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MGM Mirage (NYSE:MGM)

Q3 2007 Earnings Call

October 30, 2007 11:00 am ET

Executives

J. Terrence Lanni - Chairman and Chief Executive Officer

Jim Murren - President and Chief Operating Officer

Dan D’Arrigo - Executive Vice President and Chief Financial Officer

Gary Jacobs - Executive Vice President, General Counsel, and Secretary

Aldo Mantini - Executive Vice President and Chief Administrative Officer

Analysts

Felicia Hendrix - Lehman Brothers

Lawrence Klatzkin - Jefferies & Company

Robin Farley - USB

Stephen Kent - Goldman Sacks

Joseph Greff - Bear Stearns & Company

Harry Curtis - J.P. Morgan

Operator

Good morning and welcome to the MGM Mirage third quarter conference call. Joining the call from the company today are Terri Lanni, Chairman and CEO, Jim Murren, President and COO, Dan D’Arrigo, executive VP and CFO, Gary Jacobs, Executive VP, General Counsel, and Secretary, Aldo Mantini, Executive VP and CAO. Participants are in listen only mode. After the companies remarks there will be a question and answer session. (Operator instructions). Now I would like to call the turn over to Mr. Dan D’Arrigo.

Daniel D’Arrigo

Good morning everyone and welcome to the MGM Mirage third quarter earnings call. This call will be broadcasted live via the internet on www.mgmmirage.com and at www.companyboardroom.com. A replay of the call will also be available on our website. This morning we furnished this earnings release and a form of AK with the FCC and that information is available either on our website or with the SEC. Addition information and supplemental financial details were also posted to our website this morning and you can find that under our investor relations section of our company website. Before we get started I’d like to read our Safe Harbor disclosure real quickly. Information we present on this call may contain forward looking statements as defined by the SEC, such forward looking statements are protected by the Safe Harbor amendments, the private securities litigation reformat of 1995, you can indentify such statements by the use of the words we expect, we anticipate, and similar phrases. These forward looking statements may include information about future earnings expected business development, anticipated capital expenditures, future financial 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.

Now I’d like to turn the call over to Terry Lanni for discussion of our overall results.

J. Terrence Lanni

Good morning ladies and gentlemen. Dan, if I had known you were going to read that as well as you did we would have made you CFO a long time ago.

First I do want to recognize a few individuals who have recently been promoted in addition to Jim Murren as we know, but Bobby Baldwin ahs been names chief design and construction officer and will continue to serve as president and CEO of the CityCenter development project. Bobby is travelling internationally on company business and will not be able to join us today.

Jim Murren, who we have had a great relationship for a long period of time and for many years into the future has been made COO of the company, retaining his title as president, and he’ll be providing comments for the first time on a quarterly basis geared towards operating results and if he strays into the financial areas Dan and I will bring him right back. He’ll talk about the trends as well as our many growth initiatives.

Dan D’Arrigo was promoted to executive VP and CFO; in addition to his many new responsibilities he’ll be proving financial results on this meetings call.

Bob Sulwood is here with us today and is now executive VP and CAO of the company.

Also here today we welcome Cathy Santoro who has recently been promoted to senior VP and treasurer of our company.

Let me talk a little bit about the overall results here.

Earnings today we reported diluted EPS from continued operations of $0.62 from the third quarter that compares to the $0.53 in the prior years quarter.

Earnings benefited from $135 million of income from hurricane Katrina insurance recoveries for our Beau Rivage property in Biloxi, Mississippi.

The $135 million total is above the guidance that we gave of $44 million and that’s due to receipt of cash actually sooner than we expected. Awkward sometimes with insurance companies that you get money before you expect to get it, and the execution of final settlement agreements have taken place with several carries in the third quarter.

107 million is recorded in property transactions and $28 million is an offset to general and administrative expenses.

We very recently reached final agreements with the remaining carriers. Our final proceeds numbers will be $635 million. We expect to recognize approximately $150 million of income in the fourth quarter relative to this matter with approximately $40 million recorded as a reduction in general and administrative expenses and $110 million as property transactions. That would be the Beau Rivage property obviously.

Dan will provide further explanation of other amounts impacting comparability in the quarter in his comments which will be coming shortly.

Top line performance for the company was strong as net revenues increased 6% to an all time record of $1.9 billion. Hotel and non gaming results led the increase in revenue this quarter. Las Vegas strip REVPAR for the company was up 6% verses 2006. That represents our 17th consecutive quarter of REVPAR increases of the strip here in Las Vegas. Many of our Las Vegas strip properties had record third quarter hotel revenues which is a very strong indicator of the strength of this market and the continued effectiveness of our operations and the management of those operations.

Gaming revenues increased 3% in total but were down 3% if you take out Beau Rivage and were impacted by a lower hold percentage in our high end Baccarat business in the quarter.

Our customer trip levels remained quite strong and we continue to believe our high end results will improve when we open MGM Grand Macau later this calendar year.

We opened the all new MGM Grand Detroit on October 2nd and it is truly a spectacular hotel and casino resort. We held our recent board of directors meeting in Detroit and we were all extremely impressed with the resort and its people. Congratulations to our Detroit team led by George Boyer and Tony Brolick and Ben Mammima who is responsible for developing the property on their behalf. It was a short project, most expensive building ever built in the city of Detroit, and truly is transforming that city and I encourage people to see it if you have not seen it. It’s quite a property.

On CityCenter, we entered into a joint venture agreement with Dubai World for 50% of CityCenter, it should be noted that we will continue to be the developer of that project. Once again we will operate CityCenter and we will receive a management fee for doing that. This transaction truly represents a paradigm in our growth strategy, with us joining a strategic financial partner in Dubai World, to leverage our management ability and real estate assets in the most effective way possible that we would even think of.

Along with the CityCenter transaction we completed the sale of 14.2 million shares of common stock at $84 per share to Dubai World on October 18th. It should be noted that was also a 13% premium over the price of the stock on the closing of that date. That produced proceeds of approximately $1.2 billion. We expect to work alongside Dubai World for many years to come on CityCenter and a significant amount of other global projects, many of which are under discussion as we are here today.

