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Rod Smith

Strip Room Rate Growth Slows Sharply

8 June 2005

The rapid growth in demand for rooms on the Strip came close to a shuddering stop in the first half of 2005, following the record increases of 2004 and in the wake of the Wynn Las Vegas opening, analysts said Tuesday.

The steady climb in rates for rooms booked three weeks or more in advance -- the most common demand-trend barometer for Las Vegas vacations -- decelerated steadily to 2 percent in the second quarter of 2005 from 44 percent in the second quarter of 2004, Bear Stearns data showed.

Bear Stearns analyst Joe Greff said the slowdown was born of the destination's own success, although some industry insiders speculated the drop could foreshadow a price war over the tough summer months.

Greff said it would be difficult under any circumstances for Las Vegas, or anywhere else, to match last year's room-price growth rates, which were well into double digits at most properties.

Investors realistically do not expect those growth rates to return in the second half of 2005, he said.

Brian Gordon, a principal in Applied Analysis, a Las Vegas-based financial consulting company, agreed that inevitably when rates are increasing on top of substantial increases in previous years, it becomes difficult to maintain the same level of growth.

Still, he added that given the pace of room-rate increases in 2004, it's impressive that operators did not cut prices heading in to this summer.

However, he also warned that a national economic slowdown could cause hotel operators to face downward pressure on pricing, which would increase hotel room-rate competition in Las Vegas.

"There's also a pricing point out there beyond which consumers aren't willing to pay more for a room. Expecting 40-plus percent growth or even double-digit growth is just unrealistic," Gordon said.

Market demand in Las Vegas is still hot, thanks to media exposure and the Wynn Las Vegas opening, but pricing has become cost-prohibitive for many visitors, he said.

"That, plus concerns over the national economic climate (could spell trouble)," Gordon said. "In the first half, we saw consumer confidence slide and concern over unemployment and employment rise. Both dampen demand for Las Vegas hotel rooms compared with what we've seen in recent quarters."

Industry insiders who asked not to be named said their companies have contingency plans to engage in tough rate competition if a price war breaks out this summer.

MGM Mirage Chairman Terry Lanni and other industry executives, however, said that would only happen if there is an economic slump or other unanticipated development.

Otherwise, they said, room rates should continue their inexorable climb.

Rates charged for rooms on the Strip in the first half of 2005 increased about 6 percent (10 percent in the first quarter and 2 percent in the second quarter) compared with an increase of about 35 percent for the first half of 2004 (25 percent in the first quarter and 44 percent in the second quarter), Bear Stearns data showed.

Deutsche Bank analyst Marc Falcone in an investor advisory applauded the "rate performance through the first half of 2005, despite tough comparisons with 2004 when room rates steadily climbed by double digit rates."

"We would expect room rates to post continued strong improvements over last year next quarter, driven by a strong convention calendar and the opening of Wynn Las Vegas," he said.

However, Greff said Bear Stearns is now forecasting slower growth in room rates than Las Vegas has seen in the past 18 months. He expects the increases to decelerate further heading into the end of the year.

"2004 was just incredible, and convention growth, in particular, just is not as strong as it was heading into the second half of the year," he said.

Greff said attendance at large conventions with 10,000 or more attendees drove room rates in the year's first half.

The number of attendees increased 14 percent compared with the first half of 2004. Convention attendance should continue to drive room rates upward, which should partly compensate for weaker demand for leisure travel.

Greff also warned investors that while room rate surveys such as his are useful for measuring demand on the Strip, the value of any single week's results are limited because of the small sample size.

For the last week in June, however, the average Strip rate increased 7 percent to $142 compared with $132 a year earlier, Bear Stearns data showed.

Weekday rates were up 14 percent while weekend rates decreased 2 percent, including Wynn Las Vegas which skewed the data upward following its April 28 "world premiere."

And Falcone said the Hard Rock Hotel was the only weekend sellout.

Greff attributed the recent market softness to a slightly weaker convention calendar. Convention business, though, will pick up in the first full week in July, he said.

Falcone said end-of-June rates at Wynn Las Vegas ($179 weekday/$299 weekend) were 43 percent higher than weekday rates and 50 percent higher than weekend rates compared with the Strip as a whole.

But Wynn Las Vegas' rates, he said, were in line with weekday upscale Strip room rates and 9 percent higher than weekend upscale Strip room rates. Upscale Strip properties include The Hotel at Mandalay Bay, Bellagio, Caesars Palace and The Venetian.

Previously, Wynn Las Vegas had lagged other upscale Strip properties.

"Despite this, our longer-term survey that extends through December of this year indicates that standard room rates (nonsuites) at Wynn Las continue to average more than $300 and are an 8 percent premium to Venetian and a 25 percent premium to rates at Bellagio over the same dates," he said.