On Leaving Las Vegas, Dubai World Style

I wrote earlier today about what I saw as some of the problems that might be ahead if Dubai World did actually default on debt coming due in the next few weeks.  One of those linkages is Dubai World’s equity stake in commercial real estate deals around the world and one of the biggest ones they have is at CityCenter in Las Vegas.  From the Las Vegas Sun:

Casino operator MGM Mirage said Friday that its CityCenter joint venture with Dubai World, the investment arm of the Dubai government, is not affected by Dubai World’s request to delay repaying billions in debt and will still open on time.

At least not yet.  But it’s not that the project is in jeopardy, per se.  Because, well, that horse is already out of the barn and there’s no point in closing the barn door now.  Again, from the Las Vegas Sun:

MGM representative Yvette Monet said in a statement that the joint venture is unaffected by Dubai World’s announcement.

“CityCenter is fully funded, on schedule and ready to begin welcoming guests starting next week,” Monet said.

There it is, fully funded.  So the banks that financed this deal are all on the hook as this article from hotelsmag.com states so eloquently:

“All of the money is literally in the bank now,” says Alan Feldman, MGM senior vice president of public affairs. “No matter what happens to Dubai World or MGM Mirage, CityCenter gets built.”

How prescient.  Because here we are, wondering if Abu Dhabi will stand behind Dubai World’s debt.  As I read it, the guarantee is less than a binding guarantee so that means they may support Dubai World or they may not.

But let’s forget about any imminent risk of a default on CityCenter, because that’s not going to happen.  But what could happen as a result of the events we’ve seen?  It seems to me one thing that could happen is Dubai World selling its stake in CityCenter to reduce its debt load.  But who would they sell it to and what price?  The price will be less than they underwrote the deal for.  Why?  Look at this article from the Las Vegas Review-Journal earlier in the year:

Dennis Farrell Jr., a bond analyst with Wachovia Capital Markets, said the opening of CityCenter will cannibalize cash flow from MGM Mirage’s 10 casinos on the Strip. Additionally, the opening of Fontainebleau and the Hard Rock Hotel expansion later this year could drag much-needed customers away.

“Same-store (cash flow) results will be challenged on the Las Vegas Strip for the next two years, in our view,” Farrell wrote Friday in a note to investors.

MGM Mirage locally owns MGM Grand, Mandalay Bay, the Luxor, Excalibur, New York-New York, Monte Carlo, Bellagio, The Mirage, Circus Circus and Treasure Island.

And there you have it.  Fontainebleau is bankrupt, but the economy in Vegas hasn’t gotten much better and real estate is still deflating there.  But the cash flow results are the key because any commercial property’s value is largely derived from its NOI or net operating income.

So I guess I’ll have to walk everyone through how to value a CRE deal.

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