Las Vegas Downturn Gathering Momentum
I've been warning folks about the looming Las Vegas downturn since the height of our economic boom back in early 2006 and since that time I've provided readers with periodic Las Vegas economic updates (a couple of my posts below:
Today's update will highlight some of the more recent LV economic woes, illustrating that the issues are gathering momentum and won't end anytime soon.
On the surface, the Las Vegas economy looks dangerously like a busted flush.
As if the housing crisis wasn't bad enough, hotel occupancy is down, visitors are spending less, commercial projects are running into trouble and convention revenues are dwindling.
Even the city's casino operators, traditionally seen as relatively recession-proof, reported a sharp downturn in their fortunes in the first quarter, in part because they have expanded their leisure and retail offerings, which are more sensitive to the fortunes of the broader economy.
Harrah's, the world's largest gaming group, with eight casinos on The Strip, including Caesars Palace, reported a first-quarter loss of $187.8 million after what Gary Loveman, its chief executive, described as a "lousy" March. The Tropicana resort filed for bankruptcy protection this month because it could not sustain its debt payments. Since November, shares in Las Vegas Sands, the owner of the Venetian and Palazzo resorts, have fallen by 38 per cent, while MGM Mirage, which controls Bellagio, Mirage and eight other Strip casinos, has dropped by 42 per cent.
But there are still $36 billion of new hotel, gambling and housing resorts being built, including an entire quarter-mile stretch at the centre of The Strip.
If recent developments are anything to go by, the chances are that a good portion of the new corporate construction will run into difficulties and some will be scrapped.
The slumping national economy has affected the bottom line of Nevada casinos much like what happened in the wake of the terrorist attacks of Sept. 11, 2001.
For the fourth straight month and the fifth month out of the last six, gaming revenues decreased as gamblers cut their discretionary spending.
The gaming win in April was just above $1 billion statewide, a 5.05 percent decrease compared with $1.053 billion won from gamblers in April 2007.
Frank Streshley, the control board's senior research analyst, said the amount casino customers wagered on slot machines declined for the sixth straight month, an economic indicator that shows casino customers are spending fewer dollars.
"You have to assume high gasoline prices have cut into people's budgets," Streshley said. "You can go through every reporting market, and there are declines with what people are spending on slot machines. It falls in line as to how people are spending less in other areas as well."
Airline capacity cutbacks combined with U.S. economic softness look set to take more money off the tables at Las Vegas Strip resorts after the summer, likely forcing room rate discounts on top of already declining visitor rates.
Work is under way to add more than 40,000 luxury hotel rooms to the gambling corridor -- about one-third more than today -- but it looks as though operators will have trouble filling them up.
The Airline cutbacks will likely mean higher fares for remaining seats as well as more time-consuming travel routes, Jacob said, which could deter potential Las Vegas visitors.
The ownership of the Hooters Casino Hotel in Las Vegas has found itself in deep financial trouble as a plan to sell the resort has fallen through. 155 East Tropicana, an investment and holding company, was forced to terminate the potential sale of the casino to Hedwigs Las Vegas Top Tier after the purchaser failed to make a $500,000 payment due by a June 6th deadline.
Although Hedwigs' offer was unsolicited, and despite Hedwigs forfeiting a non-refundable $5.5 million in deposits and payments for extensions, East Tropicana still finds itself in an untenable position regarding its debt.
Moody's Investment Service has downgraded Tropicana's corporate rating and the rating on its secured notes, as well as its default probability.
Herbst's reliance on budget-conscious customers drives down profits
Herbst Gaming reached an agreement with lenders this month that buys the company more time to work out a deal with them and potentially avoid bankruptcy court despite the company's worsening finances.
The agreement includes suspending payments on bond debt until Sept. 30. Most of the company's $1.1 billion in debt is in bank loans, which carry less risk than corporate bonds.
The company's slot route and small casino business benefited for many years from Las Vegas' population growth but is now feeling the brunt of the slowdown, as Herbst caters to budget-conscious customers who are more affected by a downturn, Farrell said.
Herbst had $16.5 million in losses in the first quarter due to higher gas costs and the economic slowdown, with slot route operating profit down 6 percent in the first quarter compared with a year ago and the company's casino business down 5 percent over the same period.
Casino bonds are generating the worst returns for investors as companies from Apollo Management LP's Harrah's Entertainment Inc. to Herbst Gaming Inc. risk bankruptcy under the weight of their debt.
