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Gambling News by Gambling Headquarters

Friday, March 24, 2006

Report: Falling Demand Brings Drop in Room Rates

 

Rapidly rising room rates took a rest in the first three months of 2006 following nearly two years of steady gains, gaming analysts said this week.

Rates for rooms on the Strip booked three weeks in advance fell an average 3 percent in the 2006 first quarter to $204, data from Bear Stearns showed. Midweek rates dropped 5 percent while weekend rates were up 1 percent.

Excluding Wynn Las Vegas, which only opened April 28, rates dropped 6 percent on average to $201.

Bear Stearns analyst Joe Greff said surveys of rates less than three weeks in advance show that operators are responding to softening demand by cutting rates further.

In first quarter of 2005, average rates were up 10 percent, midweek rates were up 11 percent and weekend rates were up 7 percent.

For all of last year, average rates were up 4.5 percent, midweek rates up 5.5 percent and weekend rates up 2.5 percent.

In the Bear Stearns first-quarter survey for 2006, average rates were down 3 percent at MGM Mirage properties to $208, down 10 percent at the former Caesars Entertainment properties to $192, down 13 percent at the former Mandalay Resort Group properties to $197, but up 7 percent at Harrah's Entertainment properties to $211.

Rates dipped 2 percent at The Venetian to $349, 10 percent at the Tropicana to $108 and 10 percent at the Stardust to $97. They increased 18 percent at The Aladdin to $240 and 23 percent at the Las Vegas Hilton to $176.

A similar survey of Strip operators by Deutsche Bank showed stronger room rate performance on average than Bear Stearns, but with room rates up on average 4.4 percent in the first quarter.

Each survey covers about 25 percent of the Strip market.

However, Deutsche Bank analyst Marc Falcone said the room rate surveys historically have been good barometers of stock price performance given Las Vegas operators' leverage from room rates to earnings.

CRT Capital Group gaming analyst Steve Ruggerio said visitation levels and occupancy rates in Las Vegas remain very strong.

Brian Gordon, a partner in the Las Vegas-based Applied Analysis financial consulting firm, said it would be unrealistic to maintain recent rates of growth for an extended period of time.

"Given the substantial run-ups in the past year, it was logical room pricing would hit some kind of a ceiling. At some point, budgets for leisure travel simply get pinched," he said.

Gordon said room rates have not topped out, but the acceleration in rates experienced across the board for the past 12 months to 18 months is not likely to continue.

However, different tiers have been hit differently by consumer demand in the past six months, Gordon said.

Specifically, lower-tier hotel-casinos have continued their inexorable room rate increases, especially as demand has been diverted from both higher-end properties and bargain destinations that have closed, such as Boardwalk, Bourbon Street and Lady Luck.

At the same time, room rates have slowed to a crawl and started to slide downward at top-tier properties, Gordon said.

"The range of room rates is narrowing across the sector," he said.

Ruggerio said the rate divergence shows low to middle market properties remain strong, partly thanks to a pricing umbrella from the top end hotel-casinos.

However, Gordon said that "at new price levels, consumers are more cost conscious when it comes to leisure travel. Visitors are more selective and the operators are having to respond."

"Room rates are a function of supply and demand, with occupancy being the other driving force. To maintain critical mass at a property, operators adjust room rates to hold up occupancy," he said.

Falcone said Deutsche Bank's longer-term survey through late April shows that rates are rising compared with previous years.

And Ruggerio said visitor levels and occupancy rates in Las Vegas remain very strong.

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