsidiary.
I would now like to turn it back to Jim for a few more comments on our financial results.
Thanks, Terry. I would like to discuss some items that affect the comparability to last year. Beau Rivage was closed last year and this year in the quarter it reported property EBITDA of $23 million. Regarding the Signature, MGM Grand Tower 3 opened in June and we recognized income of $63 million in the quarter from our share of the profits on the closing of the units for a total of $0.14 a share. We’re pretty good at estimating how much profit we’re going to make per tower but not exactly the timing of when we’re going to get that profit. It was a little bit better than we thought, quite a bit better in terms of time.
Prior year quarter had profits from the Signature at the MGM Grand of $28 million for a total of $0.06 of a share, so $0.14 this year versus $0.06 a year ago. This quarter’s profits were a little bit better than we had talked about as a result of the higher pace of closings. Tower 3 profits are on track to exceed profits from Tower 2 in the aggregate and we’ll touch on those expectations for the third quarter closings when we talk about outlook. We had $0.04 a share impact from preopening and property transactions compared to the impact of $0.06 of a year ago.
We closed on the sale of Primm Valley resorts. We sold those assets for $400 million and the Lawson properties which we sold for $200 million. The combined pretax gain was $264 million and that’s included in discontinued operations along with the results of these operations for both periods.
On the hotel side, hotel revenue was $555 million up 9% in the quarter, up 5% if you exclude Beau Rivage. The results of course were achieved despite the fact we had 60,000 less available rooms in the current year, related primarily to the room remodel activity I’m sure John will touch upon at Mandalay Bay which was out 46,000 rooms and the closure of Nevada Landing out which closed in March of this. Terry mentioned this but it’s worth repeating. Our occupancy for the Las Vegas Strip resorts was 97.8%, really, a very strong quarter. ADR was $162 compared to a year ago. 7% RevPAR increase was our 16th consecutive year which is about four years, I think, of consecutive year-over-year RevPAR increases.
Gaming renews were up 5%. You pull out Beau Rivage however, gaming renews were down 5%. The decrease was mainly due to decrease in baccarat volume compared to a pretty tough year a year ago. We were down 13% in baccarat volume, second quarter last year we were actually up 19%, but we were down 13% this year. The good news is that customers were here, they beat us though, which is not so good. The lower hold obviously has a dampening impact as well on lower drop.
Table game hold percentage was within our normal range as we have defined it year in and year out with you of 18% to 22% but toward the low end in the current quarter versus being in the high end of the 2006 quarter. There’s about 300 basis points difference between hold percentage between the two years. I think we noted in the release, Bellagio and Mandalay Bay were particularly affected by the low hold, and they were both below the low end of the range.
Excluding Beau Rivage, slot revenues were up slightly from the prior year. Slot volumes at our Las Vegas Strip resorts were actually up 4% which is a distinct improvement versus the first quarter in terms of volume, so occupancy slot volumes are far more vibrant in the second quarter year-over-year than the first quarter.
Food and beverage, our revenues were up 15% in the quarter, up 9% if you take out Beau Rivage and that of course was due to many new enhancements to our properties, new restaurants and lounges at several resorts including at the Mirage and Mandalay Bay and a very, very strong performance at the MGM Grand Las Vegas, which has benefited from the foot traffic also from the two Signature towers that came online throughout the year, and of course were in the second quarter.
Entertainment revenues were up 37%, and that was the big benefit there, of course, with the opening of Love at the Mirage that opened in July of last year and we had a very strong event calendar at the MGM Grand Las Vegas and that included the De La Hoya Mayweather Fight which was a really terrific event for the resort and really across our portfolio of properties.
EBITDA was $686 million, that was up 9% versus the prior year. Terry mentioned that there were several records and highlights. But I think the key takeaways were that we generated significant cash flow increases across all market segments, even while we’re making substantial improvements to resorts like Luxor and Monte Carlo and Excalibur, we saw very strong traffic and profit right from the economy segment and right up through to our highest-end properties from a volume perspective.
We believe that we can continue to generate very strong returns from these kind of investments as evidenced by our margins, which are very strong still. They are 33% in the current quarter if you exclude out Beau Rivage and the Signature. I think now that we have half the year underway, we’re off, we could say, with some confidence that 2007 looks like it’s going to be a very solid year in Las Vegas as we capitalize on its market’s increased popularity. It looks like it will be at least as good as 2006.
With that, I’ll turn it over to John.