High-yield, high-risk casino bonds, which returned 10 percent during the last recession in 2001, are the biggest losers this year, according to Bank of America Corp., as consumers get slammed by record gasoline prices and the worst housing-market slump since the Great Depression. The debt has lost 4.4 percent, compared with junk bonds' average return of 1.4 percent.
Until the latest economic slowdown, casino bonds had gained a reputation for being recession-resistant, said Bruce Monrad, who manages $1.2 billion of below investment-grade debt at Northeast Investment Management Inc. in Boston.
Herbst Gaming, operator of 8,400 slot machines in Nevada, stopped paying interest last month, Tropicana Entertainment LLC and Greektown Casino LLC filed for bankruptcy in May and bond prices show Harrah's and Station Casinos, which piled on more than $25 billion of combined debt in the past year to go private, are also at risk of default.
High oil prices and falling property values are curbing spending on gambling at a time when casino operators have committed to spend more than $10 billion through 2009, according to Deutsche Bank AG. They invested $7.8 billion last year.
Casinos took on a record debt load before the economy's latest slowdown.
"This would probably be the most leveraged" the gaming industry has ever been, said Michael Paladino, an analyst at Fitch Ratings in New York. "There's going to be an increase in defaults."
Bond rating agency Moody's Investors Service released its most negative report yet on the Las Vegas Strip Wednesday.
Moody's analysts say this downturn will have a more negative effect on earnings than the period following the Sept. 11 terrorist attacks and will dampen earnings for the next 12 to 18 months.
While that seems hard for many to believe (witness many fewer layoffs and the simple fact that travelers are still free to travel) Moody's offers an able argument, already hinted at by analysts and economists.
"Las Vegas largely sidestepped trouble by using price discounts to lure skittish travelers," the report said. "Now, with consumers' anxieties centered on their economic well-being, that strategy is unlikely to be as effective. Las Vegas operators are preparing for an extended period of weak demand will have to turn to other levers, such as reduced capital spending or less aggressive financial policies, to hold up through the next year or more."
Southern Nevada's office market further softened during the first quarter as a cooling economy ratcheted up unemployment resulting in a glut of available inventory. The valley had a 13.4 percent, first-quarter vacancy rate, 2.5 percent more than a year ago, and higher than the 2001 recession peak vacancies, Colliers International Las Vegas reports.
"There is no doubt that the Las Vegas office market is struggling through the current sluggish economy," Colliers' managing partner Michael Mixer said. "In 2007, office employment in the Las Vegas area decreased by 4,000 jobs."
Vacancy rates could creep higher in the future with 1.4 million square feet of new projects under construction in the first quarter, such as Centra Realty's $20 million, 100,000-square-foot Seven Series at Hughes Airport Center at 740 Pilot Road. There is also another 3.5 million square feet planned for future development, including an eight-story, 173,210-square-foot Class A office tower addition inside Hughes Center at 3893 Howard Hughes Parkway.
While demand for office space over the past two years was strong, it simply couldn't keep pace with new supply.
Stumbling home sales and slipping resort earnings grab all the headlines these days, but the housing and hotel sectors aren't the only industries suffering from faltering consumer spending.
Restaurants are enticing fewer customers as well.
Industry members credit the restaurant slump to slower spending among three segments: Local consumers struggling with falling home equity and higher fuel prices; executives reining in corporate expense accounts for hurting businesses; and a 6.6 percent decline year over year in March in the number of local visits from conventioneers, who typically spend lavishly on meals out while in town.
State numbers on taxable sales reveal the dip in food-and-beverage spending.Taxable sales among restaurants in Clark County have fallen three of the past 12 months, including a 10.3 percent drop in February year over year.
As I've pointed out before, this downturn will be much larger than any that have come before it. Gaming revenues have fallen ONLY ONCE since 1970 -- in the aftermath of the Sept. 11 terror attacks (they dropped a mere 1 percent from 2001 to 2002).
Thus far, compounded by the housing crisis, higher debt loads, higher gas prices, higher airfare/reduced flights, increasing layoffs, reduced credit availability, etc, the gaming losses have been far worse than that experienced in 01/02.
As stated in a previous post of mine: Las Vegas Preforeclosures Hit Record:
"Las Vegas lives off the margin. Good times, fat margins; lean times, no margin. LV has no plan B, there's nothing to take up the slack from a decrease in visitor volume. Even dollar rich foreigners aren't going to hold up employment that is based on a volume service industry and housing construction."