Apertor california and-lv_strip

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The report includes and analysis of the California economy and California's economic impact on the Las Vegas Strip.

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Apertor california and-lv_strip

  1. 1. Apertor Research www.apertorhospitality.comMay 19, 2010 Gregg Carlson Advisor 702.506.0475 x540California’s Impact on the Las Vegas Strip gcarlson@apertorhospitality.com“ Slow recovery ahead based on conditions 300 miles away”In our ongoing effort to judge prospective demand levels on the Las VegasStrip (LV Strip), we have updated our surveyed “top down” economic view ofthe Southern California/California (Sou CA/CA) economy. Sou CA/CA has beenand remains the largest feeder market for the LV Strip, supplying approximately26%/31% of LV Strip visitors during 2009.Sou CA/CA is also home to a diverse economy that is tied to the balance of theU.S., Mexico/Central/South America, Japan/China/Asia and other regions of theworld due to its manufacturing base, geographic location, variety of major industrysegments and significant shipping-transportation lane (one of the busiest ports inthe world and the largest in the U.S.). On a GDP equivalent basis, Sou CA/CA alsocontinues to rank as one of the largest economies in the world as of 2008 as follows: California[1] 8th Los Angeles Five-County Area[2] 17th Los Angeles County 19thCA has recently suffered through one of its worst economic downturns in history.While signs of healing have emerged, economic pain remains for the economy asa whole and for Sou CA consumers impacted by continuing high unemploymentand housing market stress, among other factors. Our research suggests that LV Stripvolume performance (visitation and spend) is tied to economic conditions in SouCA/CA. As a result, we continue to believe that industry “top-line” fundamentals andtiming of a recovery on the LV Strip will be significantly influenced by the shapeand breadth of the overall economic recovery in Sou CA/CA and more specifically,improvement in economic factors that impact Sou CA/CA consumers.1 California ranks 8th behind the U.S., Japan, China, Germany, France, the U.K. and Italy.2 The Los Angeles Five-County Area includes Los Angeles, Orange, Riverside, San Bernardino and Ventura Counties. ©2010 Apertor Hospitality, LLC. All Rights Reserved.
  2. 2. California’s Impact on the Las Vegas Strip May 19, 2010While recent (fall 2009 to February 2010) LV Strip volume-related data pointsremain well below 2006 to 2007 peak industry levels, several metrics (visitation,auto traffic and gaming revenue) have shown sequential signs of improvementfrom the late 2008 to early 2009 trough levels as they appear to be “less bad” on ay/y basis. Current consensus thinking is that convention group business volumelevels will remain challenged into the first half of 2010 before commencingrecovery during late 2010 to 2011. For LV Strip operators, the open question is,where will the numbers go from here?We previously studied Sou CA/CA LV Strip economic trends during July 2009. Atthe time, conditions remained challenged, with many surveyed CA economic datapoints trending flat or downward in direction. The forecasts we viewed at the timepredicted continued difficult economic conditions through 2009 and into 2010 forSou CA. Specifically, unemployment was expected to rise and significant challengeswere expected to remain in the housing market, while overall economic growthwas expected to remain weak. Based on the available data points and forecasts atthe time, we hypothesized that macroeconomic conditions would outweigh the“new supply drives visitation” factor, despite the fact that City Center would attractattention and visitation. Late summer–fall 2009 and early 2010 data points havegenerally supported this thesis.Current forecasts of economic metrics tied to LV Strip performance in the U.S., SouCA/CA and AZ suggest that while the worst may be over, recovery prospects willbe mixed during 2010 with a modest to less than robust recovery in 2011 to 2012.Our research suggests that the level of forecasted macroeconomic recovery willnot be sufficient to drive performance on the LV Strip between 2010 and 2012 toprevious peak levels (2006 to 2007). This implies that if recovery to historic peakvolume levels occurs, it will likely occur after 2012. Economic measures we surveyedwere generally not forecasted this far into the future, as credible forecasts for 2013or later are difficult to make at this juncture. Forecasts of select economic metricsthat do exist generally fall below levels achieved from 2006 to 2007, the peakperformance period for the LV Strip in the previous decade. As a result, we remainskeptical of near-historic peak level LV Strip forecasts in the foreseeable future.In addition to ongoing issues that could put the economic recovery forecast atrisk (national and regional housing concerns, unemployment and householddeleveraging issues, among others noted in this report), we expect Sou CA/CAtribal gaming to remain a competitive threat to the LV Strip. Also, given the slowgrowth and ongoing relatively weak demand environment we forecast for theLV Strip for the foreseeable future, we believe incremental supply (Cosmopolitan,Fontainebleau, etc.) would pose a further threat (cannibalization) to the existingLV Strip property base. ©2010 Apertor Hospitality, LLC. All Rights Reserved.
