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Arnold M. Knightly

Off-Strip hotels push harder

15 May 2008

LAS VEGAS, Nevada -- Three off-Strip properties are addressing the economic pinch by increasing promotional spending, although they are taking separate approaches to cost-cutting efforts.

Hooters Hotel, Hard Rock Hotel and the Las Vegas Hilton increased promotional efforts to help drive customers to their properties during the first three months of the year, filings with the Securities and Exchange Commission during the past week show.

Hooters Hotel increased promotional expenses 24.5 percent, cut operational expenses 10.2 percent and slashed room rates 11 percent from the first quarter last year.

The property, which is a block east of the Strip on Tropicana Avenue, plans to save as much as $500,000 per month on operational expenses this year. The company said it began cutting payroll last year, but didn't say exactly how.

"The reduction that began in the fourth quarter 2007 played out in the first quarter of 2008," Chief Operating Officer Gary Gregg said during a conference call Wednesday with investors.

The property posted a net loss of $2.2 million while revenues fell 6 percent to $16.1 million from $17.1 million in 2007. However, cost reductions helped trim the loss by 22.4 percent from $2.8 million in 2007.

Gregg said the combination of decreased expenses and increased gaming revenue, which bucked market trends by climbing 4.6 percent to $6.4 million, has positioned the property well "when the pressure comes off the discretionary or entertainment dollar of the consumer."

Hooters Hotel also cut average daily room rates by 11 percent, $80 per night compared with $90 per night last year, hoping hotel visitors would spend the savings in the casino. Hooters Chief Financial Officer Deborah Pierce said during a conference call that the hotel is following the Las Vegas trend of cutting rates to attract visitors amid the soft economy.

Room occupancy was 87.9 percent for the quarter, down from 91.3 percent a year earlier. However, Pierce said the poor occupancy was driven by a poor January with the hotel at 96 percent occupancy in February and March.

Separately, the Hard Rock Hotel is contending with challenges beyond the economy.

A $750 million renovation, scheduled for completion in mid-2009, is under way and is causing disruptions at the property.

"We started to move some dirt and the parking lot is pretty full with construction vehicles," said Richard Szymanski, chief financial officer of Morgans Hotel Group, the property's co-owner. "Having said all that, we actually did better in the market than a lot of our competitors."

Although the property increased promotional expenses 33.4 percent, its quarterly loss was driven by a 15.4 percent increase in interest expenses and deferred financing from the property's acquisition in February 2007.

The hotel-casino reported a net loss of $22.6 million, a 62.5 percent increase from a net loss of $13.9 million in 2007.

Revenues fell 3.3 percent to $40.6 million from $42.1 million.

The revenue decrease against a 1.8 percent increase in operating expenses contributed to the overall loss.

Casino revenues for the quarter rose 0.7 percent to $13.7 million from $13.6 million.

The property has also begun a new advertising campaign in local magazines and on billboards aimed at local players.

The hotel-casino, which is owned by a joint venture between New York-based boutique hotel operator Morgans Hotel Group and investment bank DLJ Merchant Banking Partner, cut average daily room rates by 4.1 percent to $184.40 per day from $192.30 per day.

Revenue per available room slid 4.2 percent to $173.41 per day from $180.99 daily. Occupancy was flat at 94 percent.

"Most of the reports for the market are 6 (percent) to 8 percent (declines)," said Szymanski during Morgans' earnings call on Friday. "We performed fairly well."

Of the three properties, the Las Vegas Hilton was the only one to report positive income for the quarter, although income dropped slightly due to a 9.2 percent increase in promotional expenses.

The property's first-quarter net income was $6.6 million, a 5.7 percent decrease from $7 million a year earlier.

Revenues increased 1.7 percent to $80.6 million from $79.3 million; expenses increased 3.2 percent.

The hotel-casino reported a 6.4 percent increase in room revenue due to "an increase in occupied room nights," but it did not release specific room occupancy or average daily rates, according to its filing.

Casino revenue in the quarter dropped 2.4 percent to $26.4 million, food and beverage increased 6.8 percent to $21.5 million, and room revenue increased 6.7 percent to $34.7 million.

The property, which did not hold a conference call on its earnings, is owned through a joint-venture between Los Angeles-based real estate investment trust Colony Capital and New York-based Whitehall Street Real Estate Funds, a Goldman Sachs affiliate.

All three properties are privately owned but have to report their earning to the Securities and Exchange Commission due to publicly held debt.