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Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
Gregg Carlson report sample Las Vegas Strip Ecosystem without pics
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Gregg Carlson report sample Las Vegas Strip Ecosystem without pics

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Market share analysis of the Las Vegas Strip. Financial analysis of various LV Strip properties.

Market share analysis of the Las Vegas Strip. Financial analysis of various LV Strip properties.

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  • 1. GREGG CARLSON Gregg Carlsoncarlson.requests@gmail.comLas Vegas Strip Market Analysis<br />April 20, 2009<br />The Las Vegas Strip as an Ecosystem<br />Battle for market share in progress<br />The original intent in undertaking this research study was to simply update our viewpoint of the future Las Vegas Strip (i.e. the Strip) supply pipeline, package it and watch events unfold. As the story is not yet complete, the future landscape of the Strip remains in flux. As a result, any analysis must be completed with assumptions and in stages as new developments occur. Events and market conditions that are unfolding as we write can and likely will have a significant impact on Las Vegas Strip operators for several years into the future.<br />We have crafted an analysis of the Strip that looks past the current headlines into 2010 and beyond that focuses on the street as a whole as well as individual property market position’s (on a market share basis) within the context of a likely upcoming significant supply increase as we assume that MGM’s City Center and the Fontainebleau/Cosmo (or some combination of) (2) open during late 2009 - 2010. <br />We have built a sensitivity model based on overall visitor volume and individual property market share/fair share assumptions. Recent history point’s to property market share adjustment pattern’s that suggest adjustments are likely to be predictable and unevenly distributed among individual properties across the market. The Strip has recently exhibited increased elasticity of demand with an overall lack of pricing power that has increased, as pressure on the consumer/Las Vegas Strip customer has built during the current recession. Mr. Steve Wynn, the current operator at the top of the pricing/quality matrix within the market, recently indicated he will price his Las Vegas Strip product (for rooms, food & beverage, etc.) to optimize traffic within his targeted market/customer profile, essentially sacrificing rate to do so. We believe this pricing pattern exerts downward pressure on properties below Wynn in the ecosystem as higher quality properties cannibalized by Wynn, in turn cannibalize those below. <br />Thus the term “ecosystem” – the complex of a community of organisms and its environment functioning as a ecological unit , appears to be an apt description for the thesis developed through this analysis. Given the current demand/supply dynamics, we have looked at the market in a matrix that addresses; (1) visitation vs. supply; (2) top of the market and new supply impact on the entire ecosystem in terms of market share adjustments, and the resulting; (3) impact on returns on invested capital (ROIC), valuation implications and free cash flow on specific market segments; (4) possible restructuring implications for MGM; (5) current and future geography issues for the Strip and finally, (6) other near-term issues.<br /> <br />EXECUTIVE SUMMARY<br />Visitation vs. supply - Our model assumes that City Center and Fontainebleau/Cosmo (2) open in late 2009 to 2010, adding approximately 11% to the Las Vegas Strip supply/capacity. Annual visitation must move up from approximately 39 to 43 million visitors (6) during 2010, 2011, etc. to avoid cannibalization of incumbent properties. While this may be possible, with current visitation in decline owing to the consumer recession, near term traffic statistics do not support an increase. While our model assumes that City Center will capture visitors and market share, the question is, will the property grow the overall market similar to the Mirage in 1989 and Bellagio in 1998? Our model points to a difficult overall market at best to a “Darwinian” market at worst for specific properties and market segments, if overall market growth is less than supply growth. <br />Specifically, if overall market growth is less than supply growth, mid market and bottom market properties are most vulnerable to market share shifts (losses) as we expect that City Center will capture market share. While the jury remains out on future overall market growth, in recent years/quarters, we have discerned specific pattern shifts among properties and have seen market share shifts increase and expect this trend to continue during 2009 in front of the City Center and possible Fontainebleau/Cosmo (2) openings. <br />Market share analysis – Viewed from a market share vs. fair share basis, the market exhibits patterns tied to the quality and market position of individual properties with a handful of properties taking a greater than their fair share