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Making sense of gaming's big crash

10 August 2009

Las Vegas Sun

LAS VEGAS, Nevada -- Imagine that you're a retired gaming executive and you're watching the industry crash all around you, in the biggest recession in the modern casino era.

You take a deep breath, counting your lucky stars you're retired but wondering: What could I have done differently? What would I do now?

The Sun invited three former casino executives to sit down for a Sunday Conversation, to candidly reflect, with the benefit of 20-20 hindsight, about the gaming industry — then, now and in the future.

Together, they talked about bad assumptions, questionable decisions and getting caught up in the go-go boom years, second-guessed shifting strategies and talked about what can and should be learned about the industry and its customers.

The trio: Phil Satre, former CEO of Harrah's Entertainment; Don Snyder, former president of Boyd Gaming; and Glenn Christenson, former chief financial officer of Station Casinos. Each is still active in corporate, civic and philanthropic life in Southern Nevada, but it was their days in the casino board rooms that we wanted to explore.

We wanted to get inside their heads, and they let us.

The following is based on a transcript that was edited for length and clarity.

We launched this Sunday Conversation by asking whether they were glad they are out of the business.

Phil Satre, retired from Harrah's: It's much more difficult to be an executive in this business and have as much fun as I had in the 25 years I was at Harrah's. We had ups and downs, we had layoffs from time to time, we had projects that didn't meet our expectations, we had significant stock price drops and, fortunately, increases, but never did I experience this sustained economic malaise that my colleagues are facing now.

Don Snyder, retired from Boyd: We've been through some ups and downs over the years but we're faced with an intensity now that's unprecedented and has to be taking a lot of the fun out of what we had done in years past. It's a triple witching hour: Companies are highly leveraged, have high cost structures and are stuck in a tough operating environment.

Glenn Christenson, retired from Station: The conditions we have today are somewhat outside of our control. Who could have predicted this kind of global financial meltdown? I still keep in touch with people on Wall Street and they second-guess the leverage and the construction of these projects — all of which they supported at the time they were proposed. I don't think things would be this bad had the recession been less severe.

Satre: What people didn't recognize, including those in Las Vegas, was how much the town's appeal was based on the discretionary income that people had developed through 401(k)s, appreciated home values and easy access to financing. It sustained us at a period when we were focused on building great restaurants, entertainment and hotel rooms. We were building compelling products but living off consumers who had a discretionary spending level that was probably unsustainable once you removed some factors, like home values, access to credit and a sense of having wealth.

Snyder: The loss of wealth and perceived loss of wealth were a significant factor. At more normal levels of leverage we probably could have gotten through this a little bit better. The operating costs that go with these very large and expensive properties was taken to the extreme. People were living beyond their means, which created a false sense of security for those of us building in those days.

Christenson: Consumer confidence is key. As an industry, we were previously resistant to recessions and now we're very highly correlated with what's going on in the national economy. When people are worried about having a job or have seen their 401(k)s decimated, if your home's value is half what it used to be, it's hard to say, "I've got to run out to Las Vegas or run down to my favorite local casino."

If you were in the hot seat at your companies, would you have detected any early warning signs? Is there anything you could have done to soften the blow?

Christenson: Some of this was beyond our control. All of us, when we looked at acquisitions or other deals, examined pro forma figures reflecting a base case, an optimistic case and a pessimistic case. We didn't look two or three standard deviations out at how bad things could be, which is where we are now. In hindsight you can argue about leverage ratios but I don't think anyone could have planned for this.

Snyder: I remember years ago saying, "Boy, things have gone up for so long. Can it really continue?" and then rationalizing all the factors that suggested that growth could continue. I think we all got caught up in that. Current management didn't do a better or worse job than we would have on any of those issues.

Satre: In 1990, when I was on the board at Harrah's, we turned down an opportunity to own what is now the New York-New York site because the board at the time was concerned about overbuilding in Las Vegas. We had second thoughts about expanding and improving some of our properties in the mid-1990s because we saw riverboat gaming and Indian gaming expanding. The big question was, "Can Las Vegas withstand this competition?" The board went through many years of being exceedingly conservative on plans for Las Vegas and kept pulling back on capital spending plans. We turned that corner after we bought the Rio and did acquisitions that increased our footprint here and became very bullish on Las Vegas, like everybody else. If there was a criticism of the company and my tenure there, it was that we didn't invest enough here and in upscale product. That was a legitimate criticism through the early 2000 period. Right now I look pretty smart. We kept looking at the thousands of rooms being added here and said, "This can't continue" and we kept being proven wrong. Our conservative estimates of the ability of this market to absorb new supply kept biting us and analysts kept digging at us for that.

