Monday, January 4, 2010

Betting on MGM Mirage's (& Las Vegas')... SUCCESS? T. Rowe Price Is. For $277 MILLION!

Oh yes, you heard me right. The Baltimore investment firm is now investing a grand total of $277 million in MGM Mirage. But why, especially when so many are still expecting MGM Mirage to fail?

Apparently, we Americans love spending money so much that T. Rowe Price is expecting us to stop being tightwads and have more fun once it becomes clearer the economy is recovering.

[T. Rowe Price portfolio manager Joseph] Fath’s optimism for MGM Mirage is mainly based on macroeconomic trends, such as recent growth in the gross domestic product, rather than any grand company strategy. Lately, he has been poring over such mind-numbing statistics as retail inventories and manufacturing shipments — data that seem far removed from the glitz and salesmanship of the Strip.

In a phone interview, Fath said he thinks the figures serve as signals of business demand and an eventual indicator of whether Joe and Jane Pittsburgh — or their counterparts in, say, China — will splurge in Las Vegas.

“I feel better than I ever have this year,” Fath said with an audible sigh of relief that sounded out of place on the other end of the phone line, in the nation’s foreclosure capital.

“Things are absolutely better than they were six months ago. Job losses are slowing and home foreclosures are starting to clear. This will be a delayed recovery. But it’s a question of how fast things pick up and what that looks like.”

Some have made similar comments. But what sets Fath apart from the many skeptics who fear for MGM Mirage and Las Vegas tourism in general is his continued belief in a tenet of American culture: “This is a consumption nation. As people’s balance sheets get better, they will spend more.”

Even though Fath admitted later in The Sun's story that he thinks MGM Mirage went in too deep with CityCenter, he now also thinks expectations have been set so low that a modest profit for their new project will be enough to restore confidence in the company, and in Las Vegas... Despite still feeling bearish on other gaming companies with debt problems, like Harrah's Entertainment, Las Vegas Sands, and Station Casinos.

Given lowered financial expectations for CityCenter, the property, he said, only has to generate a modest profit for MGM Mirage stock to benefit. CityCenter will hurt the lowest-performing and least competitive properties, which isn’t necessarily a bad thing for the Strip or MGM Mirage, which owns several of the Strip’s more profitable resorts, he added. [...]

MGM Mirage will seek to refinance its heavy debt load, while likely taking cash out of CityCenter in exchange for debt on the mostly equity-financed project, Fath said. “There’s still heavy lifting to do, but the nasty stuff is done.”

This year will be bumpy, he warns, with business likely to grow in the second half of the year and into next year. “The average Joe needs to feel better about things and for that to happen, things like employment and housing prices need to pick up.”

And yet, many Strip resorts, especially those owned by MGM Mirage, have been able to maintain high occupancy rates by offering unprecedented deals. Thirty-five million visitors flocked to Las Vegas this year in a crummy economy.

“The demand is there. They need to book business at higher rates. But a lot of operators are scared to raise rates,” Fath said.

Well, casino operators have had good reason to be afraid of raising rates. In the dark, hard times of 2009, they had to lower rates just to fill the rooms and cut their losses. If even Steve Wynn agreed to do it, then what else could they have done?

However, things may be changing. Vegas room rates for New Year's Eve 2009/10 were up 4% over NYE 2008/09, and a number of hotels, from Aria to Paris to Sam's Town to The M, were all sold out by December 30. Now we're still nowhere near 2007 room rate highs, but occupancy looks to be flat... Which is a minor miracle of its own, considering all the new hotel rooms added last year on The Strip (CityCenter, PHo Westgate), on Paradise (Hard Rock's new towers), and in Henderson (The M Resort).

So perhaps we finally hit rock bottom at some point in 2009 and are poised for some kind of comeback in 2010? I hope so, and it looks like T. Rowe Price is betting so with its bet on MGM Mirage. And looking at the first tea leaves for 2010, perhaps better days lie ahead in the new year.

3 comments:

  1. “This is a consumption nation. As people’s balance sheets get better, they will spend more.”

    In other words: Nobody will have learned anything, and be just as unprepared for the next recession as this one.

    ReplyDelete
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