Analysts see LV slowdown, big Strip operators deny it

David Strow

Monday, March 26, 2001 | 10:37 a.m.

Since last fall, Wall Street has been afraid Las Vegas is approaching a serious slowdown.

Now, as major stock indexes implode and fears of a recession rise, the first concrete signals of that slowdown may be starting to materialize. Two independent surveys of room rates along the Las Vegas Strip show rates plunging in April.

Yet all three of the Strip's major casino operators are disputing these results, saying they've seen no evidence the market is getting soft.

Bear Stearns is reporting room rate quotes are down an average of 25 percent for the first week of April, when compared to the same week in 2000. The second week of April is off 45 percent.

Room rate surveys are viewed by many as a key leading indicator of consumer demand for the Las Vegas gaming industry.

Jason Ader, gaming analyst for Bear Stearns, said the drop is particularly notable, as room rates were fairly steady from January to March.

"This is the first evidence we've seen of it (a slowdown) in Las Vegas," said Bear Stearns gaming analyst Jason Ader. "The real question is, will it continue for an extended time? The first two weeks (of April) are enough to get us concerned. I do think it's worrisome."

Las Vegas Investment Advisors, an investment firm specializing in gaming stocks, reports room rates have been declining since mid-February -- and were down more than 20 percent as of mid-April from the same period in 2000.

"That's an unusually sharp decline," said LVIA Chairman David Ehlers.

Ehlers said the drop becomes more notable when compared with other indicators. In January, the Las Vegas Convention and Visitors Authority reported, Las Vegas' visitor count rose just 0.4 percent, the lowest monthly increase since 1998.

Yet Mandalay Resort Group, MGM MIRAGE and Park Place Entertainment Corp. -- companies that control well over half of the rooms on the Las Vegas Strip -- are all insisting they're seeing no evidence of decreased demand.

"Our March, April and May for all five of our Strip properties are strong, running ahead of last year," said John Marz, Mandalay vice president of marketing. "Demand for our products is very strong. Maybe he (Ader) is seeing something we aren't."

Jim Murren, president and chief financial officer of MGM MIRAGE, tells a similar story.

"Certainly the trends are nicely positive, and we're sticking by what we said two months ago (about strong business this year)," Murren said.

And in a presentation to investors last week, Park Place Entertainment Corp. Chief Financial Officer Scott LaPorta indicated the company's room bookings were strong going into the second quarter.

Surveys not 'reflective'

Murren argued that room rate surveys can be misleading, since they only measure demand from the "free-and-independent" traveler market -- about 20 to 35 percent of a hotel's business. But Murren said that doesn't include business from conventions or conferences, group business or rooms comped to high-end casino customers.

"It is interesting to look at as a datapoint, but it certainly is never reflective of how a hotel is doing," Murren said. "It certainly is not the most important part of our company's room business or the city at large."

Mandalay, MGM MIRAGE and Park Place have not been favorites of investors in recent weeks. MGM MIRAGE closed Friday at $24, down 25 percent from Feb. 1; Park Place was at $9.55, off 17 percent; and Mandalay closed at $18.91, down 15 percent in the past seven weeks.

Market effects

There's a multitude of factors causing that investor concern, and they're all converging at the same time. Most notable is the meltdown of the stock market in recent weeks.

While the stock market was booming, the theory goes, people felt more confident about the economy and had capital gains to blow on a Las Vegas vacation, helping spur the Strip's boom of the past two years. But that can work in reverse, analysts say.

"This will be a white-collar recession," Ader said. "You have a substantial base of customers who were worth a whole lot more a year ago. They feel a lot worse off today than they did a year ago. That will affect consumption at the high end."

Murren acknowledged that "clearly, deteriorating financial portfolios will have some impact on disposable income, visitors' willingness to spend."

"I think we'll see whether that manifests itself into changing (visitor) patterns," Murren said. "Right now, during March Madness, the city is packed, and I'll bet visitor volumes are up. If the volume's up, and the city's packed, what's the connection to the Nasdaq? I don't see it yet."

