Las Vegas Sun

March 28, 2024

Gaming:

Will CityCenter change type of tourist in Vegas?

Profits might drop as discounts lure thriftier visitors

CityCenter grand opening

Leila Navidi

Guests enter the Aria hotel-casino for the first time Wednesday, Dec. 16, 2009.

CityCenter Construction Timelapse

CityCenter first broke ground on April 3, 2006 on a 67-acre site between the Monte Carlo and Bellagio. The Boardwalk Casino was later imploded on May 9, 2006 to make room for the $8.5 billion project. The first hotel opened on Dec. 1, 2009, marking the first phase of completion of nearly three and a half years of construction.

Aria Opening

CityCenter President and CEO, Bobby Baldwin, bottom center, speaks during the opening of Aria at CityCenter in Las Vegas on Wednesday, Dec. 16, 2009. Launch slideshow »

CityCenter grand opening

Guests enter the Aria hotel-casino for the first time Wednesday, Dec. 16, 2009. Launch slideshow »

CityCenter's Aria Makes Debut

CityCenter's Aria makes it long awaited debut to the public.

Aria opens its doors to the public

CityCenter's Aria has opened its doors to the public. Fireworks exploded over the centerpiece of the $8.5 billion CityCenter project, and people eagerly awaited to be the first inside Aria, which is a partnership between MGM Mirage and Dubai World.

After a night spent gaping at Aria’s modernist splendor, draining designer cocktails and downing caviar and sushi, invited VIPs and other well-wishers at the opening gala for CityCenter’s centerpiece resort woke up Thursday to a grim reality on the Strip: Amid the worst recession in 70 years, only the toughest, best-equipped competitors will survive the coming battle for customers.

Although Las Vegas tourism is expected to pick up modestly next year, in large part because of CityCenter, that won’t be enough to offset declining profits as visitors, enticed by deep discounts, spend less while they are here, analysts say.

That is why some analysts expect Strip profits to fall in 2010 even as visitor traffic improves. It might take several years, they say, before profits begin to rise steadily on the Strip — the sign of a true recovery.

That recovery will eventually arrive, experts say, but the economic pressures in the interim will likely change the competitive landscape.

Adding supply when demand is depressed will force CityCenter, with its nearly 5,900 hotel and hotel-condominium units, to steal some business from other high-end properties, according to Wall Street analysts. That, they say, will have a ripple effect — forcing luxury properties to lower prices in a battle for middle-market customers, and in turn forcing the middle-market to go after the low end, and so on.

The health of the Strip — and survival of some outlying properties — may rest on how well CityCenter can attract visitors in the coming years. So far, the prognosis isn’t good.

“The economy is going to continue to be weak next year and so, even though visitation to Las Vegas will be up modestly, with all the new rooms there will continue to be pressure on room rates on the Strip,” said Dennis Forst, a gaming stock analyst with KeyBanc Capital Markets.

MGM Mirage executives have disputed such forecasts, citing the Strip’s growth cycles in the 1990s, when new resorts generated their own demand regardless of the economy. The 2005 debut of Wynn Las Vegas at the top of the resort food chain helped neighboring properties, as did previous landmark openings that raised the bar for tourism on the Strip, such as Mirage and Bellagio.

That conventional wisdom — that new Strip resorts only make the economic pie larger — has been abandoned by many as the recession has deeply unsettled American consumers, forcing them to rethink purchases in a way that may become permanent, analysts say.

That distressing epiphany arrived for some in early 2008 with the lackluster opening of Palazzo and later that year with the debut of Encore, which did little to boost demand in Las Vegas.

Beyond the recession, analysts note that today’s resorts are up against tougher competition as new, expanded or refurbished casinos spread on the Strip and across the country.

“Vegas has become so big now and there’s so much gaming around the country, I’m not sure that paradigm about creating demand is relevant now,” Forst said.

In other words, analysts think Strip operators will have to fight for each and every customer.

Although CityCenter will boost tourism, the resort complex will take some business from existing properties, including ones owned by MGM Mirage, Deutsche Bank bond analyst Andrew Zarnett said in a note to investors Thursday.

This forecast was reflected in the remarks of Justin Chase and Victoria Rachels of Dallas, who visited Aria on Wednesday night. After wandering the elegant casino floor and checking out its posh restaurants, Rachels said: “We’re thinking about seeing if we can switch our room from MGM Grand over to here.”

MGM Mirage executives think CityCenter will generate unprecedented global interest, attracting tourists from other countries that haven’t been as hard-hit by the downturn. The company is banking on attracting new visitors, including those who previously swore off Las Vegas as a cultural backwater — a risky strategy in a recession, some analysts say.

New room capacity will further depress room rates next year, resulting in lower revenue and cash flow for Strip operators, analysts say.

In the short term, the battle for customers may at first disproportionately affect higher-end properties that compete directly with CityCenter, analysts say. In time, the ripple effect will probably most hurt the lowest-rent joints — those with less to offer compared to better properties with competitive prices, they say.

“CityCenter will cause some of the very low-end properties to go out of business or become irrelevant,” Forst said.

Bond rating agency Fitch Ratings thinks discretionary spending will remain weak in 2010, with national unemployment peaking in the second quarter. Unemployment will remain high through 2011, according to its gaming outlook published Thursday.

Fitch estimates visitation to Las Vegas will rise 3 percent to 5 percent next year — less than the 7 percent estimate MGM Mirage has offered — although Strip revenue will fall by 3 percent to 5 percent.

“Profitability will remain under pressure as operators will be aggressive on pricing and marketing through 2010, as new capacity needs to be filled, corporate travel budgets remain under pressure and consumer spending patterns improve only modestly,” the report said.

“Las Vegas is going to come back, but it’s going to be a slow recovery the next few years” as companies struggle to pay down monster debts incurred during the boom, Michael Paladino, senior director of gaming, lodging and leisure for Fitch, said in an interview.

Likewise, Deutsche Bank bond analyst Andrew Zarnett is forecasting a 10 percent decline in revenue for Strip properties and a 20 percent decline in cash flow, or earnings minus select expenses.

After this redistribution of wealth on the Strip, high-end, competitive properties will emerge the winners, according to analysts.

Just how healthy these winners will be isn’t clear.

Of the major, publicly traded casino companies in the United States, MGM Mirage and Harrah’s Entertainment — which together own most of the Strip’s casinos — also are the greatest in debt, relative to what they earn.

Thus, competition from CityCenter may disproportionately affect their properties. Both companies, among the state’s largest taxpayers, have so far escaped bankruptcy through extensive, and in some cases, well-timed, financial engineering: MGM by issuing stock and bonds as the lending environment began to pick up; and Harrah’s by negotiating with lenders to forgive and extend debt obligations.

MGM Mirage is expected to negotiate some arrangement with lenders early next year to address about $4.3 billion in debt due for repayment in October, Paladino said.

“How CityCenter is doing could help or hurt those negotiations,” he said.

Sun reporter Amanda Finnegan contributed to this story.

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