Snyder: Before the recession, each new building cycle in Las Vegas would create more demand. Most industries don't work that way. That reinforced future decisions. As we moved into this latest building cycle and reinvention phase for Las Vegas, we said, "Of course we can create new demand and fill all these rooms, no matter what happens." Now we're dealing with a backlash that we've never felt before.

Christenson: It's a Catch-22 because what drove that demand is the quality of these products. We've all looked at projections for average room rates of $250 to $300 and that's not happening right now. The debt that went along with this growth is very difficult to service now. And I'm not sure anyone could build what I'd describe as a B product today and be successful.

Satre: Not when the A product is now priced below the B product. Not when you look at quality rooms going for $100 to $150 a night plus coupons and everything else.

Snyder: One of our greatest challenges is that we're moving back to a value-oriented proposition, which is great for the consumer but doesn't leave a lot of value for shareholders.

Satre: The problem for our industry is this enormous investment in bricks and mortar which is really hard to change. The retail and auto industries can cycle through their inventory in a year to a year and a half and can scale down their product and pricing to meet that inventory. It's hard in this industry to re-price your inventory once you've opened because your cost per square foot is embedded into those rooms, restaurants, the casino floor. In some cases you can bring in a more inexpensive show or re-price a high end restaurant. If someone said I could build a new product in Las Vegas, I'm not sure what I would do. If I knew I could compete on pricing I wouldn't scale up to the prices of the past five years. I'd come in with a product that on a per-square-foot basis could earn a return on the rates I'd get in the hotel and what people were spending elsewhere in the property. The problem with that is you've got to compete with all the A product already out there.

Snyder: The current generation of executives has a tougher job. It's tough to dig out from under the cost structure built into these projects, but that needs to happen somehow. It happened when Phil Ruffin was able to pick up the Treasure Island for what would have been a bargain basement price three years ago. A more painful process is happening at Station Casinos, which will reduce its leverage in bankruptcy.

Christenson: There is a window of perhaps six to 18 months. If these companies can't make it through this window during which the economy probably isn't going to improve much they will have to look at significantly reducing debt, putting more equity into their companies or selling them. I foresee a significant change in ownership in the gaming industry over the next few years. These operations can only generate so much cash flow.

Satre: When you look at how hospitality economies were made obsolete there were two factors involved: A new competitor came in with a lot of new product and declining investment in the existing product. Atlantic City was a vibrant hospitality economy in 1930 and then Miami developed a hospitality economy and it took all the business out of Atlantic City. The owners of those properties stopped investing in them. There wasn't a hotel in Atlantic City fit to stay in by the time casinos arrived in 1978. Then Las Vegas took a tremendous amount of business out of Miami. The same thing happened in Miami: They pulled back on investment because the returns kept dropping. The danger for Las Vegas would be a new competitor with a new pricing structure that didn't have these embedded costs. Even after you pull out of this recession, you could see the money reinvested in these businesses decline. Here's an extreme case: If the California coastline, for example, became a casino resort area — you've got a heavily populated, beautiful location with easy access by air, and I'm not trying to give any suggestions to Gov. Schwarzenegger — that would be a very challenging situation for Las Vegas.

Christenson: The one thing we have going for us is our business climate, which is a lot better and a lot more receptive than California's.

Snyder: The magnitude of investment that's been made in Las Vegas gives us a footprint that's very difficult to challenge, but it's also why we need to build new properties that are vibrant. The cost structure of some of these new projects is just too far over the edge to make a return.

Christenson: The challenge is to continue to provide a great customer experience. We have trained customers to expect the highest quality there is, arguably in the world, and you can't do that on the cheap and make it work.

Is it a smart strategy to pursue the high end when Las Vegas was built on mass-market business? Is there enough business to support luxury properties?

Snyder: The luxury properties can get the lower end of the market to come to their properties. But they aren't spending enough money to pay all the bills.

Satre: If this continues ultimately you have new ownership. It's like commercial real estate, when the owners of office buildings developed during a bull cycle can't hang on to their buildings and someone else comes in. Sometimes you cycle through three or four owners before the property can make money.

Christenson: This downturn will also create new opportunities. New blood can be helpful.

Satre: For the next 10 years, I don't see the upscale customer coming back with the discretionary income we saw two years ago. The economy can recover, jobs can recover, but the customer's sense that he will have as much wealth and access to credit as before, that's gone. If there is anything new built in this market and they revise their cost structure, they are not going to go up but down. They're going to cater to customers who want to spend less for a room, food, drink and entertainment even if they have the money.

Snyder: I agree. Nor are we going to see the middle market customer who spent like the high-end customer. The wealth effect has eroded, even for Mom and Pop folks who had a lot of equity in their homes and felt good about that. It's going to take a long time for that sense of wealth and confidence to be restored before we have spending that's anything close to what we were used to.