We’re already working with Dubai World in connection with the Kerzner International Joint Venture in the Las Vegas strip on 40 acres of land that we contributed, across from Sahara and north of Circus Circus.

We announce plans for MGM Grand Atlantic City, which will be between a $4.5 and $5 billion casino resort. We will initially use 60 of the 72 acres at that site, Renaissance point. 12 acres will be reserved for future development, based upon the importance of the time I could certainly have residential as a component, it certainly could potentially have an arena. We’re evaluating that as we move forward at this project,

We are extremely excited about this project and we believe it’s iconic Kohn Pederson Fox design and unmatched amenities will drive increase casino and non casino demand in the Atlantic City marketplace and it will be the most impactful resort in that markets history.

It should be noted that Kohn Pederson Fox is a firm that we have a great relationship with because they are also designed the Manadarin Oriental at our CityCenter project, and that is indeed an iconic building into itself.

At CityCenter, the construction budget has increased as we noted today approximately $400 million from $7.4 billion to $7.8 billion. It always our goal to build the finest and the best, and yes projects do tend to increase in cost, and they increase in cost because of what we want to be sure that that is an iconic structure and a series of structures.

The cost increase is largely due to other factors though, the complexity of the hotel casino podium, the theater buildings, and the (inaudible) designed group structure over the crystals retail area which required additional steel, concreted and fabrications along with additional design changes for exterior lighting and water features and site utility costs. As I like to say you have once change to make a great first impression and we are not going to do anything to deny this company the opportunity to do that with out project CityCenter.

Construction has made substantial progress during the third quarter; we’ve reached the 26th floor of the hotel casino tower. Construction of Vidara, the condominium hotel has also reached the 26th floor. And Mandarin Oriental is up to level fifteen. All other elements of the project are under way as well.

On the residential front since our last earnings call, we’ve contracted for $170 million of residential units bringing the total at CityCenter to over $1.5 billion. Almost half of all available units are now under hard contract to be sold. The Harmon residences, the final CityCenter residential project went on sale in September of this year to friends and family and we’ve already contracted for 25% of those units and there’s 207 units in that particular building. Sales to the public will start in early 2008.

In Macau, the updated cost estimate for the project is $1.25 billion, up from the precious estimate of 1.1 billion dollars and as I mentioned earlier the resort is expected to open by the end of this year.

I’ll now turn it over to Dan for additional comments on our financial results. Dan.

Dan D’Arrigo

Thank you Terri. As Terri mentioned, I’ll first discuss some of the items that impacted our comparability year over year. Profits from the sale of our condominium units at the signature at MGM grand were 12 million In the current quarter versus 26 million In the prior year’s quarter. This us mostly due to the closeout essentially of Tower C which I’ll get to a little later, but this impacted EPS by about $.03 in the quarter.

Terri already talked about the insurance recoveries from Katrina that are included in property transactions but offsetting the $107 million profit in that particular line item were higher other property transactions in 2007. we had roughly about 18 million of demolition costs and write offs In the third quarter versus less than a million in the prior years quarter, about a $.04 per share difference and most of that was at the MGM grand in Mandalay, for some of the room remodel and some of the other projects that are underway at those two properties. Also we had a $.06 per share impact from preopening and startup expenses compared to only $.01 per share in 2006, the current quarter is higher due to the October 3rd opening of MGM Grand Detroit and the ramp up of preopening activities and our hare of those preopening activities at MGM Grand Macau.

Property EBITDA up 705 million as up 13% versus 621 million in the prior years quarter. Excluding the impact from the insurance recoveries, write down, preopening expenses, and the signature profits, property EBITDA was flat compared to 2006. The property EBITDA margins were also consistent in both periods excluding these items.

Corporate expense increased to 63 million versus 35 million in the prior year quarter, the increase in corporate expense over our original guidance of 40 million was due to certain unanticipated costs related to our recent announced transactions, the accrual of certain compensation costs and some development expenses related to Macau and Atlantic City, as well as CityCenter transaction costs.

Our net interest expense was 180 million dollars, which was consistent with our guidance. That was made up of roughly 243 million of gross interest expense and about 63 million of capitalized interest in the third quarter.

I’ll now turn it over to Jim for more detailed components of our operating results.

Jim Murren

Thank you, Dan. I’m going to drill into some of our operating performance and give you an outlook as well of what we see happening here. First in the hotel side, our hotel revenue was up 7% in the quarter to 511 million that was notable since we had 29,000 less available room nights here in Las Vegas versus the prior year and that was primarily due to the room remodel project that’s now complete over at Mandalay Bay.

Terri had mentioned that our REVPAR was up a healthy 6%, get into that our occupancy actually was up from 96 to 97% and our ADR also increased, it went from 140 to $147. In fact, REVPAR was up everywhere in the quarter, in all our properties. I think it’s worth noting that we are somewhat dependent on air traffic here in Las Vegas. In the market air seat capacity actually increased 16% year over year, and our daily air passengers have increased 5% into the market. That obviously bodes very well for our 36,500 rooms here in Las Vegas, as approximately 70% of our customers come by plane.

On the food and beverage side, and also in entertainment, we’re very gratified, very strong results, food and beverage revenue is up 10%, even up 6% without including Beau Rivage. All the restaurants and nightclubs continue to show nice growth in both volume and in profits. Our entertainment revenue is up 13%, really strong demand across our portfolio of entertainment amenities. Our Cirque shows continue to be a huge draw here, and are obviously clear market leaders. In fact, our longest running show, Mystere, draws more customers than any of our competitors’ shows. The trick now for us, and we’ve been doing this for the last several quarters, is to capture more of the customer spend, through improved amenities and food and beverage, entertainment on lounges.