Thanks, Jim and good morning, everyone. MGM Grand Resort had an exceptional second quarter driven by strong slots, hotel food and beverage and convention business. EBITDA MGM Grand and Excalibur were the highest quarterly results ever achieved, as Jim mentioned. Mandalay Bay results were negatively impacted by a less than normal table game hold percentage and 39 ,000 less occupied room nights due to the room renovation project currently in progress. The combination of lower hold percentage and less occupied room reduced EBITDA by approximately $10 million at Mandalay Bay.
The standard rooms will be completed later this month, with suites expected to be finished in October. In Q3 2007 we expect to be down approximately 19,000 occupied room at Mandalay Bay due to the ongoing renovation. In addition, in Q2 we completed the pool area enhancement at Mandalay which includes climate-controlled pool side gaming, additional exclusive cabanas and much needed additional pool seating.
With regard to the Signature and MGM Grand, the Q2 gain related to closing condo sales was $63 million and the forecasted gain for Q3 should be approximately $13 million.
Moving to Detroit, the permanent facility under construction in Detroit will open October 2nd 2007, approximately two years from the date construction commenced. The current temporary or interim facility will close on the evening of September 30th, in order to transition over to the permanent MGM Grand Detroit. This 400-room hotel casino and entertainment complex spread over 25 acres is a fully integrated Las Vegas style resort. The current interim casino facility consistently operates at or near capacity on two gaming floors with 2,876 parking spaces, 2,840 slot machines and 72 table games.
The new facility will have 7,300 parking spaces, 4,500 slot machines and 98 table games all on a single level. The restaurant seating capacity will more than doubt the existing count anchored by 24-hour casual dining and room service managed by Wolfgang Puck and a steak and seafood venue managed by Michael Mina. These world-renowned chefs, coupled with numerous exciting bars, entertainment venues, health spas and retail outlets and 30,000 square feet of meeting space will vault the fun and excitement bar to all new levels. The 510 square foot standard room and 78 suites will impress the most discriminating customer with the highest quality and latest technology. As a reminder, when the permanent facility opens October 2nd, the current gaming tax rate of 26% will roll back 500 basis points to 21%.
Finally, I want to give you an update on the interior transformation of the Luxor. We felt the property has significant upside potential with better management, operating strategy and prudent capital investments. As we discussed some time ago, the initial quick strategy was to address the slot floor and drive occupancy, I think the success to date speaks for itself. Realizing the inside of the building did not deliver on the expectation created on the outside, we’re adding numerous exciting bar and restaurant concepts to drive more foot traffic, eliminate the dorm effect by providing guests a reason to stay and further drive ADR.
With the interior transformation and enhanced quality, creativity and know how, we have signed leases with strategic partners including the peer group who will operate multiple venues including the LAX Nightclub which will open next month around Labor Day. Throughout the year and into next, we will continue to add new and exciting venues, culminating with the Chris Angel Circ de Soleil show in the latter part of next year. The aggregate investment being made by these strategic partners will total approximately $60 million. Given advanced discussions we’re having with other potential partners, I would expect the aggregate investment by partners to approach $100 million at the Luxor.
With that I’ll turn it back over to Jim.
Thank you, John. I would like to give you some other financial data from the quarter. Our net interest expense was $184 million. That was slightly lower than our guidance, I believe we said $190 million. Composition of that was we had $236 million gross interest, $53 million of cap interest, net interest of about $183 million, $184 million. A year ago, the gross interest was $219 million, cap interest was $28 million for a net of $191 million.
Corporate expense was $44 million, and that was slightly higher than our forecast. We gave you a range of $35 million to $40 million, and that’s largely due to the fact that we incurred some additional expense of about $3 million related to the Tracinda 13D filing that occurred in May.
Other charges affecting earnings and EBITDA were the pre-opening start-up expenses of $14 million; that was primarily related to CityCenter but also MGM Macau and MGM Grand Detroit. Property transactions net, that was $2 million net, primarily related to construction of new amenities at the properties that we’ve been talking to you about. You add those two together, as I said it was about $0.04 a share.
From a CapEx perspective, we spent $1.3 billion of capital in our existing resorts and of course on our major development initiatives. Obviously the major part of that was CityCenter. We spent about $441 million on CityCenter; $81 million at MGM Grand Detroit; $23 million of trailing payments for the Beau Rivage reconstruction. Capital expenditures also included spending around $54 million on the room and suite remodel projects, primarily that was at Mandalay Bay. We spent $580 million on land that we had purchased and that land, remember, is north of Circus Circus, a large part of that land has now been flipped into the joint venture with Kerzner at a profit. We also had expenditures of $27 million on corporate aircraft. These are deposits on planes that we’ve already talked to you about. They will you be delivered later this year and into 2008. The remaining $90 million was just other routine CapEx mostly here in Las Vegas as we’re upgrading our properties.
