Strip gaining in economic recovery, Moody’s says

The Strip is "gaining traction" in its economic recovery, but rising fuel costs could set back any financial healing in the market, an analyst for bond rating agency Moody's Investors Service said.

In a report released Monday, Moody's gaming analyst Peggy Holloway said increased visitor volume and improving gaming revenues during 2011 have improved the prospects for casino companies that rely on the Strip for the bulk of their gaming revenues, including MGM Resorts International and Caesars Entertainment Corp.

Last year, Las Vegas drew 38.9 million visitors, which neared the city's record of 39.2 million visitors in 2007. "After suffering through a deep trough during the recession when visitor volume declined as new capacity came online, the Las Vegas recovery is under way," Holloway said. "Hotels are benefiting from increased visitor numbers that permit higher room rates, while gaming revenues are recovering, albeit more slowly."

The Moody's report noted several improving trends in 2011 including a 4.3 percent rise in visitor volume from 2010, a 3.5 percent increase in slot revenue and a 3.4 percent increase -- the first since 2007 -- in hotel occupancy.

Gaming revenues on the Strip grew 5.1 percent in 2011 to $6.068 billion.

The improvements in Moody's view of the Strip are supported by low growth in hotel room supply, which gives operators more pricing power, Holloway said.

Average daily room rates have increased to the mid-to-high single digit percentages this year, following a 10.7 percent increase in 2011.

Moody's said there is a lack of any significant new hotel construction planned in coming years, and as demand and occupancy rise, operators will gain pricing power.

However, rising gasoline prices could endanger the recovery as money that consumers would spend at the casino could be deployed to fuel spending. Moody's said the average price of regular gasoline was $3.83 a gallon at the time the report was researched.

With crude oil trading at its highest level since 2008 and gasoline prices high, consumers could pull back on discretionary spending and travel to Las Vegas, the report stated.

"The effects could hit hardest in the casino," Holloway wrote in the report. "While we expect strong visitation to Las Vegas this year, consumers may dial back their allotments for gaming, which are entirely discretionary."

Also, Holloway said the cost to travel to Las Vegas by car or air would increase, potentially reducing spending at the destination and hurting trip frequency for regular visitors.

While trends along the Strip are improving, Holloway said it will be a while before casino operators reach the peak levels seen in the mid-2000s.

"The pace of recovery will largely dictate the fortunes of companies that rely on this market for a material portion of their profits," Holloway wrote, focusing attention on MGM Resorts and Caesars, which each operate 10 hotel-casinos on or near the Strip.

"These companies have a high mountain to climb to reach previous levels of absolute profits," Holloway said.

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871.
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