Venetian posts quarterly losses of $30.9 million

The number of hotel rooms available for occupancy at the Venetian hotel-casino rose from 336 on May 4 to an average of 2,776 in June and now stands at 3,000, says a report filed with the Securities and Exchange Commission.

During May and June, the occupancy rate for available rooms was 63 percent and the average daily room rate (ADR) was $152, the report said.

In July, the hotel's occupancy rate rose to 85 percent of its average 2,963 available rooms, but its ADR fell to $127. For the first 11 days of August, occupancy rose to 90 percent and the ADR to $144. The Venetian had projected an ADR of $167.

The Venetian may have staggered from the starting gate, but expects operating results to improve "significantly" after posting a $30.9 million net loss in the second quarter.

Yet cost overruns and litigation surrounding the $1.5 billion Italian-themed resort have created uncertainties about whether it will be able to pay $39.5 million due creditors by Nov. 15.

Those interest payments exclude another $246 million in liens and claims filed against the Venetian by companies that built the sprawling Strip resort, which contends it doesn't owe that money.

The uncertainties also have apparently prompted Venetian owner Sheldon Adelson to delay construction on another 3,036-room hotel tower called the Lido for at least a year.

Those are some of the details disclosed in a report filed with the Securities & Exchange Commission Monday by the Venetian's parent company, Las Vegas Sands Inc.

Despite the overruns and litigation, disclosures in the filing and recent statements by Venetian executives have helped bond prices recover a bit. The Venetian's $425 million of mortgage notes were trading in the 87-88 range today after being as low as 80 a week ago.

"The bond market has been looking for more information, and the company has started to provide it," one bond analyst said.

As expected, the report said the delayed opening of the Venetian contributed to a $30.9 million net loss for the quarter ended June 30. The loss included $14.7 million of pre-opening expenses and another $12.9 million of interest payments.

The Venetian said it grossed $42.7 million from its rooms, restaurants, retail shops and casino operations since opening May 4. But $46.5 million of operating expenses left the resort with a $3.8 million operating deficit for the quarter.

The report also disclosed that the resort won $12.2 million from its 122 table games and $12.4 million from its 2,500 slots during the first 59 days it was open.

That works out to an average daily win of $84 per slot and $1,695 per table game -- substantially below the $151 daily slot win and $2,463 daily table-game win the Venetian had projected.

Big Strip resorts win an average of $106 per day per slot and $1,777 per table game, according to State Gaming Control Board figures.

The results were impacted by the Venetian's "soft opening," which saw the resort debut with only a handful of rooms, restaurants and retail shops. The report said Venetian expects "significantly improved operating results" for the third quarter because more amenities are functioning.

The Venetian report noted that the company has sued Lehrer McGovern Bovis Inc., construction manager for the hotel-casino, for more than $50 million for allegedly failing to pay subcontractors and mismanagement.

The report also noted that Bovis has countersued the Venetian and filed mechanics liens totaling $145.6 million against it. Another $65.7 million of liens have been filed against the Venetian by subcontractors, the report said.

"The company believes that a substantial portion of these claims are unsubstantiated, without merit, overstated and/or duplicative," the report said. "In addition, the company believes ... (Bovis) is responsible for payment of any subcontractors' claims ... determined to be valid."

The report said the Venetian will "vigorously defend itself" against any attempts by lien claimants to foreclose on the property, but noted that it can't draw down any more money from its bank lenders until the liens are "bonded or released."

The Venetian said it will attempt to secure bonds for the liens, but that could prove to be costly. Under Nevada law, a bond has to be for 1.5 times the face value of a lien, and surety bonds typically cost from 1 percent to 30 percent of the amount at risk, depending on the credit risk involved.

While there is some duplication in the liens filed against the Venetian by Bovis and subcontractors, the total amount of claims is in dispute.

The report said there are $211 million of liens outstanding, though Venetian officials have said privately they believe only $60 million to $70 million are "legitimate." Whatever the amount, the Venetian claimed, Bovis is responsible for paying them.

Still, to bond around the liens could cost the Venetian anywhere from $900,000 to $95 million, depending on the price demanded by surety companies willing to write bonds.

At least three lawsuits have been filed in District Court by lien claimants seeking to foreclose on the Venetian. More claimants are expected to join the lawsuits, which are likely to be consolidated into one case.

"Although bonding these liens will prevent any foreclosure," the Venetian's SEC filing said, "the company will be required to pay or immediately reimburse the bonding company if and to the extent that the claims underlying such liens are judicially determined to be valid."

The Venetian and Bovis are trying to settle the claims out of court, and each has extra incentives to do so.

Adelson wants to build another hotel-casino complex called the Lido next to the Venetian, but hasn't been able to obtain financing commitments due to the uncertainties surrounding the existing property. The company doesn't expect to begin building the Lido "until at least next year," the report said.

And Bovis wants to clear up the cloud hanging over its finances caused by the dispute with the Venetian so it can proceed with an initial public offering. Bovis' parent company, Peninsular & Oriental Steam Navigation Co., announced it plans to spin off the company, but the offering is in jeopardy due to the Venetian spat.

Meanwhile, the Venetian said, it has informed companies providing Bovis with coverage under a liquidated-damages insurance policy it intends to seek up to $24 million for damages incurred due to the delayed opening of the resort.

The report also disclosed that the company "has significant debt-service payments due during the remainder of 1999" -- including $8.6 million on Sept. 30 and $30.9 million on Nov. 15.

"To fund these payments from operating cash flow, the company must achieve improved operating results for its next fiscal quarter," the report said.

The report disclosed Adelson had plowed another $16 million into the project in the second quarter, boosting bond investors' confidence he'll "be there in November," an analyst said.

"The negative is that additional capital was required, but the positive was that he put it in," the analyst said.

The Venetian's debt-service requirements rise to more than $130 million in 2000, making higher cash flow critical to the property's success. Cash flow -- generally defined as earnings before interest, taxes, depreciation and amortization -- measures a company's ability to make debt payments.

"It's a liquidity question now," the analyst said. "Operations are paramount because we've yet to see concrete evidence of positive cash flow."

In another development, the Sun has learned that the Nevada State Contractors' Board has subpoenaed documents from Bovis as part of its investigation into subcontractor complaints about nonpayment.

Bovis has claimed the Venetian owes it and other trade contractors for work performed on the project, while the Venetian has said Bovis is responsible.

If the board determines Bovis owes subcontractors, it can impose penalties on the construction manager that range from a written warning to license revocation.

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