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MGM released an 8K stating that it may need to take an impairment charge on CityCenter. While that's no surprise, the comment that sales proceeds from the CityCenter residential segment may come in below cost is not good.

MGM released an 8K this morning, stating that it may need to take an impairment charge on CityCenter and its condo developments at CityCenter when it reports 3Q09 results.  Is anyone surprised that the PV of the cash flows won’t add up to north of $11BN?  What may be a surprise is that residential sales proceeds may fall below cost.

MGM made two comments regarding the value of CityCenter

1)      The value of the casino, hotels, and retail, will have to be written down since the present value of the cash flows will be lower than the net book value of the development – ok, this is really no surprise to anyone

2)      The eventual sale price of the residential piece of CityCenter will likely be below the construction cost plus marketing/selling cost, which sounds like they are going to have to lower prices even more than expected

Well, the good news is that MGM only owns 50% of CityCenter ….

“The Company expects to conduct an impairment analysis of its investment in CityCenter as of September 30, 2009. The Company believes it is reasonably likely that the outcome of this review may lead to a non-cash impairment charge but cannot reasonably estimate the amount or range of such impairment charge at this time. 

In addition, CityCenter has a significant amount of residential real estate currently under development. Its ability to close out its residential sales program will be based, in part, on future market conditions. As disclosed in the June 30 10-Q, CityCenter may incur a non-cash impairment charge if discounts to the prices of residential units prior to completion lead to a conclusion that the carrying value of the residential inventory is not recoverable based on management’s estimates of undiscounted cash flows. Once the residential inventory is complete, CityCenter will be required to measure such inventory at the lower of a) its carrying value, or b) fair value less cost to sell. It is reasonably likely that the fair value less cost to sell of the residential inventory at completion will be below the inventory’s carrying value, and that the joint venture will be required to record an impairment charge at that time — which may be in the fourth quarter of 2009 or the first quarter of 2010. The Company would record 50% of any such impairment, offset by certain basis differences, as a part of ‘Income from Unconsolidated Affiliates’ in its Consolidated Statements of Operations.”