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MGM MIRAGE (NYSE:MGM)

Q2 2008 Earnings Call Transcript

August 5, 2008 11:00 am ET

Executives

Dan D'Arrigo – EVP and CFO

Terry Lanni – Chairman and CEO

Jim Murren – President and COO

Bobby Baldwin – Chief Design and Construction Officer

Aldo Manzini – EVP and Chief Administrative Officer

Analysts

Felicia Hendrix – Lehman Brothers

Larry Klatzkin – Jefferies & Company

Robin Farley – UBS

Celeste Brown – Morgan Stanley

Joseph Greff – JP Morgan

Operator

Good morning and welcome to the MGM MIRAGE second quarter conference call. Joining the call from their company today are Terry Lanni, Chairman and Chief Executive; Jim Murren, President and Chief Operating Officer; Bobby Baldwin, Chief Designing Construction Officer of MGM MIRAGE and President and CEO of CityCenter; Dan D'Arrigo, Executive Vice President and Chief Financial Officer; Aldo Manzini, Executive Vice President and Chief Administrative Officer. Participants are in a listen only mode. After the company's remarks, there will be a question and answer session. (Operator instructions)

Now, I would like to turn the call over to Mr. Dan D'Arrigo.

Dan D'Arrigo

Well thank you, Amanda, and good morning everyone. Welcome to our second quarter earnings conference call. This call this morning is being broadcast live on the internet at www.mgmmirage.com and at www.companyboardroom.com, and a complete replay of the call will be made available on the company's website.

This morning, we furnished this earnings release on form 8-K to the SEC and it also is available through their website as well. Additional supplemental information was posted on our website this morning which gives you significant detail behind the numbers included in the release. And before we get started, the information we present on this call may contain forward-looking statement 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. Any forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those 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 it over to Terry Lanni for some introductory comment on our results.

Terry Lanni

Thank you, Dan, and good morning, everyone. We are very pleased, actually with our second quarter results, and though the economy certainly remains challenging, we believe that we're very successful at generating revenues very near prior year levels. And considerable work on the expense side of the equation allowed us to hold profit levels that we saw in the first quarter.

On the overall basis, we reported earnings of $0.40 per diluted share, compared to $0.62 from the 2007 quarter. The year prior including significant profit – or did include significant profits from residential sales of the signature and MGM Grand. That was $63 million, or $0.14 per share, that makes up a large portion of the decrease in EPS from the prior year. There were other less significant items affecting comparability and we can outline those in the release. Dan and Jim will give you some more specifics on trends seen during the quarter, as well as our outlook later on on this call. I'd like to point out some highlights from the quarter.

On a comparable basis, property EBITDA was down 12% on a 2% decline in net revenue. These results are better than others in this market place. We believe our market share is growing based on the superior quality of our resorts and premium guest service. In Las Vegas, Bellagio and Mandalay Bay posted increases in cash flow, with Bellagio reporting the highest property EBITDA of any resort on the Las Vegas strip, and Mandalay Bay producing a record second quarter. Also reporting increases in cash flow were Gold Strike in Tunica, Beau Rivage in Beluxi, and MGM Grand in Detroit which accelerated its year-over-year increase from the first quarter. We've taken a significant number of measures to right-size the company for this changing times and done so without impacting the quality of service to our guest. This measures have allowed us to maintain profit margins at superior levels to our competition.

I'd like to discuss the results at MGM Grand Macau. MGM Grand Macau generated net revenues of approximately $268 million in the quarter and a disappointing property EBITDA of $23 million, and clearly these are disappointing results. If you really take a look at the Macau market place, we have 8% of the market as far as by number of units, of tables, and slots, and basically – and the quarter period we did about 8% of the revenue. I'm pleased to say, and the numbers that were released by the government of Macau just last week, that our July market share has increased to 9.5% from 8%. We, basically have set aside 57 table games within the 366 games that we have there for junket operators. Maybe basically, $60 million in turnover which is a good number for those number of tables and win of U.S. 1.8 million per day. In-house VIP, we hold 23 tables. So, we are limited in this regard that we have 80 tables and we have six junket operators and I say that is our capacity. We have reached out two and others have reached out to us a number of other junket operators who would like very much to associate themselves with MGM Grand Macau but at this point we don't have the capacity.

Now, what we're doing to correct that is the following

We have on the 34th and 35th floors determined to convert those floors to be VIP rooms and by the middle of August, we would have added 22 tables to our existing number of 80 tables. Level two, we were converting– that was originally set aside a section of that for mass market and we have determined that would be important to add more VIP tables and by the end of the year, we would have added another 48 tables on level two. That will bring us to a total of 150 VIP room– tables, I should say as compared to the current level of 80 and they'll be flowing in through the rest of this year and be in place by the first of 2009.

One of the issues has been very positive for those people who have at least the retail component in Macau and when we originally planned our project – we have a project immediately next door to us, and actually connected to us which is called One Central, which includes some 250,000 square feet of net rentable high-end retail which is proven to be a very significant component as I say in the Macau market place.

The original anticipation was the Hip Hing, the contractor for that project of four Hong Kong land in Shun Tak, would be able to open that facility concurrent with ours. Unfortunately, that did not happen. There were significant construction delays and it's expected now that that project will be flowing in starting some time about this time next year. That does put us at a disadvantage because we have two minimal retail outlets in the existing MGM Grand Macau. When this opens, with its some 1,200 condominiums, service apartments and the Mandarin grand Oriental hotel, along with the retail component, we think will be a significant factor to improve the reported numbers and the production of that particular property.

