Analyst warns of “volatility” in Vegas

May 15, 2024 2:00 PM
Photo: Shutterstock
  • David McKee, CDC Gaming Reports
May 15, 2024 2:00 PM
  • David McKee, CDC Gaming Reports

Reflecting on the first quarter of 2024, Deutsche Bank analyst Carlo Santarelli wrote that it was one of “interesting stock dynamics” for the gaming and lodging industries and of “fundamental realities that have now come more to light.

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“Bluntly, if you were a gaming company and missed or even beat [projections], the reaction was less than stellar, or painful, depending on the report,” Santarelli wrote. By contrast, lodging companies were investor comfort food, he said, in which “shares essentially reacted as if nothing had happened, a strange dynamic.”

The analyst began his coverage in Macau, which grew consistently. All forms of gross gaming revenue (GGR) were up 67 percent. Mass-market play was 11 percent higher, while VIP action continued to lag, down 67 percent. This, Santarelli opined, was the new-normal baseline for high-roller play in the enclave.

Las Vegas Sands and Galaxy Entertainment lost Macanese market share to (in descending order) MGM Resorts International, Wynn Resorts, SJM Holdings, and Melco Resorts & Entertainment. Property-level cash flow for the six concessionaires grew at an even faster pace than revenue at 79 percent.

The three American-owned concessionaires offered capex-improvement breakdowns. Wynn Resorts, in addition to a new food court, is underway with as much as $500 million in investments in non-casino amenities. Sands is expanding its Venetian Expo facilities to the tune of $1.35 billion, along with themed attractions and new restaurant product. MGM budgeted up to $200 million toward its concession commitment to non-gambling amenities.

Back on this side of the Pacific, the Las Vegas Strip was showing fissures. Explained Santarelli, “While headline growth continued, under the surface, some cracks have emerged, though these cracks have been masked by the strength in the baccarat segment, which was again prominent in the 1Q24.”

Non-baccarat play, on the other hand, was seen to hit a plateau, experiencing negative comparisons in six months out of the past 12. Even so, Strip gambling revenues are 35 percent ahead of where they were prior to the pandemic.

Lower hold at both slot machines and table games on the Strip “caused the GGR declines to be a bit more punitive, with slot GGR falling 1.5% Y/Y and domestic table-game GGR contracting 9.3% Y/Y.” Against this, the house’s winning clip at baccarat shot up 45 percent, despite only two percent higher wagering.

“At present, we think the competition for the high-end gaming patron is intensifying, which is usually a signal that the market, in this case the baccarat segment, is reaching an apex,” Santarelli wrote. He cautioned of a volatile baccarat dynamic, which had been juiced by the Las Vegas Grand Prix and Super Bowl.

Should baccarat winnings cool, he warned, it would change the outlook on the Strip for the worse. Already, the comparisons for baccarat winnings are becoming tougher on a year-over-year basis.

The biggest names on the Strip were underperforming, with Wynn/Encore and MGM up only 1.5 percent and one percent, respectively, in GGR. Much worse off was Caesars Entertainment, plummeting 15.6 percent.

“While [the absence of] CONEXPO created a tough comparison to some degree, as the lift in gaming play over time hasn’t been all that pronounced,” Santarelli wrote, “the underlying results are somewhat disappointing, in our view, especially when considering the Super Bowl in Las Vegas in February.”

A bright spot, even for Caesars, was non-casino revenue, which rose at a faster rate than GGR (or, in the case of Caesars, declined only four percent). Santarelli credited higher prices for hotel rooms and dining, along with “a solid event calendar.” An additional extenuating event for Caesars was the elimination of the Rio from its hotel inventory, reducing the number of rooms and revenue achievable.

The Deutsche Bank analyst found April commentary regarding the Strip by operators “relatively encouraging.” He cited seven percent hotel-rate increases at MGM and 98 percent occupancy at Caesars through June.

If Las Vegas was up modestly, regional markets were slightly down, “further exacerbated by increased costs, primarily labor, that drove same-store EBITDAR down mid-single to low double digits for each.” Any improvements in the numbers, Santarelli predicted, would be “muted.”

GGR trends were characterized as stable, although new product was noted to have driven positive comparisons in Colorado (Chamonix) and Illinois (multiple casinos). April GGR in the six states that Deutsche Bank tracks was down almost three percent.

“That said,” encouraged Santarelli, “it is worth noting that the April calendar was unfavorable, reversing in May. However, so as to not get too carried away, if we were to exclude Illinois, which is benefitting from new supply as same-store Illinois GGR was down 5.4% Y/Y, the remaining 5 states experienced a GGR decline in April of 4.5% Y/Y.”

He said he got the sense that merger-and acquisition activity “was percolating.” Given an absence of organic same-store growth in the gaming sector, Santarelli felt the atmosphere was right for asset sales or outright M&A, although no names were named.

As far as regional gambling was concerned, the analyst felt that forward-looking commentary was “bland,” but “broadly constructive.” He quoted Penn Entertainment CEO Jay Snowden as saying, “Visitation subsequently rebounded with stable trends persisting into April.”

This was echoed in Boyd Gaming CEO Kevin Smith’s being “encouraged by the improving customer trends over the last several quarters, and those trends have continued across our Midwest & South segment in April.” Added Station Casinos director Lorenzo Fertitta, “The only real weakness, as we already articulated, you saw some weakness in race and sports,” something he felt Station shared with the Strip.