Analysts still see weakness in Las Vegas Strip room rates

David Strow

Thursday, April 12, 2001 | 11:06 a.m.

Systems Research and Development, a Las Vegas technology firm, said it's sel' ling data warehouse software to Mandalay Resort Group.

The software collects customer information from all of Mandalay's casinos and almost instantly sends it to a central database. Employees at any other Mandalay property will have almost immediate access to this data.

The data warehouse will be used to drive Mandalay's customer relationship management system, allowing the company to identify the worth of customers across the company, personalize marketing efforts to customers and prevent duplicative marketing efforts by individual properties.

One of Mandalay's most notable current marketing projects is the development of a single "slot card" that would unify all five Las Vegas Mandalay properties. The new data warehouse was purchased to support marketing initiatives across the company, said Mandalay Vice President of Marketing John Marz, but will also play a "significant " role in the development of the unified slot club.

Despite expectations of good first quarter earnings news from Las Vegas gaming operators, analysts continue to fret over signs of a slowdown on the Strip.

Despite an absence of megaresort openings that would boost the city's hotel room count, Wall Street casino watchers remain concerned over the triple threat of the growth of Indian gambling in California, rising energy costs and the slowing global economy.

On the heels of a report showing a 12 percent dip in the Strip's February gaming revenues came new, troubling indicators Wednesday -- a 4 percent dip in Las Vegas visitation in February, and several analyst reports stating that room rates are coming down on the Strip.

The Las Vegas Convention and Visitors Authority reported that Las Vegas hosted 2.76 million visitors in February, a 3.9 percent decline from February 2000.

This dip came despite a 3.2 percent increase in passengers at McCarran International Airport, which recorded 2.92 million passengers for the month. And convention attendance rose 28 percent to 476,000.

But other indicators told the story of the decline. Room nights fell 5 percent to 3.04 million, and as a result, total citywide occupancy dropped 4 percentage points to 87.3 percent. And auto traffic on Interstate 15 -- the freeway link between Los Angeles and Las Vegas -- fell 6.1 percent to 374,000 vehicles.

Despite this, most gaming analysts are maintaining their bullish earnings expectations for Strip operators in the first quarter, based on guidance from the companies. In a few cases, estimates are even moving up.

One such upgrade came Tuesday, when Raymond James gaming analyst Damon Brundage bumped MGM MIRAGE's earnings estimate from 39 cents per share to 44 cents per share for the quarter ending March 31, and from $1.65 to $1.70 for 2001. The new estimate equates to $71 million in net income for the first quarter, and $270 million to $275 million in net income for the year 2001.

Brundage said he expects growth in excess of 10 percent in both casino play and room revenues in the quarter, "with Bellagio and the Mirage probably leading the way." Moreover, Brundage said indications are that both high-end and convention business remains strong at the company's properties.

Yet Brundage, like his counterparts at other Wall Street firms, is growing more concerned that room rates are softening on the Strip. And, as a result, he did not change his "Market Perform" rating on MGM MIRAGE.

"While we are optimistic about the long-term prospects of both (MGM MIRAGE) and the Las Vegas market, we believe that, as the economy slows and growth in consumer spending wanes, the operating environment in Las Vegas may become a bit less hospitable ... during the next three months," Brundage wrote.

Brundage is not the only one. In a research note issued Wednesday, Bear Stearns gaming analyst Jason Ader warned that room rates at Las Vegas properties are continuing to decline. Though Bear Stearns found that midweek rates on the Strip for the first week of May actually moved up, weekend rates fell 6.5 percent. The decline is the fourth in five weeks recorded by the Bear Stearns survey.

The conclusions of such surveys by Wall Street firms have been hotly contested by Strip executives, who say such surveys only capture pricing for a small portion of their market -- that of the "free and independent traveler" (FIT). A large majority of Strip hotel rooms actually go to other types of customers, including conventioneers, high rollers and pre-booked groups.

Ader insists, however, that the survey numbers still have great significance.

"While we recognize our weekly room rate surveys only capture a small portion of the Las Vegas room base, slowing room rate growth has shown a correlation with stock price performance," Ader wrote. "In our view, FIT room rates could continue to show signs of deceleration driven by the uncertain economic outlook, as well as the increasing competition from Native American gaming in California and the growing impact related to higher utility costs in California."

The most severe decline was recorded at Mandalay Resort Group's Luxor, where rates for the May 5 weekend dropped 54 percent -- primarily because the property was charging $409 a night on May 6, 2000. Mandalay's Excalibur quoted rates 45 percent below 2000 levels, and Monte Carlo (jointly owned by Mandalay and MGM MIRAGE) dropped 37 percent. Other properties posting declines were the Las Vegas Hilton (down 29 percent), the Rio (down 22 percent), the Venetian (down 20 percent), the MGM Grand (down 17 percent), the Tropicana (down 11 percent), the New York-New York (down 10 percent) and the Bellagio (down 10 percent). Three properties -- Paris Las Vegas, Bally's Las Vegas and Caesars Palace -- were sold out.

Yet a few properties showed big jumps -- the Flamingo Las Vegas was up 46 percent, the Mirage rose 44 percent and Harrah's Las Vegas was up 36 percent. Despite its decline, the Venetian commanded the highest rate in town, at $399.

Strong convention business kept the picture brighter during midweek, with Las Vegas hotels reporting an average increase of 12.6 percent in rates. While the Bellagio (up 101 percent) and Rio (up 63 percent) showed huge increases, eight properties lost ground: Mandalay Bay (down 48 percent), the Mirage (down 34 percent), the Venetian (down 34 percent), the Tropicana (down 33 percent), the Excalibur (down 23 percent), Paris Las Vegas (down 20 percent), Caesars Palace (down 14 percent) and the Stardust (down 8 percent).

Robertson Stephens gaming analyst Harry Curtis is also seeing declines. In a Wednesday note, Curtis said Robertson Stephens surveys are showing most Las Veags properties are reporting 10 percent declines in average daily room rates in the second quarter.

As a result, Curtis lowered his earnings estimates on Mandalay, which operates more hotel rooms on the Strip than any other company. Curtis cut his 2002 operating net income estimate from $115 million to $108 million, and his 2003 estimate from $141 million to $127.5 million.

Still, Curtis did not downgrade Mandalay from its "buy" rating, citing the company's stock valuation and its strong free cash flow. But there were other reasons as well -- Curtis said it appears Mandalay is "going private by degrees," and said he believes the company will be positioned to attempt a leveraged buyout in two years.

In a leveraged buyout, a company offers to purchase all outstanding shares of its stock at a premium, and pays for these shares with cash or by taking out a huge amount of debt. Mandalay has been aggressively buying its own shares over the past several years -- over the 12 months ending Nov. 30, 2000, Mandalay bought 14.4 million shares of its own stock, or about 16 percent of its total outstanding shares. Such aggressive share purchases have prompted talk in previous years that Mandalay was eyeing an LBO.

Mandalay President Glenn Schaeffer declined comment on the possibility Mandalay would attempt an LBO.