As Las Vegas gaming companies see gains, stock market brings uncertainty
16 August 2011
What do you think?
Upswings in earnings among some Las Vegas casinos have many locals cheering a business recovery that’s reflected in actual spending data rather than ephemeral indicators such as consumer sentiment.
May and June gambling revenue reported by the state reflected such improvements, offering a glimmer of hope to a hard-hit economy plagued by bad economic news. Other segments such as hotel rooms improved for many of the big local casino operators.
Some experts attribute much of these gains to the stock market recovery that began in 2010 — a trend that first benefited luxury properties but eventually trickled down to lower-rent competitors.
Although stocks rose on the strength of corporate profits, other national indicators such as the weak job market, flat wages and high levels of consumer and corporate debt are dragging down the U.S. economy.
That’s why there is so much concern about the latest stock market chaos.
Stock market performance has proved an effective harbinger of the kind of discretionary income people have to spend in Las Vegas months later.
Paper profits in the stock market helped fuel trips to Las Vegas through the boom years, even as the housing market — an indicator that’s less visible for consumers — fell in 2007. Jacob Oberman, director of gaming research and analysis at CB Richard Ellis, suspects the rising stock market helped mask underlying economic problems such as the crumbling real estate market. Strip revenue didn’t decline until early 2008, a few months after the stock market began to slip from its record highs.
Similarly, the spending power and confidence of corporations and affluent consumers — two groups that have buoyed the Las Vegas market in recent months — “could be quickly stripped away” in a volatile stock market, Oberman said.
In the months leading up to the debt-ceiling debate in Washington, the stock market appeared to be roaring back from the postrecession dumps — a hot streak that turned out well for Las Vegas.
The recent downgrade of U.S. debt rating sent stocks tumbling this month as investors pulled billions from stocks, stashing money in cash and commodities such as gold.
Some casino executives say they haven’t seen any immediate effect on business or future bookings.
Still, the market turmoil has experts wondering just how sustainable recent earnings gains will be given the poor state of the broader economy.
Stock market gains are largely responsible for this year’s brightening casino earnings, Oberman said.
Analysts, casino executives and other insiders had a simple explanation for the latest tail wind: Affluent customers — people who had benefited most from the rising stock market and weren’t as hurt by sagging home values — sought out higher-end hotels in Las Vegas that were still reasonably priced.
A broader segment of Las Vegas properties appeared to benefit in the second quarter. Caesars Entertainment and MGM Resorts International, which together own most Strip resorts, each reported revenue increases this month as visitors spent more money on hotel rooms and other amenities.
Luxury hotels are attracting high rolling baccarat players from China — a growing economy that is boosting the fortunes of three Las Vegas casino giants in the downturn.
Soaring earnings in Asia, where Wynn Resorts and Las Vegas Sands generate more than 70 percent of their money, are boosting both amid the faltering U.S. economy. Both companies are building resorts and focusing long-term corporate investment in Macau, the world’s largest gambling market and the only region in China where casino gambling is legal. Analysts expect gambling revenue in Macau to grow in the double digits this year and next.
Second-quarter earnings nearly tripled at MGM Resorts’ joint venture resort in Macau, where the company plans a second property.
Another trend is also benefiting upscale resorts: Corporations with improving earnings are spending more on conventions and other business gatherings — a trend that helps upper-tier resorts that have extensive or well-appointed convention facilities such as Mandalay Bay, Aria, Venetian and Wynn Las Vegas.
Some of those benefits have trickled down to lower-end properties, as increasing room rates at higher-end hotels force some customers to seek cheaper alternatives, Oberman said.
“With the luxury properties really pushing their rates, there’s a gap forming again” between the high end and everyone else, he said. “It’s still more challenging for the lower-end guys.”
There’s some evidence the Strip’s improving fortunes may have trickled down into the local economy. Combined gambling revenue across North Las Vegas, the Boulder strip and suburban Clark County is up 2 percent so far this year. Last month, Boyd Gaming reported a slight decline in local casino revenue but said profits rose as the company kept costs under control. Revenue and earnings rose at Boyd’s downtown casinos.
On Monday, the Deutsche Bank-owned Cosmopolitan said it lost $54.3 million on net revenue of $126.1 million for the second quarter ended June 30 — but noted that casino volumes improved in the quarter. The problem was that the house wasn’t as lucky, with its table games hold percentage less than expected.
Station Casinos has yet to report second-quarter earnings. Las Vegas’ biggest operator of suburban casinos emerged from Chapter 11 bankruptcy in June after reducing debt by more than $4 billion.
Not even soaring stocks or rising room rates are enough to help some resorts weather big debts accumulated during the boom years.
Those include Hooters hotel, which filed for Chapter 11 bankruptcy protection this month, an anticipated result that’s expected to reduce debts of more than $160 million on a property that defaulted on debt payments in 2009 as the economy worsened.
Also this month, the Las Vegas Hilton said it missed another interest payment on a loan that’s part of more than $290 million in total debt. The Hilton is negotiating with lenders to restructure debt.
Individual properties don’t have the same resources or leverage as giant chains such as MGM Resorts and Caesars, which are in the process of paying down tens of billions of dollars to avoid a similar fate. Both companies, which have become more efficient profit generators after trimming costs, have negotiated better terms with lenders that give them more time to weather the downturn and more cash to invest in existing amenities or — in the case of Caesars — new attractions like its acquisition of the Planet Hollywood hotel and Project Linq, a $500 million retail, dining and entertainment district planned for the Strip.
Recent market volatility may have removed one of the few positive economic indicators for Las Vegas.
Locally and nationally, the economy is under pressure because of crippling consumer and corporate debt accumulated during the boom years, economist John Restrepo said. At many companies, the bulk of profits are going to pay down these debts rather than investing in new employees or storefronts.
Although investments have boosted the fortunes of the well-to-do, most Americans’ wealth is tied up in their homes, he said. Home prices across the country have declined this year, hitting postrecession lows.
The employment picture is also weak, with a relatively high national unemployment rate and local unemployment that’s more than doubled since the boom. Inflation-adjusted wages have settled at levels not seen since the 1990s, Restrepo said.
The Las Vegas Valley is losing more jobs, although the rate of decline has lessened. Since the recession hit in December 2007, the Las Vegas metro area is down about 134,000 jobs — losses that may not be recouped for many years.
“That’s not exactly a formula for a robust recovery,” he said.
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