California's Impact on the Las Vegas Strip, City Center & the port of LA

 

 

As the equity market look’s forward to the City Center opening in late 2009, the question remains,  when and will the Las Vegas Strip absorb the coming capacity increase?  The $8.4 billion City Center question is now being analyzed in the typical company and Wall Street bottom-up approach that deal’s with company model assumptions, market growth, share and segment analysis,  visitor and spend assumptions and forward booking modeling.

 

The 1989 opening of the Mirage grew the market. In 1998 and 2005 Steve Wynn grew the market with the opening's of Bellagio and Wynn while Sheldon Adelson grew the market with the Venetian.    More recently, Mr. Wynn and Adelson did not grow the market at a rate commensurate with the supply growth of Palazzo and and Encore. With the City Center late 2009 opening and openings that may follow in 2010 and beyond, the grow the LV Strip market question will remain open.

 

We grapple with the question by poring through bottom-up focused company, market share and visitation models, following company comment’s and staying attuned to our channel check output.   We must admit however, that after going through the exercise our confidence level in the models and Wall Street’s consensus thinking for MGM and the Strip is less than 100%. In an effort to gain some perspective and view the question from a different angle, we looked 300 miles away from City Center and the Las Vegas Strip (LV Strip) to Southern California (Sou CA). 

 

The U.S., California (CA) and the LV Strip are currently mired in the worst economic downturn since the depression 60 years ago. Due to the nature and depth of the current recession, our opinion is that broad economic factors carry a bigger weight on 2010 – 2011 LV Strip volumes than new property opening driven visitation/volumes similar to the Mirage, Bellagio and Wynn patterns, despite the fact that City Center may be a “category killer”.

 

As a result, we have augmented our bottom-up work with  a top down view of the issue and have focused on economic conditions in the neighboring state of CA, as CA as a whole and Sou CA are the largest geographic feeder markets for the LV Strip supplying approximately 30%/25% of LV Strip traffic during 2008. CA is also the 5th largest GNP in the world with a diverse economy tied to the balance of the U.S., Asia, Central America/Mexico and other economic regions of the world. 

 

Sou CA is also home to one of the most significant shipping lanes in the world and the busiest port in the U.S. as a significant entry point for Asian imports  and exports. Shipping volumes have dramatically fallen off  during 2009

(-20% YTD YOY) after negative YOY years in 2008 and 2007 that followed the peak positive year of 2006 as consumer spending  has cratered in the U.S..  With 60% of the port’s volume being import related and imports being significantly comprised of consumer goods, port volumes will not begin to recover until local and national retail inventories are rebuilt in front of/in response to increased consumer demand/spending. In summary, this is the connection to the LV Strip as port volume recovery, like the LV Strip, is dependent on increased consumer confidence and spending.  Therefore we view port volumes as a potential coincident/leading indicator for discretionary spending on the LV Strip  as volumes have fallen at similar rates on the Strip and at the LA ports, since the peak year 2006. In summary, the economic health of CA, is not only a major direct contributor to the economic performance of the LV Strip but also a major barometer of general  overall economic health of the region, the U.S. and various international economies that drive visitation to the market. As a result,  it is hard to see a significant LV Strip recovery without economic recovery in CA. 

                                                                                                                           

This research focuses on various CA economic indicators and their relationship to LV Strip traffic and spend metrics. We examined historical relationships in a variety of metrics and also provided the latest data points. We included CA economic data from a variety of sources and have also examined the latest forecasts.   While the street focuses on terms such as the high end market, mid market, economy, FIT, convention, midweek and other metrics,  we believe it is also important to take a bigger picture view of the LV Strip that is grounded in macro economics and geography and have focused on economic conditions in the largest feeder market for the LV Strip, Southern CA. 

 

The CA/Sou CA economy has suffered during the current economic crises. Various economic measures for the state have significantly declined during the recession. While some may be bottoming, others are continuing to descend. In this research we used LA Port activity as a broad indicator for CA, U.S. and International economic health as the LA shipping terminal is the busiest in the U.S. and one of the major terminals in the world as a significant amount of goods ($200 - $300+ billion per year) flow between this port,  the U.S. and Asia. YOY port shipments have significantly declined during the current U.S./worldwide recession. Recent metrics have remained negative as the US consumer has retrenched and Asian economies have contracted due to export declines. The decline in port activity is also indicative of difficulties in the Southern CA economy as it is a major employer and indicator of overall local economic activity. While the Southern CA and CA economies are diverse, during the current recession, CA has experienced a more severe economic decline than many other regions in the U.S. due to the implosion of residential real estate and and the financial services industries, among other factors.

 

As we write, the Chairman of the fed recently indicated that some level of overall economic recovery may be around the corner. While this may be the case, our survey of recent economic CA forecasts and recent data points appear to tell a less positive story and one that indicates recovery visibility remains a bit cloudy as current economic data points are a mixed bag as some significant previously negative key consumer related indicators (e.g. CA/Sou CA unemployment) continue to deteriorate. As a result, we a maintain a cautious view of the LV Strip looking into 2010. Our belief is that the LV Strip will not significantly grow during 2010 until conditions in CA improve which is currently forecasted to be a back half 2010 to 2011 event.

 

>         Southern CA is the most significant point of origin for LV Strip visitors. Between 2004 – 2008, 28% - 33% of LV Strip visitors originated from CA with 24% - 29% originating from Southern CA.

>         Historically, Southern CA selected general and consumer related economic statistical trends re: income, employment, and GDP have tracked LV visitation and spend data during the period examined, 2001 - 2008.

>         LV Strip YOY volume data has also tracked YOY declines in Southern CA sales of existing homes and prices for the period examined, 2003 – 2009.

>         Like the LV Strip, tribal YOY gaming revenue in CA and the Western U.S. declined during 2008. At the same time however, CA tribes appeared to take share from the LV Strip during 2008.

>         Recent YOY LV Strip traffic and volume indicators including visitor volume, convention delegates, enplanements/deplanements, I-15 traffic and gaming revenue like various CA economic metrics, largely remain negative during 2009 for recent data points and on a YTD basis.

>         Recent Southern CA key consumer related economic data points (i.e. income and unemployment remain largely negative while some housing related data points may be bottoming out.

>         Recent Southern CA economic survey forecasts authored by UCLA and the Los Angeles County Economic Development Corporation (LAEDC) remain mostly negative and point to continued challenging conditions. Specifically, unemployment is expected to continue to rise into 2010. General economic indicators are not forecasted to significantly improve during 2009 and possibly not before 2011 in a meaningful way. Key recent economic data points largely remain negative. Forecasts call for some improvement in 2009, modest CA economic improvement in 2010 with more significant growth to resume in 2011.

>         Anecdotal evidence (i.e. informal surveys of local contacts, observed theme park and restaurant volumes, etc.) recently collected in Southern CA are negative and appear to be coincident indicators that are consistent with current local negative economic headlines.

>         We surveyed economic conditions in Arizona and like California, conditions are negative. Approximately 9% of LV Strip visitors originate in AZ, so the market is important. Economists are forecasting that unemployment will continue to rise to the 10%+ level into 2010 and then decline slowly with the rate not reaching more typical historic 6%ish levels, until 2012. The overall forecast for 2010 economic growth is meager. As a result, we are forecasting that 2010 AZ visitation to the LV Strip will be comparable to 2009 and below recent peak year levels on the LV Strip.

>         We are betting against the build it and they will come LV Strip thesis in 2010 as we believe macro economic conditions will outweigh the new property drives visitation factor, despite that fact that City Center will attract attention and visitation.