One other factor was that when we opened on December 18th and until the month of June, we had actually operated that property without the benefit of the excellent MGM Mirage International Marketing Organization. We determined that was a mistake not to utilize that organization and joint venture agreed to utilize the facilities which existed throughout the world especially in the Far East. And, since we have incorporated MGM Mirage marketing, which was in the month of June this year, we have doubled our VIP in-house business and we think that can continue to grow. We do have some issues in construction and I would hate to complain about construction. That's the reason why we have some difficulties. But, getting in and out of our property is very difficult as a result of all the construction both done by the government of the special administrative region as well as existing and some would be or future competitors. And, that's going to take probably about another 9 to 12 months to complete that construction, including the One Central property next door to us, which should alleviate some of the restrictions that the mass market has in getting into our property.

So in balance, we're not pleased with the past performance of our property in Macau. But, we believe that we are taking the necessary steps, and the early indications from those steps are indicating that we are getting a good response and we believe that we will consistently improve that particular market and our particular property in that market. And I think you also know, we have appointed effective on August 1st, Grant Bowie as President of MGM Grand Macau. He's an experienced gaming operator, including four years as a Chief Executive in Macau. At the same time, Bob Moon has moved back to his role as Head of International Operations for MGM Mirage, and we'll continue to lead our efforts oversees including our casino international marketing efforts.

I'd now like to turn the meeting over to Dan for a few detailed comment on our operating results for the quarter, Dan.

Dan D'Arrigo

Thank you, Terry. I'd like to provide a quick short summary on the results of our second quarter. At a higher level, the trends in the second quarter were similar to those experienced in the first quarter. We also provided significant detail on our release this morning and posted the supplemental information I mentioned earlier to our website.

Our casino revenues decreased by approximate 4% compared to last year's quarter, while our net non-casino revenues were essentially flat for a 2% overall decrease in net revenue. We achieved a 97% occupancy at our Las Vegas Strip Resorts, and as you've seen in the markets, we did have to give on rate to some extent for the benefit of the overall operations. But Las Vegas remains in a high demand and we have the properties of choice in each of the market segments.

Red Parrot, our Las Vegas Strip Resorts, went down approximate 5% year-over-year similar to the 4% decline that we experienced in the first quarter, and a point to note is that, our occupancy trends from the first quarter to the second quarter, in a year-over-year basis, actually improved from being down some 230 basis points in Q1 to only 90 basis points in Q2. So we picked up significant traction on these occupancy levels.

So, worthy to note, is that our comps are incredibly difficult to interrupt against a all time record 2007 second quarter for both revenues and profits, and our Strip REVPAR last year was actually up 7% in that quarter.

Adjusting for comparable items, property EBITDA margin in this quarter was approximately 30% versus 33% in the prior year's quarter, and a very strong operating margin in this environment. We still see room for company-wide margin improvement as our cost-saving initiatives continue to gain more traction in the coming months. Our income from unconsolidated affiliates was $17 million in this quarter versus $97 million in the prior year's quarter, approximately $63 million as experienced, that Terry mentioned earlier, was attributable to the prior year residential standings with the signature at MGM Grand. The remaining difference is due to lower income from our pickup from Burgada [ph] as well as Mikhael [ph] operating loss. And this year of course, we have our share of the city panel [ph] residential expenses in our own consolidated affiliate line items.

Our net interest expense was $145 million compared to $183 million in the prior year's quarter as we continue to benefit from the lower debt balance this year over year. Our gross interest in the second quarter this year was $184 million. Our capitalized interest was approximately $39 million for net number of $145 million. Our income from continuing operations, which exclude the gains recorded the last year in the sale of both the Primm properties in Laughlin was $113 million in 2008 versus $183 million in 2007, most notably, the difference there is the signature event last year versus this year.

Now, I would like to turn it over to Jim for some more detailed discussion on our operating results.

Jim Murren

Thank you, Dan. Well, it's certainly has been a tough year from economic perspective but we've made quite a bit of progress this year. We know we picked up a bunch of market share here in Las Vegas, for example, unfortunately the June numbers for the market are not out but I can give you through May.

Year-to-date through May, our ADR is down 2.2%, the strip is down over 4%. Year-to-date through May, our table drop was only down 1.3%, Las Vegas was down 3.3%, and actually our baccarat drop has been up year-over-year through May, and of course the strip has been down.

We have picked up quite a bit of market share. We see that through the gaming numbers and the non-gaming numbers, and it's particularly notable since there was a large competitor that was added to the market this year, and yet our market share went up nonetheless. It's well advertise that people coming to Las Vegas is data is down, and of course airport traffic is down as well but our occupancy was 97% in the second quarter, and as Dan mentioned, it actually improved sequentially. We do have the best of class properties in every market in which we operate. There's a reason for that. We have invested heavily in this properties in the past. The capital expenditures that we're making this year will position us very well into 2009, and of course that means CapEx is going to fall pretty dramatically next year.

