Thursday, April 2, 2009

They Can Call It CityCenter Station!

The Wall Street Journal reports today that MGM Mirage may have a new sugar daddy, Colony Capital. These are the folk who own the Las Vegas Hilton but, more importantly, own 75 percent of Station Casinos which, from what we've been hearing, is about to go into bankruptcy itself. They also own Resorts Atlantic City, which is facing foreclosure.

So I'm baffled. Why is Station going into bankruptcy if its major owner has money to invest in another risky project on the verge of bankruptcy? Is it all, as we've always suspected, just Monopoly money after all? The WSJ says that Colony has raised $1b in capital to invest in distressed assets. Shouldn't they invest it in the distressed assets they already own?

On a similar but different front, I continue to be confounded by the dollar figures involved with CityCenter. Dubai is a 50-50 partner with MGM Mirage. MGM Mirage said last week that the project cost is $8.7 billion, although the WSJ used $8.6 billion today. Either way, the WSJ says Dubai World has already kicked in $4.3 billion. Why does Dubai still owe anything? Or is the $8.7 or $8.6 billion figure inaccurate? If Dubai still needs to give more, then MGM Mirage must know the project will cost more than $8.7 billion. Or maybe the WSJ is wrong and Dubai has not yet actually kicked in $4.3 billion? ACK!

Am I the only one confused here?


Anonymous said...

First, Colony, an investment firm. They gather investor cash to put into investments and offer a return. Station is operated by them as a wholly owned subsidiary and one of their investment deals. While it's distressed, throwing more money at it won't cover their intial investor returns unless they can either negotiate a new payment plan or do it through bankruptcy.

Each subsidiary is also it's own entity. K Mart bought Sears, then rolled K Mart's parent into Sears Holding Company that owns both K Mart and Sears stores. If Sears stores weren't able to make their debt payments they could let it go into bancruptcy to restructure and yet invest cash in another retailer that could be profitable.

The $1 bil isn't enough to pay off Station's debt and doesn't buy a bigger piece of their own pie. If they get the concessions with Stations, then they've said they're willing to throw in $244 mil to help bondholders feel more secure that they won't loose the remaining sliver left if they concede.

Colony is shooting for a deal on a piece of City Center that would be through another subsidiary. That would provide a potential return for this $1 bil in investor money they've amassed. Here they're looking to diversify by possibly gaining a stake at fire sale price that they might be able to get from MGM and Dubai.

On the amount of City Center, MGM put up $1 billion AND the land, design work and approvals. Dubai World bought in at $4.3 bil for a 50% cut. Before the Harmon change you may have heard the number $11.2 bil for the construction cost and the land.

Dubia World bucks combined with MGM's, only $5.3 bil of construction cost was covered and the rest, $3.2 bil or whatever the final number turns out to be, still needed to be funded with a 50-50 commitment.

So MGM & Dubai World both knew more funding was needed.

The cost is going to float. What was your gasoline tab last year? What are you paying this year? The same? I don't think so.

Now imagine all the building materials, freight, and even fuel prices for a project this size and over the period of time it takes to build. The prices can go up or down, even more than somone can estimate. Then what about things that don't fit in the real world like they do on paper? Or inspections or code findings that require modifications? Contractor change orders that reflect the new price, since it wasn't what they bid on. There are countless things that can cause projected cost to float.

The budget amount is an estimate, and I'm sure you've heard of projects that came in under, over, or on budget. They can revise their guestimates as time goes on and completed materials and labor are paid for, but they don't know the final number exactly, until it's done.


Thanks for the explainer on Colony.

As for the cost of CityCenter, I get that the costs will change. The problem is that Dubai World is already in for $4.3b and is still expected to spend more. If it's a 50-50 deal, then the cost of CityCenter has ALREADY been $8.6b. Which means that the $8.6 or $8.7b estimate cited last week is a cost TO DATE and not a cost of the whole project. But they're saying it's the cost of the whole project AND that they've need another $1.2 billion. It's not that these figures change - that's fine - but that the figure being cited right now doesn't exactly mesh with reality.

Anonymous said...

To add to the CityCenter confusion, the JV partners are still $800 million short of being able to tap another $1.8 billion in bank money -- not counting the $1.2 billion that's still unfunded. So my math (which may not congrue with actual math) shows them $3.8 billion short of completion, on top of whatever has been put into the project to date.

David McKee

Anonymous said...

