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Analysts Confident in Las Vegas

3 July 2003

LAS VEGAS --Wall Street analysts are generally bullish about the prospects of upscale rooms being added in Las Vegas between now and 2005.

At the same time, analysts are skeptical about the ability of Atlantic City to fill 3,506 rooms being added to the market by 2005, especially in the short run.

The Borgata opens Thursday in Atlantic City, the first new hotel opened since the Taj Mahal opened 13 years ago, said Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm.

In addition to the 2,010-room Borgata, 544 rooms are being added to the Showboat, 450 rooms are being added at Resorts International and 502 rooms at the Tropicana are ready to open. That brings total room expansion to 3,506.

But in reports released Monday, both Deutsche Bank and Fulcrum found that since 1989 there has been a negative correlation between capacity growth and cash flow in Atlantic City.

Historically, although Atlantic City has introduced gaming to increasing numbers of players, it has not been able to absorb new capacity as rapidly as has Las Vegas, Greff said.

"The correlation between new supply growth and visitation growth is surprisingly weak in Atlantic City," Greff said. "In fact, visitor growth actually has declined in the years following major supply increases in Atlantic City. Conversely, the must-see natures of new Vegas offerings tend to stimulate visitation."

Analysts predict in the short run, the Borgata will cannibalize existing operators. Aztar Corp., Park Place Entertainment Corp. and Harrah Entertainment Inc. will be most adversely affected by the new supply in Atlantic City, he said.

"Las Vegas is different because it is a destination market where people stay longer and spend more," he said.

There are now 5,775 rooms being added to the upscale market in Las Vegas, with 1,000 at The Venetian, 1,125 at Mandalay Bay, 950 at Bellagio and 2,700 at Wynn Las Vegas.

"Importantly, historical trends indicate that operating margins suffer much more in Atlantic City than margins do in Las Vegas during periods of rapid supply increases," Greff said.

It took approximately five and eight years for operating margins in Atlantic City to recover to pre-expansion levels after the supply increases, he said. Now, after nearly five year years of virtually zero supply growth, Atlantic City's total room count stands to increase 30 percent in two years.

By comparison, Las Vegas property expansions total only 7 percent of the market and will be isolated to the high-end, best-performing properties, Greff said.

"From an absolute standpoint, more rooms will open in Las Vegas than Atlantic City (5,775 compared with 3,506) over the next three years, but from a relative perspective, it will be easier for the Las Vegas Strip to absorb 7 percent of its current supply than it will be for Atlantic City to digest efficiently 30 percent of its current supply no matter how under-roomed Atlantic City is," Greff said.

Fulcrum's report cited Las Vegas's status as a key convention and trade show market as well as a destination resort with multiple days-per-average stay, compared with Atlantic City's status as a day-tripper market, as key reasons why the city should be able to absorb new rooms more efficiently.

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