Friday, July 2, 2010

Portfolio (aka me) Analysis of Weird Analysis

Gaming analyst Bill Lerner of Union Gaming believes the soon-to-open Cosmo adding 2,000 rooms to the city could cause room rates to RISE. Uh, what? So I did a Portfolio.Com blog looking at that weird idea a little closer:

A Las Vegas Analyst's Odd Prediction

It has become incontrovertible conventional wisdom that Las Vegas is overbuilt and that several large projects came to fruition at exactly the wrong time. The city boasts nearly 149,000 hotel rooms, of which 11,000 were added since the recession really took hold in fall 2008 thanks mainly to the openings of Wynn Resorts’ Encore tower, MGM Resorts’ CityCenter and two expansions at the Hard Rock Hotel.

Yet late 2010 brings another debut, the $3.5 billion Cosmopolitan of Las Vegas, a hotel and casino project owned by Deutsche Bank. In mid-December, Cosmo plans to dump another 2,000 of its eventual stock of 2,995 rooms onto the flailing, bargain-basement Strip immediately north of the struggling CityCenter.

Which is why Union Gaming analyst Bill Lerner’s July 1 email blast made eyes fall out of their sockets. “Cosmopolitan, we’re not so concerned about Las Vegas Impact.”


Could it be that he figures things are just so bad that they can’t really get any worse? How could yet another wad of rooms, especially those squeezed between the Bellagio and Aria (CityCenter's main hotel), not have a negative impact?

It’s very, very difficult to decipher Lerner’s logic, and after saying he’d try to call Portfolio back, he did not. But Lerner's note is yet another example of him crossing swords publicly with another analyst, this time Shaun Kelley of Bank of America Merrill Lynch. Kelley issued a June 30 report calling Cosmo “the largest negative for CityCenter and MGM as the market is clearly struggling to absorb” the 6,000 rooms added by the six-month-old $8.5 billion project.

Lerner refers in his missive to his comments being a reaction to “a competitor” and acknowledged to Portfolio that Kelley is his unnamed spar partner. And Lerner does, in his note, acknowledge there’s an oversupply in the market and even parenthetically notes that “one additional room is too much.”

Yet Lerner writes that room rates at the Cosmopolitan—the resort’s website is asking for $275 for opening weekend, well above the current average luxury Vegas room of about $200—could “have an odd, unintended impact on the market as it could pull rates UP (not DOWN as we think was implied in this competitor’s research report.)”

Lerner never actually explains how or why that would happen. His best bet is a fantasy, that “if operators theoretically colluded and took rates higher, we’re not sure demand would be negatively impacted of note.” Right, because Steve Wynn, Jim Murren and Sheldon Adelson, none of whom even like one another all that much, are seriously going to make such a pact. The SEC would just love that.

Read the rest at Portfolio.Com


detroit1051 said...

Bill Lerner is a Strip cheerleader. He sees sunshine in the midst of a thunderstorm. said...

Six months before CityCenter opened, cheerleaders lined up behind it to tout is as the most amazing thing man had ever seen. Something that would change Las Vegas forever. We all knew differently. Most of us just kept our mouths shut because it was in the best interest of the city for it to succeed.

Now, I'm getting reader after reader (and I'm fortunate enough to have an upscale readership) telling me that they either haven't bothered to check it out because it is set so far back, or were burned out by the time they got through Crystals. You build a property 100% opposite of how every other property works (get people in the damn doors and straight into the casino) and you wonder why it isn't working?

Note: Steve Wynn is pretty much the only one who got away with violating that: The shopping you walk through to get into Bellagio and Wynn. But it wasn't a mall. Just a shopping hall.

Cosmo is going to bomb early on. OK... let's just brace for it. No more sugar-coating. Another high-end, non-themed resort in a town swamped with them.

Another side note: My readers are clamoring for the return of hotel themes. People love them. Hell... I love them! Once again, I think the only person who could get away with a non-themed property was Steve Wynn. Except it really does have a theme: Steve Wynn. And I don't want to sound like Hunter here in adoration of Wynn, but people want to be Steve Wynn. They like him. They want to stay at his joint. Even Sheldon needed a theme.

Room rates are going to be depressed here for a long, long time. Even after the economy starts to bounce back. Bad for the gaming companies, but great for the energy and spirit (and yearly visitor counts) of Las Vegas.

Leave people enough money in their pocket to see a show and take a tour (and if you quit gouging them at gaming, play some games).

Jeff in OKC said...

Could you tell us about how Union Gaming works? My impression is that they are people who are gaming observors/advisors who do not work for any investment group. Is that correct? More importantly, how do they make money?

Michael said...

I wouldn't worry about the hyperbole from casino owners with a new resort opening right now. They typically seem far less concerned with reality then their own beliefs of a resort. Cosmo's likely to get a decent start as the new thing on the block, however keeping it there will be another and I'd be surprised if we see 3 months of high rates from them, before you are likely to see them discount heavily. Not having any player database to speak of (I'm sure they've bought someone's) is not going to help either, so they are going to rely on rack rates much more then other resorts and there marketing is going to have to ramp up too. Even by one of their own admissions in an article, they aren't likely to target high end play (as they won't be able to compete anyway) so they essentially think there is a high middle class that will gamble freely and cares not for spending rack rates on a room. Sure, maybe if they had a casino license in another city, where they were 1 of 3 that held it, but not on the strip where even high middle class will be satisfied staying at a mid range property for comp or pennies on the dollar and taking their play where they want to go.

This reminds me of Hooters ownership and their comments during the boom that they thought they could charge a premium for their room, not understanding their total product and competitive surroundings is a disaster waiting to happen for a company regardless of economic upturn or downturn, the difference in a downturn it's likely to be evident much quicker.