On the gaming side, our gaming revenues were up 3%, but if you strip our Beau Rivage, they were actually down 3%. To get into that a couple minutes here, our flat revenues were a mixed bag. Several of our properties here on Las Vegas Strip were up very nicely, up in the 8% range, both at Bellagio, MGM Grand and Mirage, also Mandalay was up strong, up 9%. Overall, on the Strip, our slot revenues were up 2%, and that means we were down on some of our properties, such as Luxor, Monte Carlo, Excalibur. These are properties that are undergoing fairly dramatic repositioning, which obviously impacts temporarily customer counts, which I’ll get into in a minute.

We’re also down at MGM Grand Detroit, in the interim facility. Obviously we were winding down that facility, and then closing it, when we opened up the MGM Grand that exists today on October 2, so that had a temporary impact on slot revenues there, and now I’ll tell you how we’re doing in a minute, it’s very remarkable.

Table games side, our table games revenues were down, that’s mainly due to a decrease in whole percentage, our volumes were flat, and Bellagio, of course, was down year over year in whole percentage, which impacts the Bellagio’s EBITDA and our overall whole percentage.

It’s also, I think, notable to talk about Bellagio. I think we closed the Baccarat room, Mike, in July. So the baccarat room here at Bellagio has been closed. It is in a temporary location, which is obviously not optimal for the very high-end customers. We’ve learnt, and I don’t think anyone knows more about this business than we do, we learned that the high-end customers gravitate towards the best rooms. The private rooms, the baccarat areas, are the stated of our technology and design. We’ve been hamstrung by not having that room open, it opens up in time for the very important season coming up, Christmas, New Year’s, Chinese New Year’s, so you’ll see, I think, a positive impact at Bellagio due to that very important new amenity.

In fact, taking kind of a step back, I’d remind people that it’s only been a short period of time since we acquired Mandalay Resort Group. It was in the middle of 2005, if you recall, and it took us a few months to find out where the restrooms were and figure out what we had there and also a few months more to put together an operational and development plan. That plan is rolling out right now, and the results, you can see, have already been very profound, as we apply capital to these properties. The properties are responding immediately. That process is not yet done.

If you go into our properties today, of the older Mandalay properties, you’d see dramatic construction underway, as we reposition these properties. The short-term impact is obvious; it has an impact on traffic. The long-term impact, I think, is also obvious, as evident by when we do this. We did it at the MGM Grand, the results revenue and cash flows have been profoundly positive there as we reposition that property. That gives us great confidence that these types of increases will happen at the Mandalay Resorts properties. They’re already beginning to happen, and it will be done in mid to late ’08. You’ll continue to see, I think, growth in these properties, and then real taking off after we’re done with the repositioning.

Terry mentioned Detroit, really just a tremendous opening to this property. I’d also add some thanks to John Redmond to the kudos and thanks. Jon is no longer with us at the company, but had a profoundly positive impact on the development and positioning of that property, and our thanks go out to him. The traffic has been tremendous, our volumes are up substantially, our room counts and our guest counts are twice what they were in the old facility, so our customer volumes are twice what we were experiencing.

On the table games side, our table game volume is up 70% year over year, and we believe that the amenities of the property, not only the gaming space itself, but the food and beverage, entertainment, and rooms, spa, and conference facilities will continue to attract a great customer, the premier customer in the marketplace, which spends more money on those kinds of amenities, and are better table game players.

We added over 1,600 more slots than the interim facility housed, and yet, our win per unit is about the same, which is really remarkable. So with an increase in slot machines from our, let’s say about 2,400 or 2,500 slot machines to well over 4,000 slot machines now, our win per unit is about the same, over $300 a day.

I’d also remind you that now that the permanent is opening, our tax rate rolls back from 26% to 25%. That will obviously result in a pickup of cash flow, once that process is finalized and we’re working with the appropriate authorities to do so.

I mentioned the repositioning of the Las Vegas resorts. I’ll give you a couple examples of this, of what’s happening here in Las Vegas. Take, for example, Luxor. Our new nightclub, LAX, opened on August 31, it is, I don’t go to these clubs, but I’ve been told it’s a great club and it’s a hot place to be, and in fact, probably one of the premier clubs now in the country. Many other restaurants, bars, nightclubs are opening up at Luxor over the coming months and quarters. For example, Company, which is more management group, is doing an American bistro, Cathouse, a sexy kind of restaurant. Again, I won’t be there, but I’m sure it’s going to be great, with a great chef there. Liquidity, and it goes on and on. These amenities will open up later next year, later this year, I’m sorry, and into 2008.

Another example is over at Mandalay Bay. Mandalay went through its room remodel. We expanded dramatically the pool area, as you know, and we’re getting great feedback in both of those areas. And in October, we opened up a hot new lounge there, it’s called Eye Candy, and right in the middle of the casino floor and it is, I’ve been by it many times in fact. That’s just a couple examples, I can go on and on with that.

On the corporate side, we’re going through our ’08 budgeting process right now and we’re really excited about some of the key areas where we see tremendous opportunity, both in terms of driving additional revenue, in the areas of rooms, international and national marketing, database marketing, convention sales, and on expenses, where we feel we can drive some great efficiencies through consolidating certain areas, say on room reservations, payroll, HR, and there are many other financial areas of opportunity where we can cut some costs. We’ll be reporting to you on the progress of this as we move forward into the balance of this year and into ’08, but I think you should expect to see a fairly substantial increase in revenue and a resulting improvement in margins. Although we’re high already, we have room to improve as we go into 2008.

And with that I’ll turn it back over to Dan D’Arrigo.

Dan D'Arrigo

Thanks Jim. We’ll kind of recap here just some follow-up highlights for the quarter, get into a little guidance, kind of help the models, and then we’ll leave plenty of time for your questions and answers.

For the quarter we spent approximately $767 million at our existing resorts, and on our development initiatives. Roughly about $451 million was spent on CityCenter in the quarter, and another $140 million was spent on MGM Grand Detroit.

Capital expenditures also included the spending of $61 million on the room and suite remodel project, primarily at Mandalay and at Bellagio. We also had about $13 million in spending related to a new corporate aircraft. The remaining $102 million related to our routine capital expenditures on various new and upgraded amenities, most of the ones Jim was touching on, at our resort properties going forward.

