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Best of Howard Stutz

Gaming Guru

Howard Stutz

New life being breathed into locals gaming market

26 May 2014

You know things are on the upswing in the locals gaming market when the two Arizona Charlie’s casinos report a first-quarter net revenue increase.

It’s been a while since that happened.

It wasn’t a large bump — less than 1 percent credited to increased slot machine revenue, hotel occupancy and restaurant sales — but with the results coming just a few days after Station Casinos’ best first-quarter earnings in five years, analysts are starting to take notice.

Union Gaming Group analyst Robert Shore pointed out that economic fundamentals in the locals market — housing, wage growth and employment — are all pointing in the right direction. He said the disconnect between improving economic conditions and stagnant gaming growth is changing.

“In our view, what is different now is the convergence of a surging Las Vegas Strip coupled with an improving locals economy,” Shore told investors last month. “While we aren’t forecasting a near-term return to peak levels, we continue to remain positive on the long-term health of the market given the aforementioned issues.”

Much of the news surrounding the gaming industry’s economic recovery has focused on the Strip.

Companies such as MGM Resorts International and Caesars Entertainment Corp. are spending a combined $1 billion to create large outdoor retail, nightlife and entertainment districts, each highlighted by a centerpiece attraction. For MGM Resorts, a 20,000-seat sports arena and events center will anchor The Park by 2016. In April, Caesars opened the 550-foot-tall High Roller observation wheel as the focal point of The Linq.

Notice gaming is not the focus.

MGM Resorts is upgrading New York-New York and Monte Carlo as part of The Park, but is not adding new gaming areas. Caesars moved and downsized the shuttered O’Shea’s Casino to become part of The Quad.

The main point is to drive nongaming spending by customers.

The locals market has gotten the hint.

Station Casinos is spending $55 million to upgrade its restaurants, nightlife and other amenities at its flagship Red Rock Resort and Green Valley Ranch Resort.

Boyd Gaming Corp. executives said during the company’s first-quarter earnings call that a retooling of restaurant offerings at its Coast Casinos and Sam’s Town is being considered.

The idea is to build off the business being created by the Strip, which often translates into increased business in the locals market.

“Boyd has both derivate and direct exposure to a Strip recovery,” Shore said. “The Las Vegas Strip is rebounding as evidenced by recent data out of the market and first-quarter Las Vegas results to-date from Strip operators.”

Deutsche Bank gaming analyst Andrew Zarnett predicts a modest growth in the Las Vegas locals market this year, which helps Boyd Gaming and Station Casinos. He said both companies have improved their credit profiles at the same time they move to reinvest in their properties.

“Over the last 12 months, Station Casinos has successfully completed a series of financial transactions that have improved the company´s liquidity profile, extended debt maturities and reduced borrowing cost,” Zarnett said.

“There have been many positive catalysts for Boyd credit in the past year, such as bank/bond refinancing at Borgata and Boyd and the sale of non-core assets (the Echelon site on the Strip to Genting).”

One other piece of the Station Casinos puzzle is the company management contract with the Graton Resort and Casino north of San Francisco for a Northern California Indian tribe.

Zarnett said the Indian casino “provides the company with some diversification away from the local Las Vegas market.”

Gaming revenue is not driving the Strip nor the locals markets, for now.

Through March, Strip gaming revenue is down 5.4 percent. For casinos along the Boulder strip, which includes Henderson, gaming revenue is down 7.3 percent through March. Both North Las Vegas casinos (1 percent) and the rest of Clark County (1.1 percent) are up for the year’s first three months.

Shore said $8 billion has been earmarked for investment on the Strip, including the $4 billion Resorts World Las Vegas development and MGM’s arena. Those projects mean more construction jobs, which result in more spending by potential locals gaming customers.

“Construction workers have high relative salaries when compared to other subsectors, are transient and free spending,” Shore said. “The upcoming capital development projects and related new construction workers should have a clear positive impact on the locals’ economy and gross gaming revenue.”