Las Vegas sweltered in July, setting at least two temperature records, and gaming analysts are pointing to increased utility costs for casinos and the heat potentially cutting into visitation.
The National Weather Service reported the hottest month in Las Vegas history, with average highs often exceeding 112 deg. F, and it was even higher in the surrounding Arizona and California deserts.
In a note to investors last week, John DeCree, an analyst with CBRE, said, “The record heat in the month likely kept some more recreational customers at home, a trend that could persist into August.”
Nevada’s gaming numbers fell 2.2% in June, with the Strip off 1.1%, and locals casinos down 10.1%, but the heat didn’t hit until toward the end of the month. July’s gaming and visitation numbers won’t be out for a few weeks, including drive-in traffic through the southern California desert. That traffic was down 2.8% in June year over year.
“It’s hard to quantify what the impact is,” DeCree told CDC Gaming Reports. “July and August are always seasonally slower in Vegas casinos (with lower convention business). It’s a great time for people living in Las Vegas to get out of town on vacation and go somewhere cooler, so you have less people in town. While casinos are air-conditioned, they’re not an ideal place to spend multiple hours every day, so people probably find a reason to stay home and sit by the pool if they don’t get out of town.”
In its second-quarter earnings call, Boyd Gaming cited “some out-of-town-customer softness” and DeCree questioned whether people wanted to travel to a city where temperatures are approaching 120 degree or “hang out in California where you’re nice and comfortable. You get fewer customers and the ones you do get spend more time at the pool than on the casino floor. We’re seeing more pronounced seasonality at these temperature levels.”
DeCree said the marketplace is watching macro environments the year-over-year comparisons are tough for locals casinos. Analysts are looking for signs on whether it’s consumer softness or seasonality.
“You can attribute, anecdotally at least, some of what we’ve seen in the last month to seasonality, given how hot it is,” DeCree said. “Fourth of July was probably good, but you probably started to see lower volumes in July.”
In an earnings call Thursday, a Wall Street analyst asked Red Rock Resorts executives about the extreme heat and its impact on local and drive-in customers.
“Las Vegas locals tend to go on summer vacations,” said Stephen Cootey, Red Rock Resorts executive vice president and chief financial officer. “They go to get out of the heat. We didn’t see any seasonality in 2021 and 2022, but I don’t think this year is anything out of the norm.”
Energy costs also raise the issue of higher utility bills cutting into the bankrolls of local players and drive-ins from nearby states.
Barry Jonas, an analyst with Truist Securities, saw consumer strength heading into the summer and will be watching for are “slight hits to spend,” given rising energy costs and inflation.
“You can argue that a nice cool casino is a good place to hang out if you want to get out of your house and not spend too much cooling your home,” Jonas said. “But it would be naive to think there isn’t any impact on consumers looking to go into the desert while we’re in a nationwide heat wave.”
Casino consultant Brendan Bussmann, managing partner with B Global, said summers in Las Vegas are like winters in the Midwest where people don’t go out as much. They’re also more likely to go to cooler destinations.
In addition, the backup of traffic that extends trips back to southern California by at least two hours makes people less willing to travel through the desert heat, Bussmann said.
And higher energy bills make wallets tighter when visitors are already faced higher costs across the board. “Some people have to make decisions and in some cases that means less discretionary money to do stuff,” Bussmann said.
Andrew Klebanow, a principal at C3 Gaming, added however that over the last three years, casino customers have endured pandemic-induced shortages and higher prices for most everything, including gasoline, yet have still visited casinos and contributed to record revenues.
“Is a 60-day bump in their electric bill going to alter their behavior? No,” Klebanow said. “If anything, they’re going to want to get out of the house, turn up their thermostat to 80 on the way out, spend a few hours in a cold casino, play a little, and have a meal. Maybe after the sun goes down, they’ll go home and crank that thermostat back to 70.”
Lori Nelson-Kraft, senior vice president of communications for the Las Vegas Convention and Visitors Authority, dispelled the traditional notion that summer is a slow season for tourism.
Going back a couple of decades, summer was known as the “quieter time of the year,” but visitation today is now on par with other prime months of April and May and even the fall, Nelson-Kraft said. There were 3.5 million visitors in July 2022.
“Summertime does appeal to a strong visitors base, but it’s probably skewed more toward leisure demand and those who are specifically coming in for special event carved out in the summer. Meeting and convention attendees start back in September and go to May and June. Las Vegas resorts have done a good job of summertime programming that speaks to visitors who have discretionary time off,” Nelson-Kraft said.
The LVCVA, along with resorts and venues, have placed an emphasis on bringing special events into Las Vegas in climate-controlled venues, including high-profile soccer matches at Allegiant Stadium and UFC matches and the WNBA All-Star Game in arenas. The 136,623 fans who attended the NBA Summer League in July were the second highest in history.
“It helps drive visitation in quieter times in the summer,” Nelson-Kraft said. But until the visitor numbers are known for July and August, she doesn’t want to forecast what impact the heat may have had this year. Still, she stressed that visitors know what summer in the desert means.
“They’re already anticipating 100-plus temperatures that sometimes average 105 to 115,” Nelson-Kraft said. “Even though it was hotter than usual throughout the country, it may impact other towns that had a greater spike than us. But our spike was fairly modest compared to the extremes throughout the country. When you look at our visitor base, they know what to expect when they come in the summer and that’s why you see a lot more programming with pools.”
Any slowdown from the heat, however, would be short lived with Las Vegas gearing up for the opening of the Sphere entertainment venue in the fall with a U2 residency, the start of the Raiders season, the Formula One race in November, and a strong convention calendar, DeCree said.
Heat impact on casino revenues
In their notes to investors, analysts have been quick to point out the impact of utility costs ahead of earnings reports and afterward.
In his note headlined, “It’s Getting Hot in Here,” Jonas cited electric and gas utility rates jumping significantly, “which could cause headwinds for Las Vegas operators in the second and third quarters.”
Large-commercial electric rates were up 50% year over year in the second quarter and rate tariffs indicate a 34% increase in the third quarter, Jonas said.
In the third quarter of 2022, Las Vegas operators called out energy-expense headwinds, with Caesars Entertainment at $20 million, Boyd Gaming at $5 million, and Red Rock Resorts at $2 million, Jonas said,
During Thursday’s earnings call, Red Rock Resorts noted a $700,000 headwind from increased utility expenses and have implemented a gas hedging strategy and other energy-management efforts to mitigate that, Jonas said.
“Companies are wrestling with Nevada Energy cost inflation and many have been looking at alternatives, such as leaving the NV Energy grid, but some companies more than others are seeing a cost impact. We’re monitoring this pretty closely, especially beyond Vegas, as we look at record heat across the country.”
Monarch Resorts said it experienced a 60% increase in utility expenses during the second quarter at its Reno property and Boyd noted an 8% increase in utility expenses with the bulk in Nevada and the East Coast, Jonas said.
“We believe Caesars has implemented an energy-hedging strategy that could mitigate its exposure. MGM previously exited NV Energy’s grid and has shifted to solar, which mitigates their risk,” Jonas said. “Although NV Energy rates are trending down sequentially, we think rates could create some continued year-over-year pressure on utility expenses and we’ll continue to track the rate environment and call out any potential concerns.”
Others aren’t as concerned.
Klebanow said utility costs make up about 1% of gaming revenue and perhaps 2.5% of EBITDA. Casinos factor in higher utility costs in July and August and they got a break in June when temperatures were below 100 degrees for most of the month, he said.