Christenson: I'm not as pessimistic, though I wouldn't bet on an increase in consumer confidence anytime soon. You're also going to have to get the finance people comfortable in lending and investing here. It's hard to know what's in store after being pounded for 18 months straight.

Satre: We haven't talked about a huge part of what made Las Vegas successful: convention and group travel. I think that's cyclical and there will be a time when we'll see these groups return. I think that business will come back stronger than the free and independent travelers who came on their own and spent at high levels.

Christenson: It wasn't so long ago that we hated conventions as an industry and now it's critical to our operations. We're severely damaged by that loss.

Snyder: The business traveler will help us get out of this slump, but it's going to take a while. It's important for us to continue marketing broadly to those markets that are so critical.

Some economists believe the local economy will lag recovery in the national economy. What's your take?

Snyder: For the first time ever in our professional lives, that's probably the case. Traditionally we were always the last in and the first out of an economic slowdown. We fell deeper this time because of the tremendous escalation in housing and speculators who were playing the field.

Satre: After 19 straight years as the fastest growing city in the United States we fell further than most parts of the country. The farther you fall the bigger the climb.

Christenson: We're down 50,000 or so jobs from a year ago. The new properties that will open here won't make that up. Our population is down — people aren't moving out here like they were. Consumer confidence is low.

Snyder: The silver lining is that we're going back to our roots. We're a much more affordable place to live. When jobs come it will be easier to recruit workers. Teachers used to be priced out of the market years ago. I also think we'll see a return of retirees because prices will be lower for an extended period. It will take a while for people to realize these benefits.

Satre: The worry is that the image of Las Vegas will have suffered at a time when consumers are ready to enjoy Las Vegas again. The state of the economy and the media coverage of the downturn present a challenge. We need to continue to offer a great experience here and protect our image as a very special place to visit. Even with the changes operators have made, it's still a remarkable place. We just had visitors from Denmark and they said, "You have to see Las Vegas if you want to see what this country has to offer because it's unique and remarkable — and it's pretty affordable right now."

Snyder: I've talked with so many visitors who have been surprised by the activity that's still here. They hear on the news about how beat-up the economy is and expect to see empty streets. It's packed over the weekend. They aren't spending as much but it still creates that Las Vegas experience as a fun getaway.

Christenson: That also creates opportunities for us. Don and I are also involved with the Nevada Development Authority and we have a new marketing program to lure businesses to Southern Nevada. As California is imploding we become an attractive alternative. If there was ever a reason why we need to diversify our economy away from gaming, this is it.

Snyder: This is one of the lessons we should have learned. We have the chance to develop a more broadly based economy that can benefit from a vibrant gaming industry, including a cultural infrastructure and quality education. Businesses expect us not to be at the bottom of every bad list. We have immense challenges but tremendous opportunities, especially when you consider our neighbor to the west.

Christenson: This gets into a broader question of leadership in Nevada and the direction of Carson City. To attract businesses here we need leaders to address education. We've made a lot of strides in our community but aren't close to where we want to be. The Nevada Cancer Institute and the Cleveland Clinic Lou Ruvo Center for Brain Health are helpful but I don't think any of us are happy with the state of health care. Don, what you're doing with the Smith Center for the Performing Arts downtown is spectacular and it's going to help us attract businesses. We're making progress, but this community can do better.

Satre: We still need to maintain our core business. The Las Vegas Convention and Visitors Authority and the operators here have to continue to get the message out that there's no better time to visit Las Vegas. Don't let people forget that and don't let others define who you are. This is a great time for other cities to define Las Vegas in a way we don't want to be defined. We have to continue to define the casino and hospitality industry as a remarkable thing.

Las Vegas built its success on an adult image — "What Happens Here, Stays Here." Doesn't that hurt efforts to attract other kinds of businesses?

Satre: Those sort of tag lines have a shelf life. We may have to think about whether there's a new tag line we want for Las Vegas — something more fitting for the current economy. More significantly than whether you stick to a certain way of describing Las Vegas is that you don't reduce your advertising.

Snyder: We're a city of 2 million people – large by any standard. A vibrant gaming industry gives us an opportunity to do other things if we thoughtfully go about it. When I came here 22 years ago I made a decision that this is where I was going to be part of the community. Part of living here is having an obligation to make it the kind of place where you want to raise your kids and grandkids. We are a tale of two cities to some extent. But this encourages us to work harder on the community side of things.

Christenson: To put this in perspective, we've had two bad years on top of a great run of 35 or 40 years. We have to start thinking ahead. We're talking to businesses about moving here. There are a lot of great things we can bring to the table.