of revenue vs. the majority that do not. Given the overall lack of pricing power in the market and negative supply vs. demand conditions for the foreseeable future, we expect the “market share” environment to continue, if not intensify with properties at the top of the market (Wynn/Encore and Bellagio for example) continuing to take share from those below. We believe this environment intensifies an overall revenue “waterfall” effect with not much water left at the bottom of the market, unless the market grows at or above the rate of supply growth. As a result, overall market pro-forma property ROIC’s and free cash flow yields are at risk for continued decline at an uneven rate depending upon where individual properties fit into given market segments within our waterfall matrix.<br />ROIC and free cash flow yields - We have analyzed on a pro-forma basis the ROIC and free cash flow yields within our waterfall market share framework and found that top of the waterfall, properties appear to be better positioned from a cash flow return and yield basis than properties further down the waterfall. While mid waterfall properties exhibit marginal positive return characteristics, bottom waterfall properties appear to be at the greatest risk for negative ROIC and free cash flow, even under our most optimistic scenario with market growth approximately equal to the supply growth rate tied to the City Center and Fontainebleau supply. We believe this has significant implications for mid tier and lower tier properties as both slide south in our waterfall model with some properties potentially sliding out of the model altogether.<br />MGM’s restructuring thesis – We believe that potential for low to negative pro forma ROIC and free cash flow outcomes have implications for MGM’s current restructuring effort and potential individual property buy/sell decisions. Without overall visitation growth in excess of supply increases, we see negative pro-forma returns and capital availability/costs limiting buyer appetite/ability to do deals therefore increasing the probability that MGM Las Vegas Strip properties remain in MGM’s hand’s. <br />Las Vegas Strip geography – We have presented our analysis in a map format and believe geography matters as we illustrate that landscape becomes more difficult on the Strip North of Wynn’s Encore property (See Figure 3) as northern Strip development has largely come to a halt. The area is home to several suspended/cancelled projects including the MGM/Kerzner JV, the Frontier site and Echelon. Recently, the public company owner of the Riviera defaulted on it’s debt while the Sahara redevelopment project is in doubt. As for Echelon, our guess is that Boyd will sit back and watch the City Center opening before considering restarting development. Given the recent negative headlines re: Fontainebleau’s lenders suspending funding for the project, this property appears to be at risk for suspension as well. In short, it is not easy living on the north end of the Strip. Given the difficulties faced in the area, combined with the lack of credit availability and overall difficult economic environment, we believe projects in this area will remain on hold for the foreseeable future.<br />On the other hand, City Center will open in our opinion and potentially move the center of Strip “gravity” to it’s neighborhood. At the same time, in our opinion, it is possible that this project stifles future development for potentially several years in general and specifically in the north and also influences near term potential property by/sell decisions (if any) that fall out of the MGM restructuring process. <br />In summary, while we have not included geographic adjustment to our individual property market share calculations, geography matters as we believe the present & future known geography of the Strip influences, individual property performance, future development decisions and potential near-term buy-sell transactions (i.e. valuations, cost of capital, etc.). It is also possible, that future supply increases remain slow or go to near zero for the next several years (post the City Center & possible Cosmo/Fontainebleau/Echelon openings), ultimately being determined by the overall growth of the market and longer term success of Wynn’s Encore project, City Center and possibly Fontainebleau, Cosmo and Echelon. <br />Other issues to watch for:<br />Company Q109 earnings releases and commentary. Commentary and results suggesting that the market has stabilized would be a near-term positive. Potential near term negatives include further visitation and revenue weakness as well as the possibility of margin compression due to the promotional environment. We have not included individual company Q109 earnings/valuation analyses in this report. For specific thoughts and analysis of specific companies, feel free to call me.