From a debt perspective, we were quite fortunate to be in the market in the second quarter. We issued $750 million of senior notes. The coupon was 7.5%. At the same time, we redeemed $710 million of notes. The coupon on the old debt was 9.75% so that’s a good trade.
Yesterday, we paid off another $692 million of fixed rate debt. $492 million of it was couponed at 10.75% and the other $200 million was at 6.75% and they are both redeemed at maturity. We have no more bond maturities this year and we have over a billion dollars of available capacity, about a $1.2 billion on our credit facility and we have the capacity certainly therefore to do everything we’ve been talking about. Our fixed and floating rate is 59% fixed, 41% floating.
We received in the quarter another $19 million of insurance recoveries, that’s related to Hurricane Katrina. These amounts have now been recognized into income, and that is pending the final settlement of the company’s insurance claim. Through June 30th, we had collected a total of $430 million dollars in recoveries, $82 million of which has been deferred. We’ll start recognizing some of that income in the current quarter. I’ll talk about that in a minute.
We continue to believe, as I’m looking out into the future here, that we’ll see strong operating trends, particularly here on the Las Vegas Strip. RevPAR we expect to be again strong in the current quarter. Operating margins, we also believe will remain strong. With a half a year under the belt, we feel more confident to say that Las Vegas is on track to have a very solid year.
We think that our trends have improved, the second quarter was certainly better than the first in terms of some important revenue and volume metrics; slot volumes, occupancy, building of rate; all underlying demand metrics that we are very happy with.
We continue to invest in these properties and the investments yield immediate returns, and therefore we believe that you’ll see the greatest delta in our property performance at the properties that are getting the major investments. A lot of those properties are the Mandalay Bay resort group properties.
We continue to work on some pretty exciting strategic partnerships. Terry mentioned the Kerzner one. I think that’s an example of things we can do and are working on and we believe we can significantly monetize the value of our brands and substantial real estate holdings in the quarters and years ahead.
John mentioned MGM Grand Detroit. It cannot be overemphasized how strong we are and how excited we are about the opening of that property. As well, of the MGM Grand Macau property that opens up in the fourth quarter. We expect them to be the market leaders and expect them to contribute significantly to our earnings in 2008.
Specifically, in terms of guidance in the third quarter, we expect profits from Tower 3 of the Signature of around $13 million. This brings the total profit of Tower 3 to $76 million. To put that in perspective, you recall that we earned about $54 million, that’s our share, $54 million of profit in Tower 1; about $71 million of profit in Tower 2. So far we’re seeing $76 million of profit in Tower 3 and we still have a few units left to sell.
As I said, we expect to recognize income from insurance proceeds related to Katrina in the third quarter. Our guess on that is $44 million. That’s due to the settlement of a portion of the claim subsequent to the second quarter end. There are still outstanding claims for which we have not received payments and we do expect to receive additional proceeds pending further negotiations with various carriers.
Total stock compensation will be, we believe, about $10 million in the quarter. Corporate expense in the $35 million to $40 million dollar range, and that includes stock compensation expense of about $4 million. Pre-opening expenses we believe will be approximately $30 million to $35 million as we ramp up the pre-opening activities in Detroit and in Macau. Net interest expense, we’re estimating to be approximately $175 million to $180 million in the quarter, with a gross interest expense of approximately 240 to 245, cap interest around 65. Depreciation, we estimate to be in the $170 million to $175 million dollar range from continuing operations.
The income tax rate, our effective tax rate excluding one-time items will be approximately 37% in the third quarter. In addition, we record a one-time tax provision charge in the third quarter due to a change in tax law in Michigan. The new tax law will lead us to record an increase in our deferred tax liabilities, and a corresponding charge to the income tax provision. The impact of that one-time item is about $20 million.
As it relates to capital expenditures, our guidance remains the same. We expect to spend approximately $3 billion this year on everything that we’ve discussed, all the property development, new projects and the CityCenter being the most particular one. That has always excluded the land purchases that we have made.
So with that, we have about 30 minutes for your questions, so I’ll turn it back over to Robin to get to it.
(Operator Instructions) Your first question comes from the line of Felicia Henry.
