Wall Street firm sees 2% decline in Las Vegas Strip revenue in 2025

Saturday, December 28, 2024 1:35 PM
Photo:  Shutterstock
  • United States
  • Nevada
  • Buck Wargo, CDC Gaming

Deutsche Bank is calling for Las Vegas Strip revenue in 2025 to decline 2% from 2024. In a year-end forecast, analyst Carlo Santarelli said the decline is due to Strip non-gaming revenue falling an estimated 2.4%. Gaming revenue will fall 0.1% year-over-year.

“We believe investor expectations are for a weaker 2025 environment and as such, an upside surprise or market net revenue growth would likely be well received,” Santarelli said.

As Las Vegas entered 2024, the outlook for the market circled event-driven catalysts, especially the February Super Bowl. So it was no surprise, according to Santarelli, that the first-quarter 2024 stock performance of Wynn Resorts, MGM Resorts International, and Caesars Entertainment had an aggregate 4% increase, the best of the year.

“Despite Strip gaming revenue growth peaking in the second quarter at +4.8%, year-over-year stock performance waned as investors presumably looked ahead to the challenging second half of 2024 gaming revenue comp stack, in which the market faced high hurdles on the baccarat side, most notably from a hold perspective,” Santarelli said.

Strip EBITDAR estimate revisions were mixed, with 2025 forecasts for both MGM and Caesars revising lower over the course of 2024, while the 2025 outlook for Wynn Las Vegas expanded about 5% from early 2024 through December, Santarelli said.

While Las Vegas rarely lacks a robust event calendar, the 2024 Super Bowl will be a difficult comparison and “is likely to put the market in a hole to begin the year,” Santarelli said. The CONAG trade show also took place in the first quarter; it doesn’t return to Las Vegas until 2026, making the year-over-year comparison more difficult.

When looking at gaming trends, it appears likely that slot revenue will grow year-over-year in 2024 when the final numbers are calculated in a month, while non-baccarat table-game revenue will likely experience a low-single-digit year-over-year decline. Baccarat will decline in low double digits, assuming a challenging November and December, Santarelli said.

“Given a healthy slot handle exit rate, we believe the slot segment sets up reasonably well for 2025, though we are forecasting modest contraction primarily due to the more challenging comp stack the segment will face around the Super Bowl and in the second half of 2025,” Santarelli said. “While baccarat is always volatile and accordingly difficult to forecast, assuming a drop environment that is largely benign, we expect modest gaming revenue growth given some easier hold comparisons over the second quarter to fourth quarter 2025 period.”

Like slots, non-baccarat table drop has been stable in recent months, though Santarelli expects November to be challenged by the tempered year-two performance of F1. This stability should continue into 2025.

“Given normal hold dynamics over the course of 2024, we anticipate non-baccarat table gaming revenue will be roughly benign in 2025, with a bias to a modest year-over-year gaming revenue decline for the segment,” Santarelli said.

Strip revenue per available room comparisons in 2024 have been robust year-over-year, but the rate of growth has decelerated over the course of the year and Santarelli expects fourth-quarter same-store revenue per room to contract for the first time in years.

“Accordingly, and hampered in part by the challenging first quarter of 2025 year-over-year comparisons with the Super Bowl, we expect 2025 revenue per available room for the larger operators to compress in the low to mid-single-digit range,” Santarelli said. “As always, and one reason why we don’t put a ton of credence in revenue per room for Las Vegas casinos, the interplay between reported RevPar metrics and promotional intensity will be a key focal point. As such, our view of a down RevPAR environment in 2025 comes with the view that promotions remain relatively stable in 2025 and continue somewhat, on the favorable trajectory we are seeing as we exit 2024.”

While unlikely to be a major factor, 2025 will be influenced to some degree by changes in capacity. Demand will mostly shift and pricing will account for the shortfall in room supply. In April, the market will lap the closure of the Tropicana Las Vegas, while July will mark the anniversary of the closure of the Mirage. Further, MGM announced that rooms will go offline for a renovation project at MGM Grand. These supply changes rarely impact the broader market dynamics, “but acknowledging the changes is relevant to the outlook,” according to Santarelli.

Promotions have been a meaningful topic for Strip operators for some time, as investors have absorbed the increase in promotions as a percentage of gross gaming revenue post-2019. Santarelli doesn’t see this as “a distinct negative,” as the drivers include a greater mix of occupied room nights, higher average daily room rates driven by the crowding out of lower-rated transient business, favorable leisure average daily room night compression, and the event calendar, along with the high- end patronage the big events have drawn to the market.

While promotion as a percentage of gaming revenue is trending slightly higher over the last 12 months relative to 2023 (43.9% versus 42%), there are some favorable signs heading into 2025, Santarelli said.

Key among them is the reduction in incremental promotions as a percentage of room revenue. Room revenue is growing at a slightly faster rate than promotional spend over the last 12 months relative to the prior period, Santarelli said. Given a more limited event calendar in 2025 relative to 2024, Deutsche Bank sees a challenge to backing off promotions, though recent trends also “imply a reasonably healthy promotional cadence,” with promotional spend growth relative to hotel revenue growth improved over 2023.

“Though difficult to see given the event and table hold impacts that influenced 2024 property margins, operators cycled the material increase in union labor costs in 2024, and we believe other expense line items are slowing in their rate of growth and will continue to slow in 2025,” Santarelli said. “As such, we believe the setup on the expense side is somewhat favorable as we head into 2025. That said, when dealing with large fixed-cost assets, demand and spend per visitor will drive the margin story. Given our view of a negative net revenue environment in 2025, we view 2025 as another year of margin contraction for each of the operators in our coverage universe. We expect the margin story to show signs of improvement in the second half of 2025 relative to the first half given potentially easing comparisons, primarily related to table hold.”