  3. 3. 1 California’s Impact on the Las Vegas Strip May 19, 2010Table of Contents 2 Executive Summary 30 Southern California Industry Trend Survey 2 Overview 30 Retail Industry 3 Key Takeaways 31 Summary of Southern California Industry Trends 33 Economic Forecast Survey 6 Recent National Macroeconomic Trends and the LV Strip 37 Tying It All Together 7 Consumer Confidence 8 Employment & Unemployment 40 Risks in the Analysis 10 Housing Market Data 12 Household Deleveraging Trends 13 Customer Origin for the Las Vegas Strip 41 Appendix A — California Alt–A & Subprime 13 Recent LV Strip Visitation & Spending Patterns Mortgage Distress–Reset Analysis 42 Appendix B — U.S. Mortgage Originations by Product 16 Specific Southern California/ California Economic Metrics 43 Appendix C — Southern California–Western Region Tribal Gaming Revenue and the LV Strip 16 Employment and Unemployment 18 Housing Market Data 47 Appendix D — Arizona Economic Forecast 18 Existing Home Sales and Prices 20 Mortgage Defaults and Delinquencies 49 Appendix E — 90+ Day Mortgage Delinquencies per TransUnion Database 22 Mortgage Resets: The Mortgage Reset Wave Is Here 24 Housing Starts 50 Bibliography 26 Linking Southern California Housing Prices to the LV Strip 52 Disclosures and Terms of Use 27 Population Trends 28 Southern California Port Activity 29 Personal Income and GSP Measures©2010 Apertor Hospitality, LLC. All Rights Reserved.
  4. 4. Executive Summary 2 California’s Impact on the Las Vegas Strip May 19, 2010Executive Summary Overview We have long held the view that the current industry downturn on the LV Strip is as much a function of deteriorating household budgets/wealth as it is an issue of over-supply from operators building inventory. In early 2008, Palazzo opened and did not grow the market on a fair-share basis during a time when the severity of the oncoming recession was not completely recognized. At the time of its opening, the national and California unemployment rate was ticking up from 4.78%/5.78% U.S./CA in 4Q07 to 5.37%/6.84% U.S./CA in 2Q08, while consumer confidence was ticking down as the front edge of the recession began to emerge. When Palazzo opened during 1Q08, our channel checks of casinos, restaurants and retail stores delivered a strong message that consumer behavior had changed, as traffic was starkly absent after many years of growth. At the time of these observations, neither the industry, Wall Street or the financial markets had yet to completely comprehend the magnitude of the downturn that was about to come, which would significantly impact the U.S./CA consumer and the gaming industry on the LV Strip. In the meantime, what may have not been completely recognized by the industry was that U.S. and California households were in the midst of taking an enormous hit to household net-worth (U.S. -20%) during 2008, tied to the ongoing U.S. and CA housing crash. Not long after Encore opened during late 2008, it became apparent that operating performance was going to be an issue as unemployment reached 6.86%/8.33% in the U.S./CA, consumer confidence plummeted and mortgage delinquencies continued to unabatedly increase. As unemployment continued to rise during 2008 and into 2009, it became a headline issue, although its use as a leading or lagging economic indicator remained a point of contention. At current high national and regional levels (10%–20%ish unemployed–discouraged- underemployed), we believe it is a factor influencing overall consumer sentiment, and along with other personal income/household wealth issues, affects consumer spending and behavior. While our research is focused on California, we begin by summarizing national consumer- related headline macroeconomic data points to provide some overall context, as the LV Strip is a regional, national and international destination market. We then illustrate the significant link between California and the LV Strip. We present data on recent visitation and spending patterns that appear to support our thesis that household balance sheet and income drives current industry demand (as opposed to the latest and greatest gaming facility). We then drill down into California’s economic conditions in general, and the Sou CA/CA consumer more specifically. Although there is some grey area as to the importance and interplay of the specific economic metrics we analyze, we summarize the metrics in Sou CA/CA that we believe most impact California consumers and their discretionary spending ability. Beyond the Sou CA/CA consumer, we also examine broader measures of specific economic activity in Sou CA (port traffic, population trends, etc.) and income-GDP measures.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  5. 5. Executive Summary 3 California’s Impact on the Las Vegas Strip May 19, 2010 Where applicable, we link Sou CA consumer related and applicable general economic data points to LV Strip volume and spend metrics. Beyond economic measures, as a proxy for consumer spending patterns, we provide color on recent Sou CA retail industry trends as well as a recent summary and outlook of Sou CA based major industry segments. We summarize Sou CA economic forecasts by providing survey history and the latest forecasts to make forward-looking inferences regarding the future of the LV Strip over the next couple of years. We also illustrate Sou CA tribal gaming and LV Strip market share and present economic data for Arizona, the second largest LV Strip feeder market in the U.S. Key Takeaways „ Although recent surveyed U.S. economic data points have improved from trough levels, they remain far below peak 2006 to 2007 levels. Consumer confidence remains weak and well under non-recession period levels while unemployment remains high and is expected to remain at elevated levels for the foreseeable future. While the housing market may be showing signs of bottoming out at well below recent peak levels, mortgage distress continues to increase. „ California/Southern California remains the most significant point of origin for the LV Strip. Between 2004 and 2009, 28%–33%/24%–29% of LV Strip visitors originated from California/Southern California. „ LV Strip volume data (e.g., gaming revenue and visitation) have tracked annual declines in recent years for key Sou CA macroeconomic indicators such as employment/unemployment, housing prices/ starts and mortgage delinquencies/foreclosures. „ While recent select LV Strip traffic and volume metrics (e.g., gaming revenue and visitation) have improved on a y/y basis owing to easy comps, they remain far below peak levels. Recent Sou CA data points remain a mixed bag, as some have shown improvement (e.g., port activity and existing home prices) while others remain weak (e.g., employment and mortgage delinquencies/foreclosures). „ Recent Sou CA/CA economic survey forecasts predict a relatively weak and protracted recovery with overall conditions remaining challenged in 2010 and recovery taking hold in 2011. Employment growth is expected to remain weak during 2010 with muted gains in 2011. Unemployment levels are forecasted to remain at double-digit levels well into 2012 and 2013. While the housing market may grow from trough levels, significant risks remain in Sou CA/CA tied to mortgage distress, continued high unemployment, large numbers of negative loan-to-value mortgages and mortgage reset risk.