<br />MGM, STN and HET, etc. restructuring news. Likely to be as important, if not more so, than than Q1 earnings results. <br />Near term visitation, revenue, spending statistics, room rate data and company commentary re: near-term forward booking trends and company results. Data indicating stabilization of recent negative trends would be viewed as positive. Sustained improvement providing evidence that the worst is over and trough conditions are behind us would be a significant positive, potentially improving industry dynamics, forward company estimates/valuations and credit cost/availability. Data point’s here are currently important and can have a significant impact on company stock/bond performance.<br />MGM Las Vegas Strip property buy/sell transactions. While we expect few, announcements that do occur could have a significant impact on the industry and specific companies, depending upon terms, participants, transaction valuation, etc. <br />Additional industry bankruptcy announcements, if any. <br />Positive/negative overall economic news.<br />News flow tied to the future LV Strip supply model. Specifically City Center, Cosmo, Fontainebleau, Echelon and/or other project news could have a positive or negative impact on the model and issues discussed within this analysis.<br />Credit news, re: availability and cost of capital.<br />VISITATION vs. SUPPLY<br />Post 9/11/2001, visitation consistently increased year-over-year (YOY) on the Las Vegas Strip through the fiscal year ending June 30, 2007. Visitation flattened out during the first half of 2008 and then sequentially declined during Q308 and Q408. Furthermore, visitation significantly declined during Q4 2008 at a negative 10.4% YOY growth rate followed by similar declines during January and February 2009 (the latest data points). Or model assumes that City Center and Fontainebleau open during near the end of 2009 to 2010 adding approximately 11% to Las Vegas Strip capacity. To completely absorb the capacity we estimate that total visitation must move to a range of 42 to 43 million (based on a current 38 - 39 million visitor base). We have built the accompanying chart that presents the recent historical (since 2001) visitation vs. supply relationship on the Strip. For 2009 – the end of the chart, 2013 we have made a number of arbitrary assumptions and left the current visitation run rate in place at an equivalent 2009 annualized run rate. While we are assuming this is unrealistic, the presentation is designed to illustrate the point, that on a near - term basis, a significant gap exists between visitation and upcoming supply levels on the street. We believe this gap and/or ongoing potential for, will frame a variety of issues for the industry vis-à-vis the Las Vegas for sometime into the future. (5)(6)<br /> Figure 1 – LV Strip vs. Room SupplyXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX<br />________________________________________________________________<br />Source: Carlson Research, Las Vegas Convention and Visitors Authorityxxxxxxxxxxx<br />Figure 1 (a) Recent % Change in Room Supply and Visitationxxxxxxxxxxxxxxxxxxxxxxxxx<br />___________________________________________________________________<br />Source: Carlson Research, Las Vegas Convention and Visitors Authorityxxxxxxxxxxxxxxx<br />Recent visitation data points remain negative. While we assume other potential Strip projects that add to future supply will remain mothballed for the foreseeable future (Echelon, the Frontier site, possibly some combination of Fontainebleau/Cosmo, etc.), the market will need to grow at a significant rate to absorb City Center and some combination of Fontainebleau/Cosmo. Given current difficult economic conditions it remains to be seen whether these projects are intriguing and differentiated enough to grow the market at a commensurate rate such as the then game changer Mirage did in 1989 and Bellagio did in 1998. More recently, our calculations indicate that the late 2007/early 2008 Palazzo property opening did not grow the market at a rate beyond and may have been less than the supply increase, thus cannibalizing the market and likely the Venetian, as LVS’s fair share of revenue dropped from above to near the combined fair share of supply, post the Palazzo opening (See Table 2). While Wynn has yet to report results for a full quarter of Encore, current 2009 street estimates for the property appear to be close to the property’s fair share of supply. The equity market will soon see where 2009 estimates adjust to, based on Q109 results. <br />In summary, the City Center (plus Fontainebleau/Cosmo and overall supply increase) vs. overall market growth impact question will remain for the duration on 2009 and likely well into 2010 and potentially beyond. Our sensitivity analysis compares various overall market growth assumptions to supply growth assumptions within a market share assumption framework for individual properties. Our analysis indicates that market growth less than supply growth scenario likely creates conditions where properties and companies are vulnerable to negative market share adjustments. History suggests that adjustments will be applied unevenly with certain properties being negatively affected more than others.