The May gaming-revenue and visitation numbers show that Las Vegas was in a strong position as it entered the summer months, with one Wall Street analyst contending that there’s “still no sign of a slowdown in Vegas.”
Whether that continues through 2022, amid high gas prices and inflation and consumer concerns over a recession, is the question going forward.
Circa Resort & Casino owner Derek Stevens told the Nevada Gaming Commission in May that he was seeing dips in ATM withdrawals and spending, but no Strip operators have expressed such concerns to analysts.
Nevada recorded its fourth highest month in history in May with $1.3 billion in gaming revenue (and highest ever in May). That’s with May’s 3.44 million visitors falling 6.6% below May 2019’s count.
“While the market continues to wait for a falloff in consumer discretionary spending, Las Vegas continues to print money,” said CBRE analyst John DeCree.
The $732 million in gaming revenue in May was 23% higher than April and 41% higher than May 2019 before the pandemic, DeCree pointed out in a note to investors. April Strip numbers were 23% higher than April 2019.
“While many speculated April’s strong data was largely attributable to the crowds drawn by the NFL Draft, May’s trends accelerated across virtually every metric,” DeCree said. “We recognize that aggressive and persistent inflation could start to weigh on consumer spending. However, we view the continued recovery in both international tourism and convention attendance as a potential offset to any moderate erosion in leisure spending. Moreover, while inflation remains an issue, if the (Federal Reserve) can engineer a softer landing and avoid a sharp spike in unemployment, Las Vegas could avoid a significant demand drawdown.”
Barry Jonas, an analyst with Truist Securities, said Nevada’s record May revenues “help dispel concerns around consumer demand for now.” His firm recently hosted investor meetings in Las Vegas.
“Despite negative market sentiment, operators remain generally positive,” Jonas said. “The Strip and locals’ markets appear healthy with group/convention returning to pre-COVID levels. The strong operator outlook is translating to gaming tech, where good content is driving increasing demand. The contrast between market and company sentiment is striking, creating potential opportunities for long-term shareholders, assuming trends don’t decelerate.”
Jonas said inflation and economic issues aren’t showing up in any numbers yet for Las Vegas. He did refer to Stevens seeing some decline downtown, but in meeting with operators found no impact on Strip visitation and customer spending.
“One operator notes a possibility of seeing some inflation pressure on margins, given rising costs with potential wallet shift from gaming to lower-margin non-gaming,” Jonas said. “Overall, a common theme throughout the visit was gaming’s resiliency to recessionary conditions, with variable cost and pricing structures able to mitigate revenue declines.”
One concern with the latest numbers was drive-in customers falling 4% from May 2021 and 2% from April, Jonas said. Along the Nevada and California border, traffic fell 6% year over year.
“We believe rising gas prices continue to have a modest impact, given that the 4% year-over-year dip is the third straight month with a decline and the steepest yet,” Jonas said.
That’s in contrast to air passengers rising 30% year over year and 8% over April. May was the third busiest month in Las Vegas air-travel history.
DeCree highlighted the continued recovery of conventions and international travel. Foreign visitors hit their highest level since the pandemic began at more than 240,000, which has room to improve; the total was down 29% from May 2019. Convention business reached 391,000 in May, which is still down about 25% from May 2019. “(That leaves) plenty of room for recovery on the horizon,” DeCree said.
Operators noted strong convention and group business, with solid bookings for the second half of the year, Jonas said. Second-quarter trends are helped by rescheduled omicron-impacted events and the event calendar, which now includes Formula 1 racing in November 2023. The MSG Sphere opening in 2023 is also driving a strong outlook, he said.
“International travel has yet to return to Vegas. However, with recent U.S. travel restrictions removed, operators believe the upside scenario may begin to be realized in the second half of 2022 and 2023,” Jonas said. “The locals’ environment appears to remain strong, benefiting from population growth, with the promotional environment still stable and rational.”
Truist reports a modest deceleration in room rates in July and August, which has caused some concern that demand is softening.
“Operators we’ve spoken with suggest any rate decel in our survey is more fine-tuning than structural,” Jonas said. “While market valuations have remained largely bearish, we still see a near-term balance on the Strip between expected macro headwinds with COVID/midweek recovery tailwinds.”