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  6. 6. Executive Summary 4 California’s Impact on the Las Vegas Strip May 19, 2010 „ While population growth slowed during the recession, growth is expected to continue for the foreseeable future and remain a driver of overall Sou CA economic growth. „ Sou CA port volume historically has been correlated to LV Strip volume. After a significant decline in 2008 and in the first half of 2009, volumes improved during the second half of 2009. Port volumes are expected to grow modestly during 2010 at 5% and then continue to grow at a modest pace thereafter. Volume levels similar to 2006 through 2007 peak levels are not expected over the next couple of years. „ Historically, LV Strip volume has been correlated with Sou/CA personal income and GDP growth. Personal income is expected to remain flat in 2010 and grow moderately (below recent peak levels) during 2011, implying that growth on the LV Strip will be moderate. „ Sou CA retail sales are expected to experience slow growth in 2010 with some modest sequential improvement in 2011. Growth in the retail sector has typically been correlated to volume growth on the LV Strip, implying that growth will be weak in 2010 on the LV Strip with modest recovery to follow. „ In the aggregate, Sou CA industry segments are expected to face a slow growth environment during 2010. Some sectors will face continued distress (building, commercial real estate and financial services) while some sectors will experience a level of recovery (business services, health care and technology). Employment growth in most sectors will remain muted. „ Sou CA economic forecasts predict little recovery in 2010 and modest recovery in 2011. While a double-dip recession is not expected, the forecasters point out that remaining risks may bring bumps along the way. „ While data is not yet available for 2009, data for 2008 and prior years suggest that Sou CA tribal gaming operations have taken some regional market share from the LV Strip. Note: Data for 2009 should become available in summer 2010, and will then be used to update our analysis. „ Arizona remains the second largest state in terms of LV Strip visitor point of origin, contributing 10% of 2009 visitor volume. Arizona was one of the hardest-hit states in the U.S. recession. While some economic metrics in Arizona have improved recently, key metrics like unemployment are not expected to reach bottom until the second half of 2010. Forecasts call for a weak protracted recovery that stretches beyond 2010 and 2011.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  7. 7. Executive Summary 5 California’s Impact on the Las Vegas Strip May 19, 2010 In summary, recent Sou CA economic data points remain well below levels that existed during the peak performance years on the LV Strip (2006 to 2007). Sou CA economic forecasts we surveyed call for a choppy 2010 followed by moderate recovery in 2011 and 2012. Forecasted U.S. and Sou CA economic data points for 2010, 2011 and 2012 remain well below 2006 to 2007 levels implying that LV Strip performance will also remain well below peak year levels at least through 2012. Therefore we presently see limited possibility of a repeat of LV Strip peak performance levels in the foreseeable future based on these data points. Additionally, the lack of household-debt-supported consumer spending and the threat of Sou CA regional tribal gaming market share gains also reduce the near-term probability of a recovery scenario. Finally, given the slow growth and ongoing relatively weak demand environment we forecast for the LV Strip for the foreseeable future, we believe incremental supply (Cosmopolitan, Fontainebleau, etc.), would pose a further threat (cannibalization) to the existing LV Strip property base.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  8. 8. Recent National Macroeconomic Trends and the LV Strip 6 California’s Impact on the Las Vegas Strip May 19, 2010Recent National Macroeconomic Trends and the LV Strip The economic forecasts and headlines we surveyed suggest that the recession, which officially began in late 2007 to early 2008, ended in mid-2009. It is now well documented that the recession resulted in a huge hit to consumers in the form of job losses (8.4 million jobs disappeared), ongoing unemployment, income losses, and a massive negative wealth hit due to the housing crisis. While household asset values have significantly declined, household debt remains high and remains to be de-leveraged through restructuring and pay-down. There was evidence during the second half of 2009 that the national economy began to grow again due to inventory restocking, consumer spending tied to “cash for clunkers” and housing-related incentive programs, among other factors. Despite the recovery headlines, the consensus view is that challenges remain for consumers, as unemployment is expected to remain at elevated levels, employment growth is expected to remain at muted levels, and total employment is expected to remain well below peak 2007 levels into 2013 (2 million jobs below 2007 levels at the end of 2012, per UCLA’s latest Anderson forecast).[3] As we write, signs of economic recovery are spreading (e.g., increases in retail sales from historically low levels, recent existing home sales increases, export activity increases and growth in business equipment and software). For 2010 and 2011, the key forecasting issue is the shape, breadth and speed of recovery. U.S. GDP growth rate forecasts we have surveyed range from 2% to 3% for 2010 to 2012, which are not viewed as strong on a typical post- recession basis. Economic forecasters we surveyed during the summer of 2009 have recently become more positive, hinting that 2010 may continue to improve to some degree. As the most significant national destination market in the U.S. gaming industry, the LV Strip has suffered during the recession, demonstrating that it is not immune to national and regional economic trends. Post-recession, during the second half of 2009, the market appeared to recover in some metrics on a y/y basis owing to easy comps. On an absolute basis, however, gaming revenue remains well below the peak market levels achieved during 2006 and 2007. Like the U.S. economy, the question for the LV Strip is focused on the strength, shape and breadth of recovery between 2010 and 2012. Our research suggests that LV Strip gaming revenue trends are correlated to overall consumer spending and changes to household net worth. In recent years, U.S. GDP growth has been driven by consumer spending, which in turn was fueled by increased debt and decreased savings. Between 3Q08 and 2Q09, consumer spending and personal income dropped, while the savings rate increased (partially fueled by an overall decline in U.S. tax rates). Forecasts we have surveyed predict muted personal income growth during 2010 (2% to 3%), with sequentially better income growth during 2011 (4% to 5%). In 2007, prior to the recession, personal income grew at a 4% to 5% rate. Consumer spending is expected to be flat over the next year followed by 2% growth between 2Q11 and 1Q12 (note–the real increase in consumer spending between 1987 and 2007 was 2.2%). While GDP grew nearly 6% during 4Q09, consumer spending increased3 The UCLA Anderson forecast is a quarterly forecast of U.S. and California economic trends.