MGM Grand adding lion habitat, launching ad campaign

The Las Vegas Strip's MGM Grand hotel-casino will add a lion habitat next April as part of its ongoing $700 million renovation, said Jim Murren, the company's chief financial officer.

Murren's comments came at an investment conference last week at which Murren also said the company's third quarter earnings -- to be announced Thursday -- will be "a very bright spot" for MGM Grand. The company's result will reflect its success in cutting costs and increasing its share of high-end meeting and convention business, Murren said.

"I think we have our act together here in Las Vegas," said Murren.

Murren was short on details -- companies rarely release specifics of their earnings reports in advance. But he did offer the following tidbits:

--The MGM has been running at a 98 percent occupancy rate over the last few months, bringing its occupancy rate for the year so far to 95 percent. The MGM is the nation's largest hotel with 5,005 rooms.

--This is largely due to the MGM's new conference center. Conference business will account for 17 percent of MGM's occupied rooms this year. That's up from 1 percent last year. The conference center will account for more than 20 percent of the resort's occupied rooms next year, said Murren.

--The resort's high-end business is down 8.1 percent this year, largely due to a big decline in wagering from high-roller Asian customers. But the declines have been mitigated somewhat by strong wagering from European and Middle Eastern high rollers.

Murren said the new conference center is one example of the way MGM's huge reinvestment in its Las Vegas property is already generating returns. Conventioneers typically pay premium rates for their rooms, generating much higher returns than budget-conscious tourists.

MGM has built its conference center on land retired from the MGM theme park, a venture that did not generate the kinds of returns the company wanted.

In addition to the conference center, MGM has remodeled its race and sports book and buffet, added a Studio 54 nightclub, a Rainforest Cafe restaurant and a spa and pool area, developed its "Studio Walk" restaurant and arcade promenade, built a six-story golden lion at the corner of Las Vegas Boulevard and Tropicana Avenue, is expanding its parking garage, and is building a $150 Tuscan mansion for high rollers.

Murren said the upgrading was necessitated by tough competition in the Las Vegas market.

"We've been very concerned about the amount of capacity that's going to hit this market over the next 18 months," said Murren.

This month's opening of Mirage Resort's Bellagio hotel-casino marked the beginning of a period that will see more than 20,000 new rooms built in Las Vegas.

Operators are concerned that with visitor volumes stagnant, demand for hotel room capacity will not keep pace with the new supply. Many industry observers expect high-end resorts like the MGM and Bellagio to weather the downturn, while second-tier properties are expected to suffer.

"I believe there will never be a period like you'll see next year," said Murren.

Oddly, however, Bellagio's opening two weeks ago was a boon for MGM.

The MGM Grand's hotel manager, said Murren, "told me he wished Bellagio opened every weekend, because we couldn't do better than when they opened."

That kind of me-too effect aside, MGM's managers considered selling the company a few years ago rather than trying to compete in what was shaping up to be a cut-throat environment, Murren said. But they decided instead to spend money making the Las Vegas casino more competitive. The result has been $565 million spent thus far on renovations and additions. That total will eventually exceed $700 million.

In addition to renovating and expanding, MGM decided to enter other markets that have a high potential for return on investment, Murren said. In Australia, the company owns what Murren calls a "cute little local's property," that will generate more than $12 million in cash flows this year, up from $6 million in 1996.

"A lot of people want to buy this thing, but we like it and we're going to hang onto it for a while," Murren said of MGM's Darwin, Australia, property.

In South Africa, MGM gets an "egregiously high" management fee for licenses it owns to manage three casinos, said Murren. The company will make $10 million to $15 million in South Africa next year on zero investment, said Murren.

In Detroit, MGM will open a temporary casino next summer and a permanent facility four years later. Detroit is shaping up to be a $2 billion market, said Murren, and MGM expects it will pay back its initial investment there in two years.

Atlantic City, where the company owns property, may have to wait a while longer for an MGM property, said Murren.

"I don't know when we're going to get in Atlantic City," he said.

MGM also earns cash from its half-ownership of the New York-New York hotel-casino on the Las Vegas Strip. Murren denied recent reports that the company had made an offer to buy out its New York-New York partner, Primadonna Resorts.

"We've bought Primadonna out about a dozen times this year," joked Murren, alluding to incessant rumors about the companies.

"We haven't talked to them," Murren added, seriously.

MGM's high cash flows will enable the company to outperform much of the rest of the industry, said Murren.

In the six months ending June 30, the latest period for which MGM has reported results, the company generated $96.4 million in cash flows. Cash flows will increase to $250 million annually within a few years, predicted Murren.

Indeed, MGM's balance sheet was central to Murren's presentation.

"We have the best balance sheet in the gaming industry, by a major factor," said Murren.

At June 30, the company reported $538.3 million in long term debt, on total equity of $1.14 billion. The company made $14.4 million, or 25 cents a share, in the quarter on $200.2 million in revenue. While revenue was up from $195.6 million in the year-ago quarter, increased borrowings pushed earnings down from $16.3 million, or 28 cents per share.

Despite his rosy financial predictions, Murren noted MGM's managers are not happy with everything.

"We are not proud of how we've marketed the property to date," he said.

MGM will embark on a major local and national advertising campaign within the next week, said Murren.

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