Bricks and Mortar: Look Past Melco's Losses

Editor's note: "Bricks and Mortar" is a series of columns written by real estate reporter Nicholas Yulico meant to help TheStreet.com readers generate real-estate-related stock ideas.

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Investors looking to own Melco(MPEL Quote) should keep an eye on rising construction costs in Macau. But the issue has been overblown, since Melco has so much attractive real estate it will eventually sell to offset these costs.

Melco, as a reminder, is a key casino stock in the "Bricks and Mortar" mock portfolio because the company is well positioned to capitalize on the explosive growth in gambling in Macau, the only region of China where gambling is legalized.

Last year, total Macau gaming revenue rose 22% to $6.9 billion, which vaulted the area ahead of Las Vegas as the world's largest casino market.

Melco reported Friday that it lost $73.5 million in 2006, widening from its loss of $3.3 million in 2005. However, since the company's first casino is still not open, the loss numbers aren't particularly important. The only revenue coming in right now is from the company's Mocha Clubs, which are noncasino slot machine parlors.

Crown Macau, Melco's first casino, is set to open on May 9, management said on the company's conference call Friday. Melco recently announced a 14% increase in the total budget for the property. The additional $71 million of costs are mostly related to scope issues and marketing expenses, not rising construction costs, management said on the call.