Looking at our capital position, on October 18, we closed on the sale of the stock 14.2 million shares to Dubai World. We received roughly $1.2 billion of proceeds under the sale of that stock sale. We used those proceeds to pay off our credit facility balance, thereby reducing our outstanding credit facility balance, and increasing our availability to roughly about $2 billion under our senior credit facility. Our fixed to floating ratio is just north of about 60%, right now fixed, just inside of 40% floating.

The CityCenter joint venture transaction is scheduled to close here in the fourth quarter as well. These two transactions combined will have a profound impact on our balance sheet. And just to put a little framework, or perspective, around the CityCenter joint venture, right now we will have invested almost about $2 billion in CIP, when we closed on the CityCenter transaction, our land carrying book value is roughly about $1 billion, and book value when we bought the land, mostly in the acquisition of Mirage Resorts in 2000, bringing our total investment to roughly $3 billion today at MGM Mirage.

Upon closing, we’ll receive over $2 billion after paying some taxes, significantly increasing our return on invested capital, as we will continue to own 50% of this project, as Terry mentioned earlier, and receive a management fee going forward. The financing is expected to be non-recoursed to MGM Mirage, and we expect to be in the market later on this quarter.

We only have minimal maturities in 2008, under 400 million, so we’re in pretty strong financial position going into not only the remainder of this year, but well into 2008. We did not repurchase shares of common stock during the quarter, and year-to-date, we’ve repurchased 2.5 million shares for roughly $175 million, which leaves us with 5.5 million shares under our current Board authorized program.

From an outlook perspective, we expect the fourth quarter to be our18th consecutive quarter of Las Vegas Strip REVPAR growth. We also believe that our operating trends, non-gaming revenues, and operating margins will remain strong. Two factors to just point out going forward. We have reached agreement on two new labor contracts; one is a five-year deal here in Las Vegas, which roughly will increase wages and benefits, pretty consistent with the last contract we had of roughly about 4% per year over that five-year term. In Detroit, we’ve reached a new labor agreement as well, for wage and benefit increase in the first year of roughly about 7%, decreasing slightly in years two to four of that contract.

Remember, as Jim pointed out, these two cost increases will be partially offset by that gaming tax reduction in Detroit, now that the permanent is open, once we receive certification of our permanent facility, the tax rate will reduce from 26% to 21%, a nice pickup for MGM Grand Detroit property.

Our continued investments in our Las Vegas resorts are providing excellent returns and we anticipate the planned additional investments in our properties will lead to further increases in property cash flows. We are currently going through our capital allocation process for 2008, and have many exciting high-return projects on the table.

Now I’ll just run through some specific income statement guidance for Q4 to help you with some of your models. As we mentioned earlier, we expect to recognize income from insurance proceeds related to Katrina, at Beau Rivage during Q4, of approximately $150 million, $40 million of which will be a credit to G&A expenses, and $110 million will be a credit to property transactions, similar to Q3 here.

Total stock compensation expenses estimated to be approximately $10 million in Q4, and corporate expense we expect to be roughly in kind of the mid-$40 million range, around $45 million, which includes stock compensation expense of roughly $5 million.

Pre-opening expenses will be approximately $20-$25 million, as our joint venture in Macau ramps up its pre-opening activities, and in anticipation for the opening of that property later on this year.

Net interest expense will be approximately $150 to $160 million in the quarter. Please note that this does not reflect any potential savings if we close the CityCenter joint venture prior to year-end and we’re on pace to potentially do that right now.

Just to give you a one update and kind of close the loop on the signature on MGM Grand. In October the joint venture partners decided to finalize the operation of our joint venture. MGM Mirage has acquired the remaining 88 units of the signature product, at a profit to the joint venture; we will not recognize any future profit from the sale of these 88 units, as our final profits will reduce our basis in these units that we have acquired.

We will be using these units predominantly for corporate uses mostly for our consultants and other business partners, who are currently using our hotel rooms at our resorts.

As you think about CityCenter and other projects going forward there’s a lot of folks using up vital real estate within our hotel rooms that we can use for our paying customers and bring in additional revenue into those building. Additionally the CityCenter sales the signature sale center at MGM will be converted to CityCenter Sales Center. That will be the third pavilion outside of the sales pavilion between NY NY and Monte Carlo and just to kind of recap what a tremendous success the signature product has been at MGM that joint venture sold over a billion dollars worth of real estate and an average $930 per square foot, for the sale of the 1728 total units. Not too bad for some old theme park land.

We recognized over 200 million of profit from that venture, with our initial investment consisting only of that access land of roughly 9 acres behind the MGM Grand. We also received the benefits of managing some of those units and received the foot traffic benefit at the MGM Grand for the customers who stay at the Signature. Depreciation in the fourth quarter we estimate to be in the 180 -185 million range from continuing operations, our income tax rate our effective rate should be roughly about 36% in the fourth quarter. and just a reminder that our share count will increase in the fourth quarter by roughly on average about 11 million shares as a result of issuing 14.2 million shares to Dubai World during the quarter.

Our guidance for CapEx remains largely the same about 3 billion in total for the year, including all our development projects. And excluding the land purchases of the strip land here in Las Vegas, but does not include the impact from closing the CityCenter transaction prior to year end as well.

So I think with that operator we’ll open up to Q&A and start taking your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from line of Felicia Hendrix with Lehman Brothers.

Felicia Hendrix - Lehman Brothers

Guys, just a few quick questions one is I think Dan you had mentioned just talking, or Jim. You had mentioned significant future projects with Dubai World. I was wondering if you could elaborate on that a little bit?

Regarding CityCenter just wondering you mentioned you described why some of the cost were escalating, wondering what you were doing to contain that going forward? and I’m just wondering given the higher cost now is that $100 million bonus for completing on time and on budget now basically a moot issue? And than in Macau just wondering if you are seeing anything that the Venitian is open are seeing anything that caused you or causing you to change your strategy at all there? And drivers behind cost increases there? Thanks.

