A Las Vegas Analyst's Odd Prediction

It has become incontrovertible conventional wisdom that Las Vegas is overbuilt and that several large projects came to fruition at exactly the wrong time. The city boasts nearly 149,000 hotel rooms, of which 11,000 were added since the recession really took hold in fall 2008, thanks mainly to the openings of Wynn Resorts’ Encore tower, MGM Resorts’ CityCenter, and two expansions at the Hard Rock Hotel.

Yet late 2010 brings another debut, the $3.5 billion Cosmopolitan of Las Vegas, a hotel and casino project owned by Deutsche Bank. In mid-December, Cosmo plans to dump another 2,000 of its eventual stock of 2,995 rooms onto the flailing, bargain-basement Strip immediately north of the struggling CityCenter.

Which is why Union Gaming analyst Bill Lerner’s July 1 email blast made eyes fall out of their sockets. “Cosmopolitan, we’re not so concerned about Las Vegas Impact.”

Huh?

Could it be that he figures things are just so bad that they can’t really get any worse? How could yet another wad of rooms, especially those squeezed between the Bellagio and Aria (CityCenter's main hotel), not have a negative impact?

It’s very, very difficult to decipher Lerner’s logic, and after saying he’d try to call Portfolio back, he did not. But Lerner's note is yet another example of him crossing swords publicly with another analyst, this time Shaun Kelley of Bank of America Merrill Lynch. Kelley issued a June 30 report calling Cosmo “the largest negative for CityCenter and MGM as the market is clearly struggling to absorb” the 6,000 rooms added by the six-month-old $8.5 billion project.

Lerner refers in his missive to his comments being a reaction to “a competitor” and acknowledged to Portfolio that Kelley is his unnamed sparring partner. And Lerner does, in his note, acknowledge there’s an oversupply in the market and even parenthetically notes that “one additional room is too much.”

Yet Lerner writes that room rates at the Cosmopolitan—the resort’s website is asking for $275 for opening weekend, well above the current average luxury Vegas room of about $200—could “have an odd, unintended impact on the market as it could pull rates up (not down, as we think was implied in this competitor’s research report.)”

Lerner never actually explains how or why that would happen. His best bet is a fantasy that “if operators theoretically colluded and took rates higher, we’re not sure demand would be negatively impacted of note.” Right, because Steve Wynn, Jim Murren, and Sheldon Adelson, none of whom even like one another all that much, are seriously going to make such a pact. The SEC would just love that.

Parts of Lerner’s missive suggest that despite Cosmo’s higher room rates, it will be noncompetitive with Bellagio, Aria, Wynn, and Venetian because it’s not going after the high-end gambling business. His rationale: Deutsche Bank is inexperienced as a casino operator and is too risk averse to provide the sort of credit to players that would make it viable. Cosmo also has the added detraction of not being a part of a large gaming conglomerate and, as such, has no feeder casinos the way Harrah’s and MGM does.

In his report, Kelley agrees that Cosmpolitan's room rates are unrealistic, noting Cosmo has no significant convention facility. So Kelley concludes that the resort will “compete for transient biz”—i.e., walk-by traffic—“which is already highly competitive.”

How does anyone compete for that, Mr. Lerner? Why, with lower room rates and gaming-table minimum bets, among other tactics.

Had Lerner only refuted Kelley’s claim that MGM’s CityCenter was most threatened by Cosmo, maybe there would be some logic. But Lerner doesn’t stop there, declaring, “Ultimately we aren’t that concerned about Cosmopolitan’s impact on Las Vegas.”

But wait. The room oversupply isn’t simply on the top end of the market. If, as Kelley and Lerner seem to imply, Cosmo will end up dropping sooner or later into the second tier of the market: 2,000 more rooms still makes an impact to the likes of Mandalay Bay, Mirage, and Paris. Right?

Lerner also makes this rather peculiar claim: “Las Vegas has a room-rate problem these days, not a visitation or even a gaming problem.” It’s a very weird remark, especially when one of the other items in his July 1 email was that air traffic to McCarran International Airport was down 1.6 percent this May versus May 2009 and is off 3.4 percent year to date. The Las Vegas Convention and Visitors Authority, which tracks the number of room nights occupied, says the city is up just 1.1 percent through April, despite already discounted rooms. That data is especially anemic given that it is compared with 2009, one of the worst years on record for Las Vegas.

Lerner is an intriguing figure. He is the most frequently quoted analyst in the Las Vegas media by dint of his history as a Deutsche Bank gaming guru who in recent years opened his own firm, Union Gaming. He may be the only full-time gaming analyst in the business who is based in Las Vegas, so that also makes him accessible and gives him a certain level of street cred among business writers here.

Yet he’s also known as having surprisingly rosy outlooks that fail to comport with what actually comes to pass. In January, as we reported, he proclaimed CityCenter’s December opening a roaring success and predicted New Year’s weekend “may have been the strongest in MGM Mirage history." His metric? He and his staff eyeballed the scene on “a significant number of days and day-parts.”

The reality: CityCenter’s crown jewel, the Aria resort, had an awful 63 percent occupancy rate in its first full quarter.

“Their non-CityCenter results aren't great either—Adjusted Property EBITDA for the wholly owned stuff is down almost 20 percent,” wrote RateVegas.com blogger Hunter Hillegas. “Table games hold was down (it was at the high end of the range in 2009), though volume was up compared to 2009. REVPAR took another hit, to under $100 at $94.”

Other Vegas bloggers are now wondering about Lerner’s judgment. After I showed David McKee of the Las Vegas Advisor’s Stiffs & Georges blog Lerner’s July 1 message, he took to his site to mock it.

“Geez, I’ve not been feeling pessimistic about the December 15 debut of the Cosmopolitan…until somebody forwarded me a copy of a Bill Lerner analysis of the property,” McKee wrote. “Now I’m worried.”

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Steve Friess is a freelance writer based in Las Vegas. He writes the blog www.VegasHappensHere.com.