This isn't splitting a dinner check, or pooling a group together to make a real estate investment of a 3rd party property. MGM already fronted the land, design, and permitting and then shopped for a partner or partners.

One more time, what was invested in cash? The balance needing to be financed.

Dubai in for $4.3 billion
MGM $1 billion

Total Cash $5.3 billion

That obviously doesn't cover the $8.6 billion or whatever in total construction costs. The 50-50 partners share equal liability in additional funding and payments, just as they'll have an equal share in future operational profits or losses.

Again, total project cost / value when complete was estimated around $11.2 B, including the land. There may also be startup costs above that amount that would need to be funded. Right now MGM is doing the staffing for the project, using their facilities, equipment and personnel.

So let's say you have a brilliant idea. You purchased a prime lot for $100k, design and get permits to build a home at a cost of $500k, that when built in 6 months will have a potential value of let's say $ $800k. The problem is, by yourself you couldn't afford to pay, or get the financing to complete it. You can gain nothing by yourself other than selling the land. That may be a break even proposition unless you tie your cash up over a long period of time.

So you shop for a partner. You could offer them a 50% stake in the ownership of the home for $250k, and you could put up an additional $50k in cash for a total of $300k toward construction cost.

You would both finance the remaining $200k in construction costs, sharing in equal payments. When completed, the home is sold at $800k, and your partner is entitled to half, or $400k return on their $250K investment plus their half of the construction loan payments. You are entitled to the other $400k, from your $100k brilliant acquisition of the lot, the money making opportunity you created, the cash you spent to design and permit, and your additional $50k in cash.

It isn't a cash out of pocket dollar for dollar match at 50% each, or is each return an equal amount of profit for both partners, and it doesn't have to be. People pay for the opportunity to share in profits from an idea.

You can allow someone to buy in for a 50% stake at whatever price you name, as long as they see value and agree to it. Example, Packer bought into Fountainebleau for $250 mil and got a 19.8% share of an estimated $2.8 bil project. At $250M, it isn't an equal 19.8% portion of the construction cost, but they can be on the hook for 19.8% of financing needed above their investment and any other partner's cash. The buy - in also allows Fountainebleau to use them basically as a cosigner for their funding.

On simpler terms, you may have a connection for a story that has a magazine willing to buy for $500. You have a car but no gas and limited expense money. So you can't get the $500. BUT, you could offer me a 50% partnership for say $100 up front and 50% of the price of your over-dinner interview. My added obligation should be around $50, since you estimate the check to be $100. For $150 I get a $250 return for a profit of $100. For your $50 half of the dinner tab, your connection, use of your car and your work, you get a $250 return, or a $200 profit less car wear and tear and your time and writing. We both made money that we couldn't have without the other, and while 50-50 partners in the finished project, we weren't 50-50 in cash out of pocket or actual profits received. Yes, and if the dinner tab turned out to be above or below your estimate, our split is still an equal share, only our returns would be either higher or lower.

If Dubai would choose to cut and run, they could sell their 50% stake or a portion of it to Colony to relieve themselves or reduce further debt obligations. Colony could get a larger chunk for a minimal investment, if DW is distressed enough to seek relief.


So here's the problem with THAT logic. Dubai World has already kicked in $4.3 billion, according to the WSJ. So if the total cost really is $8.6b, then Dubai HAS put in -- already!!! -- half of the dollar cost for their 50 percent stake. If the cost really is $8.6b, then any further money Dubai puts in is MORE than half the cost of the construction. That, too, makes no sense if your suggestion is that ultimately Dubai is getting 50 percent ownership for less than half of the cost.

Also a flaw in your claim is that it's clear that the covenants require Dubai and MGM -- the 50/50 partners -- to pay up equal shares. That's what happened last week -- there was a $200m payment due and both sides were expected to put up $100m. So if Dubai has already put more into it than MGM in cash, how did that happen? And why? If MGM was expected to pick up more than half of the actual cost, why the 50/50 payments?

What you're saying makes sense IF Dubai is putting less than half the cash for the construction and is getting half the equity. That's similar to MGM's deal with Marnell -- they gave him $160m and got 50 percent of his $1b property. Fine.

But if Dubai has already kicked in $4.3b in cash and MGM claims the total project cost is $8.6b and Dubai still is on the hook for more money, then Dubai is being asked to put up MORE than half the cash. But surely not -- who would agree to put up more cash than they're getting in equity? So something's missing.

Anthony said...

Add James Packer from Crown Ltd to the mix