And we do have the profit leaders as well, which is actually more important. Obviously we mentioned Bellagio being up year-over-year and obviously the most profitable casino here in Las Vegas. Mandalay had an all-time record in the second quarter. We had several departmental records in the quarter despite the economy. And outside of Las Vegas, we did well in Mississippi, and in Detroit.

One of reason why we've been able to do this in addition to the capital we've spent on initiatives that we put into place beginning last year, we've cut quite a bit of cost out of this company to the tune of over $200 million a year, and those cost savings are gaining traction and will continue to resonate in our coming quarters and that is why we believe you'll see profit improvement in 2009.

Dan is going to get into the guidance when he gets back to you. But, we view this quarter as a trough quarter and we see improvement in the fourth-quarter and in most revenue items and certainly in a profit picture as well.

Specifically to the second-quarter, get back to that, our REVPAR was down 5%. The average rate decreased to $155 versus $162 a year ago. We had fewer group room nights in the second quarter, we mentioned that on the last quarter call, and that's still inline with our guidance, it's down 4%, because we had higher attrition rates than we had a year ago, but that attrition rate has also stabilized and we see improvements actually in attrition rates into the fourth-quarter. And in fact, many of our properties experienced records in this past quarter in terms of booking new business, which is particularly encouraging. In fact, Mandalay, Mirage, Bellagio, and MGM Grand, all had all-time record in the second quarter just ending in terms of booking business in 2009 and beyond. And so, we believe that would bode well for future periods.

On the table side, our volume was down 7%. We did have 11% decrease on our strip resorts, but that was mostly on the lower end of our portfolio. Bellagio was actually up year-over-year in volume, Mandalay, as I've said, had the best second-quarter ever. MGM was down, but it was worst than all-time record last year and, as I mentioned earlier, other elements of MGM were actually quite drawn [ph], including food and beverage.

From a standpoint of slots. Slot revenue was down 2% in the quarter. We, actually, did well on many of our properties including in Mississippi and particularly notable in Detroit. Detroit was up 18% and that was better than the results that they had even in the first quarter this year. And of course, the MGM Grand Detroit property continues to gain market share and now, as of June, stands at 44%.

We've been upgrading our loyalty marketing programs. We believe we have come behind the market for many years in customer acquisition and loyalty marketing and we have great initiatives led by Aldo, to my left over here, and his team to much better market our properties and be more productive on a customer acquisition perspective. It's not rocket science, actually. It's just black and tackling and we're going to be far more valuable to our gaming customers on a going forward basis as we provide more value to them. And I think that would do well on the market share as well.

Food and beverage revenue was also strong, actually, in the quarter, was up 2%. Pretty incredible given the environment. And that's the benefit of having high occupancies with the right kind of customers. Strong international visitation to Las Vegas has had the benefit of all of our, particularly, our non-gaming areas, and, of course, our entertainment as second to none and our entertainment was very solid in the quarter as well. We had a big fight last year. If you recall we have the Dela Hoya-Mayweather fight last year. Tough comparison but because of our Cirque du Soleil productions and other productions in our arenas, we had a very solid results here on a second quarter.

So, in summary, the hospitality is taking many body blows this year. Gasoline prices, airline traffics, consumer credit issues. But we believe we performed admirably. We made important profit improvements in the quarter that are lasting. We continue to see softness on the revenue side this summer, but that we see improvement in our profit picture and in to 2009 beginning actually in the fourth quarter. We're going to have fewer rooms out of service in the current quarter than we did in the second quarter, and fewer still in the fourth quarter, and even fewer still in 2009, so that will help us on the revenue side. And on the gaming side, we continued to pick up market share in the difficult environment as we continue to improve the profitability of our resorts but also, the attractiveness. So with that, I'll turn it over to Bobby, for his comments.

Bobby Baldwin

Thank you, Jim, and good morning everyone. First of all, I want to talk a little bit about Monte Carlo, as you know, it had a fire in the first quarter, and for the second quarter, it had 23,000 room nights that were out of service and impacted the cash flows. As of June 30th, the 31st and the 32nd floor of the hotel remain out of the inventory. The 32nd floor from the damage, and the 31st floor, Clark County has not permitted us back on to that floor to keep it as a buffer floor. We expect to have the 34– 31st floor back in inventory within the next 30 days, and for the third quarter, we estimate we're going to loose about 10,000 additional room nights.

The insurance claim is still not pretty clearly in the release, but so that everybody can be reminded, Monte Carlo made about $13 million in cash flow in 2007. It's going to do about 96 this year, $50 million of that is interruption and $46 million is cash. So, overall it's going to be down about 14% when you make those two adjustments.

We– we're about halfway through the BI claim, because we are going to recover additional payment of $18 million in Q3 and – pardon me, $9 million in Q3 and about $9 million in Q4 to complete the business interruption claim at Monte Carlo.

Also, Monte Carlo is under stress that relates not to the events of January but mainly the stress from the construction site of CityCenter. As you know, Monte Carlo's main entry is in the rear of the building and of course, we're building 18 million square feet surrounding that, and they have the benefit of our concrete batch plant, unfortunately and we're going to improve their entire arrival next year. By the end of the year, this year, their going to get their garage back. We tore down their garage to make a larger garage to share with Monte Carlo and CityCenter, and we doubled the spaces available to them for self-park, but currently, they have no self-park as we complete the new garage. We also disconnected through the second time repeat remover system from Bellagio so they'll have a benefit of the new people mover system beginning December of next year.

