State’s casinos post healthy increase, despite slowdown

Cy Ryan and David Strow

Monday, Feb. 25, 2002 | 11:06 a.m.

After the Strip's casino building boom ended in August 2000, the state's run of explosive growth in gaming revenues came to an end.

But the Strip's growing focus on non-gaming revenues appeared to serve it well in this slowing environment. Despite the slowdown, Nevada casinos were able to post a healthy increase in net income for the fiscal year ending June 30, 2001 -- the first such increase in five years.

The annual report, prepared by the state Gaming Control Board, said Nevada casinos had net income of $554.4 million for the fiscal year, an 11.6 percent increase from fiscal 2000. Total revenue rose 3 percent to $18.1 billion, putting the average profit margin of the state's casinos at 3.1 percent.

The cash flow of Nevada casinos, according to the report, rose 15 percent to $3.37 billion.

The Strip accounted for much of that gain. Strip casinos' $388.1 million in net income was a 109 percent increase from the previous fiscal year, the Control Board said. The Strip's net income represented 3.7 percent of revenues, up from 1.8 percent a year ago.

The report measures the performance of the 247 Nevada casinos that report more than $1 million a year in revenues. The net income figure does not include federal taxes.

Just a handful of properties, including the Venetian and the MGM MIRAGE portfolio, could have accounted for the big gains, said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. The Bellagio showed significant cash flow gains after the May 2000 buyout of Mirage Resorts by MGM Grand Inc., Zarnett said, and the Venetian's cash flow improved significantly after a sluggish first year.

"Those two alone helped significantly grow (cash flow) in the market ... that's one reason why it's up," Zarnett said.

Despite the increase, not everyone is optimistic about the numbers.

Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno, noted historical profit margins ran around 12 percent, with net income ranging between $1.1 billion and $1.3 billion in the 1990s.

"The year 2000 numbers were pretty bad, historically," Eadington said. "This is a byproduct of a slowing economy, a glut of top-end casinos, and the poor performance of casinos like the Aladdin. (The 2001 numbers) are not that great, I'd have to say."

A big cause of the decline from the net income numbers seen in the 1990s was a change in accounting practices. In 1999, casinos were instructed to record interest as an expense at each individual property, if the debt was incurred for that property.

For casino corporations, the shift made little difference, as these costs were already reported to shareholders as a corporate expense. But the difference on the abstract's numbers was substantial, as net income fell from $1.2 billion in fiscal 1998 to a low of $496.8 million in fiscal 2000.

But over that same period, the profits reported by casino corporations to Wall Street were steadily improving.

"The reporting for the state is very different than that for SEC (Securities and Exchange Commission) purposes," said Jason Ader, gaming analyst for Bear Stearns. "We spend more time focused on the results that are filed in (quarterly and annual) reports."

Regardless, the return on investment of casino operators -- particularly on the Strip -- has been declining since the mid-1990s. And that could have long-term ramifications for companies looking to build new resorts on the Strip, Ader and Eadington said.

"The casino industry is a less profitable business today, based on return on capital, than it was 10 years ago," Ader said. "It's one of the few (sectors) performing in the American economy today, but in the long-term, if it doesn't create economic value for the shareholders, capital will be harder to come by."

During the fiscal year, gross gaming win fell 1.5 percent on the Strip, the Control Board report said. But other areas more than made up this increase.

"With new high-end shops, new restaurants ... (customers) are spending more and more off the casino floor," said Frank Streshley, senior research analyst for the Control Board.

Gaming accounted for just 43.7 percent of Strip casinos' total revenue during the fiscal year, down from 45.9 percent the previous fiscal year. Fiscal 2001 marked the third consecutive year that Strip resorts made more from non-gaming sources than they did on casino floors.

But non-gaming businesses tend to be more sensitive to recessions, Eadington warned.

With the national economy now in recession, "that has a much greater bearing on the new profile of Las Vegas," Eadington said.

There was a big difference between the financial performance of the Strip's largest properties -- those that made $72 million or more in gaming revenue -- and the second tier.

The 22 largest Strip casinos posted net income of $422.4 million. But the 16 Strip casinos in the below-$72 million category showed a loss of $34.2 million.

Statewide, gaming remains the source of a majority of casinos' revenues, at 51.4 percent of total revenues. However, this was down from 53 percent in fiscal 2000.

Total revenue from the casinos accounted for $9.3 billion of the state's revenue total; hotel rooms, $3.4 billion; food, $2.3 billion; beverages, $935.3 million; and "other," $2 billion.

While the Strip fared better than the previous fiscal year, the rest of Clark County was in decline, the report said.

Net income in the downtown Las Vegas casinos fell 28.9 percent to $20.8 million. These clubs generated $1.1 billion in all departments, an increase of 0.5 percent. Gaming accounted for 60.9 percent of downtown properties' revenue, down from 61.1 percent last year.

The Boulder Strip properties registered net income of $24.2 million, down 51.6 percent, while total revenues increased 2.8 percent to $823.8 million.

Casinos in Laughlin reported net income before federal taxes of $22.5 million, down 57.7 percent from the previous year. Total revenues fell 0.7 percent to $853 million.

The largest plunge came in the "balance of Clark County" category, which includes North Las Vegas. Though revenues rose 8.4 percent to $1.6 billion, the casinos posted an aggregate net loss of $53.4 million. Streshley could not point to a specific area or property that caused this big loss, but noted general administrative costs rose more than $87 million from fiscal 2000.

Casinos in Washoe County reported $73.3 million in profits before federal income taxes; Carson Valley area clubs registered $8.4 million in net income; Elko County casinos had $6.4 million in net income; and South Lake Tahoe casinos posted $43 million in net income.