Felicia Hendrix – Lehman Brothers
First question for you gave the hold impact at Mandalay Bay, what was it at Bellagio?
Well, I think it was the other way around, wasn’t it. John gave it specifically, I’m sorry. I wasn’t listening to you John. What was it at Bellagio?
I can give you the Bellagio side Felicia on hold. Remember we said in the last quarter, last year second quarter that the unusually high hold of Bellagio in the second quarter resulted in about a $15 million increase in EBITDA. So, this year, the abnormally low hold was negative $10 million to $15 million EBITDA. So the year-over-year swing, I guess if you look at it that way would be like $25 million to $30 million difference. That’s Bellagio.
Another way of looking at it is looking at our whole percentage in general. I guess one way of looking at it is although, and we have said, we’ve been between 18% and 22%, table hold, really, for the past six-and-a-half years. A 1% difference in table hold represents about $8 million of EBITDA, as big as we are now. So the swing in the quarter between a year ago was about a little over $24 million or $0.05 a share in earnings.
Felicia Hendrix – Lehman Brothers
Moving on to your Kerzner JV, wondering when you expect to have a signed contract and if you have any kind of details about how they are going to finance the project or how project in general is going to be financed, rather?
Well, we’re pretty much wrapping up the definitive agreement negotiations now, Felicia. So we expect to have that definitive signed this month. And of course, when we get that signed, we will disclose that at that time. In terms of what the project will look like, that will be next year. We’re sitting down with our friends there and working on a plan. What would you guess, Terry, the of next year?
I would think clearly by the middle of next year.
Middle of next year we’ll be able to give you a program. What I can tell you is remember how that deal works: Kerzner and its partners put in $600 million cash. We put in the 40 acres at a land value of $20 million an acre. When that occurs, we actually, MGM Mirage pulls out $200 million, we put that in our pocket. That $1.2 billion of equity, of land and cash equity we believe will be more than sufficient to raise the bank debt capital that we expect will largely fund the project. Between Kerzner and MGM Mirage as sponsors, the ability for us to raise money in the bank market is, I don’t think that is any question. We could do that today if we felt like it. So we’ll do all that sometime probably early next year. At that time, we’ll be able to give you a very detailed ideas of what the project looks like, what it will be and when it will open.
Felicia Hendrix – Lehman Brothers
Okay, that’s great. So along those lines, as we try to forecast or think about future projects that you might do domestically, given your experience, probably given the quality of the partners that you’re going to be working with, even in light of this environment, do you see risk or maybe timing delays on any kind of future domestic JV projects you might have in the pipeline.
The folks that we’re talking to, Felicia, are not looking at the TNBS market. The folks we’re talking to are very, very large strategic partners, non-gaming strategic partners and other investors that are not dependent upon the day to day fluctuation of the credit markets. So the work that we’re doing, which is constant, has not abated whatsoever in the past month.
Your next question comes from the line of Larry Klatzkin – Jefferies.
Larry Klatzkin – Jefferies
A couple quick questions. One, on the management company or hospitality, can you explain how you envision we’ll see how things come out of that is going to be? Is it in Diaoyutai first and other hotels around the world? Is it expanding existing guest house before you build new ones? Can you just give us some idea of the direction we might be looking that.
Gamal and I have met a number of times over this. He’s traveling as a matter of fact right now. If you break it down with the existing agreements we have, for example the Diaoyutai State Guest House, we are in Beijing and different cities in China right now looking for various sites to look at non-casino hotels within China. We have found some excellent sites and we’re moving towards closure on those and we’ll have announcements shortly on those. So in that regard, they would be development of new brand and would be MGM at the Diaoyutai as boutique hotels.
The thought would be these would be 300 rooms roughly all suites. They would have City Club so you would have the wealthiest people in those cities participating in that and a world class spa. So it will be boutique in that regard and it will be a new brand but brands that are very familiar already in China. The Diaoyutai is well-known throughout the higher circles of people within the People’s Republic of China. Because of our affiliation with our sister company for so many years the studios, MGM is a very well-known name in the PRC. That’s moving along quite well. In Abudabi it’s a joint venture called Mirala we are working on the development of a joint venture of hotel in the Emirates, as well as the potential property here on the strip, a non-casino property with them because that’s a non-casino development company in that regard.
As you know, also we have the MGM Grand in Foxwoods in Connecticut and it will be opening in June next year. That is coming along very nicely and we’re looking at other opportunities in that regard with them.