But that's hardly the only factor worrying Wall Street. Other recent events worrying investors include:

* The rise of Indian gaming in California. As tribes throughout California open new casinos across the state, analysts expect many Californians to begin cutting back on Las Vegas trips. Ader noted in a recent research note that he expected lower-end Las Vegas properties to take the worst hit.

Even worse hit could be the Reno and Laughlin markets, both heavily dependent on drive-in traffic from California. The impact is already being seen at some Laughlin casinos -- in the quarter ending January 2001, Mandalay reported that its two Laughlin properties reported negative cash flow, a very rare event for a gaming property. Calling it a "lousy performance," Mandalay Chief Financial Officer Glenn Schaeffer warned investors to expect more declines from the Laughlin properties in 2001.

"The fact is, there are 30,000 to 35,000 slots in California today," Ehlers said. "That is bound to have some indeterminable effect."

* The economic struggles of certain Asian countries, such as Japan, Singapore and Indonesia. This will have a particularly severe impact on high-end business, since 75 percent of Las Vegas high-roller business comes from Asia, Ader said.

"(High-end) business could be volatile over the next several months," Ader said. "Back in 1998, on the heels of (the Asian economic crisis), baccarat play was down over 20 percent, and many casinos were stuck with bad debt. We believe incentives and discounting could accelerate (for high-rollers)."

But after returning from a recent trip to Asia, Murren said he was pleasantly surprised by the confidence of some of MGM MIRAGE's most lucrative customers.

"The attitude was that things didn't get as bad as they could have," Murren said. "I came away with the feeling that this might not be such a bad year after all."

* The start of construction along I-15 between Los Angeles and Las Vegas. Though this five-year project is crucial to Las Vegas' long-term economic health, it could be disruptive in the short-term, wrote Merrill Lynch gaming analyst David Anders.

"Given that 90 percent of the visitors from Southern California drive, we believe that construction, and the potential for delays, could negatively affect demand, particularly during the busy summer months," Anders wrote.

* The explosion of electricity costs in both California and Nevada. In California, higher electric bills means less to spend on Las Vegas vacations.

"A dollar's worth of casino expenditure is the most postponable thing we have," Ehlers said. "If we've got anything left over (after monthly bills), then we use it for entertainment, which is what casino gambling is."

But casinos will also be directly affected by high bills in their own state, Anders said.

"We expect energy costs for most Nevada-based gaming operators to be up at least 20 to 25 percent in 2001, which, in a slowing demand environment, could put additional pressure on (cash flow) margins," Anders wrote.

* The lack of new hotel-casino megaresort openings in Las Vegas over the next several years.

From 1998 to 2000, five new hotel-casinos opened their doors on the Strip. As a result, visitor counts have soared over the past two years, as tourists flocked from around the globe to see Bellagio, Mandalay Bay, Venetian, Paris Las Vegas and Aladdin.

No new megaresorts is partly good news for Las Vegas, since it means hotel room supply will be restricted, which could help stabilize room prices. But it isn't all good news, Ader said.

"There's not a whole lot of new reasons for people to come out to Las Vegas," Ader said. "The dynamic of supply driving demand isn't playing itself out."

* The possibility of reduced air service into Las Vegas, as airlines come under pressure to hold up earnings.

"While air service is holding steady each month, we believe airlines could look to reduce lower-yielding routes, such as Las Vegas," Ader wrote.

While Murren doesn't believe Las Vegas is immune to a recession, he does believe Wall Street has been too eager in previous months to predict the city's gaming industry will hit a wall.

"This game (worrying about future Las Vegas business) is getting tiresome to me," Murren said. "Las Vegas clearly benefits more in a vibrant economy than in a slowing one.(But) we're far more resilient than any other hospitality segment or geographic area in the country. We have more to offer at a better value than any other area of the country, and we always will."

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