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From: "Bill Lerner"
Date: Thu, 23 Jul 2009 18:18:34 -0700
To: <bill.lerner@uniongaminggroup.com>
Subject: Maximizing the Eventual Recovery in Las Vegas
Maximizing the Eventual Recovery in Las Vegas
Gaming companies have been doing their part to resolve balance sheet issues and these have been difficult but necessary decisions, such as dilutive or expensive capital raises and the wayward asset sale. As a result Las Vegas has a chance to be an early cycle collective asset class when the macro environment turns (incredibly short booking windows; limited legacy discounted corporate rates; favorable room pricing in conjunction with room glut in pipeline). At the time, Las Vegas could once again be characterized by new investment, job creation, lower unemployment and renewed wealth creation – a path we were firmly on through most of 2007.
To accelerate the process and make the recovery more efficient and prolific, there are a handful of issues that need proactive attention. Categorically we see these as: messaging/visitation, transport (inbound/in-market), room supply, employment and budget.
This piece discusses these five issues in greater detail, suggesting solutions in each case. The overarching point is to raise awareness and work towards a solution.
Messaging/Visitation
Visitation to Las Vegas is down 6.9% year-to-date on the back of a 4% decline in 2008. While that has much to do with the national economy and cost of transport, we think Las Vegas has exacerbated the trend by pricing core customers out of the market over time. Over the last twenty-years, we estimate that spend-per- visit has grown approximately 5%/year comparing unfavorably to inflation averaging 3% over the same period. This dynamic has been even more unfavorable over the last five-years as the cost per room has increased 18% for free-independent-travelers (FIT), package tours +33%, food and beverage (F&B) +15% and shows +9%, all based on Las Vegas Convention and Visitors Authority data (LVCVA). Gaming in Las Vegas is even more ‘expensive’ these days with a greater mix of higher holding progressive slots and specialty table games. Collectively spend-per-visit has outpaced inflation growth of 14% over the last five-years. Furthermore the cost of transport is also up notably whether it’s air or auto. Ultimately Las Vegas has migrated towards the higher-end of the demographic scale at the expense of the value customer.
The industry is under the impression that Las Vegas offers a great value proposition relative to other destinations, but that appears to be less the case today. However, with 7% more room supply in the pipeline through mid-2010 and the likely simultaneous downward pressure on room pricing, Las Vegas has a chance to recapture this fading dynamic. Concurrently, the core communication from Las Vegas to consumers and businesses should reflect a renewed value proposition. Las Vegas also needs to re-focus on the fading value customer as a tool to address visitation trends. For future development or property repositionings we’d advocate targeting this group. It’s ‘finally’ structurally feasible to do so these days as the cost of land, labor and commodities have contracted materially from the peak.
Transport
When visitation recovers, airport and road capacity will likely be an issue. Contemplating peak levels in 2007, even after D gate expansion and Terminal 3 at McCarran, Las Vegas only had capacity for approximately 3 million more arrivals annually. Despite declines in resort corridor development that’s not enough to handle the demand needed to justify today’s resort pipeline without a great deal of cannibalization. A rail line from California and the longer-term Ivanpah airport prospect are solutions worth pursuing now so we can capture the inflection in visitation instead of reacting later with long delay.
We see a similar story for local transport. We estimate that the completion of the Las Vegas development pipeline will result in 7.2 million additional cars on the road in the Strip corridor in 2012, or 19,600 more vehicles per day. This also takes into account vehicles related to resort employees, vendors and locals due to a resumption of population growth. Light rail is a solution, particularly monorail extension to the airport and up the west side of the Las Vegas Strip. Altering traffic flow to optimize roads like Las Vegas Blvd., Paradise and Frank Sinatra all make sense, however the work has to start now.
Room Supply
Regardless of 48,469 Strip resort room cancellations or delays there is still 7% more room supply coming to the Strip corridor over the next couple of years (CityCenter, Cosmopolitan, Hard Rock expansion), that’s 9,343 more rooms on a base of 141,395. This is happening at a time when room pricing is already down 33% from the peak. The result may be destructive to Strip earnings despite a prospective economic recovery and perhaps offset the benefit of related job creation to Las Vegas. The question to be addressed is: How do Strip corridor operators maintain price integrity with the City in mind while trying to maximize returns on invested capital (ROIC)? Perhaps a partial solution may be the removal of legacy/neglected room supply. This may work to insulate well-maintained value oriented properties. A consortium of gaming operators with a collective interest in this room supply issue could acquire and retire a meaningful amount of this supply. Regardless, Las Vegas needs a proactive solution.
Employment
Unemployment is at a twenty-five year high in Las Vegas at 12.3% and it’s 29% worse than the U.S. average. In Las Vegas there are 124,900 eligible people unemployed and that’s doubled in the last year. Las Vegas’ unusual population growth over the years is now rearing its negative side. A partial solution is in the pipeline given the jobs created by the $13.4 billion in resort development coming online. We estimate this will result in approximately 24,000 new direct and indirect jobs and has the potential to take unemployment back below 10%. Filling these jobs predominantly with Nevadans would add to the solution. Essentially a proactive approach to responsible employment practice is needed.
Budget
Nevada’s budget deficit was $1.5 billion at the recent peak. Las Vegas needs a secular solution to prevent such magnitude in the future. Band-aiding it with pay cuts, layoffs, sales tax hikes and motor vehicle tax increases work to impact the consumer further, while a payroll tax increase concentrates the tax base. Consumer spending and the whole tax cycle are impacted in this scenario. Raising gaming taxes, which are a tax on revenue (not profit), isn’t a viable solution now or in the long-run. Had the teachers’ 2008 proposal succeeded to raise the gaming tax rate by 40%, the combination with current financial duress amongst the casino operators and the forthcoming room supply glut, would likely have resulted in more bankruptcies locally. However, a broad based corporate income tax might be the long term solution. The requires education and outreach to the business community along with a proactive legislative effort.
Bill Lerner
Union Gaming Group
702-866-0747
bill.lerner@uniongaminggroup.com
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