What we’re doing also in hospitality is the idea, we are approached all the time with different people, with new brands, existing brands that are looking for participation. In many instances, these will be non-capital investment areas. They will merely be management, development and operating agreements. Again, it’s the early stages of it but we have great hope and expectation for this company. Gamal is very excited about it and he’s putting a team together and I think the opportunities will be both domestic and international. As Jim was mentioning the other aspects of our businesses, we are partnering up with significant partners with significant resources at every level.
Larry Klatzkin – Jefferies
We should be looking for 18 to 20 times multiple in that like Four Seasons used to get, right?
We’ll give ourselves five seasons. We’ll get an extra season.
Larry Klatzkin – Jefferies
Second question, your outlook in Japan. LBS mentioned a little bit that things are going on. Do you see any timing there? Obviously it’s a market you will be looking at.
It is a market we will be looking at. We have international operations subsidiary which is headed by Bob Moon, who is also the current President in the development company at MGM Grand Macau. We’ve watched with interest, obviously Prime Minister’s Abhay’s loss of the upper house which is the first since the end of the World War II is a significant one. What he does or doesn’t do may have an impact. The minority party is now the majority party in the upper house or at least plurality. They’ll have a lot to say about it and
I think the easy flow that was expected with the liberal democratic party is going to probably be facing some adjustments here. I think it will be a little more time than maybe all of others had anticipated before. It will be approved, I suspect it will be approved and we believe it is a market we should be a part of.
Larry Klatzkin – Jefferies
As far as your 14 acres in Atlantic City and also CityCenter East any feeling for CityCenter East and what you might do with the 14 acres?
As we mentioned before a couple calls ago or the last one, Ken is heading up the design and the program for the 71 acres at Renaissance point immediately adjacent to Borgata. We would expect to be in a position to move further on that and present it to our board either the end of this year or the beginning of next year with a proposal for a development on that site.
The second site you referred to, the 14 acres have been in litigation with an issue that have been determined in our favor by the court that is being appealed. As it’s being appealed, we obviously think the court should be involved in this process. We’ll evaluate our opportunities.
The land values fortunately in Atlantic City are only increase. It is a great location, 14 acres immediately next to Trump Marina and we think it has potential but we need to follow through the litigation and the appeal process which probably will take some more time. Jane is here and she’s the number two in our legal department. She does all the work anyway, and Gary’s in China so she just tells me it’s going to take a little while.
Larry Klatzkin – Jefferies
This is the last question. As far as timing and announcing the next Macau sites.
We’re working on that also but obviously our focus is to get open in Macau which we will during the fourth quarter of this year. We’re moving on that. But we also have located a site working with the government on that and that will be announced when the work is completed on developing the program for it. As you probably know, that is required. You need to develop the program on government-owned land, and the government to determine the lease cost of it and that’s what we’re in the process of working on right now.
Your next question comes from Robin Farley - UBS.
Robin Farley - UBS
I have a question about your Las Vegas trends. It came in on the broader market a little bit better than we might have expected in terms of RevPAR. Maybe a little more color on the baccarat volume decline because I think we saw the same thing in Q1.
On the baccarat I sound like a broken record but I had long conversations with the president of our international marketing and with Bob Moon who is on the ground right now if you will in Hong Kong and Macau. It’s more anecdotal than what I can provide. The anecdotal aspect is that very clearly our friends, and I use that advisedly, at Venetian and at Wynn are meeting a lot of people from the People’s Republic of China.
The issue is that we really do believe that they’re being introduced to new business that we haven’t seen and we can’t wait to open as we will in the fourth quarter of this year and put back a level playing field. But we’re holding our business very well with existing customers and historical customers. But it’s clear that there are new people we don’t know who are visiting the Wynn and the Sands properties in Macau and they are properly and I give them credit for it, taking advantage of that and welcoming them here in the States and here in Nevada. We expect a level playing field to deal with that, as we have historically. In the interim, as I said two quarters ago, this is going to be a problem for us and challenge for us until we do open.
I would add to that, Robin, a couple things to put in perspective. One is we certainly have not gotten a lot of that incremental business. The underlying business on the high end for us is still quite strong. Our table game volume at Bellagio and MGM Grand Las Vegas was significantly above our neighbor up the street that just reported yesterday.
