Posted: 2007/09/07 by: Glenn Haussman.
Though the US economy is beginning to slow down – analysts believe it will be a soft landing—the research firm Fitch is still bullish on gaming assets for 2007.
While the average gaming company’s pipeline is chock full of new projects, these companies could have a harder time buying money however.
That being said, don’t feel so bad for these companies. Gaming operator demand trends are likely to remain modestly positive in 2007 with continued strength on the Las Vegas Strip offset by weakness in the Las Vegas locals market. The regional markets are likely to be mixed as new markets ramp up in Florida and Pennsylvania, the latter of which is likely to impact Atlantic City results. New supply will need to be absorbed in St. Louis, Southern Indiana, and Michigan. The robust Gulf Coast recovery will likely slow but casinos should continue to benefit from rebuilding in the region. Macau will continue to be the fastest growing established market as substantial new capacity opens.
The next wave of casino development in Las Vegas that began with Wynn Las Vegas' opening in April 2005 will continue with Las Vegas Sands' Palazzo opening nest fall. Fueled by the Wynn LV opening, gaming revenue (for Clark County) grew by 11% in 2005 and is up 9% through September 2006. In recent months, Las Vegas has seen strong trends in convention demand as well as international and high-end play, which appears to be continuing in Q4 and into next year.
Historically, new mega-resorts in Las Vegas have driven demand and revenue growth, but a significant increase in room supply over the next few years could cause investors some concern. However, Fitch believes there are some mitigating factors:
--There has been very little room supply growth so far this decade, as Wynn Las Vegas was the first major new Strip resort to open since 2000.
--Due to the sheer size of the MGM CityCenter and Boyd’s Echelon Place projects, it is possible that some of the other projects scheduled for completion toward the end of the decade may be delayed.
--Some older properties could shutdown to make way for new development, which could offset some of the near-term projected growth.
Fitch is concerned that much of the increase in supply is concentrated on high-end room product. However, the high-end concentration could be mitigated as older properties, such as MGM Grand and The Mirage, could migrate down-market as new supply comes on line.
In 2007 and for the next few years, Macau will continue to be the fastest growing established market as it has been in recent years. Las Vegas Sands' Sands Macau, which opened in 2004, has been a tremendous success as that property proved there was a significant, under penetrated mass market in the region. In 2007, U.S. operators will make a greater push into the more established VIP market as Macau Sands has recently ramped up its VIP business, Wynn Macau opened in September 2006, Venetian Macau on the Cotai Strip opens in mid-2007 and MGM Grand Macau opens in late 2007. As these developments come on line and the Cotai Strip is further developed, the market appetite for non-gaming amenities similar to the Las Vegas Strip will begin to be determined. Historically, Macau has been largely a gaming-centric market, while the U.S. operators plan to capitalize on broadening the product offering.
Fitch is somewhat concerned that the newest gaming markets decided on high tax rates of 50% in Florida and 55% in Pennsylvania. The high tax rates may limit investment and profitability for the gaming operators. Longer-term, Fitch is concerned that other potential jurisdictions could look to Florida and Pennsylvania as a barometer when considering tax structure, which could dampen the industry's expansion outlook.
Gaming operations in Pennsylvania commenced in November and additional gaming licenses are expected to be awarded on December 20. The additional supply in Pennsylvania in 2007 is likely to impact casinos in Atlantic City. The competitive impact should be somewhat mitigated by the closure of the Atlantic City Sands, which was recently acquired by Pinnacle and shutdown on November 11 for its future new development.
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