There's been plenty to talk about Bellagio. Just a few notes, we did have a terrific quarter. EBITDA was up about $7 million, or 6.5%, from the last year. But, locally, the hotel people had done a very good job. They had $95 million, almost, in hotel revenue for the quarter, which was a record, and the REVPAR was up nicely.

Finally, CityCenter, as we track the maximum price contracts for CityCenter, we have all eight of the GEMPs in. Six have been signed and executed by the joint venture board with Dubai World, the other two will be executed, and the last two will be executed inside on the 20th of August and that will complete all of the GEMPs for CityCenter.

I said in the last call that everything is on schedule, that if you've been by CityCenter lately, you'll see that most of the buildings are approaching full height and in fact all of the buildings will be full height by the end of February of next year. RA [ph] as the major casino hotel tops up completely later this month. The Mandarin Oriental tops out in September. All of crystals retail structural steel is up and it's going to begin to turn over some of it's spaces to some of its tenants beginning in February of next year in three phases, February, March, and April for those important tenant fit outs to be preparing for the December opening next year. If you've driven by, you've seen the APM or the Automated People Mover guideway system up in the cars – the train cars are in fabrication, they will begin testing early next year as well.

As it relates to city to city residential, 37 units are about $34 million worth of inventory, were sold in second quarter. We've said before, we tracked the entire market here in Las Vegas, of course, particularly for high rise sales and for better or worst, CityCenter represents virtually all new high-rise condo sales in Las Vegas. I might add that if you look back to the first quarter we sold 56 units, in the second quarter I said we sold 37, and in July we sold 32. What's important about July is we had 17 sales that came from our new sales office in Dubai, so we look forward to future success in that channel of sales. Total, from inception to date, is about a $1,000,000,750 in residential sales representing about 59% of our total sales. When we complete the project. We have sold 54% of the inventory or 1421 units sold and that's my report.

Dan D'Arrigo

Thank you, Bobby. First, before we get into some guidance. A quick discussion on our balance sheet. In regards to capital spending, we invested $221 million in a quarter with the details specified in the release this morning. As we've mentioned earlier this morning, we're now forecasting our CapEx to come down somewhat based on the tremendous shape of our properties and the positioning that we've taken over the last couple of years to strategically make sure that all of our properties were in the best shape as we head into the reopening of CityCenter and we are completing most of that capital program here this year. I'd expect capital spending, going forward in each of last year quarters of '08, to be approximately $200 million. This will bring our total spend to approximately $800 million per year of '08, down from our previous guidance of about a billion dollar. Well, it's too early to give a number for 2009 while we're just beginning our budget process. We would expect that spending in 2009 will be considerably less than in 2008.

Regarding our long-term debt, we borrowed net debt of just over 200 million in the quarter. At quarter end, we had approximately 1.7 billion available under our bank credit facility and here in early August, we have some senior notes that matured. So after giving effect to, roughly the $200 million of senior notes, our credit facility and viability is approximately 1.5 billion here in early August. In the quarter, we repurchased 2.6 million shares at a cost of $134 million. That completed our 2007 authorization and in May of 2008, our board had authorized another $20 million repurchase program, which we have not utilized to date.

And the CityCenter update, on the CityCenter financing, we have – once the financing is in place, we'd have spent approximately $4.2 billion of the estimated $9.1 billion of gross [ph] cash construction and pre-opening cost and therefore, that will leave just $5 billion left to spend to complete the construction of the project. As we said in the release, the joint venture is seeking a $3 billion financing package, which we're working with our lending group right now and we believe that bank portion will be completed this quarter. And as highlighted, this is a very difficult credit environment but we've already received firm commitment of over $1.65 billion of this package and continue to work with several domestic and international relationship banks to complete this financing.

Based on this expectation, the partners will be committed to funding the difference, which would be just under $2 billion after financing is in place, split evenly between MGM and Dubai World. We anticipate that the timing of these remaining funds would be approximately half throughout the remainder of '08 and into early ''09, and the remainder towards the end of construction as needed. I'd highlight that these numbers are before the application of any condo proceeds or any future debt financing that maybe done at the joint venture level. From an MGM Mirage perspective, we have ample capacity to fund our share of these cost through our available credit lines, and available free cash flow from our operations, and as most of you know, our credit facility can actually be expanded from $7 billion to $8 billion with additional commitments from lenders as well. So, we're well in good shape there to funding these costs.

From a future operations outlook, our outlook is generally consistent with the commentary heard so far in this call relative to the second quarter. As Jim pointed out, our REVPAR forecast here in the third quarter, that we believe will decrease from the first half of the year, we're projecting REVPAR to be down in the high single digits and large part due to the seasonally weakness – the seasonal weakness in the third quarter that is typical for our operations.

As a result of our cost-cutting initiatives, our property EBITDA forecast cost per year-over-year decreased in about the same range that we saw on the first and second quarter of this year. So our cost-cutting initiatives are gaining more traction and will continue to benefits us going forward.

Looking out to the fourth quarter, we expect to see improvement from these levels as we mentioned in the release, we're seeing positive room trends heading into the fourth quarter, and with revenues, we expect the fourth quarter to show some improvement quarter-over-quarter, in property EBITDA as well, in the fourth quarter.