In terms of hold, remember, our hold has an impact on drop from the standpoint of how hold is calculated. Without making excuses on it, we’ve lost business but I believe Terry, you’re saying the incremental business. The fundamental business on the high end is still firm. We had, as I said, very strong customer activity. I should have said it, good customer activity in the quarter because we had very attractive events like the De La Hoya fight and other events that brought in play but sometimes they beat us darn it and that happened in the quarter.
Clearly, you’re right in the national business we’re doing quite well and exceeding expectations very frankly and a very robust probably economy is helping us. But that’s moving very much in that way. But I was referring specifically to baccarat and specifically to new clients from the People’s Republic of China who are going into the Sands and into Wynn in Macau and haven’t been going to our property right now because they have to bring hammers and nails.
Your next question comes from the line of Joseph Greff – Bear Stearns.
Joseph Greff – Bear Stearns
In the second quarter, I guess what we would characterize maybe as the mid-market properties – New York, New York or Excalibur – did quite well. Can you amplify what were the drivers there?
We saw it really accelerating throughout the quarter, we saw better walk-in business. We saw better occupancy through the FIT channels. We saw overall stronger activity on the floors which was evidenced by the slot volumes being up. We had some aberrant behavior in the first quarter. We had some highway closures temporarily. We had a consumer that clearly was more distracted in the first quarter than the second. So our mass market business, our economy up through the mid-market business was clearly stronger in the second quarter versus the first quarter. That translated into you saw the occupancy and also the slot volumes and table volumes excluding the baccarat.
I think also some of the amenities that we’ve added over the past several quarters are starting to kick in. I think the big impact in that segment has not yet been felt because most of the important work is as John mentioned is taking place right now at Luxor Monte Carlo, Excalibur, Mandalay. You’ll see, I hope, customer traffic increase as a result of that. But anything specific, John.
It’s really a slot hotel story. In the cases of Excalibur we only renovated 1,000 of the 4,000 rooms. The next thousand rooms are coming up and scheduled to start in November of this year. So that story continues to get better over the next several years. But clearly, the occupancy ADR improvement and slot traffic.
Your next question comes from the line of Steve Kent – Goldman Sachs.
Steve Kent – Goldman Sachs
First, from a strategic perspective, can you just give us some color or an update on where you are seeing demand for your assets given the filings on June 20th? Are there still as many people interested in the individual assets or the company? Have those parties changed?
Just from an operations perspective, forward bookings going into Q3, Q4 especially on the convention side of the business. Maybe you can give us some color on that.
Sure. Well, on the first part I’ll tackle that and then I’ll turn it over to Terry and John on the operating trends which I think we’ve touched on but we’ll give you a little bit more detail on it.
The Kerzner joint venture occurred quite rapidly to us, in fact in the room that we’re in right now. Solomon Kerzner called Terry Lanni, you sat down and it immediately resulted in a decision to meet as a collective entity to see if we can hammer out a letter of intent which we did in record time I think for a variety of reasons, we have high degree of respect and admiration for each other. We think a lot alike as it relates to development and management. We had a common objective of putting a great resort with a Kerzner flavor on the strip because we believe that will be great for the valley and great for the neighborhood. Of course we own a lot of land in the neighborhood.
So that deal came together quite quickly, but what we recognized through the original 13D filing and the process that ensued from that was that’s an enormous amount of demand from a variety of sectors on trying to partner up with us. Whether that be passive money, insurance companies, pension money in the financial segment to other financial sponsors, whether it’s PE money or hedge funds or otherwise.
To the strategic side where we’ve been very encouraged and I’m actually quite surprised about the quality and size of companies in the non-gaming arena, but large companies nonetheless, that are interested in perhaps partnering up with a company like MGM Mirage given our position in the marketplace.
So since that filing, I believe you’re referring to, Steve, it’s been constant. Our focus has been to get the definitive agreement completed with Kerzner and as I said, that should be done this month and to continue to dialogue with some other folks. I think it’s logical to expect that you’ll hear more on this topic in a productive way as the quarters progress.
As it relates to the operating trends, can you repeat it?
Steve Kent – Goldman Sachs
The convention bookings going into Q3 and Q4 and just forward looking more broadly.
Q3 and Q4 on all fronts, whether it’s convention, FIT, foreign travel, any market segment you want to pick looked very, very strong. Obviously we’re a month into a quarter already and there’s no reason to believe that the third and fourth quarter won’t be very strong. So we’re very encouraged by what we see, what we’ve seen and what we believe we’re going to see on a go-forward basis. It looks very strong.
Your next question comes from the line of Celeste Brown – Morgan Stanley.