<br /> <br />EnhancedMetaFilefalse* MERGEFORMAT<br />MARKET SHARE ANALYSIS<br />Our analytical view of the Strip is framed in a market share perspective. While our framework is likely more simplistic and cleaner than the messiness of actual reality and does not deal with a whole host of issues connected with individual company/property strategy, market segment position and financial model characteristics of individual companies and properties, it provides a structure to develop a forward looking thesis. It also is consistent with the growing theme on the Strip that the Strip market has become more competitive and market share driven given the decline in the existing overall market. Recently Steve Wynn indicated that he would sacrifice price to drive traffic into his Las Vegas properties. At a recent investor conference, Wynn indicated that the Las Vegas Strip market is becoming more market share driven, due to the recent overall market shrinkage and lack of a near term visible turn around. As we write, both Wynn and LVS announced new price driven promotional strategies for the Strip for 2009. We expect these conditions to persist until overall economic conditions improve.<br />Given current conditions within the LV Strip market, combined with incremental supply growth, we believe the market share focus and pressure on the players within the market will persist, if not increase looking forward into the City Center opening and beyond into early 2010. While we expect City Center to capture market share, the question that will remain for awhile, is if City Center and Fontainebleau can grow the overall market enough to absorb the incremental supply? While our opinion, is that MGM believes that City Center will capture significant share, likely influencing their restructuring strategy, the ongoing question for MGM and others will be how much existing Strip supply will be cannibalized? The overarching issue of the supply/demand imbalance on the Strip tied to factors such as the overall visitation decline, Palazzo’s 2008 opening (that did not appear to grow the overall market at an equivalent supply growth rate), and Encore’s recent opening along with the now beginning of the City Center reservation ramp-up pre-opening phase, will likely keep significant pressure on the incumbent’s to maintain traffic into their Strip properties, for the foreseeable future.<br />We have examined historical fair share and market share by major Strip operators and properties (see figure 2) as well as revenue performance by properties for the years 2006 – 2008. Our analysis indicates better/worse than fair share performance by company and individual properties. On an individual property basis, Wynn, Bellagio, Mandalay Bay, MGM, the Mirage and the Venetian have outperformed the remainder of market, HET (3) has performed near it’s fair share position, while most other properties have underperformed. For LVS, while the Venetian outperformed the market prior to the Palazzo opening in early 2008, the Venetian/Palazzo combination has declined as our combined property market share calculation is near it’s fair share (See Table 2, for specific detailed information). The jury is still out for Encore due it’s recent opening and lack of operating history. We also examined the properties from a recent YOY decline perspective. On this basis, the YOY declines are uneven as well with the decline patterns roughly matching up with market share patterns, specifically as properties at the top of the share model generally experienced smaller recent YOY declines than those living in the lower tiers of our market matrix (see Table 3 for additional information).<br /> Figure 2 – Market Share vs. Position Share by PropertyXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX<br />Source : Carlson Research<br />Figure 2(a) – Market Share by OperatorXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX<br />Source: Carlson Research<br /> Figure 2(b) – Market share by Property + Harrah’s (1)<br />Source: Carlson Research<br />Harrah’s does not disclose individual property information<br />.<br />Recent scuttlebutt from Las Vegas Strip and visits to individual properties, appear to be roughly inline with our data, suggesting that the overall market decline is currently being unevenly felt on the Strip. Given the history, combined with top of the eco-system properties like Wynn and Venetian currently being forced to use promotional/pricing strategies in an effort to maintain share, those below are feeling the pressure. We believe recent trends will continue if not accelerate into the City Center opening and beyond if City Center does not grow the overall market. <br />EnhancedMetaFilefalse* MERGEFORMAT<br />Based on our view, we built a sensitivity analysis model of the Strip market (see Table 4) in a 2010/2011 post City Center/Fontainebleau opening environment that addresses overall market growth and individual property market share issue implications. At the market level, we developed four scenario assumptions; (1) zero growth in the market from our base case 39 million visitor assumption; (2) then 2%, 3% and finally 11% (overall market growth equals supply growth) growth assumptions. Within the context of the market growth assumptions, we also assume City Center and Fontainebleau market share assumptions are; (1) 3%/1% ; (2) 4%/2% ; (3) 5%/3% and our most optimistic assumption; (4) 6%/5% (market share equal to market growth).