Dan D’Arrigo

I think Terry will take the first one on Dubai World and we’ll jump in on CityCenter and Macau

J. Terrence Lanni

Good Morning Felicia. Let’s talk a little bit about it. You may have noticed in news not too long ago that Dubai World one of its subsidiaries won a very significant bidding competition for a non casino site in the Republic of Singapore. And we are in discussions with them about development of that site, it’s going to have two large towers, we’ll have two hotel components, retail components, and residential components. And we’re talking to them about a couple of our brands in one of those towers.

In addition I mentioned earlier that Bobby Baldwin has gone to the Middle East, I said Internationally, it’s actually the Middle East he is in Dubai as we speak and (inaudible) the time differential is difficult for him to be here but one of the first things we did when we entered into the agreement Sultan Sulian (ph) we had a discussion and it was suggested that we take and develop a sales center for CityCenter, and the city and Dubai. And in turn to develop a marketing office to market the non casino aspects of our various hotels, throughout the United States and the World, with specific influence and focus, if you will on the Las Vegas marketplace. So we’ll shortly have open there sometime in the half of next year a sales center comparable to the one that we have here on the Strip between NY NY and Monte Carlo.

And in addition we’ll have a separate marketing office where our marketing people will market the non gaming aspects of our resorts and food and beverage, the retail, the entertainment, the spas and the like. So we’re very excited about those transactions.

In addition, Gary Jacobs and I just returned from the Peoples Republic of China and had very significant meetings there. and had meetings just last week with representatives of Dubai, who have indicated a significant interest in investing and owning these non casino hotels that we’re going to be developing with the Diaoyutai Guesthouse State and ourselves and the Peoples republic of China. In addition there are some other areas of the Far East; the head of their investment fund in Singapore met with us just this last Friday as a matter of fact, Thursday. And we’re looking at opportunities in other parts of South East Asia both gaming and non gaming which would be in some form or another potentially be in partnership with Dubai World, or one of it’s affiliates.

Dan D’Arrigo

And CityCenter, Felicia I’ll jump in on that one a little bit. CityCenter as we’ve said all along is very detailed and very complex project. we are working with out business partners there, on a GMP (ph) process that process is beginning here in the fourth quarter, it probably wont be wrapped up until sometime in the middle of next year. But that’s when we’re really have a lot more clarity and the project will be locked down, with our business partners through the GMP process there at CityCenter. As it relates to Macau which I think was your third

Felicia Hendrix - Lehman Brothers

Wow, back to CityCenter there was a 100 Million bonus for completing on time and on budget so I was wondering if that is now in flux.

J. Terrence Lanni

Well I would say that’s its in flux but it’s certainly not off the table. That bonus is based upon the net cost of the CityCenter so there are many components to it. It’s not only what CityCenter ultimately cost, but the ability for us to sell the residential product. The residential story is uniquely positive I think, unique to what is happening in the United States and certainly unique to what’s happening here in Las Vegas. So our sales pace and the price per foot we’re getting is very positive and the bonus is based upon how we end up on the net basis, when we’re done with the project which will be late 09. So we certainly have not written it off.

Felicia Hendrix - Lehman Brothers

Ok and than Macau

Dan D’Arrigo

And than in Macau there is kind of a the good and the bad of following others. The good news is that we can evaluate the marketplace and react as we’re continuing to kind of develop our property, I think when you look at where we started out in this development and construction faze we’re focusing more casino space on the VIP rooms and the marketplace today, than we probably would have a year or so ago. So the property has been kind of changed slightly through this design and development process, and we continue to monitor that. And so there’s kind of a good side of following others, and the bad side is that we’re a little later than others to the marketplace. But we’ll be there real soon, and we have a lot more data points today, than we ever had in kind of evaluating the VIP customer segment as well as the mass market.

J. Terrence Lanni

Not only (ph) that Dan, not only does our property sit next to Steve Wynn’s beautiful property, not only does it tower over it actually, but it’s substantially larger than the Wynn property is today. Both in terms of number of tables that we will open up with, significantly more over 75 more in fact and in terms of slots. And we have a far easier ability to expand that property even further. So we’re going to come out of the box we think on a fast run. With a larger facility tailored to what the market expects today, with the ability to expand it. And it opens in a couple of months and I don’t think people have really focused on the impact that property will have on our company both on how it does in Macau but the cross marketing impact it will have on our Las Vegas properties.

Felicia Hendrix - Lehman Brothers

Great, thank you.

Operator

Your next question comes from the line of Lawrence Klatzkin with Jefferies & Company

Lawrence Klatzkin - Jefferies & Company

Couple of questions here, one does this housekeeping capitalize interest for the first, for the third quarter?

Dan D’Arrigo

I thought we gave that I guess roughly about 63 million if I remember correctly 63 million

Lawrence Klatzkin - Jefferies & Company

63 million ok perfect. As far as, could you quantify the hold effect just maybe a more general number than it was a lot.

J. Terrence Lanni

Larry, we tend not to do that as you know. Because lets say it gets us into a situation where we’ll be talking about this every single quarter up and down. Clearly the hold is lower its no an excuse it’s just a reality of how we are in the gaming business. I don’t think that we should loose sight of that. It’s had its most profound impact on the property of Bellagio obviously as well. But it was within our normal range so therefore I would just leave it I would just leave it as saying it impacted Bellagio’s results both in terms of its hold and the fact that it’s more important weapon in the high end was on the side lines. The Baccarat room was effectively out of business and that will be opened up here in the fourth quarter.

Lawrence Klatzkin - Jefferies & Company

Ok so does that maybe some effect on there in part of the fourth quarter also?

J. Terrence Lanni

Sure, the Baccarat room opens up, what Mike, mid December a vast preponderance of our high end business occurs as you know mid December right through New Years. That’s when you want it open we planned it’s down time for this period of time for this reason. It will be open at that time, but it has an impact here in October and November.