Celeste Brown – Morgan Stanley
I was intrigued by the comments about how much your partners are investing into Luxor. Is that something new or is that something you’ve seen in the past and should we see more of that if it’s new?
Secondarily Jim you mentioned a lot of partners, passive partners potentially wanting to put money into the potential future developments. How much management capacity do you have, you don’t have five Kerzners out there, but how much capacity do you have to do multiple deals given everything you’re trying to do right now.
The issue is the management side with the hospitality company for example. We’re basically taking only two people from our existing operations to join Gamal; others are being engaged from the outside through search firms with significant backgrounds and pure hospitality industries, pure hotel industry. There are a lot of people very frankly that want to invest with us. There are a lot of people that want to work with us and that is coming through very well. Individual operations, I don’t think there’s a company in the industry that has the depth of management that we have. We bring a lot of talent along through different programs and when you see a great president at Luxor, you have ten people below him who are moving right along and giving opportunities to people. I am very comfortable at the depth, breadth and quality of our management and the ability to reach out where we need to in new areas. I’m very comfortable on the management side.
Maybe I can add to that for a second, Terry. Not all transactions will require significant time from our perspective. In some cases we’re a managing partner and in some cases we’re a passive partner. In addition to the fact that the depth of the management we currently have. An example would be the Turnberry venture where our friends at Turnberry did quite a bit, of course we were very active but they did quite a bit of work. That little joint venture made over $400 million. We got over $200 million, right, John and our partners got $200 million. $400 million profit on 9 acres of land is pretty cool. I think we can do deals in the future with that kind of template. That’s a pretty good one. Some of them require almost little time relative to our partners. Some require more.
The other point I’d make is in light of what’s going on in the industry and I mean the hospitality industry with many companies going private, in many cases you have a pick of very talented people. They’re out looking for work and MGM is an employer of choice. We’re the largest employer in this state, and I think we pay people pretty well and people like working here. So the ability to attract management to supplement the deep bench Terry mentioned has never been better.
Plus based on Luxor and maybe before that, we kind of demonstrated that bench that Jim and Terry referred to when we took over the Mandalay Bay properties, we placed new management as all of you know in most of those properties and I’m sure our results show, we haven’t skipped a beat here. We have a very, very deep operations. Bobby and I spend a lot of time developing talent at all of our respective properties and we’re very comfortable about the folks we have on board here.
Speaking about Luxor and the investments to be made by others, I think each property you have to look at a little bit differently in terms of how you look at outside investments. Luxor we felt there was such tremendous opportunity but it was also going to cost a lot of money to put Luxor in a position where we thought it needed to be as well as potentially a lot of time if you looked at it as a sequential process of development. We didn’t want to wait that much time. You know this company all too well. We wanted to move quickly and aggressively so it made sense for us to look for additional partners, ones who have a demonstrated track record of success and has the financial wherewithal to move quickly and aggressively as we do. So we’re very happy with the partners we brought on.
We have some other very interesting partners and compelling projects that we’re exploring on a go-forward basis. I was mentioning we’re about $60 million that other partners are putting in and upwards of another $40 million in the not too distant future by additional partners. So that’s going to get the Luxor property to where we think it needs to be. We’ve always thought that that property had so much upside that we’re just going to realize it faster when we bring in partners in a way that we’re doing.
I think, Celeste, you bring up an interesting point. Four, five years ago, we wouldn’t have been able to do that type of transaction. We would be out looking around the country looking for people that would manage something that we build and burdened by our capital, the success, the dramatic success of these venues, these night life venues which I don’t go to, but the dramatic success that has attracted an awful lot of interest. So the tables have turned a little bit where we’re getting approached by people that are more than willing to put up capital. They seem to be very successful once they do so and it allows us to upgrade these properties at a much lower cost to us.
Celeste Brown – Morgan Stanley
I was wondering if you can give a little more detail on the $250 million in increment sales for CityCenter where those units were sold in terms of the different buildings. Was any of that from exclusive resorts or will it fall into the third quarter?
I’ll tackle the second question right away. Exclusive resort transactions fall into the current quarter here. One thing to mention on that because it’s a significant transaction and they announced that they are going to have 30 units, that is 30 units reconfigured, I think we sold 76 units to them which they are going to convert to 30 units. That will have a significant jump in the quarter. We have sold well over 600 units now at Vadara just alone. But in total, remember that Harmon is not even on the market, 209 so when we say 2,600 units, we really are only trying to market about 2,400 units right now, and we have sold 1,200 of them. Half of the units on the market right now, specific to the quarter was really across the portfolio with a significant amount occurring at [Vere], to a lesser extent at Vadara. We sold a few units that we had left over at Mandarin, which is already the runaway success. So most of the activity in the second quarter was at [Vere], and I believe, Terry, we put Harmon on the market at the end of this quarter?