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  9. 9. Recent National Macroeconomic Trends and the LV Strip 7 California’s Impact on the Las Vegas Strip May 19, 2010 by 1%, essentially decoupling from GDP growth. The forecasts we have reviewed assume continued decoupling between GDP growth and consumer spending. In summary, our national forecast survey suggests that consumer spending will remain weak in the near term, implying that growth will not come back to the LV Strip until sometime after 1Q11. There are unknown factors that may influence this forecast positively or negatively, including better- than-expected spending patterns, additional unexpected weakness in the labor market, an increase in interest rates that would do further damage to the housing market, and the high level of consumer debt that will need to be deleveraged via repayment (thus dampening consumption) and/or write-offs by the banks. Outlined below is a discussion of a select few consumer-related economic metrics. Consumer Confidence Figure 1 shows that LV Strip gaming revenue has been correlated to overall consumer confidence. The index has recently bounced off recession lows of 30 during 4Q08 through 1Q09. The current index is in the 50s range, while a 100 index range is considered to be normal. The “look-ahead” expectations index is also weak. We believe consumer confidence would rise in conjunction with higher income and/or employment growth. As employment is expected to remain weak, we expect confidence to remain weak in the near term. History suggests that the LV Strip will recover when confidence recovers.Figure 1 — Consumer Confidence Index & LV Strip Gaming Revenue ($’s in millions)†$900 140 LV Strip gaming$800 revenue ($1m+)† 120$700 100$600 Consumer 80 confidence index$500$400 60$300 40$200 20$100 $0 0 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09Source: Conference Board, Nevada Gaming Commission, Apertor Hospitality† Nevada Gaming Commission, Monthly Gaming Revenue Report, Las Vegas Strip, $1 million and over gaming revenue category©2010 Apertor Hospitality, LLC. All Rights Reserved.
  10. 10. Recent National Macroeconomic Trends and the LV Strip 8 California’s Impact on the Las Vegas Strip May 19, 2010 Employment & Unemployment Since December 2007, 8.4 million jobs have been lost. Unemployment increased throughout 2008 and well into 2009 before it was acknowledged as a serious issue for the gaming industry. Throughout 2009 we continued to read industry analysis making the case that there was little relationship between gaming revenues and changes in the unemployment metric. Unemployment is also viewed as a lagging economic indicator and an economic factor that is reaching or has reached a bottom. The current consensus view is that the U.S. is in a jobless recovery, with unemployment likely to remain at elevated levels for an extended period of time. Forecasts we have surveyed suggest that at the end of 2012, even in an economic-jobs recovery, total employment will remain two million jobs below the 2007 peak. When underemployment is included, actual rates are higher than headline numbers. Beyond the direct hit to individual and aggregate personal income levels, we believe continued weak employment growth/high unemployment figures have a dampening effect on consumer sentiment, which historically impacts gaming spending (see Figures 2 & 3). Looking ahead, the ongoing issue will be, are current high unemployment levels cyclical or structural in nature? The gaming industry will keep its fingers crossed and hope that the issue is cyclical. Current economic forecast consensus suggests that it may be structural, and economic research suggests that the housing crises drove unemployment in many regions of the U.S.[4] Our sense is that a housing market recovery reversion to recent peak year levels is not in the cards implying that housing-driven employment gains will not reach the magnitude of the previous up cycle. As we write, March 2010 employment numbers were released showing the first gain in three years. The gain predominantly came from the hiring of temporary census workers and positive hiring in the manufacturing sector. The challenge is that despite this gain, long-term unemployment will remain high and is expected to stay elevated for an extended period of time. While the published unemployment rate remained at 9.7%, the broader measure of unemployment (which includes discouraged workers) increased by .1%, to 16.9%. While lower than the October 2009 high of 17.4%, the number remains discouragingly high. In summary, while job growth was positive in March, the consensus economic view is that the recovery in jobs is expected to be slow. And because history suggests a negative correlation between U.S. unemployment numbers and LV Strip gaming revenue, we believe forecasted ongoing elevated unemployment levels are not helpful for LV gaming’s revenue growth prospects, for the market as a whole and particularly the middle market.4 For an analysis of the U.S. housing crises and unemployment see Atif Mian and Amir Sufi, Household Leverage and the Recession of 2007 to 2009, University of Chicago and NBER, November 6, 2009.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  11. 11. Recent National Macroeconomic Trends and the LV Strip 9 California’s Impact on the Las Vegas Strip May 19, 2010Figure 2 — Consumer Confidence and Unemployment 140 12% 120 10% 100 8% 80 6% 60 4% 40 20 2% 0 0% Dec 00 Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun 02 Sep 02 Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Consumer confidence index U.S. unemployment rateSource: Conference Board, U.S. Department of LaborFigure 3 — U.S. Nonfarm Employment and LV Strip Gaming Revenue (amounts in millions)140 $700138 $600 136134 $500132 $400130 $300128 126 $200124 $100122120 $0 Dec 99 Mar 01 Jun 01 Sep 01 Dec 01 Mar 05 Jun 05 Dec 05 Mar 06 Jun 06 Dec 06 Mar 09 Jun 09 Dec 09 Sep 05 Sep 06 Sep 09 Dec 00 Dec 02 Dec 03 Dec 04 Dec 07 Dec 08 Jun 00 Jun 02 Jun 03 Jun 04 Jun 07 Jun 08 Mar 00 Mar 02 Mar 03 Mar 04 Mar 07 Mar 08 Mar 10 Sep 00 Sep 02 Sep 03 Sep 04 Sep 07 Sep 08 Nonfarm employment Monthly LV Strip gaming revenue†Source: Bureau of Labor Statistics, Nonfarm Employment, Apertor Hospitality† Nevada Gaming Commission, Monthly Gaming Revenue Report, Las Vegas Strip, $1 million and over gaming revenue category©2010 Apertor Hospitality, LLC. All Rights Reserved.
