No More Fun & Games
Now that the idea of gaming as 'recession-proof’ has been proven false, the world’s casino operators try to keep from going bust.
By Adam Kirby, Associate Editor -- Hotels, 2/28/2009 11:00:00 PM
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MGM Mirage’s CityCenter project, set to begin opening in phases later this year, has ballooned in cost from US$4 billion to an estimated US$11 billion. |
Up until late last year, the gaming industry was routinely referred to as “recession-proof.” Most industry insiders and analysts now say that was a myth that was probably never really true, but the current downturn nevertheless has shaken casino operators, some of whom are now opening massive—and massively expensive—resorts at the worst possible time. An industry that only recently seemingly had a license to print money suddenly finds itself struggling to stay afloat.
In November, the number of Las Vegas visitors dropped 10% compared to the previous year, and profits at casinos on the Strip fell a staggering 57% through the first half of last year—even despite the opening of Las Vegas Sands Corp.’s 3,066-key Palazzo in January 2008. And that was before the economy really got bad.
After Anthony Marnell’s 390-key M Resort Spa and Casino debuts in March and MGM Mirage opens its mammoth 6,800-unit CityCenter in 2010, it could be a relatively long wait before Las Vegas sees another big opening. For a city that has thrived on selling The Next Big Thing, Vegas may need to figure out another way to keep the crowds coming.
“By Las Vegas standards, the number of projects scheduled to open is much less than what it was just a couple years ago, so what you are seeing is the Las Vegas development timeline move to a more realistic pattern,” says Rob Stillwell, vice president of corporate communications for Boyd Gaming Corp., Las Vegas. “We got pretty accustomed to things happening here virtually overnight.”
Las Vegas Happenings
Of course, Vegas being Vegas, there is still plenty happening.
Elad IDB Las Vegas LLC, headed by Israeli billionaire Yitzhak Tshuva, remains on track to build a hotel casino on the Las Vegas Strip site of the former New Frontier Hotel & Casino. The planned US$5 billion Plaza Las Vegas is slated to open sometime in 2012, but construction has not yet begun.
Israel-based AFI Group is seeking permits for what would be the largest hotel in the world, a 6,745-key casino resort on 60 acres (24 ha) east of the Strip. The project, known as Edge, was announced in January.
The same month, Cleveland-based Forest City Enterprises Inc. announced plans for a 47-story, 1,000-key hotel-casino in downtown Las Vegas. If built, it would be downtown’s first new casino since 1979, but significant permitting issues must be overcome before the project could move forward. And although it is already topped off, the opening of the 665-key Octavius Tower at Caesar’s Palace Las Vegas Hotel & Casino is being delayed by Harrah’s Entertainment Inc., Las Vegas, until room demand strengthens.
Boyd’s highly anticipated US$5 billion Echelon Hotel Casino development will continue to sit partially built into next year, and likely longer, though Boyd executives insist the project eventually will get done. Another high-profile Strip project, the proposed 1,064-ft. (323-m) Crown Las Vegas, a joint venture between MGM Mirage and Kerzner International Holdings Ltd., has been postponed indefinitely.
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Wynn Resorts’ 2,034-key Encore, which opened in January, is posting rack rates a fraction of what had been projected. |
Vegas famously went up-market in the last decade, announcing and opening a seemingly never-ending string of massive, luxurious resorts, and modernizing and upgrading many older properties. Although the newest stunning developments, like Palazzo and Las Vegas-based Wynn Resorts’ 2,034-key Encore, are posting rack rates a fraction of what was expected just two years ago, one would be hard-pressed to find any gaming executives regretting the collective decision to leave Sin City’s middle class roots in the past.
Alan Feldman, senior vice president of public affairs for Las Vegas-based MGM Mirage, says the up-market surge is a big reason why Vegas is still drawing occupancy rates around 90%, regardless of any forced rate-slashing. “The investments that we’ve made in Las Vegas to keep it fresh, exciting, new and updated are frankly what are helping to keep us where we are right now,” Feldman says. “I shudder to think what would have happened had we not made these investments.”
The news coming out of Vegas in the next year or so may be more transaction-oriented than in recent times, as debt-stricken operators unload properties for the sake of liquidity. Vegas veteran Phil Ruffin, who sold the New Frontier to Elad for US$1.2 billion in 2007, is returning to the Strip with the US$750 million purchase of Treasure Island Hotel and Casino from MGM Mirage, a deal expected to close in June.
Whether MGM Mirage sells additional assets remains to be seen—although Feldman says the company is “not shopping any property,” a primary corporate goal is increased liquidity. In January, Penn National Gaming, Pennsylvania, was widely rumored to be close to a bid for The Mirage, and while Penn dispelled that report, company executives are on record as wanting to enter the Vegas market. Published reports have also linked Penn with Rio Las Vegas All-Suite Hotel & Casino, a Harrah’s property.
MGM Mirage’s CityCenter, the center-Strip behemoth that has ballooned in price from an estimated US$4 billion to US$11 billion, will begin opening in phases in the third quarter. Rack rates at the various CityCenter properties will fall well short of the 2006 projections, but aside from scrapping all 200 condo units of the 400-guestroom Harmon Hotel & Spa—ostensibly due to construction flaws identified in January—no significant changes are being made to the project.
Little Green In A.C.
