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Rod Smith

Bulls Cry Back: Gaming Will Stay in Black

25 May 2005

LAS VEGAS, Nevada -- In a decidedly bullish report on Las Vegas and the gaming industry, investment banking giant Bear Stearns on Tuesday projected the industry would enjoy an average rate of return of 16 percent on total investments of $25 billion over the next five years.

Despite recent gloomy reports from competing banking firms Merrill Lynch and Goldman Sachs, Bear Stearns analyst Joe Greff predicted history will repeat itself and the coming wave of new hotel rooms will spur even faster growth in revenues and profits.

Other analysts said the newly generated debate is not over whether Las Vegas will succeed, but how well new developments such as Wynn Las Vegas are likely to do and what returns on investments they will generate.

Goldman Sachs Group analyst Steve Kent in mid-May named gaming his least-favorite industry and recommended caution in investing in most casino companies, especially Wynn Resorts Ltd.

Last week, Merrill Lynch analyst David Anders warned of a euphoria surrounding gaming and projected the industry's average rate of return would--drop to 7.1 percent by 2006.

Susquehanna Financial Group gaming analyst Eric Hausler said the debate among investment banks was set off by the opening of Wynn Las Vegas and the divergent projections are caused by concerns stemming from the building boom in Las Vegas.

"Investors are concerned about whether the economy is slowing and how much that might affect Las Vegas," he said.

"No one is debating whether Las Vegas is doing well. It's a debate about how well (developer) Steve Wynn will do and what kinds of returns new projects will generate," Hausler said.

It has been estimated that 30,000 added hotel rooms are planned for the market by 2010.

Greff reduced that to 25,000 because of several projects that are unlikely to get off the ground, but he added in a portion of the announced condominium projects, 21,000 units, that are likely to be built.

However, he said the added inventory of 46,000 units represents only a 5.2 percent increase in room supply per year, slightly ahead of the 34-year average of 5 percent.

How well Wynn Las Vegas does is being viewed as a bellwether on Wall Street for how well Las Vegas will do in absorbing other planned projects, and whether they get financing and off the drawing board, Hausler said.

Greff said the Strip is a unique market because new capacity typically stimulates room demand, visitor volume and increased spending.

In each year that supply has increased by more than 8 percent since 1970, demand has increased by more than 10 percent, he said.

"While much of the demand side of the equation depends on the state of the economy, we think history suggests new development will continue to spur demand growth," Greff said.

University of Nevada, Las Vegas history department Chairman Hal Rothman echoed the optimists.

"The thing that saves Las Vegas is the variety of niche markets and the economics of being special. No one ever came here and said: 'Now, I want to go to Foxwoods,'" he said.

"The future is the 75-year-old catching the 95-year-old Rolling Stones' concert. The baby boomers are the richest generation in history; they're living longer and they want to travel, especially here," Rothman said.

UNLV professor Bill Thompson, who specializes in gaming studies, said 10,000 new baby boomers turn 55 every day.

"That's our market. That's the strength of Las Vegas for the next five years and the next 20 years. For the foreseeable future, we're golden, despite the naysayers," he said.

Deutsche Bank analyst Andrew Zarnett agreed that the demand from baby boomers will outpace any projected increases in supply. Furthermore, increases in inventory in the long run are modest, especially compared with that growing demand, he said.

At Bear Stearns, Greff said Las Vegas' growth trajectory is underpinned by its evolution from a gaming-focused economy into a diversified destination with world-class hotel, convention and noncasino amenities.

"While casino revenues remain an important contributor to the overall revenue base, the gaming component has declined to an average of about 25 percent from 35 percent between 1970 and 1980," he said.

In addition, visitor spending on each trip is outstripping growth in the economy by 4-to-1.