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November 27, 2014

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Flood of new hotel rooms dims Vegas outlook for ’10

Lower room rates have helped, but condo sales stay low, experts say

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Justin M. Bowen

In recent reports, analysts expressed concern about an oversupply of rooms on the Las Vegas Strip, with additional rooms opening in the next several months.

Skeptics have been suggesting for decades that Las Vegas has built more hotel rooms than can be filled, and still with every economic downturn, the Strip bounces back with remarkable occupancy rates, stoking even more construction.

It may be the closest that man has come to creating a perpetual motion machine.

But the machine is sputtering now, and will sputter more through 2010, according to two new reports out this week that fret about the number of hotel rooms being added to the market next year.

In their reports, debt analysts at Deutsche Bank and CreditSights zeroed in on the impending flood of new hotel rooms on and near the Las Vegas Strip — a market struggling with an oversupply of rooms, slot machines and gaming tables.

“The challenge for the casinos will be to maintain hotel occupancy even as new supply is brought on over the next 14 months,” CreditSights said in its report.

Even without taking into account the 3,815 rooms at the stalled and bankrupt Fontainebleau resort, analysts say new rooms coming online at CityCenter and elsewhere will pressure the Las Vegas industry.

CreditSights noted that lower room rates are helping to fill Las Vegas hotels, but sales of condominium units on and near the Strip have come to a near standstill with 2,200 vacant units on the market.

The CreditSights analysts called it “remarkable” that Nevada gaming win dropped in April for the 16th consecutive month, considering the major additions to the market.

With the opening of Las Vegas Sands’ Palazzo and Steve Wynn’s Encore, “the old rubric that ‘supply creates its own demand’ is clearly not relevant in today’s environment,” CreditSights said.

Still, CreditSights analysts Chris Snow and Frank Lee said they are encouraged by recent efforts by Strip leaders MGM Mirage and Harrah’s Entertainment to deal with their short-term debt and balance sheet issues.

Major gaming companies have successfully negotiated with lenders to fend off the immediate risk of default, the analysts said. Such an event could lead to Chapter 11 bankruptcy protection filings by giving lenders the right to demand repayment.

But they aren’t out of the woods yet. Both MGM Mirage and Harrah’s face a looming cash crunch in 2011, they said.

Although May gaming win numbers have not been released, it’s doubtful they showed much of an improvement considering the numbers issued for May last week by McCarran International Airport.

McCarran said the passenger count in and out of the nation’s gambling capital was about 3.5 million people, down 11.5 percent from May 2008 and 11.9 percent year-to-date.

Also this week, Deutsche Bank analyst Andrew Zarnett reiterated concerns about the new rooms coming online in Las Vegas. Overall, he said, they’ll reduce resort earnings and further stress owners’ balance sheets.

Even with the likely postponement of Fontainebleau, the Strip still won’t be able to fill new rooms that are coming online, Zarnett wrote. He cited “weak economic fundamentals and a diffident consumer.”

Deutsche Bank estimates the room count for the Strip market will grow about 15 percent, or 10,000 rooms, to 77,000 rooms over the next year.

This includes some 5,895 rooms at MGM Mirage’s CityCenter, 865 at the Hard Rock Hotel, 2,400 at the Planet Hollywood Westgate and 800 to 3,000 at the Cosmopolitan.

Strip gaming revenue and earnings before some expenses will decline by 15 percent and 30 percent respectively in 2009 even if the market begins to stabilize in the second half of this year, Zarnett said.

But the situation will worsen in 2010 with the opening of CityCenter in late 2009 and other resorts thereafter, he said.

One glimmer of hope is that CityCenter will drive added visitation to Las Vegas in 2010 — resulting in at least a slowing in the financial beating the Strip is taking, Zarnett wrote.

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