  12. 12. Recent National Macroeconomic Trends and the LV Strip 10 California’s Impact on the Las Vegas Strip May 19, 2010 Housing Market Data Although housing prices seem to have bottomed out and improved somewhat in select regions during 2009, the consensus view is that prices are not expected to reach 2006 peak year levels for the foreseeable future. While national numbers are modest, some markets (e.g., Cleveland, Memphis, San Francisco and Denver) are hot, posting double-digit increases in prices during 2009. Policy (low interest rates, quantitative easing, FHA loan guarantees and the homebuyer tax credit) more than fundamentals is driving the market. The challenge is that such policies have a limited lifespan due to the risk of inflationary pressures, among other factors.[5] In spite of the price increase during 2009, the larger issue of foreclosures remains, as homeowner rescue plans so far have had little to no impact on the pace of foreclosures. At December 31, 2009, the Mortgage Bankers Association reported that approximately 14% of all mortgages where non-performing (see Figure 4). In terms of raw data, the number of mortgages that are 60 days delinquent or foreclosed has grown from 1.3 million mortgages to 5.0 million mortgages between 4Q06 and 4Q09, with almost all regions in the U.S. being negatively, though unevenly, affected. Areas like CA and NV have fared worse than the remainder of the U.S. and now lead the nation in terms of share of delinquent loans at 4Q09. The combination of past overbuilding, a high number of distressed mortgages potentially creating future supply, high vacancy rates and job-loss-related personal income challenges imply that a significant uptick toward 2006 peak pricing levels in the housing market is unlikely to occur for several years. An overall positive is that the dramatic decrease in housing prices has made housing more affordable. An overall negative is that at the end of 2009, approximately 29% of all U.S. mortgages sat at a negative loan-to-value ratio. An additional housing market overhang is the large number of remaining variable-rate mortgages that may be reset at higher interest rates (if rates increase) between now and 2012. Prior to the bust, debt-fueled housing appreciation drove consumer spending and gaming industry revenues (see Figure 5). Between 2010 and 2012, we do not expect housing to be a significant driver of gaming industry spend, as we do not believe the “house as an ATM” phenomenon will be repeated. We also believe that the probability of housing prices reaching past peak levels is low.5 For additional information, see Beacon Economics winter 2010 forecast. Beacon Economics is an independent economic forecasting firm based in California.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  13. 13. Recent National Macroeconomic Trends and the LV Strip 11 California’s Impact on the Las Vegas Strip May 19, 2010Figure 4 — U.S. Mortgage Delinquencies and Foreclosures (% of outstanding mortgages)16% Delinquencies14% Foreclosures12% Total delinquencies10% and foreclosures8%6%4%2%0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09Source: Mortgage Bankers AssociationFigure 5 — Case Shiller Index & LV Strip Gaming Revenue ($’s in billions)220 $7 Case Shiller index200 $6 LV Strip gaming180 revenue ($72m+)†160 $5140 $4120100 $3 80 60 $2 40 $1 20 0 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: S&P Case Shiller Index, Nevada Gaming Commission, Apertor Hospitality† Nevada Gaming Commission, Monthly Gaming Revenue Report, Las Vegas Strip, $72 million and over gaming revenue category©2010 Apertor Hospitality, LLC. All Rights Reserved.
