This is the final part of a series about the problems that MGM Resorts International faces at CityCenter and how those problems may be impacting the important relationships they need to run their businesses.
Based on fascinating new insight into operations at the various CityCenter components, we dive deep into how the complex is doing and how bad things might get.
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Perini and Subcontractors
In the interim, MGM has made an effort to deal with sub-contractors directly and is reducing liens against the property as quickly as they can. That approach seems to be working which helps to improve MGM's overall position with CityCenter financing and the banks that hold it.
For the banks that hold the majority of CityCenter debt, they may be willing to go along with anything that sounds like it will help secure the viability of their large investment. If the loans here are set up like most, there are a few potential potholes in the road that may be coming up soon.
At some point, probably shortly after the first year of operation, CityCenter will need a clean audit opinion to keep the banks happy. An unqualified opinion may be difficult to achieve given the circumstances surrounding their financial covenants and the liens that still remain on the property. It's in CityCenter's interest to clear up the lien situation as quickly as possible.
Beyond that, these banks may be asked to participate in extending the current maturities, many of which should be coming due sometime in 2012. I'd imagine the viability of the enterprise relies on being able to roll those forward past their current dates. The easier that job is for the property the better.
CityCenter was planned to include two hotels managed by outside entities: Mandarin Oriental (Mandarin Oriental Hotel Group) and The Harmon (The Light Group). As it stands today, Mandarin opened in December and The Harmon remains a stunted blue shell / the world's most expensive billboard.
According to those familiar with the situation, despite favorable reviews from this author and others, Mandarin has been consistently losing money since opening, with no end in sight. With occupancy rates averaging close to 50% and MO management refusing to lower room rates, the boutique hotel has become the money pit of the CityCenter family.
Closing Mandarin Oriental would be a drastic hit on CityCenter's reputation and might not even save much money if MGM has to pay the management fees regardless. Still, that option was considered as recently as just a few weeks ago. Expect a stepped up marketing campaign for the exclusive enclave, even if MGM has to take the front seat in getting that rolling.
While Mandarin may be burning through cash, The Harmon has yet to welcome a single guest and won't anytime soon. Originally slated to open with the rest of the complex, construction difficulties resulted in a condo component being nixed and the building halved in size.
Las Vegas' Light Group, the successful nightlife and hospitality operator, was slated to take their first shot at hotel management at The Harmon. How happy can they be that this has been delayed again and again? Come to think of it, I don't remember any Light Group official speaking at any of the opening week events. With the difficulties that MGM is having filling rooms at Aria, Vdara and Mandarin, what's the chance this hotel will open anytime in the near future? I'd guess not very high.
Norm Clarke has recently reported that Light Group principals have been trying to negotiate the purchase of the nearby Monte Carlo for some time - we may see another TI/Ruffin type deal for that property instead of at the oft-rumored Mirage. Beyond Monte Carlo, Robin Leach (I know, I know) recently posted a note about a 'solid rumor' about The Light Group looking at the Hard Rock. If that is true, even more evidence that these guys want to get into the game now and may not be waiting whenever MGM gets around to finishing The Harmon.
What Does It Mean?
Now that we've cycled through MGM's relationships with these key partners on CityCenter, it's important to ask how serious these issues are. From the CityCenter insiders I talked with for this piece, while panic may be too strong a word, there's certainly significant concern about various parts of the operation inside the company. It's clear they know how much is on the line with this project.
The reality of CityCenter is that it may need to be prepared to operate in 'extended economic downturn mode' for years. The problem for management is that there's not much left to cut. Now, the focus needs to be on raising the revenues coming in the front door. The hotel occupancy rates at Aria went from pitiful (~63%) to moderately acceptable (~80%) and seems to be on an upward trend - the forecasted average for the fourth quarter is just about 80%, including the often terrible month of December where 65% occupancy is projected. What can they do to get customers to come and then return?
The CityCenter team isn't sitting still - their internal action plans include a variety of different initiatives: lavish casino promotions, high profile media events for major magazines and newspapers - even hosting high profile "bloggers" in the various restaurants. Will these initiatives bring the revolutionary change that the resort needs? We need more time to asses the results - there's a good chance that CityCenter will just have to endure bad numbers for the foreseeable future.
There's a phrase I've heard MGM execs use with regard to CityCenter: "new for ten years". That's probably true - beyond the Cosmo and maybe the Fontainebleau, it's unlikely we're going to see any major development for some time. Does that mean that these problems are just a temporary blip on the project's radar? Will things work themselves out in the long term? They might. Will current management still be around to see it? I personally think that's far less likely.
CEO Jim Murren worked hard to make sure he was personally identified with the project, even more-so than his predecessor, Mr. Lanni did. It would be logical to assume that if things continue to spiral out of control, he might find himself looking for a new job. When combined with his previous proclamations that he doesn't even visit his competitor's properties, it's hard not to look to him to lay blame when things start to go wrong. Murren seems to almost have a disdain for this business and instead of trying to determine what the customers wanted, he decided for them... and he may have been wrong.
Still, Murren seems to have the continued support of Kirk Kerkorian, a major (but no longer majority) shareholder. As long as that continues, he may just hang on, the shareholders and JV board members be damned.
MGM weathered a significant banking crisis in 2009 and survived, which many people attribute to Murren and his team. Could that happen again? Given CityCenter's disappointing financial performance and the state of the global economy, I would argue that literally anything is possible.
Aria's neighbor, The Cosmopolitan of Las Vegas, opens in December. This will only increase the downward price pressure on CityCenter's room inventory - the last thing that MGM needs right now. Would MGM consider giving up and cutting their losses on CityCenter? Given the amount of ego invested, that's almost impossible to imagine, unless of course, Admiral Murren is thrown overboard in the process.
These days, the company has a much longer runway to land their wounded albatross but the remaining pavement has more potholes than an underfunded California freeway... but hey, at least they know it was built by their good buddies at Perini.
My heart goes out to all the people working at CityCenter that are just trying to keep their jobs and had nothing to do with this mess. Good luck guys, I mean it.
This post concludes our program. Thank you for listening.
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