Nevada's gaming-dependent tax system doesn't work. How do you fix it?

Snyder: It's time for us to decide where we want to be as a state and as a community 10, 15, 20 years from now. Once you know where you want to be it's like running a business: You develop a strategy for how to get there. The tax structure was created a few decades ago, before we were the fastest growing state in America for 20 out of the last 22 years, and isn't designed for where we are today, let alone what we want to be 10 or 15 years from now. The governor and Legislature have tremendous challenges and opportunities. The political process is tough, but it's incredibly important for Nevada that they work better. We need a governor and Legislature that can come together. If there was ever a time to do things differently, now is the time. I think a lot of the dialogue in the last session was focused on that. We need to continue that dialogue between elected officials and the private sector.

Christenson: We need leaders that can credibly discuss these things. Difficult decisions need to be made. I get very tired of hearing about a Republican or a Democratic solution when what we need is a Nevada solution. That's going to require raising revenues or reducing the services we provide. We need credible information. Many people moved here because of the low tax environment but there's no free lunch.

What are some fond memories of the good old days, before the recession?

Satre: I think of the people I used to work with, including Claudine Williams, who recently passed away. These were interesting people who enriched my life. Others include Bill Boyd, the Fertitta family, Bill Harrah. I know Jack Binion and wish I'd met Benny Binion. The other part was being part of an industry in transition. My first trip to Las Vegas on business was in 1978. I was doing some work for the Union Plaza as a lawyer and then I got involved in the Holiday Inn casino with Claudine and then we purchased that casino. You left some of the characters of that era behind but things were always getting better. If you look at what we and others were building — that was an exciting time.

Snyder: There's a tremendous amount of characters that built Las Vegas. The three of us came from other industries — banking, accounting, legal.

Satre: And we're the guys who they say ruined the business!

Snyder: We were part of the transition to more professional management. I think the industry benefits from that mix of old-timers and professionals from other industries. When I transitioned from the banking business to the gaming business I worked for an interim period with the Fremont Street Experience. We'd have strategic meetings before the idea for the district emerged and you'd sit around a table with Steve Wynn, Bill Boyd, Jackie Gaughan and Mel Exber. The personalities who built this state and this town were incredible.

Christenson: When I came to Las Vegas 37 years ago as a rookie accountant our responsibility as a firm was to keep track of Howard Hughes' interests. He dominated everything. One of my clients was Bill Boyd and the Boyd Group. I was there the night regulators took over the Stardust, which was the last vestiges of those days. I saw some accounting controls — and I use that term loosely — that I'd never seen in all the time I'd been here. When I first went to work for the Fertitta family people wondered what I was thinking. I'd been a partner with a big accounting firm; Palace Station was the entire company, and it was half the size it is today. I was fortunate to spend time with Mr. Fertitta, who really created the concept of locals casinos. Watching the company grow from a single casino to 16 has been unbelievable.

Satre: It's been a bit like watching the NFL. The egos get bigger. The scuttlebutt was who's got the winning team, whom Wall Street liked the most, who's gossiping about the other team and stealing players and strategies. About 15 years ago people were taking each other's hosts and customers. At the time we were wringing our hands, but it was all part of the game and the desire to be seen as a winner.

Snyder: I came here in 1987, just before the reinvention of Las Vegas, when Steve Wynn was working on the Mirage. At my office at the top of the First Interstate Bank tower, now Wells Fargo, we'd take visitors out to the patio and, like just about every other commercial banker in the world, would point to the Mirage and say, "There's no way this property can be successful. They have to generate a million dollars in cash flow just to service the debt on a $640 million property!" They generated $2 million a day. The guts that Steve Wynn had to bite off such a big chunk in those days was incredible. You had to be a strong personality to do that, and I have great regard for the people who built this city.

Would you ever build or operate a casino, together or separately? Do you see gaming ventures in your future?

Snyder: I've turned the page. I enjoy my board work with three public companies and a couple of private companies. It's nice to share our experiences in the boardroom but walk away and realize you don't have to implement policies, deal with personnel problems and things like that. We're all applying our expertise by being involved in community projects. The gaming industry is the most intense I've ever encountered. It's a cash-based, 24-hour, seven-day-a-week business. You layer in today's challenges on top of it and it's a tough job.

Satre: I don't foresee it, but I'm reluctant to say never. I don't seek out opportunities. I'm busy with other things and have built a new lifestyle around that, so it would be a challenge to go back to those day-to-day responsibilities.

So it's good to be retired?

Christenson: I prefer to think of myself as a free agent. I did it for 17 years and had a blast. But I'm really enjoying learning about new industries and confronting new challenges.

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