  14. 14. Recent National Macroeconomic Trends and the LV Strip 12 California’s Impact on the Las Vegas Strip May 19, 2010 Household Deleveraging Trends Until recently, the gaming industry mantra has been that supply and development creates demand. However, since the peak performance years of 2006 to 2007, demand has clearly slackened. The current bull case is that recent data points suggest a recovery is ahead as demand is coming back. The reality is that the consumer appears to be in a vastly different place today compared to the 2006 to 2007 peak industry period. As a result, we are reluctant to forecast recent positive data points in a linear manner into the indefinite future due to current high levels of consumer debt that may very well be paid down over several years (e.g., by deleveraging), thus dampening consumer spending in the gaming industry (see Figure 6). The bull case is that household deleveraging either will not occur or will occur in a manner whereby consumer spending is not significantly impacted looking forward. The bear case is that household deleveraging occurs in a manner that reduces overall consumer spending. As we are in an unprecedented situation, only time will tell which scenario proves correct. Our view is that, in either case, the gaming industry will be significantly impacted.Figure 6 — U.S. Aggregate Household Liabilities as Share of Disposable Income (100 = 100%)150140130120 110100 90 80 70 60 Q309 1971 1981 1991 2001 1967 1968 1969 1970 1972 1973 1974 1975 1976 1977 1978 1979 1980 1982 1983 1984 1985 1986 1987 1988 1989 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 2007 2008Source: McKinsey & Company, Federal Reserve©2010 Apertor Hospitality, LLC. All Rights Reserved.
  15. 15. Customer Origin for the Las Vegas Strip 13 California’s Impact on the Las Vegas Strip May 19, 2010Customer Origin for the Las Vegas Strip The Las Vegas Convention and Visitors Authority (LVCVA) conducts an annual visitor survey that, among other things, documents the place of residence/point of origin for LV Strip visitors. California has been the largest individual category of visitors included in the survey, accounting for 26%–33% of all LV Strip visitors from 2004 to 2009 (the survey period we reviewed). Southern California contributed 24%–29% of total LV Strip visitors between 2004 and 2009, and it remains the largest single geographic submarket for the LV Strip (Arizona is ranked #2 as an individual state, with the remaining rankings defined as regions). In summary, Southern California is the nearest and largest single market (by a factor of 2x–3x or more) for the LV Strip (see Figure 7). Therefore LV Strip volume performance is directly and significantly impacted by conditions in Sou CA/CA.Figure 7 — LV Strip Visitor Origin (% of total visitors)100% 14% Foreign 90% Other western states 80% 15% 6% 6% Arizona 70% 7% 9% 4% 4% 6% 6% 9% 10% 60% Northern CA 4% 5% 27% 50% 29% 27% 25% Southern CA 24% 26% 40% Midwest US 30% Southern US 12% 20% Eastern US 11% 10% 7% 0% 2004 2005 2006 2007 2008 2009Source: LVCVA Annual Visitor Survey Recent LV Strip Visitation & Spending Patterns In Figures 8 & 9 we show that headline LV Strip visitor volume and spend metrics grew post- 9/11 and peaked during 2006 and 2007 due to the opening of Wynn in 2005 (which grew the market) and also due to a demand environment (driven by macro conditions) that supported industry pricing power. The majority of new LV Strip development projects were announced during this period of peak demand. In 2007, growth leveled off before dropping significantly as the recession intensified in the latter half of 2008. Y/Y results remained negative until the second half of 2009, when y/y numbers largely turned positive due to easy comps (see Figure 10). As City Center recently opened, the jury is still out regarding the magnitude of volume growth driven by this project.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  16. 16. Customer Origin for the Las Vegas Strip 14 California’s Impact on the Las Vegas Strip May 19, 2010 U.S. and CA economic metrics were positive between 2003 and 2006 and then began to flatten during 2007. From 2008 to early 2009, U.S. and CA economic metrics rolled over during the economic crises, and remained weak throughout 2009. Looking forward, the breadth and depth of recovery are uncertain. Our view is that the shape and magnitude of overall economic recovery in Sou CA will influence the shape and depth of recovery for Sou CA/CA consumers and therefore the LV Strip.Figure 8 — Las Vegas Strip Gaming Revenue ($’s in millions)†$700$650$600$550$500$450$400$350$300 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09Source: Nevada Gaming Commission† Nevada Gaming Commission, Monthly Gaming Revenue Report, Las Vegas Strip, $1 million and over gaming revenue categoryFigure 9 — Y/Y Change in LV Strip Visitation and Gaming Revenue 15% LV Visitor volume 10% Air traffic 5% 2009 I 15 traffic 2001 2008 0% LV Strip gaming 2002 2003 2004 2005 2006 2007 revenue ($72m+)† -5%-10%-15%Source: LVCVA, Nevada Gaming Commission, Apertor Hospitality† Nevada Gaming Commission, Monthly Gaming Revenue Report, Las Vegas Strip, $72 million and over gaming revenue category©2010 Apertor Hospitality, LLC. All Rights Reserved.
  17. 17. Customer Origin for the Las Vegas Strip 15 California’s Impact on the Las Vegas Strip May 19, 2010Figure 10 — Monthly Changes in LV Strip Visitation and Gaming Revenue 15% Visitor volume 10% Air traffic 5% I 15 traffic 0% LV Strip gaming -5% revenue ($72m+)†-10%-15%-20%-25%-30% Oct 08 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10Source: LVCVA, Nevada Gaming Commission, Apertor Hospitality† Nevada Gaming Commission, Monthly Gaming Revenue Report, Las Vegas Strip, $72 million and over gaming revenue category©2010 Apertor Hospitality, LLC. All Rights Reserved.
