MGM Mirage to take $1.1 billion charge for CityCenter

By Steve Green

Published Tuesday, Oct. 20, 2009 | 7:05 a.m.

Updated Tuesday, Oct. 20, 2009 | 8:07 a.m.

MGM Mirage today said it's slashing by 31 percent the value of its investment in the CityCenter megaresort complex opening in December on the Las Vegas Strip.

The company plans to take $1.1 billion in non-cash charges against earnings to reflect reduced profit expectations for the $8.5 billion development.

In a separate announcement this morning, Tracinda Corp. -- owned by MGM Mirage board member and the company's largest shareholder, Kirk Kerkorian -- said it's exploring "the possibility of strategic partnerships or other alternatives" with respect to its stake in MGM Mirage.

"Tracinda believes there is substantial unrecognized value in MGM Mirage and CityCenter that is not reflected in the market value of MGM Mirage’s stock," Tracinda said in a statement.

Tracinda doesn't expect to take any actions until after the opening of CityCenter.

A Tracinda spokesman, Tom Johnson, said he couldn't comment further or comment on a report that Tracinda intends to cut its 37 percent stake in MGM Mirage.

MGM Mirage stock closed Monday at $11.80, well off its 52-week high of $17.30. The stock opened higher this morning, trading at $12.20, up 3.39 percent.

MGM Mirage, in its announcement, said that when it reports third quarter financial results on Nov. 5, it expects to take a pre-tax non-cash impairment charge of approximately $955 million related to its investment in the 67-acre CityCenter.

In addition, CityCenter, the company's 50-percent owned joint venture with Infinity World Development Corp, is expected to recognize a $348 million non-cash impairment charge related to its residential real estate under development.

MGM Mirage will recognize 50 percent of that impairment charge, subject to adjustments. The net pre-tax impact of the CityCenter residential charge to the company's third quarter operating results is expected to be approximately $200 million, MGM Mirage said.

The residential charge follows the company's decision to discount the prices of CityCenter condominiums by 30 percent to reflect market realities that have slashed the value of real estate in Las Vegas and have made it difficult for buyers to finance and close on deals signed before the onset of the recession.

As for its overall investment in CityCenter, MGM Mirage's announcement follows weak operating trends for the Las Vegas gaming industry -- and little hope for a dramatic turnaround in visitation to the city in 2010 because of the U.S. recession.

Bill Lerner, an analyst at Union Gaming Group in Las Vegas, said Kerkorian at age 92 seems to be signaling that he's looking at ways to distribute his wealth in a way that is not disruptive to the stock and may be preparing to transfer his shares to a partner or other party.

Lerner said the good news for the stock is that Kerkorian is not intending to place his shares on the open market and in today's announcement expressed his view that the value of MGM Mirage and CityCenter is not reflected in the stock price.

"It's exploratory. He may do nothing at all. We can take comfort he won't put his shares on the open market," Lerner said.

As for the CityCenter writedowns, they were not unexpected by investors who are accustomed to seeing such writedowns by companies that have seen the value of their real estate holdings decline, Lerner said.

"It's a function of the economy," Lerner said.

Lerner said that in discussions with gaming and food and beverage operators around town, there's a sense that the Las Vegas market is stabilizing.

Business improved in September and bookings for October and November are improving sequentially, he said. Additionally, McCarran International Airport reported September traffic was off 1.2 percent from the year-ago month, an improvement from trends earlier in the year that have pushed year-to-date numbers down 10.2 percent.

"Less bad is starting to rear its head," Lerner said.

The Las Vegas Convention and Visitors Authority reported that in August, visitor volume to the city totaled 3.092 million people -- down 3.7 percent from August 2008. The city's hotel room count, in the meantime, had risen 2.7 percent to 141,200.

The monthly occupancy rate was down 6.9 percentage points to 81.4 percent.

"Based on revised operating forecasts developed by CityCenter late in the third quarter, MGM Mirage has now determined that the carrying value of the company's 50 percent investment is greater than its fair value and an impairment is indicated. The company, based in part on consultations with third-party valuation specialists, estimates the fair value of its 50 percent investment to be approximately $2.44 billion as of Sept. 30, 2009,"MGM Mirage said in its statement.

The new carrying value is down from $3.551 billion as of June 30.

MGM Mirage will manage the operations of CityCenter for a fee. CityCenter will feature Aria, a 4,000-room casino resort; two 400-room non-gaming boutique hotels, the Mandarin Oriental and the Harmon Hotel & Spa. Completion of the Harmon has been delayed.

CityCenter will have about 425,000 square feet of retail shops, dining and entertainment venues; and about 2.1 million square feet of residential space in some 2,400 luxury condominium and condominium-hotel units in multiple towers.