Other specific guidance to help you with your modeling, our total stock compensation in the third quarter is estimated to be approximately $10 million, corporate expense is estimated at around $35 to $40 million including about $4 million of stock comp expense. Our pre-opening expenses should be consistent with the second quarter, which is primarily our share pre-opening related to CityCenter, our net interest expense were forecasted to be consistent with the second quarter as well in the $140 to $150 million range, and our depreciation is estimated to be approximately $200 million as well in the quarter. Our effective tax rate is estimated in the third quarter to be approximately 37%. And at this time, operator, I think, we have about 25 to 30 minutes to open it up for questions and answers.

Question-and-answer Session

Operator

(Operator instructions) Your first question is from Felicia Hendrix with Lehman Brothers.

Felicia Hendrix – Lehman Brothers

Hi. Good morning, guys.

Aldo Manzini

Hi, Felicia.

Felicia Hendrix – Lehman Brothers

Just wondering the $1.65 billion, what rate was that priced at?

Aldo Manzini

Well, we'll give out those – all the information once the deal is finalized, Felicia. But, it's very attractive margin for us and the Libor rates are still very well in this environment. So, it would be pretty attractive project financing. And as we pointed out on our last call, that would be very similar if not inside of what Burgada [ph] has priced at when we get that project financing several years back.

Felicia Hendrix – Lehman Brothers

Okay. When we see those rates, should we assume that they were all priced of a discount so we should ask about deal to this kind at the time?

Aldo Manzini

No. They won't. They will not be.

Felicia Hendrix – Lehman Brothers

They're not going to be priced at a discount?

Aldo Manzini

Correct.

Felicia Hendrix – Lehman Brothers

Okay. And then, just Bobby, can you just tell us how the leasing for Crystal looks so far?

Bobby Baldwin

It looks pretty good. We have 76 different leases to get completed, which includes all the retail in all the food and beverage at Crystal's. We have 20 side deals and we have another 20 or 30 where the business–- the business points are pretty much worth that but have not yet to– yet to be signed. We expect it to get just about all of the leases done and Crystal should have all of about six basis leased by the time we open. We have five or six location within Crystals that are pretty tough locations given the traffic flows and they take more time. The retail environment, as you probably know, is also slow particularly in the United States and it's difficult to get these companies, many of which are foreign companies, to sign their leases. As strange as that may seen, they don't want to do anything until the very last moment but Crystals is coming together the nice way.

Felicia Hendrix – Lehman Brothers

Okay, great. And then, don't know if this is for Jim or who's from –on the Bellagio, the property held up remarkably well considering how some of that– your competitors have done. I mean, Venetian is fine. It's competing against the opening of the Plaza but Wynn was also down year-over-year and Bellagio is actually up year-over-year. So, just wondering, in particular, where do you think is driving that and obviously, from your comment, it sounds like you do expect it to be sustainable but wondering if you could just reiterate that there.

Bobby Baldwin

Well, this is Bobby. The Bellagio, really, has a benefit of being in the market place for ten years. It has a much deeper and more committed and loyal customer base, at least I believe, than maybe some of its newer competitors. It also has a benefit of being part of MGM Mirage that has ten operating companies in Las Vegas and they can synchronized its business activities in concert with the other operating companies in Las Vegas. And just, generally, makes it stronger overall. And I think, Bellagio is proven it has withstood the test of time and it's a great property in a great location and it's always going to do very well against even stiff competition.

Felicia Hendrix – Lehman Brothers

Okay, thank you.

Operator

Your next question is from Larry Klatzkin of Jefferies & Company.

Larry Klatzkin – Jefferies & Company

Hey guys. A couple of questions here. The Mirage seems a little out of line with the – some of the other big ones. Did you have some bad luck there? Was there anything there that might have brought the number down a little bit?

Terry Lanni

We had a couple of things there, Larry. I'll tackle that one. Bobby gets the good news, but I have to hand over the ones who are down. When you have so many properties, then not all are going to be up or down in the same time. We did have a little bit of that, but we have– been working on the Mirage. We've had a lot of CAPEX into that property this year. That – those programs are done. We've been working on the casino marketing side quite a bit, that's going to improve, and on the room side, of course, it's been part of the whole process here, but room trends are also starting to improve.

It doesn't deal as well on the convention side to some of our other properties and that's an area that we're working on right now. So, on balance, we have had the whole issues up and down. As you know, we don't give hope per property and we don't use that as an excuse because as a portfolio, our property holds about the same as a year-ago, and within our range, but you get ins and outs with the properties.

Dan D'Arrigo

And, Larry, I'll just add one other...

Larry Klatzkin – Jefferies & Company

Yeah, right, go ahead, Dan.

Dan D'Arrigo

The Mirage unfortunately had an unfavorable legal lawsuit go against it in the quarter, and they actually took about $6 to $7 million accrual for that legal matter.

Terry Lanni

Yes. Which, that (inaudible) the story is not finished with that, on that legal matter. It's on appeal right now, but it was about $7 million hit in the quarter.

Larry Klatzkin – Jefferies & Company

Okay, okay, that makes more sense then. You're saying you need $2 billion for the – of course CityCenter, you have $1.7 billion of condo sales. Is there a chance some of those condo sales will applied towards some of the final needs and you actually won't need to put in your shares of billion dollars that you'll be able to take out some of the money from the condo sales?

