Top analyst still banking on Formula One

September 21, 2023 12:02 PM
Photo: Shutterstock
  • David McKee, CDC Gaming Reports
September 21, 2023 12:02 PM
  • David McKee, CDC Gaming Reports

Truist Securities analyst Barry Jonas was in Las Vegas last week and, since his team stayed at Mandalay Bay, got a front-row seat for MGM Resorts International’s response to the September 10 cyber attack. He reported that operations “are largely back to normal,” although competitors could benefit from the assault, whose effects might extend into the fourth quarter.

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Both MGM and recent ransomware victim Caesars Entertainment indicated to Jonas that they expected insurance to cover any losses sustained during the attacks, which came to light simultaneously. Jonas dismissed the possibility of long-term damage. “Barring repeated attacks … we believe cyberattacks are more common than some may believe and we think urgency around defending against attacks will be heightened moving forward.”

On the flip side, Jonas remained optimistic about the upcoming Las Vegas Grand Prix, a subject of much consternation among local residents. He noted that room rates on the Las Vegas Strip are anywhere from double to quadruple last year’s, admittedly one of the Strip’s slowest weekends.

Recent collapses in room prices have made the news recently and Jonas noted “investor concern” about a loss of momentum in rates and bookings, but “left meetings with our enthusiasm intact.” He observed that falling rates were concentrated at lower-tier and economy locations.

Furthermore, most of the upside is expected to manifest in upscale resorts, the ones targeting Formula One fans. “Most higher-tier room packages have been booked (many with no/more limited cancellation policies).” In addition, casino executives’ expectations are increasing, anticipating that the November 20 weekend will be “one of the highest-grossing gaming events in city history.”

Despite local misgivings, casino operators were upbeat that the inaugural Grand Prix would provide a baseline for the annual races. Room rates could be “optimized” for future derbies and “any kinks with the event will be smoothed out.” Caesars execs went so far as to predict a $25 million cash-flow lift from F1 weekend.

One unspecified casino operator told Jonas it was concerned that the combined pull of Formula One and the Super Bowl was so strong, it would lure customers away from traditional magnet of New Year’s Eve. But “others disputed this theory.”

Staying with marquee events, Jonas turned his attention to Madison Square Garden’s Sphere, which debuts with a residency by U2. The likeliest beneficiaries, he wrote, are the nearby Venetian and Wynn Las Vegas. “However,” he chronicled, “all operators pointed to the Sphere as a benefit to the city as Vegas continues to build out its entertainment offering and recent buzz on social media is good marketing for the city.”

Jonas took the unusual step of meeting with Secretary-Treasurer Ted Papageorge and other leading members of Culinary Union Local 226. He noted that the Culinary represents as many as 70 percent of Strip employees, at least 40,000 strong (mainly at MGM properties). The Culinary’s last five-year pact with operators lapsed in May and a strike vote, which the analyst expects will be affirmative, is slated for September 26.

Both Jonas and casino operators, however, were sanguine about the prospects for labor peace. The former observed that both sides were “highly motivated” to reach an accord before Formula One hit town, since “a strike would have sizably negative ramifications for both companies and tipped employees.” Wynn Resorts, Caesars, and MGM executives all said talks “are about where they thought they’d be at this time,” with an October resolution anticipated.

Culinary officials told Jonas that their sticking points extended well beyond wages, with replacement of workers by technologies (“which many consumers are more and more demanding”) and reduced workloads, which may prompt the removal of bathtubs from hotel rooms, the key issues.

Operators such as Caesars have been stockpiling revenue for anticipated salary increases, as well baking such cost rises into their Wall Street forecasts. MGM, for one, expects every percentage point of wage hike to translate into $20 million of extra cost.

For his part, Jonas foresees a double-digit pay bump, largely in the first year of the new contract. Workload reductions may mandate hiring more employees. He added, “We do think MGM’s recent cyberattack highlights the importance of maintaining a strong relationship between operators and unions.”

Turning to New York state where MGM covets the New York City market, operators told Jonas they were “somewhat frustrated” by the pace of the casino-selection process, “many months behind the original schedule.” They foresee an early 2025 decision, perhaps earlier, and “remain hopeful … as there is belief that operating in the market could yield material returns.”

Locals-facing operators also came in for scrutiny. Jonas is very optimistic about the debut of Station Casinos’ Durango Resort on November 20. He believes the $780 million casino-hotel could serve as “the “anti-F1” for players who don’t want to deal with the hullabaloo on the Strip.” Station is also optimistic, so much so that planning for a second phase of Durango is already on the boards.

“Management has worked diligently to ensure there is not a loss leader on the property,” Jonas wrote of 2,500-slot 200-room Durango, “and believes the property should see profit out of the box on the way to being the highest margin property in the portfolio.” He continued that interest in working at the casino “has been strong,” although it is expected “to drag on margins” for the company for 18 months, as is often case with locals-casinos openings.

In the near term, Durango is expected to pull business from proximate casinos, including Station’s own Red Rock Resort. This should be offset in the long term by continued population growth and new housing developments near existing Station casinos. Station execs (as well as those of Boyd Gaming) were reported as hopeful that a new collective-bargaining pact on the Strip would fatten receipts at their properties.

Jonas added that both Boyd and Station “are fans of Vegas’s continued efforts to attract high-profile events to the city, given meaningful overflow play leaks to the locals properties on event weekends, given players’ wishes to avoid Strip traffic and room rates.”

Despite the Maui wildfires, Boyd executives don’t expect to see Hawaii-derived business to be “materially” harmed. Although renovations at downtown Vegas Main Street Station and Fremont Hotel have been disrupted, management still anticipates a completion sometime next month.

Regionally, Boyd launched a renovation at Ameristar St. Charles in Missouri, earlier than planned, after “a piping issue arose.” Company execs were described as “excited” about their new land-based casino (with closer parking) in Kenner, Louisiana. A 20 percent return on investment is expected.