Truist Securities’ room-rate survey tracking 13 weeks of internet rates for 28 casinos across the Strip showed that MGM Resorts and Caesars Entertainment rates in July fell 19% and 13%, respectively, from their peaks.
“We are also revisiting August rates, which are modestly lower, as MGM/Caesars saw rates decline -2%/-3% week over week, now down 16%/8% from prior highs,” Jonas said.
As for the Fourth of July weekend, Jonas said they looked at trends of recent years and “noticed less upside in 2022 than in prior years.” Average rates remain elevated over 2019 and 2021; however, “deceleration into the week was fairly pronounced” for both Caesars and MGM, he said.
Jonas pointed out that average daily room rates on the Strip, while up 41% year over year, fell 1% from April.
Weekend occupancy increased 4% year over year, but fell 1% from April. Midweek was 16% higher than May 2021, but down 1% from April, he said.
Another concern raised by an analyst was locals casinos recording a revenue decline of 1.4% from May 2021 and down from April.
“Demand in the Las Vegas locals market decelerated month over month more than anticipated, which may be the lower-end Las Vegas locals’ consumer worsening,” said Joseph Greff, an analyst with J.P. Morgan in a note to investors. “That said, even if June slows relative to May, we don’t see downside to (Boyd Gaming and Red Rock Resorts’ EBITDA estimates), but further second-half deceleration could suggest modest downside to their locals (casinos during the) second-half of 2022 revenues/EBITDA results.”
Based on their meetings, Jonas said regional operators highlighted strong trends, while some noted that the older demographic has not fully returned, and potentially won’t until COVID is entirely in the rear-view.
“One operator pointed to rising wages offsetting cost inflation to maintain strong customer spend,” Jonas said. “Additionally, cutbacks on non-free-play promos have incrementally strengthened margins, with little noted impact on customer spend or visitation, according to operators.”
Jonas said they visited Boyd Gaming’s headquarters in Las Vegas and met with CFO Josh Hirshberg and Jake Mulcahy, director of corporate finance and investor relations.
“Boyd continues to note no impact from macro/inflation pressures, stating that if customers were leaving, then new customers were showing up to replace them,” Jonas said. “On the gap between 2019 visitation, Boyd stated that the oldest cohorts have returned, but that 5% to 10% of customers may not return.”
Jonas met with Caesars Senior Vice President of Finance and Investor Relations Brian Agnew and Investor Relations Manager Charise Crumbley at Caesars Palace.
Management stated that its properties were not experiencing a slowdown similar to Stevens’s downtown, Jonas said.
“Caesars also noted that downtown is a different market than Strip, and that the mix of destination versus local could be driving the contrast,” Jonas said.
Caesars commented that group business was 15% of occupied rooms in 2019 and could be up to 20% in 2022 and beyond.
“The reopening of Caesars Forum was highlighted as a major contributor to outperformance,” Jonas said. “Management highlighted international and 55+ demographics as upside scenarios for visitation, as they have yet to fully recover from 2019.”
Jonas visited MGM’s headquarters at Bellagio and met with CFO Jonathan Halkyard, Senior Vice President of Finance Sarah Rogers, and Director of Investor Relations Andrew Chapman.
Like the other Strip properties, MGM is not yet seeing any material slowdown related to inflation and the economy, though budgets could see some impact with sustained inflation, Jonas said.
“Management highlighted its findings between macro indicators and gross gaming revenue (GGR), finding loose correlations between consumer confidence and GGR, but not with gas prices/interest rates and GGR,” Jonas said. “Management noted the group pipeline remains strong. MGM stated structural changes to group travel (video meetings, more focus on restrained spending by companies) seems to be less impactful in Vegas which could also benefit from multiple factors.”
Those include lower pricing compared to other markets, group retreats at hybrid companies, and the return of international visitors, which can occupy as much as 10% of room nights, Jonas said.
“On room-rate deceleration highlighted in our recent Nevada GGR note, MGM stated that rates are adjusted based on the demand curve, which is largely an automated process,” Jonas said. “Management stated that changes are usually related to midweek cancelations, while weekends are largely event driven, and the overall rate environment remains very strong with no recent changes.”