<br />In addition to the above, we have made market share assumptions for incumbent properties. Consistent with recent history, our subset assumptions here are that mid waterfall and bottom waterfall properties lose share under all market growth scenarios as top tier properties also lose share to new supply in the current environment, but at a smaller rate of loss than lower tiered properties. Given the results, we expect the environment to remain challenging for mid waterfall players and most challenging for those at the bottom of the market as pricing power diminishes as we move south within the waterfall matrix, unless the the new supply drives commensurate overall market growth or more. <br />On a revenue basis, based on the assumption set, mid waterfall and bottom waterfall segments experience revenue declines from base assumptions despite overall market growth at minus approximate 9% - 10% peak to trough and minus 7%, base to best case market assumption. Within the top tier, revenue remains roughly flattish from base to best case market assumptions for incumbent players despite revenue increases/market share increases per our growth scenarios for City Center and Fontainebleau. <br />Figure 3 includes a table that illustrates our model results showing top waterfall tiered properties gain share at the expense of mid to bottom waterfall tiered properties, even in our most positive market assumption where market growth equals supply growth of 11%. For market growth less than supply growth, we forecast that negative share adjustments are larger in the mid to bottom waterfall segments than the top segment.<br />Figure 3 – Market Share by Waterfall Segment’s + City Center & Fontainebleau/Cosmo<br />____________________________________________________________________<br />Source: Carlson Researchxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx <br />Implications of the Analysis<br />We forecast that conditions will remain challenging for properties in the middle to bottom of the market as top and mid tiered properties with newer facilities/more attractive amenities/overall higher quality properties, cannibalize those below within the overall market ecosystem. This appears to be the case for all market growth rate assumptions within our model. At the same time, we acknowledge current trough conditions in the market and recognize that a rebound can occur in the future. For the lower half of the market, overall market growth will need to exceed supply growth assumptions for revenue growth to occur. Near term indicators do not support this assumption.<br />Properties near to or at the bottom of the “waterfall” are at risk for being moved out of the market altogether, therefore creating a potential reduction in supply that we have not modeled at this juncture. The model will also work’s best for incumbent’s in the top half of the market, if the new supply can drive visitation growth rates beyond levels of supply growth. For this to occur, our belief is that economic conditions must improve for the consumer in general and in specifically within California and Asia. (4) While recent data points have been negative, our sense is that the public interest level in City Center will be high, therefore providing MGM the opportunity to showcase the property creating the potential for growth. <br />Therefore the possibility exists for negative adjustments to steady state and take-out valuations as perceptions/assumptions change for forward property performance ranked in the middle and bottom half of our model, driven by a likely increasingly more competitive market. <br />At the company level we believe that Wynn is reasonably well positioned relative to it’s peers due to better pricing power and higher quality than most. MGM may be well positioned depending upon the outcome of it’s restructuring owing to it’s control of City Center (which is likely to create share for itself) and several properties near the top of the waterfall. LVS appears may or may not be in a reasonable market position given the “me to” quality of the Palazzo supply addition during 2008. Harrah’s appears to be vulnerable with a portfolio of properties in the middle of the market that may very well get pushed lower, while non major operators appear to be at risk.