Terry Lanni

Well, that's correct. As I pointed out some of the requirement is due at the end and near completion of construction and we start – actually we're about – I think about a year away from the door being completed, so we will start with giving condo proceeds in August of '09. So that is before the application of any condo proceeds, which we're expecting, obviously, based on our track record thus far.

Larry Klatzkin – Jefferies & Company

And would the banks let you apply the condo proceeds toward the 2 billion needed?

Terry Lanni

Yes.

Larry Klatzkin – Jefferies & Company

Okay. So if you end up selling 2 billion of condos, the odds are you won't have to come up with a bulk of that money.

Terry Lanni

That's correct.

Larry Klatzkin – Jefferies & Company

Okay. You have big bank maturity next year. Anything going on with the banks on that?

Terry Lanni

We had – our bank credit facility does not mature until 2011. I think you might be referring to – we have a couple of bond issuances that come due in – kind of around July and October of next year that –

Larry Klatzkin – Jefferies & Company

Right. (inaudible)

Terry Lanni

Yes, totaled about $1.3 billion in total next year. So we'll be – after CityCenter will be working now on extending those maturities and being proactive on that front.

Larry Klatzkin – Jefferies & Company

Okay. Okay. Is CapEx for next year, might we think something in the tune of $400 million plus/minus, which means the next 18 months your needs might be three quarters of a billion dollars, which means your positive cash flow generator excluding for CityCenter?

Terry Lanni

Not to speak for our board as we'll be bringing that budget to the board in the upcoming months, but I think that'd be a fair step in higher [ph].

Larry Klatzkin – Jefferies & Company

Okay, great. I commend you have probably close to a billion dollars of free cash flow excluding what you need to put in the CityCenter? Obviously, you're not going to answer that one.

Robert Baldwin

Yeah, we're not – that's your estimate.

Larry Klatzkin – Jefferies & Company

Got to try. Last question on Macau, do you have a problem where you – just an expression, can't get there from here where the road is such that you got to almost drive past your place and go around the Macau tower? I know there's a conflict between China and the Macau about whose land is the – and it wanted – when the fund of yours that turned around? Any temporary solutions that may be down there to make ease of entry?

Terry Lanni

We are working with the SAR in Macau to a right hand turn lane in the front of our property. And it's not, kind of, you to have to go past it. You have to go all around down to the tower and then come back. It's about – if your leaving from the ferry station, you add about 12 minutes to it depending upon traffic. So that one we expect and hopefully we'll have resolve much sooner than later. And you're right. The issue is, when they reclaimed land, the Chinese government claims that that's still part of China. So the widened that road there is more difficult in front of our property because the widening area would have to go into what is perceived by the central government of Beijing to be China's compared to a special administrative region. But we think, we could (inaudible) – we think, we could get that right hand turn lane regardless and we've had the chief executive's commitment for that, and that's job number one for Grant Bowie.

Larry Klatzkin – Jefferies & Company

So, basically, if I have this right, if you have, your condo sales are over 2 billion, and you really don't need to raise any additional money for CityCenter and you'll end up with more than $1 billion of increased free cash over the next 18 months.

Terry Lanni

I think you're on the right track, Larry.

Larry Klatzkin – Jefferies & Company

Alright, thanks, Terry.

Terry Lanni

I mean its been a – its been a remarkable commentary around CityCenter financing than we've done dozens of bank financings over the past decade and there's an incredible amount of interest in this particular one. And, it has taken a little bit longer than we would have like because we've been having healthy discussions on rate and also on structure. But, we're over halfway there. We're going to get it done this quarter. We wanted it done last quarter but we're going to get it done this quarter. And in the mean time, we're funding CityCenter with our partners and we have tremendous amount of optionality with it in terms of our own lines, in terms of other joint venture financings, in terms of bank financings. And we think it's been completely overdone in terms of the interest on this, but nonetheless, it's topical.

Larry Klatzkin – Jefferies & Company

All right. Thanks, guys.

Terry Lanni

Thanks.

Dan D'Arrigo

Thanks, Larry.

Operator

Your next question is from Robin Farley of UBS.

Robin Farley – UBS

Great, thanks. You saw the news yesterday about the Jean, Nevada joint venture and obviously the news is echelon the board had the other day. I wonder if you could comment on your joint venture with Kerzner and whether the timing of that has changed. Anything changing there?

Terry Lanni

I can take that. Robin, its Terry Lanni. We have selected a architect and we're in the final stages of dealing with that particular entity. We suspect we've had that in position probably by October. We will not be breaking ground anytime soon on that project, obviously, because of the credit market as they are. But, we're still very excited about as is Kerzner and we continue to meet them and fine-tune it. One of the advantages you'll have with this credit market is, being the way they are, it allows us to get much more detail into the drawing. When we do, eventually begun construction on these properties that will be a much better understanding of what the actual cost would be and the chance of having overruns and what have you, obviously, would be mitigated. So, that's a built-in advantage from the disadvantage of the credit market as they are.

