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Rod Smith

Looking North, Looking up

25 July 2005

From Wall Street to Las Vegas, gaming operators and analysts have looked askance at Reno as the Rodney Dangerfield of the casino world for at least a decade.

Now, a new Deutsche Bank study of the Northern Nevada market is pitching Reno as "the biggest little locals market in the world."

"Even though the gaming market in Reno has remained soft over the past 10 years, we see a silver lining that goes unnoticed," said Deutsche Bank analyst Marc Falcone. "We believe further development of newer and high-quality properties is in the cards and likely to generate above-market returns (for investors)."

Past skepticism has been based on Reno's performance over the past 10 years, when gaming revenues increased at just 1 percent a year compared with 4 percent for the Strip and 11 percent for the Las Vegas locals market.

Deutsche Bank found the tepid growth was the result of competition from tribal casinos in Northern California, the lack of new developments, the proximity to Las Vegas and the lingering effect of the Sept. 11, 2001. terrorist attacks.

Now, University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, said Reno is finally coming to mirror Las Vegas economically.

"Reno's a suburb of San Francisco just like Las Vegas is a suburb of Los Angeles. And Reno actually has an advantage over Las Vegas in that it can attract other businesses," he said. "Plus, if they can build more casinos, they can get more people in there. But they need to attract overnight visitors with properties that are a notch above what the Indians are offering and give the people in San Francisco a reason to drive the extra two hours."

In its study, Deutsche Bank found that the Reno area is experiencing solid, sustainable growth, partially because of its track record in attracting new businesses.

"Reno offers some very compelling demand trends, both demographic and economic. We believe this environment supports high-quality, targeted casino development by sophisticated locals operators with long and successful track records," Falcone said.

The Deutsche Bank report also found that while gaming revenues in Reno have remained soft for 10 years, the segment catering to local residents has proved strong.

"We see a silver lining that goes unnoticed," Falcone said. "Premium locals casinos in the market have achieved revenue growth in the high single digits. In our opinion, this signals what could be an increasing and largely unmet demand for local casino development,"

In addition to finding that the demand for locals gaming operations exists and is growing, Deutsche Bank also said the market's ultimate size will be dictated by the quality of the hotel-casinos it offers customers.

"Build it and they might come; build it well, and they will come. This assessment is confirmed by the tremendous growth of the Las Vegas locals market over the past 10 years," the study said.

Station Casinos, already one of the leading local casinos operators in Las Vegas, has confirmed the Deutsche Bank analysts with three recent land deals, which Falcone said add to the company's already solid pipeline of growth catalysts.

The company recently announced agreement to buy a 50-acre site on Mount Rose Highway, part of a 200-acre, master-planned project that will include the Summit Sierra, an open-air entertainment, retail, office and residential development and a nearby 96-acre parcel on South Virginia Street, for which plans have not been announced. It has also reached agreement to lease an 8-acre site across from the Reno-Sparks Convention Center, for which plans have yet to be developed.

Thompson said Station Casinos' recent commitment to Reno, especially given its understanding of locals casinos and management of the Thunder Valley tribal casino outside Sacramento, augurs well for the area's development prospects.

Station Casinos Executive Vice President Glenn Christenson said Reno offers a great risk-reward ratio, especially for companies like his that are willing to invest long-term.

"We find investing in Northern Nevada makes a lot of sense. The whole state has a great regulatory and tax environment, and we believe we will be able to drive incremental business into Reno," he said.

Station Casinos' plan for its properties, yet to be announced, is to target the regional and locals markets with entertainment malls, much like Green Valley Ranch Station, in which gaming is just one element, Christenson said.

"We see it as an excellent business environment, one of the most robust economies in the country. It's very similar to Las Vegas in demographics and economic potential. Essentially, many of the same characteristics we see in Las Vegas are what are drawing us to Reno," he said.

University of Nevada, Las Vegas, professor Hal Rothman, however, was skeptical about the newfound enthusiasm about Reno's prospects as a gaming market.

"The optimism is premature. There may be a locals gaming market. If someone invested $750 million in a local's casino, it'd make some difference," he said. "But because Reno's a driving destination -- people don't fly -- Reno is trapped by its location and what it does have can be easily replicated."