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Best of Howard Stutz

Gaming Guru

Howard Stutz

Analysts see little optimism for gaming industry

14 September 2010

LAS VEGAS, Nevada -- At least the Strip still attracts the analyst community.

Wall Street researchers sojourned to Las Vegas this summer to assess a gaming industry reeling from two years of diminished revenues and a sour economy.

For the most part, their opinions reflect little optimism.

December's opening of the Cosmopolitan is expected to add 2,000 hotel rooms to an already over-saturated market. Add to that continued declines in airline capacity at McCarran International Airport and Wall Street doesn't hold out much hope for a Strip turnaround by the end of the year.

"While forward convention and group bookings are encouraging, Strip operators remain cautious over the magnitude of potential average daily room rate increases due to additional supply entering the market over the next six months," Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski told investors following several days of meetings with senior managers from casino operators and gaming equipment providers.

Wieczynski said the conversations led him to believe the doldrums could last well into next year.

The Strip has few positive signs.

Customers are frequenting the market on weekends and holidays but midweek business is sluggish. Nongaming revenues remain depressed because consumers have less discretionary funds.

Janney Montgomery Scott gaming analyst Brian McGill said the Cosmopolitan of Las Vegas' scheduled unveiling only compounds the problem for Strip operators. With the property becoming part of Marriott International's customer loyalty program, Cosmopolitan operators solved their lack-of-a-database issue and put pressure on the rest of the Strip.

Also, McGill said the number of airline seats into the market, which are down almost 3 percent through July, will continue to affect gaming revenues. Airlines, he said, are not adding more flights into Las Vegas for 2011.

"While the Street is of course aware of the difficulties that have already occurred, we believe the recovery will be a multiyear process, and we remain negative on the outlook for the Las Vegas Strip," McGill told investors.

Wieczynski said he met with officials from two casino operators who are optimistic that the market might show signs of a slight rebound by year's end.

In the locals market, Boyd Gaming Corp. executives told Wieczynski consumer spending levels are still depressed but improved in the first five months of the year.

The company abandoned its attempt to acquire all or part of bankrupt rival Station Casinos, but officials believe additional casino purchase opportunities will become available.

"Despite the relatively high levels of unemployment in the Las Vegas area, management does not believe its business model is broken and believes there is room for supply to come out of the market," Wieczynski said.

As for the Strip, talks with MGM Resorts International officials centered on CityCenter.

The company reported improvements in hotel occupancy and room rates. Casinos at MGM Grand, Aria and Bellagio have relied heavily upon record levels of international high-end baccarat play to help offset continued weakness in gaming revenues.

MGM Resorts plans to renovate 4,000 rooms at the MGM Grand beginning in October, and renovate Bellagio's high-limit slot area.

As for CityCenter, visitation has improved and high-end play is allowing Aria's casino to grab a market share that equals Bellagio.

MGM Resorts had a 50-50 partnership in CityCenter with financially troubled Dubai World. Company officials said representatives of the Persian Gulf emirate's investment arm have not contacted them about a potential sale.

"In the event Dubai World wished to divest its 50 percent interest, only MGM Resorts or a suitable bank involved in the project financing could purchase the stake within the first five years of the joint venture agreement," Wieczynski said, adding that he didn't expect a sale to take place in the foreseeable future.

With the Golden Nugget, Goodman touted the redevelopment of the El Cortez and the Gold Spike casinos. He said progress was being made on the former property once controlled by Union Pacific Railroad, including the $100 million Cleveland Clinic Lou Ruvo Center for Brain Health, which opened this year, and the under-construction $470 million Smith Center for the Performing Arts.

Connecting the casinos along Fremont Street and the Fremont Street Experience with the projects along Grand Central Parkway has long been his goal.

A redevelopment of the Plaza might help make Goodman's dream a reality.

"Maybe with a redone Plaza, we'll be able to work with them to get access from the Fremont Street Experience to the 61 acres," Goodman said. "We have to get the critical mass flowing in that direction."

On Monday, producers of "The Rat Pack is Back" said they had signed a three-year contract to perform the show in the Plaza's Copa Room.

Lucky's Race and Sports Book operates the facility inside the Plaza.

"This action is necessary for us to reorganize and renovate the Plaza over the next year, during which time we will be closing portions of the casino and all hotel rooms," Landfield said. "We anticipate that some employees will be retained to continue various operations."
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