Lawrence Klatzkin - Jefferies & Company

Ok, and as far as Dubai goes is there any chance you will be doing something similar to Kerzner is doing? Some kind of property in Dubai itself? Non (inaudible)

J. Terrence Lanni

Well we are looking at an interesting site in fact looking at it the day after two days I think, as a matter of fact. Which is significant development would be there which we would use one or more of our brands for a non casino hotel, not unlike what Sol Kerzer is doing with Atlantis, which is a non casino hotel in Dubai. And I guess he is doing one in Morocco as well.

So yes we do think there are opportunities there. And as you know we’ve also entered into an agreement also with Mubadala in Abu Dhabi a sister emirate. And we think there are fascinating opportunities there we’re reviewing that at about the same time for our brands for non casino hotel ventures in that particular marketplace also.

Lawrence Klatzkin - Jefferies & Company

No and Abu Dhabi it’s more their money. In Dubai would it be, MGM would you invest some money I know with the Kerzner thing Kerzner is putting in half the money and Dubai is putting in half the money.

J. Terrence Lanni

But we don’t do have to wait to go through the whole process. I would suspect that when in that part of the world more, most of what we’ll be doing, a significant part of that will be in development branding management fees. I think the investment if any would be more limited.

Dan D’Arrigo

Ok I would just add Terry; I don’t think our capital is what compels our partners to do business with us. It is our brands, our unique approach to development, and the way we operate resorts. And the fact that most of our hotel friends are already omnipresent, they’re in almost every market. its’ not really particularly exciting to add another X hotel in a major market globally. It is quite exciting to add some brand new market into a new market a brand new brand, and that is really where these discussions are coming. So I think you will find us very much as a feed based model for these development projects.

Lawrence Klatzkin - Jefferies & Company

All right and than AC14 acres now that you have decided to make your big move on the big block of land. The smaller block are you guys talking to people are you willing to put that into a JV or donate into something?

J. Terrence Lanni

Well a number of people as you can imagine have contacted us on that particular site. We’re adding tremendous value to it with the development of 60 acres immediately across the street from it. And if you know I think that’s also its in litigation, we won the original case but it’s on appeals. So it’s something that it’s probably more prudent for us to wait through the legal process before we do anything. But there is significant interest about right purchasing, joint venture anything you could possibly name.

Lawrence Klatzkin - Jefferies & Company

Ok great and than the last thing as far as Macau property, originally the Feng Shui dates where in there early part of December, is that still the case or should we be expecting it maybe a little later in the month?

J. Terrence Lanni

Well we have practical people; we have a series of Feng Shui specialist that we can work on various dates. If some of them find to more enticing than others we will get it up before the end of the year and as Jim mentioned anything we did indicate the cost of increase, and that not merely of cost just additional labor which is part of it, but if you take look at, and you’ll see it when it does open, the quality of the restaurants compares very favorably to what we have here. We saw very frankly what Steve Wynn did, and he built a very quality product and it transformed that area in the peninsula and we need to properly compete with that and I think we’ll have a very cooperative spirit there because he’ll develop business, we’ll develop business, and that will interact between those two properties and probably (inaudible). But I don’t think we can really issue the importance and understand the importance of us being in Macau for that very high end business that we have here in Las Vegas. It’s extremely important to us to be there. I’ve said this will be the third and hopefully the very last quarter I have to say this is that we have operated at a distinct disadvantage to a Venetian, and Wynn. Give them credit, they were there first and they are meeting people that we don’t know that’s all going to change by the end of this year, and we’ll be in a level playing field and ready to do battle.

Lawrence A. Klatzkin - Jefferies & Company

All right, well I look forward to the invitation of the opening. Thanks Terry.

Operator

Your next question comes from the line of Robin M. Farley with UBS

Robin M. Farley - UBS

Thanks. A couple of questions on the Las Vegas property. One is can you (inaudible) what the hotel revenue just in Las Vegas, the increase in total hotel revenue, because I know your repertoire was up but you also had some room side of service so.

J. Terrence Lanni

Yeah, your breaking up a little Robin, I think you asked what our hotel revenue was up in the Las Vegas strip?

Robin M. Farley - UBS

Yes.

J. Terrence Lanni

Overall we gave that number at 511million which is up 7%. Overall in Las Vegas, strip was 5% in revenue.

Robin M. Farley - UBS

Ok, great. And then also the table volume, you commented with and without Beau Rivage so I wonder if you took out Detroit, just Las Vegas table volume.

J. Terrence Lanni

The Las Vegas table volume was flat.

Robin M. Farley - UBS

Great. And then can you talk about any impact so far in, on the fourth quarter from two things. One is, I guess a couple of days you had your reservation systems were down and just how significant of an impact that was as a property for that happened or they were on and off for a few days. And then also any impact southern California is obviously an important market for you and weather you are seeing any impact from the wild fires there in terms of visitation to Las Vegas.

J. Terrence Lanni

Sure, I’ll tackle the first. Yes, we did have a system, failure for a brief period of time. It started on October 17th wrapped up on October 26th. Seven of our resorts here and also Beau Rivage in Mississippi, so seven total, were impacted by this. We had unscheduled down time resulting in about 19 hours of down time of our properties hotel system. That’s the Opera system which is developed by Micros. It runs on an HP platform and it had an Oracle database associated with it. And that combined system did break down for that period of time. We went into our recovery mode when that happened and brought a lot of staff on place and manually checked in people which when you have properties as big as ours obviously there are significant issues involved in that. The problem was in a memory leak in the operating system and that has been, we have been working on it really 24 hours a day. The system is fully functional right now, but we don’t like the lack of redundancy in the system so were improving the redundancy of the system and getting a more robust system to handle this. This is kind of a bruising edge because Micros never has developed a system that operates these scale of room products both per property and system wide, and we’re working with them. We lost some revenue because of that. We had some customer issues that we know how to handle, we’re customer service oriented and they were inconvenienced for that period of time, we’re sorry for that, and we are in threat recovery mode as I said it is working right now. So, we did have a temporary breakdown in the system, it’s regrettable, but it was temporary and it’s behind us.

