Investor unhappy over $99 rooms at Bellagio

Andrew Pollack

Monday, Nov. 9, 1998 | 11:20 a.m.

Mark Greenberg, portfolio manager of the Invesco Leisure fund, stayed at the new Bellagio hotel in Las Vegas last month while attending the Salomon Smith Barney Leisure Conference.

The accommodations were luxurious, but Greenberg was a bit unhappy about the price. "I wish my rate wasn't so good," he said. "It's $99 a night."

Greenberg's fund has a small amount of its money invested in Mirage Resorts Inc., which owns the Bellagio and hopes to charge $200 a night on average, a new high for Las Vegas.

The fact that Greenberg got his room for $99 -- albeit on a weekday during a slow time of the year -- could be a sign of deep trouble for Las Vegas, the nation's largest gambling center.

Indeed, the Picassos aside, the Las Vegas picture is not pretty, at least for casino companies and investors. A looming oversupply of rooms and falling profits have battered their stocks.

But that might not mean that such stocks are bargains. "In that environment, the better question is not who thrives but who survives," said Harry Curtis, an analyst with BancBoston Robertson Stephens.

A glut of rooms is not the only concern. The Asian economic crisis has reduced visits by Asian high rollers.

And California voters last week approved a proposition that could expand Indian-run casinos in their state.

The 3,000-room Bellagio, which opened on Oct. 15, is the first of four splashy hotels that together will increase the number of rooms in Las Vegas by more than 12,000, or 12 percent, in the coming year.

Curtis predicted that the visitor count would rise 4 percent to 4.5 percent a year, but that 6 percent would be needed for Las Vegas casinos as a group to meet earnings expectations.

Moreover, a belief that each new round of hotels must be more spectacular than the last means higher construction costs, thus lowering potential returns.

"There is no doubt that the returns on investment during this round of capital investment will be less than they were last time," said Andrew S. Zarnett, an analyst at Ladenburg Thalmann.

Many analysts recommend a flight to quality. "Some of the better operators will glean the lion's share of the profits and others will be working very hard to make less money," said John J. Rohs, an analyst with Schroder & Co.

Greenberg, despite small positions in Hilton and Mirage Resorts, is not buying any more Las Vegas casino stocks, quite a statement for a fund manager whose mission is to invest in leisure industries. "I don't know what they are going to do to get out of this problem," he said of the oversupply.

So perhaps the best reason for buying casino stocks now is that no one else seems to want them. This is what is known in Las Vegas as a long shot.