Bobby Baldwin

And I would add, Robin that – and I haven't seen a lot of this, maybe it's been done. But the amount of new capacities that's going to hit Las Vegas is going to be a fraction of what people thought was going to be a year ago. I mean a dramatic decline because of many reasons not only the credit market, construction cost, the ability to finance these projects. It really boils down to– if you're not almost done, you're just not going to do anything for a long time in Las Vegas. And that, of course, accrues to the benefit of the incumbents and as long as this market continues to show it's durability, and a lot of people are coming here even right now, we – and continue to build our market share as we are, we think that's a positive. So, you're right. We pushed off joint ventures. We canceled some – many projects that has been announced will just never be built and the reality is if you're not here right now, if you're not fully financed or have the balance sheets to do projects, you're just not going to do anything over the next several years. And that we think is a profound positive for our competitors that are here today and ourselves.

Robin Farley – UBS

Great. Thanks. And two other questions on. One, just to clarify on the City Center budget. You mentioned $9.1 billion. On the last call you talked about $8.3 to $8.6 billion. Is there a difference? Is some of that just pre-opening or can you just clarify, sort of how the budget has changed if it has changed in the last quarter?

Dan D'Arrigo

Sure, Robin. This is Dan. Two things. One is the 9.1 does include pre-opening which is about $300 million and also that number is the full GEMP number which still contains some contingencies and some potential costing. So, it's up to our collective efforts now to keep everyone on time and well within these GEMP amount. So, the number that I have given you, is on the outside GEMP– it relates to the outside GEMP numbers that are essentially locked down now.

Terry Lanni

And the number we gave you last quarter is unchanged in terms of guidance and obviously the delay of many projects puts Bobby and his team in a better competitive position as we debate costs at every level with CityCenter in that the tide is turned a little bit, so that the owners now have a lot more leverage than the builders.

Robin Farley – UBS

Okay, great. And then, my last question is your comments about forward-looking trends in Q4, showing improvement. I guess, that's a little surprising because your comps look like they wouldn't get easier till Q1 and obviously there's a lot of concern about airlift into Vegas and so, can you give us a sense of, you know, rather– it seems like your visibility was somewhat limited in Q4 and just, what you think is driving that and whether that something, I know, in the last few months that the convention bookings got a little worst than they looked initially and I don't know if you're seeing the same in other segments, but just so we get a sense of how that improvement in Q4, you know, as we get closer to it whether that's likely to get better or worse?

Terry Lanni

Sure, I'll tackle that Robin, and maybe my colleagues can jump in. You know, when we last talked to you all, three months ago, of course gas was about $3.66 a gallon, and then, its back well over $4 and it's come down quite a bit. We had a view as to the second half on the convention side, we don't really do well on the third quarter on the convention business and that's really our best lead indicator as you know and we just can't get businesses to come out here in any numbers in the third quarter, particularly, in July and August.

We see improvement in a variety of areas on the convention side even beginning right after Labor Day but, particularly, in the fourth quarter. So, one element at the fourth quarter will be on the convention side. I think you'll see positive comparison from a standpoint of the year-over-year trends versus what we're seeing this year, number one. Number two. We've had many self inflicted wounds here in Las Vegas. We've alluded to it but I don't think we've been specific from a standpoint of the massive amount that capital were spending this year and what the impact has been on traffic. The casino floor, the entire floor of New York- New York, is basically been out of service this year as we've gutted that floor and totally remodeled it. It will be done. The Luxur, of course, has had a profound repositioning and we opened up a new Cirque du Soleil show in October, which along with other restaurants and a very successful nightclubs and other venues, will prove to the benefit of that property. And I can go property by property. I mean, every property has its own story but that's a big component.

The third component is the room nights that have been out of service. I mean, to give you a sense of it, in the second quarter, we had about 77,000 room nights out of service. We just didn't have them available because of the room remodels. The third quarter that will drop to 35,000 room nights and the fourth quarter it's only 5,000 room nights and we'll have, basically, minimal room nights out of service throughout the entire year of 2009.

And we look very encouraging on the event side as well from a standpoint of our entertainment. Big concert, big fights, and so when we – have forecast it as we're trying to get a handle on what's happening here in Las Vegas in particular, we have shown to our operators improvements in REVPAR in the year-over-year basis in the fourth quarter. We see improvements in overall property trends because of what I just mentioned and the booking trends for 2009 are quite clear. So unless we get another shoe to drop, and we have another major economic hit to the whole system, the whole economy, we feel very confident that the fourth quarter will be better than the third. A

And the final point is the cost savings. We have had many initiatives, it's been a lot of work. It's been exhaustive right from the CEO down. And every quarter we get more of the benefits of that, it was over $50 million in the second quarter alone, and that will be more in the third, and more in fourth, and the 200 million I gave as an annual number is a minimum number, it's going to improve we believe in 2009.

Robin Farley – UBS

All right. Thank you.

Terry Lanni

Thank you.

Operator

Your next question is from Celeste Brown with Morgan Stanley.

Celeste Brown – Morgan Stanley

Hi guys, good morning. Jim, sorry to belabor the point, I just want to be clear on what your saying on the fourth quarter. You're saying that fourth quarter will be better than the first three but you're not saying it will be up year-over-year. Is that right?

Jim Murren

That's correct. We were down, obviously we're giving you the REVPAR trends. You see what we've done in terms of cash flow decline year-over-year. We think that we're going to – the decline in the fourth quarter will be the least, the smallest decline of the year. And so sequentially, from a profit perspective on year-over-year basis, we're going to improve.

