In the first six months of 2009 Nevada’s gaming revenues were down 13.5%, and 14.7% on the strip. In June the state’s gaming revenue sunk to 2004 levels: casinos collected $818.2 million from customers in June, which is a 13.8% decline from June 2008, and is the 18th straight monthly decline. On the Strip gaming revenue fell 14.8% in June to $414.5m. (Ref: Las Vegas Review Journal, 14 August 2009.)

A lot of Las Vegas’s appeal is based on the discretionary income that had increased through stock heavy 401Ks, home value increases, and easy lending practices. This lead to a building boom and focus on higher end casinos.

Las Vegas is more highly correlated with the national economy than it was previously because of its reliance on this discretionary income which has been eroded by the current recession. The wealth effect that drove Vegas’s boom is unlikely to come back quickly, particularly in the middle-market segment of customer.

The way that Las Vegas has traditionally worked is to have each building cycle create it in demand. But this build it and they will come is clearly not something that will work in the current environment, and there is a significant supply of housing coming online.

Basically the industry built some very grand casinos based on average room rates in excess of $250 per night and with easy access to financing. With room rates below half that target the debt is becoming harder to service, and it may be the case that the cost structures are unsustainable, and that the next few years will witness collapses and changes of ownership. It may the case that the bull cycle owners go bust and it is the next owners that make the money.

Existing casinos are under pressure. Riviera Holdings Corp. owns the Riviera on the strip and a casino in Colorado. For the quarter ending June 30 it posted a net loss of $13.5m versus a profit of $10m for the same period last year. (Ref: SEC Filing.) The Strip’s Riviera Hotel saw its revenues fall 27.8% to $24.9m.

As a result of revenue losses Riviera defaulted on a $6m interest payment due in the second quarter, which follows a $4m default in March. With $276.1m of long-term debt Riviera could well be moving into Chapter 11.

A further pressure on casinos is falling visitor satisfaction. The Vega$AT Index Survey conducted by Clear Seas Research showed that most visitors rated their stay as mediocre at best. (Ref: Gaming Today, 4 August 2009.) This is compounded by the fact that locals also seem to be loosing interest in their neighborhood casinos. The average number of trips by locals to casinos has halved in the last 18 months. (Ref: Glenn Goulet, Gaming Strategies.)  In a Gaming Strategies survey only 69% of customers felt that they were treated fairly versus 88% a year ago. It seems that a number of casino initiatives to meet Wall Street’s demands are negatively impacting the customer experience:

• Electronic and table games have been speeded up to reduce playing time. On slots the hold percentage has been decreased by 1% to decrease playing time by 17.5%
• The number of coins to play has been increased
• Replacement of slot machine arms with buttons
• High holds and multiple side bets at table games to promote quicker and more frequent losses (Ref: Gaming Today, 4 August 2009.)

It seems that casinos need to not only restructure their debt and operating costs, but also get back to the basics of customer experience, or they could end up being the losers in Vegas.

MGM Mirage
The fate of MGM Mirage rests on its $8.5bn CityCenter development. The hotel portion of the development will create 10,000-12,000 jobs upon completion.

Las Vegas Sands
Las Vegas Sands has restructured a $3.3bn credit facility to allow it to spin off its Macau operations, which it intends to IPO to raise funds. It has been agreed that $500m of the proceeds will be used to pay down debt. The company has also been given six quarters of relief from its debt covenants. Sands has felt the pressure of downturn in Macau as a result of Beijing tightening visa policies and the economic downturn: casino revenues in Macau are down 12.4% year-on-year to $6.4bn. (Ref: Financial Times, 16 August 2009.)

Planet Hollywood Resort
Planet Hollywood Resort announced on 14 August that it may not be able to generate enough cash flow to fund financial commitments which include monthly payments on a $860m loan. An SEC filing warned that without a loan modification or additional capital the property could default. The company made a net loss of $13.6m in the second quarter, which results from casino revenues falling 8.5% in the quarter, and hotel revenues falling 14.8%. Compared to the same month last year the average daily room rate has dropped from $136 to $96m and occupancy from 97% to 91.6%. (Ref: SEC Filing.)

Hooters Hotel
Hooters Hotel posted a net loss of $5m in the second quarter compared to a $2.3m profit in the same period last year. Hooters is in discussions with Wells Fargo Foothill after announcing 31 March that it was unable to service its debt. Casino revenues fell 37% and hotel revenues 32.8%. Occupancy dropped from 97.6% in the same period last year to 84.6% in the quarter. (Ref: Las Vegas Review Journal, 15 August 2009.)

Station Casinos
Station Casinos filed for Chapter 11 bankruptcy protection in July with $5.7bn in debt. Most of Station’s 18 casinos and resorts are held in subsidiaries and were not part of the filing. Station got into trouble after taking on excessive debt obligations as part of the deal that took it private in 2007: the company was sold to the founding Fertitta family and Colony Capital for $90 a share. 

Black Gaming
Black Gaming, a Mesquite-based company that operates casinos including one 80 miles north-east of Las Vegas on the Interstate 15, is on default on its debt of $205.8m and in discussions on restructuring. In the second quarter it posted a $4.8m loss, which is actually an improvement on the $20.3 million loss in the same quarter last year. (Ref: Las Vegas Review Journal, 15 August 2009.)

Herbst Gaming
Herbst Gaming is set to emerge from Chapter 11 bankruptcy following a ballot of creditors on 15 September. The company posted second quarter net income of $4.5m, but has made a loss of $28.4m in the first six months of the year. (Ref: Las Vegas Review Journal, 15 August 2009.)

The few operating cranes in town are scattered among the 9,500 construction workers still crawling over CityCenter, an $8.4 billion, five-skyscraper, ultra-luxury project that is the largest privately financed development ever in the U.S. Although the company has managed to keep the project going through a desperate battle for financing deals with Dubai World, a number of people who signed up for condominiums are looking to bail. So MGM Mirage, which owns the most properties on Las Vegas Boulevard — the Strip — ducked and weaved around bankruptcy for six months earlier this year by pumping $140 million, almost a quarter of its monthly revenues, into the project. MGM sold off Treasure Island at a bargain price: Phil Ruffin, the buyer, paid the equivalent of $225,000 for each room on the property; CityCenter's rooms cost about $1.5 million each to build. Even if CityCenter is a big success and people want urban density as a part of their Vegas experience, experts like Bill Lerner, a gaming analyst at Union Gaming Group, figure it will be five to 10 years before Vegas needs more than the 150,000 or so hotel rooms it will have when CityCenter's 6,000 and the Cosmopolitan's 800 are completed. And if CityCenter tanks, Vegas will be holding some very bad cards.