Analyst sees LV gaming cash-flow declines continuing

Gary Thompson

Thursday, Dec. 10, 1998 | 11:44 a.m.

Southern Nevada casinos' 27-month string of declines in same-store cash flow should continue for another nine quarters, a top gaming analyst says.

Signs "are not encouraging as the market embarks upon its historic $7.8 billion expansion," Bruce Turner of Salomon Smith Barney writes in his latest research report.

"Still reeling from the effects of a marginally successful expansion in 1996 and 1997 and an ever-encroaching riverboat and Native American gaming industry, the market was sideswiped by a deteriorating global economy," he says.

Turner says the market's reaction to the latest supply wave "is signaling the end of Southern Nevada's supply-constrained market and the beginning of a more mature phase."

Relatively unchanged visitor volume through the first nine months of the year and a sharp drop in high-end baccarat play continued to depress the area's financial results, he says.

And hotel occupancy levels "will remain under pressure over the next two years as the market absorbs an additional 18,000 new hotel rooms," Turner asserts.

"We anticipate the top-quality resorts will continue to price their rooms at levels to ensure 90 percent-plus occupancy levels, resulting in the greatest occupancy and rate pressure for older hotels traditionally at the lower end of the rate spectrum."

Turner says he's reduced his estimated of new hotel-casino capital investment here over the next three years to $7.8 billion from $8.5 billion, in part due to Planet Hollywood's withdrawal from the Aladdin project and "the expected closing in 2000 of the Tropicana."

Aztar Corp. spokesman Joe Cole says closure of the Phoenix-based company's Las Vegas hotel-casino is only one of several options under consideration.

"We haven't set any timetable and haven't decided whether or not to close the Tropicana," Cole says. "Complete redevelopment of the property may be an attractive alternative."

The 1,900-room hotel-casino sits on 34 acres at Tropicana Avenue and Las Vegas Boulevard, one of the two hottest resort corners in Southern Nevada. The Jaffe family of Chicago owns a half interest in the property, but Aztar has an option to buy them out for $120 million.

Aztar is frequently mentioned as a takeover target because of the potential of that Strip locale, as well as the strong performance of its Atlantic City casino and riverboats in Missouri and Indiana. Aztar also owns a casino in Laughlin, an area showing improved financial results for the first time in four years.

Aztar's directors have deferred significant capital spending at the Las Vegas Tropicana until they assess the market's ability to absorb the new rooms that will open over the next year.

In the meantime, some analysts speculate MGM Grand Inc. is eyeing Aztar as a potential merger candidate. MGM Grand's 5,000-room hotel-casino sits at the northeast corner of the Strip-Tropicana Avenue intersection, and it recently announced an agreement to acquire Primadonna Resorts Inc., its partner in the New York-New York hotel-casino that occupies the northwest corner.

Acquiring Aztar would give MGM control of three of the Las Vegas intersection's four corners, as well as a presence in Atlantic City and riverboat markets. MGM also plans a hotel-casino in Detroit.

Meanwhile, Salomon Smith Barney's Turner says the new resorts such as Bellagio, Paris, The Venetian and Mandalay Bay should draw "many new visitors to Las Vegas and allow the (latest wave of hotel-casino) expansion to outperform its immediate predecessor in 1996."

"However, the sheer magnitude of new investment will likely dramatically increase competition, causing the market to underperform the highly successful expansion of 1993," Turner predicts.