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Convention Growth Considered Critical

LAS VEGAS -- Major Strip operators could be in for a 40 percent boost in profitability by 2005 from added convention business and higher attendance levels, a new Wall Street study shows.

"Conventions are critical growth drivers for Las Vegas, with capital expenditures (such as new towers at The Venetian, Bellagio and Mandalay Bay mainly) going toward conventioneers," Merrill Lynch analyst David Anders said. "The convention business keeps growing because there are assets being committed to it."

The Merrill Lynch study projected the number of convention visitors coming to Las Vegas increasing from 5.1 million in 2002 to 6 million in 2005.

Total spending per conventioneer is also projected to increase to $1,250 by 2005, up 2.5 percent a year.

"As a result, the total economic impact of conventions on the Las Vegas economy will increase from $5.9 billion to $7.4 billion in 2005, a 26 percent increase," the study said.

Deutsche Bank analyst Marc Falcone called the growing convention business critical for Strip companies because they drive midweek room rates upward.

"If convention business falters, a lot of gaming companies would find it very difficult to fill all the rooms," let alone expand, he said.

The Merrill Lynch study estimates that free cash flow after new capital spending, a key measure of profitability, will increase by $180 million for Las Vegas hotels.

For hotels on the Strip, cash flow will get a boost of $144 million, about a 25 percent increase from current levels, the study found.

Deutsche Bank estimates the current cash flow after capital expenditures, generally defined as earnings before interest taxes, depreciation and amortization, for major Strip operators at $427 million.

Park Place Entertainment Corp. and MGM Mirage should be the big winners despite operating no major convention halls because they control roughly 75 percent of the rooms of the Strip, Anders said, suggesting an increase of $108 million in cash flow for the three industry giants.

Deutsche Bank analyst Andrew Zarnett said increasing convention business growth is vital to Las Vegas' growth because it drives room occupancy, especially in seasonally slow periods and helps diversify the economy. He said it also reinforces the trend toward more reliance on revenue from hotel, entertainment, and food and beverage operations.

It is particularly important to The Venetian because it generates a higher proportion of its revenue and cash flow from convention business than any other Las Vegas operation, even though the amount generated is less than either Park Place or MGM Mirage because they operate several properties, he said.

MGM Mirage spokesman Alan Feldman said: "(The) convention segment of our business has been and continues to be one of the most important we have. Along with tremendous growth in other segments of our business, we've see it in convention business especially with convention and meeting space being built, some in large amounts at Mandalay Bay resort and The Venetian," he said.

Also, smaller projects in the neighborhood of 60,000 square feet are being built, at the Bellagio for example, that alone would each represent a 50 percent increase in capacity in many less-commanding convention cities.

"It translates into a tremendous number of jobs and drives other segments of the business as people who come here as conventioneers return as tourists," Feldman said.

Fulcrum Global Partners gaming analyst Joe Greff said the convention business should be the real driver for the gaming industry in Las Vegas over the next two years because the new Mandalay Convention Center and expansions at Sands Expo and the Las Vegas Convention Center are attracting existing major conventions away from Texas, California and the Midwest.

The Merrill Lynch study found the Las Vegas share of the national market should increase from 26 percent to at least 30 percent by 2005 largely because of the attraction of conventions from other cities.

Las Vegas is beating out peer cities because of its new halls, lower rooms rates and affordable air fares.

"(It has built all) the newest types of facilities, has lower costs for convention organizers and is cheaper to attend for conventioneers," Greff said.

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