<br />ROIC and CASH FLOW YIELDS<br />We have modeled pro-forma ROIC and free cash flow yield calculations based on assumption sets in each market share tier (see Table 4). Our model assumes the highest ROIC and free cash flow yields will occur in the top tier of the waterfall. We we have not used actual invested capital, margin, debt costs and capital structure data as the industry is currently in a state of flux due to the current financial restructuring environment.. We have also used debt cost assumptions that likely do not match near term market reality. <br />Instead, our goal was to attempt to built a pro-forma model for each segment with some differences in an effort to compare relative performance of market segments that may include existing “as is” or restructured properties in a post opening City Center/Fontainebleau environment. We have forecasted varying ebitda margins due to perceived differing impacts of operating leverage within segments. We have also varied our ebitda return on invested capital assumptions but not varied interest expense and maintenance assumptions, which is likely unrealistic. Based on our knowledge of individual properties it is quite likely that actual maintenance cap-ex assumptions will vary with bottom of the market properties potentially most in need of maintenance capital. Also current conditions in the credit markets point to credit costs that are currently higher than our model, plus the lack of credit availability altogether for some participants in the market and/or potential buyers.<br />Our model indicates properties ranked in the bottom half of our model are most at risk for break-even to negative ROIC/debt spreads and free cash flow yields. This is the case even in our most optimistic modeled scenario of visitation growth (market growth) equal to future supply growth. More pessimistic interest rate assumptions drive cash flow yields further south from modeled numbers. This is currently being played out in the market as we write for some properties that have recently faced the largest YOY revenue declines(1). Given the current visitation decline, lack of pricing power and significant new ultra competitive supply growth profile, we forecast that these conditions will persist with the potential for supply to decrease, as selective properties go dark and slide out of the market altogether. <br />EnhancedMetaFilefalse* MERGEFORMAT<br />MGM’s RESTRUCTURING THESIS <br />While this research effort is not focused on MGM’s restructuring effort, we believe the relationship between future between market size and individual property market share/future competitive position and along with a myriad of other individual property strategic and financial issues has a direct bearing on future valuation and free cash flow profiles. As a result, issues described herein may be one additional variable to be added to the myriad of others that MGM, it’s lenders and potential acquirers of Strip assets must assess. <br />Our general thesis for the MGM restructuring process is that the process will be managed through some combination of:<br />Assets sales;<br />Three-way asset for debt swaps;<br />Debt exchanges and/or equity issuance and;<br />The completion of City Center with a late 2009/early 2010 opening.<br />Our assumption is that MGM and it’s major creditors have a framework developed for the overall process bounded by a variety of economic and strategic parameters. As each potential outcome in the overall process is not entirely certain and completely predictable, there is likely some flexibility built into the overall plan with the plan being event driven to some degree. As a result, outcomes in a particular branch of the plan may affect the decision making process by MGM and it’s creditors in other areas thereby influencing the willingness to do a deal and the deal terms for particular potential property transactions. <br />We believe MGM will open City Center, making the competitive landscape significantly more challenging, resulting in overall market growth (or not) that (barring as significant economic recovery) put’s much of the Strip at a higher risk for near term (2010, 2011, etc.) market share losses and YOY revenue/ebitda declines resulting in marginal to negative free cash flow. Because of this and other factors, our thesis is that Las Vegas Strip deals will not be easy to make. From a creditor’s perspective, MGM may be the best operator for specific assets on a go forward basis within this environment due to their history with individual properties, ability to take advantage of maintaining the property within their overall brand and system, plus the opportunity for City Center cross marketing opportunities. These factors, among others and given that given that credit is not cheap and readily available therefore limiting ROIC – WACC spreads , make us believe that MGM will hold onto most of their Las Vegas inventory and in general, fewer deals on the Strip will be made, rather than more. Of course, we could be wrong, as events are unfolding as we write.<br />In summary, the potential for mediocre to low to negative pro forma returns for some assets reduce the overall probability of transactions. Also, as our thesis assumes that future market share adjustments will be unevenly applied to specific properties and market segments (in addition to a host of other deal/transaction details for MGM and potential buyers), therefore we believe some properties are more likely legitimate transaction candidates that others. While the story will play out over the near future, on an overall basis we believe few transactions will actually be completed on the strip.