Analysts hopeful 2012 can be bridge year for casino industry

LAS VEGAS, Nevada -- Let's dispense with the preliminaries.

Macau, the world's largest gaming market, shows no signs of slowing in 2012.

Through November, Macau casinos have collected $30.5 billion in gaming revenues, up 44 percent compared with the first 11 months of 2010.

In fact, most prognosticators suspect that a year from now the gaming revenues produced by Macau's 34 casinos will increase anywhere from 15 percent to 25 percent and will eclipse the gaming revenues collected by the entire 21-state U.S. commercial casino market.

"(Macau) has performed exceptionally well and Moody's anticipates that this trend will continue," Moody's Investors Service gaming analyst Keith Foley wrote in a research report on Las Vegas Sands Corp. in November.

As for Singapore, gaming revenues produced by the island-nation's nearly 2-year-old, two-casino market are expected to blow past the Strip's 2010 revenue figure of $5.8 billion by the time this year is in the books.

"That market will maintain a double-digit year-over-year growth in gaming revenues," Foley said.

Analysts looking toward 2012 don't expect Las Vegas or other U.S.-based gaming markets to experience the growth projected for Macau or Singapore.

Still, with the economy recovering and discretionary spending slowly rising, the American casino industry is cautiously optimistic that 2012 could be a bridge to stronger results in 2013.

"I think the Strip is going to be an interesting story in 2012," Union Gaming Group principal Bill Lerner said of the roughly four-mile stretch of Las Vegas Boulevard that is considered the heart of the gambling industry's universe.

Lerner said that if the U.S. economy continues on its current course, big casino operators such as MGM Resorts International and Las Vegas Sands will be able to pay down some debt obligations while freeing cash flow for other uses. Lerner doesn't expect Las Vegas to add any room capacity over the next 12 months, other than the announced 660 rooms at Caesars Palace's Octavius Tower, which opens Jan. 2.

There is even the possibility a hotel closure could take some rooms off the market.

"Continued visitation growth and a lack of new room supply is a good formula for some of these companies going into 2013, when I believe we'll start seeing a new peak in room occupancy and hotel room rates," Lerner said.

Credit Suisse gaming analyst Joel Simkins said 2012 could mirror results from 2011. A gradual spike in convention business throughout the year helped the Strip's recovery from down times in 2008 and 2009.

"We generally expect more of the same," Simkins said. "Corporate America doesn't seem to be retrenching next year, which is good for the Las Vegas convention market. Businesses are still not sending as many people to Las Vegas as they have in previous years for conventions, so that means hotels have to do something with the remaining room inventory."

Through September, gaming revenues on the Strip were up 3.9 percent over the same nine months of 2009, according to the Gaming Control Board. October's statewide gaming revenues numbers were expected to be released Dec. 9.

In a report released last month, CB Richard Ellis gaming analyst Jacob Oberman predicted the Strip would see an overall gaming revenue increase of 1.9 percent to 5.7 percent in 2012. The figure was positive as opposed to two years of declines experienced in 2008 and 2009, followed by the 4.1 percent increase last year.

"Although there are some troubling signs that can be seen on the horizon, the positive momentum that has built up in the areas of convention demand and leisure spending since 2010 will not be completely undone in 2012," Oberman wrote in the report's executive summary.

EYE ON THE AIRPORT

Analysts said they will be watching the figures coming out of McCarran International Airport more closely in 2012 than ever before.

Through October, passenger traffic is up 4.4 percent and the airport is on pace to break the 40 million-passenger barrier. In 2010, McCarran passenger totals dipped below 40 million for the first time since 2004.

McCarran's passenger volume has risen in 11 of the past 13 months, helped by continued strong numbers in international airline arrivals. In a report, Lerner's firm is projecting increased room occupancy and higher average daily room rates, based on the overall favorable trend in McCarran traffic.

"We're feeling pretty good about 2012," Lerner said. "It's not going to be a banner year, but it's also not going to be a nonevent. If airport arrivals continue to increase, that should boost occupancy rates because we're not going to see much hotel expansion."

Simkins said airport capacity will be a key figure to watch. McCarran is expected to open its $2.4 billion Terminal 3 project in the middle of next year. He worries, however, that any upward spike in oil prices could slow the comeback.

LOOKING OFF THE STRIP

While the Strip appears headed toward its second straight gaming revenue recovery in 2011, other reporting markets are either up slightly or flat when comparing the year's first nine months with 2010.

Downtown gaming revenues are up 1 percent through September, North Las Vegas is up 0.4 percent, the Boulder Strip is up 1.7 percent and the balance of Clark County is up 0.5 percent.

Gaming Control Board senior research analyst Michael Lawton said the locals market as a whole is up 0.94 percent for the first nine months of the year.

Analysts are mixed over how the locals market will fare in 2012.

Simkins said he's "more positive about the locals business" than he is about the Strip, where results from volatile high-end baccarat play continue to be the deciding factor whether Strip casinos have a positive month.

"There is not a sensitivity to baccarat play and the locals market isn't reliant on traffic coming in from the airport," Simkins said. "There isn't much in the way of new development in the pipeline and you have two major players (Station Casinos and Boyd Gaming Corp.) dominating the market."

Lerner said the locals market is still affected by two areas: high unemployment figures and the sour housing market.

However, he said locals operators are working to keep customers and attract new business.

"The locals market should be fairly stable," Lerner said. "The question will be if a Strip operator more aggressively goes after that business. It's happened before."

NEW DEVELOPMENT SLOWS

Before the economy tanked, it seemed as if Las Vegas was opening one or two new resorts every year. The last major hotel-casino opening was The Cosmopolitan of Las Vegas in December 2010.

Stalled projects such as Echelon, Fontainebleau Las Vegas and other smaller developments will continue to sit idle in 2012.

Most analysts believe a new hotel-casino won't be built in Las Vegas the rest of this decade.

"In our opinion, it will be many years before any new megaresorts are developed on the Strip," Oberman and co-author Brent Pirosch wrote in the CB Richard Ellis report, saying the figures don't add up to quantify the construction of a 3,000-room hotel-casino that would generate $300 million in cash flow.

"Megaresorts in their current configuration require significant gaming revenues to support the fixed costs associated with their size," the authors wrote. "As gaming revenue, as a mix of total revenue, trends downward, a new development scheme will be required to bring new resorts into a profitable balance."

Lerner said a redevelopment of the closed Sahara by owners SBE Entertainment and Stockbridge Real Estate might be the only new project on the horizon. The ownership may have the wherewithal to fund the project.

"If I were to bet on one, the Sahara has a good shot at moving forward," Lerner said. "They are looking for a way to move forward and it could be timed right with the capital markets."

In a recent interview with Bloomberg Businessweek, SBE owner Sam Nazarian said he wants to convert the Sahara into a luxury hotel brand, SLS Las Vegas, which is owned by his company. The property would also be filled with SBE's restaurant and nightclub brands.