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Chris Sieroty

Moody's projects stability for U.S. gaming industry

29 December 2010

LAS VEGAS, Nevada -- Moody's Investors Service has increased its expectations for the U.S. gaming industry, issuing a stable outlook while projecting revenues will grow 1 to 2 percent and casino operator profits will increase 2 to 4 percent in 2011.

But, Moody analysts expect Las Vegas resorts to continue to struggle due to an oversupply of gaming and hotel rooms.

The increased expectations are a revised estimate from a previous report by the rating agency, which estimated 2011 gaming revenues would be flat, between 1 percent down to an increase of 1 percent. Moody's analysts expected operating profits to decline by as much as 2 percent or grow by 2 percent.

"The stable outlook expresses our view that fundamental credit conditions in the gaming industry will neither erode significantly nor improve materially over the next 12 to 18 months," said Keith Foley, a senior vice president with Moody's and co-author of the report.

The recovery in the gaming sector will be uneven, the report said. More mature and built out markets like Las Vegas and Atlantic City will "continue to struggle," while newer destinations like Pennsylvania will drive industry growth.

Foley expects further gaming proliferation, resulting in more companies competing for the same customer rather than more expansion of the industry.

Any growth on the Strip will continue to be effected by a decline in consumer spending, as it has in other gaming markets.

However, the Strip has an added challenge because of an oversupply of gaming and room capacity. Foley wrote the Strip will struggle to absorb the new supply that has entered the market, especially the 11,000 rooms brought online in December 2009 with the opening of MGM Resorts International's CityCenter, and the 2,995 rooms at the Cosmopolitan of Las Vegas.

The new rooms were expected to increase the number of Las Vegas hotel rooms to approximately 149,000, according to the Las Vegas Convention and Visitors Authority.

"Even if general U.S. economic conditions continue to improve, the oversupply is likely to slow the prospects of a recovery in Las Vegas because it will keep considerable pressure on hotel room rates," the report found.

Foley said the slow recovery on the Strip would impact larger gaming companies, including MGM Resorts and Caesars Entertainment Corp. Although impacted by their Strip properties, Las Vegas Sands Corp. and Wynn Resorts Ltd. have been less affected because of their holdings in Asia, which have experienced strong consumer demand trends.

Strip gaming revenue for the month ended Oct. 31 was nearly $494.8 million, 16.1 percent higher than the $426.3 million for the same period a year ago.

However, the report found a large portion of the increase was due to higher-than-average "table hold percentage" for baccarat. Foley cautioned that, on a normalized basis, the monthly increase would have been in the low single-digit range.

Year-to-date as of Oct. 31, gaming revenue on the Strip was up 5.4 percent to $4.8 billion from $4.5 billion for the same period last year.

Las Vegas visitor volume grew 5.7 percent in October to 3.33 million from a year earlier, while the occupancy increased a modest 2.3 percent to 84.9 percent in October compared to the same period a year earlier.