<br />LAS VEGAS STRIP GEOGRAPHY<br />We believe the current and future geography matters. Over the last year the North end of the Strip has become a bone yard for suspended and/or cancelled projects. The area is also home to aged gaming properties and commercial/retail storefronts. In summary, the neighborhood appears to be moving in the wrong direction, we believe putting future project development in doubt, in the area for several years into the future given the current difficult environment.<br />At the same time, City Center’s potential success may very well move the center of gravity to the proximity of the project. These trends likely influence future development property performance patterns. While we have not modeled this into our calculations, we believe this will have an impact on market performance at the individual company/property level. Existing property fair share losers located at the north end of the Strip may be at risk for more loss, post a City Center opening, especially in a scenario where the market grows less than 6% (the incremental City Center market supply increase). Simultaneously, properties adjacent and/or close to City Center may benefit, particularly if City Center grows the the market. We expect the northern end of the Strip to remain challenged.. <br />Near-term, the North vs. the middle to South view of the strip may influence MGM buy/sell transactions. Long term, a permanent geographic pattern shift may very well occur driven by City Center.<br />Risks and disclosures<br />The thesis and opinions expressed in this report reflect my personal view. No part of my compensation was directly or indirectly related to specific recommendations or views expresses in this research report. Readers should consider this report as only a single factor in making investment, business and/or economic decisions. As we are not your advisor we do not take responsibility for any action you take based on this report. This publication is provided to you for information purposes only. The views in this publication are those of the author and are subject to change, and the author has no obligation to update it’s opinion or information in this publication. The author does not accept liability for any direct or indirect losses arising from use of this publication or it’s contents. The author recommends that readers of this report consult with any personal advisor’s they deem necessary before taking any actions based on this report. Actual results may and are likely to be materially different than those indicated in this report. Finally the author does not provide tax or financial advice and nothing contained herein should be construed to be tax or financial advice.<br />About the author<br />Is a Las Vegas based securities analyst that has followed the Gaming industry for a number of years after working in the in a Gaming industry focused hedge fund for five years as an analyst. Earlier in my career, as a CPA, I held a number of analytical/financial management positions within the Gaming/Lodging and Real Estate industries. In addition to modeling, discussions with companies and monitoring public filings and news flow (i.e. typical analyst company work), I visit properties where practical. <br />Footnotes<br />The Riviera Hotel for example, reported near zero cash flow as ebitda was entirely offset by interest expense during Q3 2008. The company recently filed a notice of default on it’s long term debt and faces bankruptcy.<br />As we write, the Fontainebleau and Cosmo (approximately 4,000 & 3,000 rooms = 7,000 rooms in total) potential property openings are in a state of flux and less than certain as to completion probability and dates. As a result, we have used a probability adjusted 4,000 room assumption in our model that we have labeled “Fontainebleau”. <br />Harrah’s (HET) does not break out individual property information for the Strip. On a consolidated basis during 2006 – 2008, HET’s market share is approximately to it’s position fair share. Therefore our model has not attempted to analyze individual HET property performance which may or may not be better or worse than HET’s consolidated Strip results. <br />Recent economic reports indicate that China’s economy may begin to rebound by mid 2009, while a rebound is not forecast for California until late 2010. At the same time, the California housing market has recently began to show signs of recovery. Approximately 30% and 12% of Strip visitors originate from California and foreign countries (with Asia being a significant subset category). See the LVCVA Las Vegas Visitor profile for additional information.<br />For additional analysis of visitation vs. supply see, ‘’Logjam in the Desert”, (July, 2008) by Bill Lerner – Deutsche Bank, that addresses in detail visitation levels required to support Strip future development and other related issues re: future supply growth.<br />We have not attempted to forecast visitation growth or levels in this analysis. As a result we have not directly addressed a long list of factors that affect forward visitation levels such as general and regional economic conditions, employment/unemployment, regional gaming supply trends such as tribal gaming in California, housing market conditions and consumer confidence, among others. <br />

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