Celeste Brown – Morgan Stanley

Okay. Thank you. And then, when should we see the benefit or have we already see – started to see the benefit of the reopened Baccarat Room in terms of the comp last year? Did you close that in the second half last year or in the first half?

Terry Lanni

In the Bellagio?

Celeste Brown – Morgan Stanley

Yes.

Terry Lanni

I'm not certain, exactly when the new Baccarat Room reopened. It was late last year, right?

Jim Murren

Yeah, it was in December. So, we've had Baccarat – Baccarat volumes are up, year-to-date and then they were up. In the second quarter, we certainly picked up market share in the second quarter as a company and Bellagio was leading the way this year in the second quarter from a volume perspective. And as a company, as we've said, we held about the same year-over-year in our range.

Celeste Brown – Morgan Stanley

Last year, the second quarter, it was closed?

Dan D'Arrigo

No, I think, it closed – Celeste, this is Dan. I think, it was around of late July or early August and reopened in mid to late December.

Celeste Brown – Morgan Stanley

Okay. Thanks. And then finally, you mentioned that few times and then the release of $1.65 billion of commitments. How firm is that? Is that contingent on getting the rest of the money? Is that – they signed a dotted line? It's just–?

Dan D'Arrigo

There's a firm commitment. They've done all their due diligence. That's part of what's kind of taken long with consultants and third party that these banks have hired. So there's a pretty firm commitment.

Jim Murren

They're not pretty firm. They are firm commitment.

Celeste Brown – Morgan Stanley

And the 1.65 just refers to the lead banks? Or that refers to the lead banks plus the smaller commitment.

Terry Lanni

That's just the classified banks. We have actually more committed than that but we – nicely more than that, but we're not going to give kind of day to day updates on that. But that's why we believe that we're going to close this deal this quarter because we're in the homestretch.

Celeste Brown – Morgan Stanley

Okay. And then, one last question. Are you – have you renewed your focus on the gaming customer given the pressures on the non-gaming customer in this environment or are the things you mentioned from a marketing perspective just something you are doing as you think about the entire company? I guess, Jim, since you've taken over as COO?

Jim Murren

Well, we've done really, really well on the non-gaming side. And in fact, room revenue is down because of ADR, but on the other non-gaming sides, we're doing extremely well and obviously we think we're going to pick up. We've never lost sight of the gaming customer. We do very well. We have a commanding share of the high-end of the business, as you know, and we have good shares up and down the food chain on gaming. What we have done is we have spent more time on the technology of the gaming customer and improving our understanding of the gaming customer like our competitors have done. And what I was alluding to – that we don't think we've led the market from a standpoint of loyalty programs, customer acquisition, data base mining. We haven't been the leader there, and we will be. It's not particularly difficult, it should take some time and that is absolutely an emphasis. We are not going to compete as the price leader. We're not going to do that. We don't have to. We have the best properties. But, we can provide more value to our customers as other companies have done and that is an emphasis, yes. And it has been an increasing emphasis over the past year.

Celeste Brown – Morgan Stanley

Okay, thank you.

Jim Murren

Thanks.

Dan D'Arrigo

Amanda, I think we're approaching our 9 o'clock hour or noon there in the east coast, and we will take one more question and wrap-up.

Operator

Thank you. Your final question is from Joseph Greff with JP Morgan.

Dan D'Arrigo

Hi, Joe.

Joseph Greff – JP Morgan

Good morning, guys. I just have a question kind of going back to the MGM Grand signature towers. What was the closure rate on those kind of sales, and is that sort of the experience you're anticipating in terms of closure rates for the CityCenter residential sales?

Jim Murren

Well, I think, Charles, as you recall, we had a little bit over 1,700 units on all three towers. We bought the remaining 80 units of that particular development and that was clearly in a different time in the market place when those units closed. So we had a very high closure rates on those towers and given the timing of CityCenter being on the backup of 2009, we have a lot of time to kind of wait and see how these mortgage in the credit markets our shaping up over that course of time. But we feel very, very confident in the quality of the customers that we've not only signed up but are signing up today as well who are entering into new contracts.

Terry Lanni

And we're confident because we know them. We know these– these are not for the most part, these are not people that are unknown to us. These are people that have been well-acquainted with MGM Mirage, for any number of reasons. We have as good a degree of confidence as you can have in this very turbulent time, we don't know what's going to happen next year, but this is not a foreign entity for us. We've had experienced closing condos in the past. These particular customers are well-known to us, and we feel as good as you can feel, given the economy right now.

Joseph Greff – JP Morgan

Do you want to comment may be on internal forecast, or what you are talking about to commercial banks in terms of how many condos are sold and those deals are finalized by the time CityCenter opens up? Or give us an estimate of– you know, roughly what you'd expect? Obviously environment's kind of tough.

Dan D'Arrigo

Well, that's financing package is not contingent on the condo piece. So, I think that's kind of two separate—two separate pieces.

Joseph Greff – JP Morgan

Okay. Thanks.

Dan D'Arrigo

And I think, with that, Amanda, we'll end there. For anyone who has any follow-up questions or calls, please feel free to call my office and we'll be happy to take those calls. And thank you for joining us this morning.

Operator

Thanks for participating in today's conference call. You may now disconnect.

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