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Tepid Returns Handicap Vegas Development

Wall Street disappointment over returns from recent projects is clipping capital availability, reining in Strip construction and dashing local economic prospects, at least through 2004, analysts said.

"Supply (growth) is low because returns have declined and capital has been less willing to speculate on Las Vegas investments," said Bear, Stearns Co. Inc. analyst Jason Ader.

The total room supply on the Strip is projected to grow by a "mild 1.4 percent compounded" annually through 2004, according to Bear, Stearns analysts.

"It used to be nearly guaranteed that investors would get a 20 percent return on investments (in Las Vegas), but that has fallen by about 50 percent (in the last five years)," he said.

Tepid returns on recent projects and skeptical capital markets are handicapping the limited building boom in Las Vegas, according to both local and Wall Street analysts.

The flurry of new projects, some recently announced and others under way on the Strip, is unlikely to kick the local economy out of the doldrums, they said.

"It'll take another round of (major) investments to see a sharp step-up in economic activity," said Keith Schwer, director of the the University of Nevada, Las Vegas' Center for Business and Economic Research.

The university models project a growth rate of only 1.5 percent through 2004, factoring in limited development of projects to increase room inventory.

Schwer said when there is "overbuilding as there has been in Las Vegas, there's good reason for concern. Still, it's hard to see where (Wall Street) is planning to put its capital (instead of Las Vegas)."

Ader said, "The last round of project openings in Las Vegas has fallen short of historic returns.

"The Aladdin isn't doing well; the money (invested in it) would be better off in a bank," he said. "Even if you look at Mandalay, Harrah's, The Venetian, Paris and the Bellagio, the return on investment has been below that of casinos opened 10 years ago."

There is no shortage of proposals for new hotel proposals in Las Vegas including "all sorts of pie-in-the-sky projects. The reality is that if returns aren't there, the capital just isn't available," Ader said.

Despite only mild growth projections for adding rooms in the market, expanding amenities "is expected to grow visitation, especially midweek, and help Las Vegas become a more complete and competitive convention destination," he said.

"We believe the limited, short-term supply dynamics look favorable for the Strip and that a few operators will continue to focus on enhancing their existing facilities with additional room, retail and convention development," Ader said.

Historically, additional rooms have not driven major visitation growth, he said.

"Art, stores, retail, restaurants and entertainment, everything from Fashion Show to the Ferrari dealership (planned in Le Reve), bring visitors back again and again," more than additional rooms alone, which have historically not driven impressive visitation growth, Ader said.

Such amenities make Las Vegas a more complete and competitive convention destination, adding "incremental visitors," and "that's what's growing the market," he said.

"Expanding amenities should provide higher risk-adjusted returns on the Strip," Ader said, "based on the Bellagio experience with "Cirque de Soleil," "O" and high-end retail shops.

"Today's resorts cost more than those of the 1960s and '70s, so everything has to be a profit center," he said. "Back then, operators made 120 percent on casinos and lost money on rooms. Now, gaming is (becoming) an afterthought" and gaming has to be mixed in with amenities.

"Given moderating returns for ground-up developments over the past five years, we believe that these types of expansions should provide attractive risk-adjusted returns for these companies," Ader said.

Still, Schwer said: "We just don't have much room for growth without room growth, given (current) occupancy rates."

Current expansion projects include an additional 1,000 rooms at The Venetian due to open in 2003.

Other projects already announced or planned include 925 rooms in a second tower at the Bellagio, 1,125 rooms at the Mandalay Bay's new tower and 900 rooms at Caesars Palace.

Steve Wynn's Le Reve is currently scheduled to open in early 2005 and should add an additional 2,455 rooms to the Strip at the existing Desert Inn site.

"As arguably the most innovative developer in Las Vegas' history, Wynn's project could spark the next wave of visitation and capital investment in the Las Vegas Strip," depending on its performance, according to analyses in the Bear, Stearns 2002-03 North American Gaming Almanac.

Further down the road are an eventual redevelopment of the Tropicana by Aztar, a potential Turnberry gaming offering and possibly a phase II Venetian development, according to Bear, Stearns.

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