A Wall Street analyst said the closing on July 17 of The Mirage, combined with the already-closed Tropicana, should catalyze higher rates for operators of hotels up and down the Strip during the second half of 2024.
John DeCree, director of equity research at CBRE, said in a note to investors that the reduction of 1,467 rooms at the Tropicana in April and the 3,044 rooms removed from the Mirage will reduce the Strip’s room supply by 4.9%, “setting the stage for a favorable rebalancing of supply and demand and a potential earnings catalyst for Strip operators.”
DeCree said CBRE is primarily focused on the Mirage, given its size and revenue productivity.
“While Tropicana could be meaningful for some properties, the demand displaced by the Mirage closing is large enough to potentially move the needle for all operators on the Strip,” DeCree said.
CBRE estimated that the Mirage had about one million occupied room nights and generated $596 million of revenue and $169 million of EBITDAR in 2023.
“This represents significant underlying demand for the Las Vegas Strip that will need to find a home,” DeCree said. “Further, considering the flow-through margin on incremental revenue, we estimate that the available EBITDAR opportunity could be even greater than implied by our 2023 estimates.”
The Mirage is expected to be closed until spring 2027, as Hard Rock International transforms the asset into the Hard Rock Hotel & Casino and Guitar Hotel Las Vegas.
“The significance and longevity of the supply contraction remain underappreciated, if appreciated at all,” DeCree said.
Investor sentiment for the Las Vegas Strip remains low amid inflation and macroeconomic uncertainty, “creating a peak earnings narrative,” Decree said in his note. Fundamental performance on the Strip, however, has held up well, even with meaningful supply growth from Fontainebleau Las Vegas that opened in late 2023 with 3,644 rooms and Resorts World Las Vegas in June 2021 with 3,500 rooms, he said.
“Average daily rates continue to climb higher and while occupancy has not yet met 2019 levels, consumer spending remains high, with help from a strong event calendar and the continued recovery of convention and international demand,” DeCree said. “We expect second-quarter Strip earnings to be in line or slightly ahead of expectations and with a tangible catalyst from material supply contraction on the Strip, we believe forward estimates could be overly conservative, which could help lift investor sentiment heading into the second half of 2024.”
DeCree pointed out that given their significant room inventory, particularly in the mid-tier asset class on and around the center Strip, Caesars Entertainment and MGM Resorts could be best positioned to consolidate the displaced demand from the Mirage. He added, however, there are likely limitations on how many room nights these two operators could capture, particularly during peak events and weekends.
“This could create an opportunity for under-occupied assets like The STRAT to benefit from both higher occupancy and a higher-spending average customer,” DeCree said. “Albeit illustrative, we estimate potential incremental EBITDAR generation for Caesars, Golden Entertainment, MGM, and Wynn Resorts based on each operator taking their fair share of the Mirage’s one million occupied room nights in 2023. While many variables could impact our analysis, we see a clear benefit for all Strip operators, with more customers chasing fewer rooms and ultimately driving higher average daily rates.”
Since 2019, the Strip has grown to 92,093 rooms, an 8.4% increase.
DeCree said occupancy on the Strip continues to recover from the reduction caused by the pandemic by averaging 88.3% over the last three months through May, as both group and international demand rebounds.
“The meaningful reduction in supply comes at a time when many investors remain cautious about peak earnings, opex inflation, and economic uncertainty,” DeCree said. “While many analysts are conservatively forecasting a decline in Las Vegas Strip earnings in 2024 and 2025 due to economic uncertainty, the significant supply reduction this year should at least act as a counterbalance to any potential waning consumer demand, if not earnings upside from higher occupancy and average daily room rates across the Strip.”