Yes, at the end of August.
Your final question comes from the line of Harry Curtis – JP Morgan.
Harry Curtis – JP Morgan
If you could talk about where your cash might come from over the next couple years outside of cash flow from operations? You’ve talked a little bit about where it could be extracted from the Kerzner partnership. Is there much that we could expect coming from those kinds of transactions? Also, do you have any appetite for selling individual or groups of assets? Could you see some cash coming in that way and what do you do with it?
Well, we like to say we planned perfectly for this day and that we knew exactly what was going to happen in the credit markets over the past three weeks, but of course we didn’t. But we did want to make sure that we had enormous amount of financial flexibility going into 2007 because we knew we were going to spend about $3 billion this year. That is why we were very active issuers of bonds in ‘06 throughout and into here in ‘07 and doing a large deal in the second quarter.
That put us in the position that we’re in today, which means we are not dependent upon nor expect to be in the bond market at all this year, and probably won’t see the bond market until sometime next year.
As I said, we have substantial amount of bank capacity and our banks love us and they should. We’re good guys and we have a substantial relationship with our banks that, you know, is very productive on a going-forward basis. So between our bank facility which is large -- the largest in our industry -- and our cash flows, we feel very comfortable about our financial needs over the coming period of time.
From the standpoint of joint ventures, these joint ventures we put in the land as equity. We’re getting cash back. If we this a couple more times which I expect we will, we’ll get more cash back. These properties are unlevered. So when we go out and do deals, we’re not the kind of joint venture partner that needs to access CNBS market or the bond market. We go out and talk to our friends at the banks and we go out and do non-recourse bank deals and they’re lining up to do that with us, even today and so joint ventures become immediately balance sheet positive. They provide us with a platform to provide bank financing and provide us with an opportunity to grow quite rapidly.
As it relates to selling assets, we do that too. We sold two major groups of assets last quarter alone. We’re constantly getting pinged by people wanting to buy some of our properties and I would bet there will be properties that we do sell, small ones, over time. As we continue to do what good portfolio managers should do, emphasize your winners and cut your smaller properties away.
In terms of existing major properties, there has been a major initiative underway where people have approached us about partnering up with existing resorts or existing development projects. Both of which we’re open-minded to, and so we look at the opportunities today as not just simply Greenfield construction opportunities of which we are working on a few others but also more broadly within our asset spectrum.
So I think we got a little bit lucky in the sense that there’s a lot of interest in gaming from a variety of investors that we had not anticipated a year ago. We made some luck by buying land at the right time and buying companies at the right time. We’re very, I think, fortunate in our timing of accessing the credit markets so as to give us an awful lot of latitude and time to see how this whole market shakes out.
Harry Curtis – JP Morgan
So a quick follow up. How does share repurchase fit in with this? You didn’t mention any share repurchase in your prepared remarks. If you could comment about your appetite going forward.
Well, we were a little distracted in the second quarter, which was why were we not in the market. We likely would have been. We’re consistent acquirers of our shares. We have 5.5 million shares remaining in our current authorization. If history’s any guide, we’ll finish that up and ask the board for another authorization. That’s what we’ve done, you know, year in and year out.
We believe that the best opportunity to invest in gaming today is in ourselves. We don’t see any M&A activity out there that’s attractive to MGM Mirage at any multiple. I don’t see, unless you disagree, Terry, anything. Terry used to tease me all the time that I want to buy everybody and we’re looking at every company and every thing. But the reality is where we are today given the land that we own, given the opportunities that we have, the opportunity or the attractiveness of using our capital to acquire other gaming companies is not appealing to us.
So as we allocate capital, it’s going to be in ourselves through the virtue of capital expenditures and share repurchases. I would expect that in the future, you would see us take a page from the past and continue to reinvest in ourselves.
Let me add one point, Jim. I was looking at this the other day and we have actually purchased over 139.5 million shares, history to date, at a cost of $2.156 billion and that’s $16 plus per share. So it’s been a good investment.
Thank you. On behalf of everyone here in Las Vegas, I want to thank you all for participating in the call. As always, if you have any follow-up questions, please feel free to give us a jingle. Thank you.