As it relates to, I think, the California wild fires, and the impact on traffic. I’ll say something; it’s been minimal to us. I don’t know if my partners here would disagree. We’ve seen very good vehicular traffic into Las Vegas at our properties. As I mentioned before, we’re more of a fly in destination than a drive in destination, at least compared to the overall market here in Las Vegas. We do have the resort nature that people gravitate to from great distances, but our drive in business, even still, has been largely unaffected.

Robin M. Farley - UBS

Okay, Great. And just a last question, do you have any sense of whether Dubai World they didn’t get much on the tender they did to the market, whether they would have an interest at coming back at a higher price or what your sense is on that.

Dan D’Arrigo

Robin, I think the issue there is, you’ll have to chat with them about that. They obviously have an agreement that they can go up to 20% of our stock and now own slightly less than 5% and I know that they believe in the company. You’ll have to ask them at what price they want to move back into this market.

Robin M. Farley - UBS

Okay, Great. Thank you.

Operator

Your next question comes from the line of Steven Kent with Goldman Sachs

Steven Kent - Goldman Sachs & Company

Hi, Good Morning. Could you just talk a little bit about margins? I guess what I am trying to figure out is, is there some offset between the casino margins and the non-gaming margins? Is there a mixed changed, or is there actually a decline in each one of those line items that I’m not able to see?

J. Terrence Lanni

What do you mean decline Steve?

Steven Kent - Goldman Sachs & Company

Some pressure on you there that the casino, I am assuming that the casino margins were under some pressure this quarter but are they under more than just the volume or is they there something else going on there some expense structure or something else going on.

J. Terrence Lanni

As you know Steve, the margins on the casino side are most significantly impacted by whole percentage. So really, simple as that, year over year, the margin in the casino department was impacted by the lower whole of this year than last year, on the expense side, there’s been really virtually no change both in terms of promotional activity and in terms of discounts, in terms of overall labor and other expenses related to generating the casino revenue that we have. As it relate to the non-casino side, that why I was confused, ‘because our margins are flat or up in every area of our company and that continues to improve, as we continue to improve our food and beverage. Our retail business was quite strong and entertainment was even better. Our margins going into 2008, as I indicated earlier will likely be up, at least if we have anything to say about it, because, of some of the revenue initiatives we are employing right now and I think more importantly, some of the cost initiatives that have an impact, possible margins.

Steven Kent - Goldman Sachs & Company

Ok, thank you.

Operator

You next question comes from the line of Joseph Greff with Bear, Stearns

Joseph R. Greff - Bear Stearns & Company

Good morning guys. Jim, I was hoping you could just give us an operating outlook for the convention booking s for the fourth quarter and for the half of next year please

Jim Murren

Sure. That’s a good question cause I don’t think, we typically talk about that and we didn’t

Joseph R. Greff - Bear Stearns & Company

Right

Jim Murren

Bring that up. Sorry about that, it’s not intentional. Well the, in the fourth quarter, looks like we are going to have another solid quarter on the convention side, and so far in 2008, looking out into 2008, we’re significantly ahead of our booking tape this year than we were last year. In fact, up in the teens in terms of bookings for the 2008 business versus where we were a year ago booking into 2007. In the attrition rate in the third quarter was about 8.8%. Year to date, our attrition rate was 9.4 so we had an improved attrition rate in the third quarter. By the way, the industry runs about 10% so we’re better than the industry in both metric. And the city wides are down, but MGM Mirage in that impact everybody. But it looks like our convention business looks solid into the fourth quarter and as I say; our forward bookings into 2008 are significantly greater than they were a year ago.

Joseph R. Greff - Bear Stearns & Company

Great, excellent. And Jim, or Terry, maybe you can give us an update on other Macau opportunities. With Panzi obviously you had some Macau development issues expensed in the third quarter. If you could just give us an update there.

J. Terrence Lanni

Well, we have a second site that the chief executive has indicated that it will be available to us and we continue the process. There is a process that you have to go through on that, and we’ve provided documentation to the government. We’ll be there next week, and may have an opportunity to have further discussions with them, but these processes take some time. But we have it identified; it is a very exciting site. It is on Kotai. And we are doing some preliminary planning on that right now. That doesn’t mean that we wouldn’t find other sites. We’ve frankly had conversations with Dubai World again, interestingly enough, because Dubai World has secured property in that area, and they’re looking for other properties and have had conversations with us about potential involvement about our joint venture to develop some part of that as a casino development.

Jim Murren

I would just add, excellent point Terry. Because our pre-opening expenses are higher than you probably anticipated. Were planting many seeds and we’re seeing immediate results in the formulation of transactions, that some of which have been to the point of disclosure, and others are not yet there. But there are many conversations underway both in the Macau area Asia in general, as Terry mentioned (inaudible) many of our partners there, in the Middle East in Dubai and Abu Dhabi, and in other parts of that region and in South East Asia.

We also open up, we’re helping of course the MGM Grand in Foxwoods we didn’t mention that but that opens up next year and that has been an effort of ours which we think could help on the cross marketing perspectives and Gamal Aziz (ph) with it’s MGM Mirage hospitality, it’s really geared toward looking at non gaming locations all around the world. So pre-opening expenses which burden our current results we think will yield very substantial profitability on a going forward basis.

The other near term impact of course was those property transactions which people really need to digest when they are looking at particularly the results of the MGM Grand here in Las Vegas and Mandalay Bay they both have significant transactions in the third quarter which impacted the results but the underline operating trends are obviously very positive in both properties.

Joseph Greff - Bear Stearns & Company

Great, and than one final question, I think both you and Jim both you and Dan, talked about identifying some capital investments that would hit 08. In terms of a dollar amount it might be early can you give us a range? You think what capital investments would be in 08?

Dan D’Arrigo

I think it’s too early to tell right now Joe, we’ll be taking that to our board later on this year, early on next year. And once we’ve shared that with our board, we’ll come back to you with that. Probably on the fourth quarter call or early in the first quarter.