The state of gaming is just as bad, if not worse, in Atlantic City, New Jersey. The gaming resort town in December experienced its largest-ever monthly decline in gaming revenues—a discouraging end to a year that saw gaming revenues fall for the second straight year following 26 consecutive years of growth.
Each of Atlantic City’s four large casino resorts that had been under development have been delayed or postponed indefinitely. Atlantic City-based Revel Entertainment Group LLC’s US$2.5 billion project will remain an iron skeleton for at least another year, while developments by Las Vegas-based Pinnacle Entertainment Inc., MGM Mirage and a private investment group backed by Wallace Barr and Curtis Bashaw have all been shelved while still in the pre-construction phase.
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MGM Mirage sold Treasure Island Hotel and Casino to Phil Ruffin for US$750 million, a transaction expected to close in June. |
Six other Atlantic City casinos, including the three-property portfolio of Trump Entertainment Resorts Inc., Atlantic City, are dangling on the verge of bankruptcy. Trump owes about US$1.25 billion in debt, and analysts say the company—which already has declared bankruptcy three times since 1991—cannot cut expenses as rapidly as gaming revenues are dwindling. Similarly, Colony Capital LLC affiliate Resorts International Holdings LLC, Atlantic City, owner of five U.S. casinos including the Las Vegas Hilton and the Atlantic City Hilton, missed an interest payment in November and is working to restructure debt.
Less than a month after opening Encore, Wynn Resorts’ fiscal outlook took a turn for the worse. The company announced plans in February to cut the hours and salaries of its Vegas workforce while also eliminating staff bonuses and 401(k) matches. The moves, expected to save Wynn US$75 million to US$100 million a year, spurred Morgan Stanley to slash its first-quarter earnings estimate for Wynn by 77%, concluding that the pay cuts signal “extraordinary pressure” on Vegas gaming operators.
Gaming’s rebound is likely to lag a turnaround in the economy at large due to its reliance on discretionary income. IbisWorld Inc., a Los Angeles-based industry intelligence firm, projects that gaming growth will return in 2010, but not before a revenue contraction of 8.4% this year.
Gaming operators in drive-to markets in the United States, particularly those without major exposure in Atlantic City or Las Vegas, are better situated to weather the downturn, says Justin Sebastiano, gaming analyst for Morgan Joseph & Co. Inc., New York City. With gas half as expensive as a year ago, regional casinos are proving a popular alternative to the traditional gaming meccas. “They’re doing less badly,” Sebastiano says. “Relative to Vegas, they should do better. But it’s still not a pretty sight.”
Several of the regional-focused gaming operators likely will need to apply for credit facility amendments later this year, which will further hit dwindling earnings. But none of them—most prominently Las Vegas-based Ameristar Casinos Inc., St. Louis-based Isle of Capri Casinos Inc. and Pinnacle, as well as Boyd—are at immediate risk of defaulting, Sebastiano says.
So where should smart-money gaming investors push in their chips in the near term? Sebastiano suggests an under-the-radar company, Delaware-based Full House Resorts Inc., which operates a Delaware casino and owns a small rural Nevada casino. Full House is adding two tribal casino management contracts to its operational portfolio this year.
Gaming analyst David Katz of Oppenheimer & Co. Inc., New York City, believes a larger regional player, Penn, holds potential for investors in 2009 because it has wrapped up significant lobbying expenses while also surpassing revenue projections in the fourth quarter of 2008. Penn ended the year with about US$746 million in cash on hand.
Asia Pacific Increasingly A Gamble
Gaming is not doing much better on the other side of the world. In Macau, three of the region’s six licensed gaming operators have announced layoffs or mass pay cuts resulting from diminished revenues. Las Vegas Sands let go some 11,000 construction workers when it suspended work in November on a 6,400-key casino, followed by 13% pay cuts to its gaming workers. Melco Crown Entertainment and Galaxy Entertainment, both based in Hong Kong, instituted salary reductions of 8% and 13%, respectively.
The slowdown in Macau continues to worsen; casino revenues plunged 30% in January year-over-year, following a 7% drop between the third and fourth quarters of 2008. The gaming spend from high-rollers in VIP junkets from mainland China has fallen off even more dramatically, with analysts projecting year-over-year VIP revenue decline of 15% to 25%.
In Singapore, Las Vegas Sands has pushed back the opening of the US$5 billion Marina Bay Sands to November, blaming construction problems. Sands reportedly was nearing default late last year, but the company proceeded to raise US$2.1 billion in a bond sale, and company officials insist enough capital exists to complete the project. Singapore’s other big gaming development, Kuala Lumpur-based Genting International’s US$4 billion Resorts World at Sentosa, remains on schedule for a 2010 opening.
Macau and Singapore may soon have another destination competing for Asia Pacific gaming revenues. Taiwan’s parliament has voted to legalize gambling on the offshore islands of Kinmen, Matsu and Penghu, paving the way for local governments to hold casino referenda. Isle of Man-based AMZ Holdings Plc owns a substantial beachfront site in Penghu and could move quickly to set up a casino resort there. Melco also has expressed interest in developing in Taiwan, but only if the China government does not object.
In the UK, past talk of permitting expansive Vegas-style “supercasinos” is dead, mainly a result of Prime Minister Gordon Brown’s disdain for gambling. However, the government will allow 16 regional casinos to be built across Britain, with exact locations to be determined. Genting and Harrah’s are among the companies expected to bid for UK gaming permits.
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