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Gaming Guru

Arnold M. Knightly
 

New owners bring optimism to downtown Vegas

5 April 2010

By Arnold M. Knightly

LAS VEGAS, Nevada -- Downtown casino owner Derek Stevens believes the business tide may finally be turning.

The Golden Gate's new majority owner said the "stars aligned" in February for downtown operators with a series of events -- the Super Bowl, Valentine's Day and NASCAR weekend -- that drove locals and tourists to Fremont Street.

March started strong, too.

"We're hoping we're seeing a little bit of a turnaround here," Stevens said. "Everybody's February numbers are going to be up substantially. Downtown did very, very well."

An increase in February would be a welcome reprieve for an area that as been as hard-hit as anywhere by the economy.

Downtown gaming recorded its worst revenue numbers in nearly two decades last year. Gaming revenues downtown fell to $523.8 million in 2009, down 10.1 percent from 2008 and 17.2 percent from 2007, numbers released by the state Gaming Control Board show.

Gaming revenues downtown had been steadily declining before the summer of 2006, independent gaming analyst Frank Martin said. Then the recession hit.

"Profitability was largely determined by nongaming revenue in 2006 when downtown had a banner year," Martin said. "Both gaming and nongaming have been slipping severely since that time."

Jobs also disappeared with 1,562 casino jobs cut between June 2007 and June 2009.

The number of operators in the market has shrunk. There are 16 downtown casinos with nonrestricted gaming licenses, including casinos near or on Fremont Street and the Stratosphere on Las Vegas Boulevard. There were 19 in 2003.

Revenue flattened in January with downtown posting a less-than-1 percent decrease. Although it will take a few more months to see whether the momentum can be sustained, downtown casino owners new and old see a bright future.

The Siegel Group, like Stevens, is new to downtown. It acquired the dilapidated Gold Spike a block north of Fremont Street in January 2008. Like Stevens, the company is bullish on downtown's future.

"We still believe downtown is coming back," said Michael Crandall, Siegel Group's business affairs director. "It takes guys like us and some other guys downtown that really believe in it. Young, motivated guys that are going to go roll up their sleeves and get in there and clean up not only our building but the neighborhood around our building."

The Siegel Group bought the Gold Spike on the corner of Las Vegas Boulevard and East Ogden Avenue for $21 million. The company quickly acquired the neighboring Travel Inn for $5 million, and renovated both for $6 million.

Crandall said his company's executives get frustrated when they see other downtown casino and business owners less dedicated to seeing downtown succeed than his company is.

"We'll face anyone head-on that's sitting down here not doing anything," Crandall said "We'll get in their face and tell them to start doing something or get out. We want people down there that are going to get the job done. I know we'll get the job done, but it can't just be us. It needs to be everyone."

One of the biggest frustrations for Crandall, and for the city of Las Vegas, is the closed Lady Luck next door to the Gold Spike. The 631-room Lady Luck, which closed four years ago in February, was sold in June 2007 to the Los Angeles-based CIM Group.

The company continually has said it has plans to redevelop the site, but little progress has been made.

CIM and the city of Las Vegas have a development agreement that says Lady Luck renovations must be completed by Dec. 31, 2011.

CIM Group officials said recently that the company is working on plans for the Lady Luck and will be present them to the city soon.

"Plans are anticipated to be presented to the city of Las Vegas within the next 30 to 60 days," CIM said in a March 15 statement. "Currently, workers are on site performing maintenance as well as making a technical assessment of its key building systems and infrastructure."

Crandall said if CIM can't finish the job, it should sell to someone who can.

"CIM is a respected group," Crandall said. "I respect them very much, but if they don't want to do anything let's get some people down there that have got some motivation and are willing to put their money into it."

Boyd Gaming Corp. Senior Vice President John Repetti, who directs operations for his company's three downtown properties, said downtown's growth doesn't depend on properties like Lady Luck returning, although it would help.

"Nobody wants to see these buildings boarded up, not being taken care of," Repetti said. "We'd love to see the Lady Luck opened up just from the standpoint of there (were) 800 rooms there when they closed. Every room that closes down is two people a night potentially that could be on Fremont Street."

Downtown's room inventory has shrunk from 27,100 rooms in 2004 to 23,700 rooms in mid-2009. That was before Binion's closed some of its 365 hotel rooms in December and before some rooms went dark at the Plaza.

Those closed rooms, however, were offset by the opening in November of 500 new hotel rooms in a new $140 million hotel tower at the Golden Nugget. It was the first new tower built downtown since 1989, when then-owner Steve Wynn opened the Golden Nugget's South Tower.

The Golden Nugget's owner, Houston-based restaurant company Landry's Restaurants, has poured more than $300 million into redeveloping the property since buying it in 2005.

Downtown gaming's decline during the past two decades can be correlated with casino growth everywhere in the state.

In 1992, downtown casinos generated $703 million, which was 12 percent of the state's revenue and 16.1 percent of Clark County's revenue. That same year, Strip casinos generated $2.63 billion. Two years later, downtown revenues had declined 2.8 percent while state revenue increased 19.5 percent and Strip revenues increased 32.7 percent.

Downtown now accounts for 5 percent of state revenue and 5.9 percent of county revenue.

In the same time frame, the Strip's revenue increased 111.4 percent to $5.5 billion. Also, the growth of neighborhood casinos drew downtown's local customer base away.

"Before, if you didn't play on the Strip you played downtown," said El Cortez general manager and Chief Operating Officer Mike Nolan, who has worked with former El Cortez owner Jackie Gaughan since 1978. "But, if there's a casino a mile-and-a-half away from you, you're probably going to go to that one."

Nolan and Repetti said downtown has always had a strong locals following, estimating that a third of Main Street Station's customers are locals.

Despite the downtown market's troubles, the city has openly discussed plans for three new hotel-casinos for downtown: one on the current City Hall site when the new one opens, one in Symphony Park, and one on the current downtown Regional Transportation Commission bus depot site.

Gaming analyst Martin, however, doubts anyone will build a new downtown hotel-casino soon, and points to the Golden Nugget's performance as proof.

On March 5, Moody's Investors Service downgraded the Golden Nugget's bonds to "extremely speculative" with a limited default, stating the company's leverage remains high.

"This significant leverage combined with Moody's expectation that consumer gaming demand and company earnings will remain weak, suggests that Golden Nugget's current capital structure is not sustainable over the longer term," Moody's senior analyst William Fahy wrote in a note to investors.

Golden Nugget's revenues, which include the same-named casino in Laughlin, were $216.8 million in 2009, down from $253.3 million in 2008, despite the financial investment and new tower.

The company's debt increased to $506.1 million last year from $422.5 million in 2008.

"Despite the amazing improvement to the property, revenue is still not back to what it was five years ago," Martin said.