Jim Murren

I would remember that Joe, the old CFO used to try to encourage people to do a five year plan. And look at not only the money that just came in to the company in form of the stock sales, but also more importantly the money that Stan mentioned soon. In the form of selling the 50% interest in City Center, it has just a profound impact on our balance sheet, profound from the standpoint of overall debt, in terms of our leverage statistics, and in terms of our flexibility to do many things, in the capital allocation program. We have been very aggressive acquires of our stock for example in the past, we have managed the balance sheet very aggressively, and I think prudently from a standpoint of risk. And we’ve been able to plant some significant development seeds over time. So we’re going to go to our board, once Terry approves first of course our budgets for 08. And then we’re going to our board in January, it would be a clear threatening move to give you numbers now, before we present it to our board. But I would say that our opportunities are better than they have been before.

Joseph Greff - Bear Stearns & Company

Great, thanks guys.

Dan D’Arrigo

Operator we will take one more question

Operator

Your last question comes from the line of Harry Curtis with J.P. Morgan

Harry Curtis - J.P. Morgan

Hi guys, so Dan if you read a little faster we would get more questions.

Dan D’Arggio

Well you’re only supposed to ask one it’s been three or four every question.

Harry Curtis - J.P. Morgan

Well all right, well with that in mind I will keep mine to Atlantic City. But I’ve got a 17 part question.

Dan D’Arggio

We’ll have a one part answer

Harry Curtis - J.P. Morgan

OK so with respect to Atlantic City. Can you give us a little more detail on the timing? Also your thoughts on the increase in capacity in the area, where the, to what extent profitability is going to come from the existing casinos in your projections? Versus expanding the market and to what degree do you factor bait or field (ph) in your thoughts?

J. Terrence Lanni

Well I think it’s not 17 but about three or four different issues. I can tell you taking the last first on bait or field (ph) we welcome that as an opportunity. And we read the press and it just seems that one company have been assigned that particular site and I think that’s a mistake because I think a number of us who were interested in that site.

If and when the governor and the city council and the other powers that be, determine that is an area that can be developed into resort, casino development we’d be very interested in that. You asked about capacity and what is going to happen in that particular regard, the issue is to me if you take a look at Atlantic City there is like 36 million visitations a year but the average number of visits per person is like eight times a year, so you really have not penetrated that market and the more we saw with our joint venture in Borgata, an ability to change that marketplace from a dynamic of 8/10 of one day, as a visit, to extend it much closer to a 1.2 nights and a little bit more in days, and that’s a paradigm for us. We think that the Renaissance Pointe - Harrah’s has put a ton of money into Renaissance Pointe. We’ve approved with our joint venture partner to expand Borgata, unfortunately a fire slowed that up, it’s going to open in the, I guess late spring or early summer of next year, and we believe that will continue to change the marketplace.

We’re going to do a $4.5 to $5 billion project that’s going to truly be transformational for Atlantic City, and we believe that will have the ability to attract people, as Bob Bogner likes to refer to them as the New York rejecters; that’s why we’ve kept the 12 acres in the back open, we think there’s a possibility, maybe a probability, that residential units would be an interesting component to add to that 60 acres.

And if we have a must-see site that is a destination resort, which I know we will do if Kohn Pedersen and Fox and our people are involved in that. We believe that will more than offset what is happening in Pennsylvania. Today as you know Pennsylvania has slot houses basically, and with the tax rate that they have there, there’s no way you could afford to build a destination resort. Any change in that tax rate or the expansion of gaming is going to take some time, in my opinion, in Pennsylvania.

Atlantic City has one opportunity, and we think it’s Renaissance Pointe and the Marina, to develop destination resorts that are second to none, they’re the premier resorts in the East Coast, and that would attract those New York rejecters, as well as people from the Philadelphia marketplace. One of the advantages in the Marina District, Harrah’s, from the time I was back there in 1978.’79, and ’80, never had a busing program, doesn’t haven’t one now. Our Borgata project has no busing project; we anticipate no busing program for our MGM Grand Atlantic City resort, and that, in my opinion, from what I read, and maybe more anecdotal than specific factual statistics, is what is happening with the business along the boardwalk, they’re losing one heck of a lot of that business comes in on buses, and that bus program, which may not necessarily be the most profitable business in the world, but it’s a business we don’t want to be a part of, and we don’t need to be a part of.

So we’re very bullish in Atlantic City, we like the fact that it has a constant rate, that 8% tax rate, plus 1.25% with the CRDA funding, gives us a predictable rate, and that’s why we said now, for about three years now, Jim, that we really wanted to focus our growth on states with stable tax rates. The state of Nevada obviously where we put our money obviously, and are putting our money, state of Mississippi and the state of New Jersey, because those are stable tax rates. We’re not interested in some of these other areas where we happen to be as a result of mergers operating, and they’re fine places and all of that, but at the same time, the tax rates are kind of - every Monday morning they may change. So very bullish in Atlantic City, bullish on the Marina, more bullish on Renaissance Pointe, and we will build a destination resort that will keep people coming to Atlantic City and staying for lots longer periods of time than they have in the past.

And the last part, as far as competition, I think competition without capacity, or just capacity alone, is just rooming houses is all they are. You need somebody coming in, developing a dynamic resort, and that could be one of our existing competitors, and I would welcome them. I welcome them to wherever they would like to build in Atlantic City, because that will bring more people. We’re not in the gas station business, where you’re on one corner and somebody pulls in, the other three gas stations don’t get the business. If we’re doing what we’re doing right, and with our new COO I know we will be doing it right, we will attract those people to come to our properties also. That’s why we love being right next to Steve Wynn in Macau, it’s going to be great, and we’re going to have the two best facilities. They’re going to be boutique compared to a certain facility, but they’ll be quality facilities.

Harry Curtis - J.P. Morgan

Thanks guys.

Dan D’Arrigo

Thanks Harry. And I think operator with that we’ll wrap it up. Thank you everyone for joining us, and feel free to call my office with any follow-up questions. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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