  18. 18. Specific Southern California/California Economic Metrics 16 California’s Impact on the Las Vegas Strip May 19, 2010Specific Southern California/California Economic Metrics We examined trends in specific consumer-related economic metrics such as employment and housing as well as broader economic measures of population trends, port activity and income/GDP equivalent measures. We also examined the movement in these measures during the past decade as Sou CA/CA moved from economic growth to recession. Our analysis provides forecasts of these measures and makes comparisons to LV Strip volume metrics to make inferences of performance levels of the LV Strip from 2010 to 2012. Although the worst may be nearly over in Sou CA/CA for the consumer, forecasts of the examined metrics suggest a moderate sequential recovery (from current low levels) for the consumer in 2011 and 2012 after a sluggish 2010. History suggests a strong relationship between the examined metrics and LV Strip performance. The Sou CA economic forecast implies a flattish year in 2010 for the LV Strip with some recovery in 2011. At the same time, we have not seen any data suggesting that a LV Strip recovery to peak 2006 to 2007 levels is likely in the foreseeable future. Employment and Unemployment Nonfarm employment in Sou CA/CA grew sequentially from 2003 and reached a peak during 2007 (see Figure 11). Sou CA/CA employment has been hit hard during the recession as total employment declined by approximately 500k/850k between 2007 and 2009. Employment losses are forecasted to bottom out during 2010 before employment rises in 2011. The challenge is that 2011 total employment growth (at +1%) is expected to be muted, as unemployment is forecast to remain high. Though the state’s economy will be growing, it will not be growing fast enough to push unemployment rates below double digits before 2012. In 2010, most industries in Sou CA are not expected to be growing enough to stimulate hiring. Businesses are also expected to remain reluctant to hire workers until confidence develops that industry recovery is established and sustainable. Sou CA is expected to shed jobs in 2010 (-.5% to -1%) with employment growth (+1%) beginning slowly in 2011. In summary, the forecasts for continued double-digit unemployment and slow employment growth through late 2010 to 2011 imply that 2006 to 2007 peak year employment levels are unlikely to return in the foreseeable future. As a result, we do not expect employment trends, a major driver of LV Strip volume, to return to previous peak levels (see Figure 12).©2010 Apertor Hospitality, LLC. All Rights Reserved.
  19. 19. Specific Southern California/California Economic Metrics 17 California’s Impact on the Las Vegas Strip May 19, 2010Figure 11 — Sou CA Nonfarm Employment & LV Strip Gaming Revenue (employment in millions, $’s in billions)8.8 $7 Sou CA employment8.6 $6 LV Strip gaming8.4 revenue ($72m+)† $58.28.0 $47.8 $37.6 $27.4 $17.27.0 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 F 2011FSource: LAEDC, Nevada Gaming Commission, Apertor Hospitality† Nevada Gaming Commission, Monthly Gaming Revenue Report, Las Vegas Strip, $72 million and over gaming revenue categoryFigure 12 — Y/Y Change in LV Strip Volume Metrics & Sou CA Unemployment Rate 15% LV Visitor volume 10% Air traffic I 15 traffic 5% 2009 LV Strip gaming revenue ($72m+)† 2008 0% Sou CA 2002 2003 2004 2005 2006 2007 2010 F 2011F unemployment rate -5% 2001-10%-15%Source: LAEDC, LVCVA, Nevada Gaming Commission, Apertor Hospitality† Nevada Gaming Commission, Monthly Gaming Revenue Report, Las Vegas Strip, $72 million and over gaming revenue category©2010 Apertor Hospitality, LLC. All Rights Reserved.
  20. 20. Specific Southern California/California Economic Metrics 18 California’s Impact on the Las Vegas Strip May 19, 2010 Housing Market Data Since the onset of the recession, CA has faced significant challenges in its housing market. After years of leading the U.S. in home price appreciation, prices began to fall significantly during 2007 and 2008, which triggered a significant wave of foreclosures and defaults. Property values that fell well below mortgage levels put many people into significant negative equity situations that, along with job losses, caused people to walk away from their homes. Fueled by easy credit, California home values grew to levels that were out of line with income growth. California also had a disproportionate share of adjustable rate mortgages (option ARMs) relative to other areas of the U.S. that, combined with speculation and loose underwriting standards, made California more vulnerable to the housing collapse than other states in the U.S. Like California, the states of Florida, Nevada and Arizona experienced similar housing market conditions during the boom, which has led to the current highest levels of distress in the U.S. in terms of post-peak depreciation, delinquencies, foreclosures and negative loan-to-value mortgages. Far below peak prices, Sou CA home prices have bounced off a bottom during 2009. While the lack of housing starts will help supply and demand rebalance, a significant supply overhang remains due to the large number of delinquencies and foreclosures that have continued to increase through the end of 2009. By the end of 2009, Sou CA was home to a significant number of negative loan-to-value mortgages (which is closely tied to pre-foreclosure activity) and a disproportionate share of option ARMs that could reset at higher rates, thus triggering another wave of defaults between 2010 and 2012. So while Sou CA unsold new housing and building permits are low (a positive for the housing market), foreclosures remain a major strain on the market, accounting for 40% of resales in December, compared with February’s 2009 high of 57%. Although credit conditions remain tight, mortgage rates are low and existing home inventories are falling. Government incentives have also helped. It is too early to tell if stability is an illusion, as substantial improvement in the job market is yet to take hold. With the large number of distressed households, a large amount of uncertainty remains in the Sou CA housing market. Forecasts we have surveyed point to the large degree of uncertainty and to a dip in existing home prices in 2010 before a very modest (muted) recovery in pricing and sales between 2011 and 2013. Existing Home Sales and Prices Figure 13 depicts activity in six counties of Sou CA, including Los Angeles, Orange, Riverside, San Bernardino, Ventura and San Diego Counties. Los Angeles County alone accounts for approximately half the activity. Aggregate pricing dropped approximately 50% from peak-to- trough in 2008, triggering an economic crisis in CA and the U.S.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  21. 21. Specific Southern California/California Economic Metrics 19 California’s Impact on the Las Vegas Strip May 19, 2010Figure 13 — New/Existing Median Home Sales & Prices in Sou CA 450,000 $600,000 New/existing home sales 400,000 New/existing home prices $500,000 350,000 300,000 $400,000 250,000 $300,000 200,000 150,000 $200,000 100,000 $100,000 50,000 - $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: Dataquick On an individual county basis, existing home prices fell in Sou CA after reaching a peak during 2007. LA prices dropped 43% peak-to-trough while Riverside-San Bernardino prices dropped 58% (see Figure 14).Figure 14 — Sou CA Median Existing Home Prices by County$800,000$700,000 Los Angeles$600,000 Orange County$500,000 Riverside$400,000$300,000 Ventura$200,000$100,000 $0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: LAEDC Existing home prices have shown stability during 2009, as they have increased slightly since bottoming out in early 2009 (see Figure 15).©2010 Apertor Hospitality, LLC. All Rights Reserved.
