Las Vegas Strip executives say high-end gaming continues to outpace the lower tiers and the spread could widen even more for some operators, according to Carlo Santarelli, an analyst with Deutsche Bank, in a note to investors after holding meetings last week with C-level management in Las Vegas.
While high-end gaming comparisons remain relatively easy in the second quarter, operators noted that trends remain firm and Santarelli said Deutsche Bank doesn’t believe hold has played a role to date for most.
“We don’t believe reinvestment in this subset has changed in any material fashion in the quarter to date, with reinvestment rates likely to be lower in the second quarter relative to the first quarter, given the influence of the Super Bowl,” Santarelli said.
Despite comments from management, Deutsche Bank is sticking with the previous assessment that during the second half of 2024, high-end gaming is challenging.
“It has been 12 straight quarters of gaming-revenue growth in Las Vegas since the market emerged from the pandemic in the second quarter of 2021, the quarter in which Las Vegas Strip gaming revenue surpassed 2019 levels for the first time in the recovery,” Santarelli said. “More recently, however, cracks have emerged, as evidenced by several quarterly reports over the last few earnings seasons. Specifically, the market has become more bifurcated, with the high end performing very well and being further augmented by events like Formula One and the Super Bowl, which have taken control of the narrative, while the lower to mid-tier properties have largely peaked and begun to decline.”
Santarelli noted that the one constant has been the high end strength, which is best evidenced by baccarat play. It has essentially carried gaming revenue to positive comps over the past year.
“We believe this segment has reached a plateau and, despite competition for this customer continuing to heat up, is likely to fade, exposing more clearly the other underlying stagnation present in the market today,” Santarelli said. “A slowdown in baccarat will likely change the sentiment around the growth outlook for Las Vegas.”
Santarelli said much like the gaming floor when it comes to hotel prices, “the high-end outperformance remains present” as operators can charge high prices at the higher-end assets.
“Overall, trends at the high end are holding up well, with April Strip revenue per available room +7.7% and May sounding reasonably strong, led by the high end,” Santarelli said, “with group and convention business helping, casino patronage remaining solid, and increased pricing on transient room nights showing limited demand sensitivity.”
In discussing locals casinos, Santarelli said they believe “the lower-end and mid-tier customer remains softer relative to the higher-end patron within the locals ecosystem.” From a big-picture perspective, new home sales remain strong, housing prices are rising, population growth remains firm, and wage growth is outpacing inflation.
“This setup bodes well for continued steady performance at the higher end,” Santarelli said as it relates to neighborhood casinos.
Santarelli doesn’t believe the promotional environment has changed “in a meaningful way” with private and single-asset owners providing the bulk of the promotional push. Those actions remain consistent with recent efforts and back up what gaming executives have said with earnings reports.
Santarelli noted they expect Red Rock Resorts to ultimately pivot to the second phase of its Durango Casino & Resort starting with parking, followed by facility expansion. That will be followed by Red Rock’s building a casino in west Henderson in the Inspirada master plan – a project likely to cost $475 to $525 million. That implies management thinks the local area can support annual EBITDAR at the property of about $100 million, he said.
Cost pressures for casinos are slowing, Santarelli said in his market assessment. After the first year of the new Culinary Union contract wage escalation, he said they expect cost pressures “to ease a bit” in the second half of the year as the second-year escalator “backs off significantly” in its rate of growth.
“That said, the earlier-than-normal heat wave in Las Vegas is likely to marginally increase utility costs in the near term, though we note this is hedged for most,” Santarelli said. “Overall, we believe other cost pressures remain generally accounted for in forecasts. Importantly, while 2024 is likely to experience aggregate cost increases in the mid-single-digit growth range, due primarily to the union contract, we expect cost pressures to revert to more normal levels in 2025 and beyond.”
Despite recent margin slippage, locals operators remain confident that margins will “remain considerably above 2019 levels,” with structural-cost eliminations still providing the majority of the boost to date, Santarelli said. They expect Boyd Gaming to experience some modest labor cost increases in the third quarter, as was the case in 2023, though they don’t anticipate it will be material.
“As we have previously noted, we believe and management teams noted net-revenue fluctuations will be the primary driver of margins from current levels, with a return to 2019 margin levels requiring revenue declines well beyond the scope of a normal recession,” Santarelli said.
Deutsche Bank also delved into F1 with Strip operators. Discussions were focused primarily on what the planners and city can do to improve the experience for a broader spectrum of operators, “with some frustration expressed regarding the efforts to date made by the event organizers to broaden the spectrum of beneficiaries.”
Santarelli said they don’t believe there have been notable changes to the 2024 event that would make the experience “materially different” than the 2023 race, even though ideas are being floated in an effort to do so.
“We believe single-day ticket sales would potentially help and this is something that is being discussed,” Santarelli said. “We also believe operators are tweaking pricing strategies for the 2024 race, given the experience last year and the reductions in room rates at mid-tier to lower-tier properties in the lead up to the event.”
As for the prospect of mergers and acquisitions, Santarelli said large scale M&A will be challenging, especially if it involves multiple partners and business lines. He added they expect proposed suitors to emerge, though their level of interest is likely to vary and that creative structures are likely needed in the current environment.
“Net-net, we believe the halo of news flow around potential M&A is likely to be positive for the group in general, though we wouldn’t characterize our confidence level around deals ultimately coming to fruition as high,” Santarelli said. “We have yet to hear and identify a credible solution to the lingering issues involving potential transactions.”