  22. 22. Specific Southern California/California Economic Metrics 20 California’s Impact on the Las Vegas Strip May 19, 2010Figure 15 — Monthly Sou CA Existing Home Sales & Prices 25,000 $400,000 New/existing home sales 20,000 $350,000 New/existing home prices $300,000 15,000 $250,000 $200,000 10,000 $150,000 $100,000 5,000 $50,000 - $0 Jul 08 Jul 09 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10Source: Dataquick Mortgage Defaults and Delinquencies Mortgage defaults and foreclosures rose substantially between 2007 and 2009 (see Figure 16). The timing of the activity represented in the chart was particularly influenced by the processing backlog in banks and loan servicers, which were hit with a massive wave of default activity and, to a lesser degree, government loan modification program efforts. The levels of activity are far above low points prior to the recession and are significantly higher than previous recessions.Figure 16 — Sou CA Housing Notices of Defaults & Foreclosures 90,000 Notices of Default 80,000 Foreclosures 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Q107 Q207 Q307 Q407 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09Source: Dataquick©2010 Apertor Hospitality, LLC. All Rights Reserved.
  23. 23. Specific Southern California/California Economic Metrics 21 California’s Impact on the Las Vegas Strip May 19, 2010 As they precede notices of default, notices of delinquency are precursors to foreclosures. Ninety-day notices of delinquency remained on the rise at the end of 2009 on a year-to-year basis (see Figure 17). Sixty-day delinquency notices are also substantially higher at 4Q09 compared to 4Q08 and 4Q06 (a pre-crises period) as follows: 1.59% in 4Q06, 8.56% in 4Q08 and 12.34% in 4Q09. The continued increase in delinquencies suggests that the Sou CA housing market is not yet out of the woods.Figure 17 — Sou CA 90 Day Mortgage Delinquencies (% of delinquent mortgages)[6]18%16% 4Q0814%12% 4Q0910% 8% 6% 4% 2% 0% Los Angeles Orange County San Diego Riverside Santa Barbara VenturaSource: Dataquick Sou CA ranks high in the share of negative loan-to-value mortgages. Of the top 50 ranked regions in the U.S., Sou CA’s major counties each rank in the top half of overall U.S. rankings in 4Q09. Negative loan-to-value mortgages are considered an indicator of possible future foreclosures. As a result, Sou CA negative loan-to-value mortgages could pose a risk to housing values and remain a risk to recovery if foreclosures increase, thus increasing future supply. In Table 1, we present Southern California and other western region negative loan-to-value estimates developed by First American CoreLogic (a national real estate research firm). Deutsche Bank has also released national and regional negative loan-to-value estimates that are generally more negative than the data presented in Table 1, which we discuss below. In August 2009, Deutsche Bank (DB) published a forward-looking analysis of current and projected negative equity mortgages by mortgage type and location.[7] DB estimated that as of 12/31/08, the percentage of borrowers in Los Angeles and Riverside/San Bernardino Counties with negative equity was 51%/81% respectively. DB estimates that the percentage of borrowers in 1Q11 in Los Angeles and Riverside/San Bernardino with negative loan-to- value will be 62%/87%. DB’s model is based on projections of absolute unemployment, changes in unemployment, excess distressed inventory and recent price changes. DB indicates that affordability is currently not a reliable metric for predicting price changes.[8] At6 See Appendix E–90+ Day Mortgage Delinquencies per the TransUnion Database for a visual depiction of U.S. mortgage delinquencies. The map was provided by the Federal Reserve of New York and is based on late 2009 data. The map is based on a 10% sample (that is statistically significant) of TransUnion’s national trend database. TransUnion is a national credit bureau.7 Shen Ying, Karen Weaver, “Drowning in Debt – A look at Underwater Homeowners”, Deutsche Bank, August 20098 Shen Ying, Karen Weaver, “The Outlook For U.S. Home Prices – Beyond the Bubble”, Deutsche Bank, March 2009©2010 Apertor Hospitality, LLC. All Rights Reserved.

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