Las Vegas Business Press :: News : Strip's oldsters await mixed future

Strip's oldsters await mixed future

BY DAVID MCKEE
BUSINESS PRESS

Death has been forecast many times for the aging properties of Las Vegas Boulevard, but most of the hotel-casinos that were in the economy niche a decade ago continue to hold their ground.

In 1999, UNLV Professor Bill Thompson told International Gaming & Wagering Business magazine: "One thing they're going to have at the Sahara, Imperial Palace or San Remo is the constant threat of being absorbed, reorganized or downsized. (Billionaire Stratosphere owner Carl) Icahn might buy them. If you're the Riviera, you're going to constantly have that threat."

Six years later, each of those properties is still independently owned and essentially in the same market position as before.

Although occupancy remains high at the 48-year old Tropicana, its parent company is under pressure to implode it and build a new megaresort.

"There remains a solid market for each of these properties," as measured in their high occupancy levels, according to Jim Medick, chief executive officer of the locally based MRC Group, which specializes in market research.

"If price is a determining factor," Medick said, "they (consumers) will seek out some of the old, famous names on the Strip and stay there. While they don't have all the sizzle that the other (newer) properties have, they certainly serve a purpose."

Which is not to say that there isn't pressure to redevelop, particularly from Wall Street. Tropicana Resort &Casino owner Aztar saw its stock price plummet $4.18 a share in February when it continued to postpone the long-awaited redevelopment of its south Strip property.

Although the Tropicana subsequently ceased taking convention bookings, Aztar Vice President of Corporate Communications Joe Cole said the move was purely precautionary, not a sign of an imminent building implosion.

"We're talking about a full redevelopment," he added. "We're in the design process for the north half."

Aztar's grand scheme is to bisect its 34-acre parcel and develop the northern half on its own.

"We would hold onto the south side either for our later development or joint-venture development," Cole said. He noted that costs for redoing the northern half of the Tropicana had been pegged around $800 million, but those numbers are outdated.

The 'Trop' is not hurting for business at present, coming off a quarter that saw 100 percent occupancy at an average daily rate of $92.17. But the resort's location, on prime real estate directly south of the MGM Grand, fuels a widespread industry perception that Aztar must re-do the property to fully capitalize on the site.

Eugene Christiansen, president of New York-based Christiansen Capital Advisors, calls Tropicana redevelopment an inevitability but questions the depth of Aztar's pockets.

"Aztar probably, if it stretched its resources to the absolute limit, could undertake a major knockdown-and-rebuild project there," he said, "but it would be a real stretch for the company. Given its capital structure, especially the debt there, probably this doesn't happen."

Christiansen favors the joint-venture scenario or perhaps a recapitalization of the company.

Capital questions also dog the Riviera, at the opposite end of the Strip and coming off a money-losing quarter.

"The Riviera is fascinating to me because of the location of the dirt," underneath it, Christiansen said. "It has Strip frontage but it's also a corridor running back to the Convention Center."

Riviera Holdings Chief Financial Officer Duane Krohn brushed aside concerns about Wall Street pressure to revamp or rebuild.

"There's been a lot of speculation in our stock, obviously, and we have in some of our presentations indicated that we have developed master plans for the area," he said, adding that the company wasn't announcing anything significant.

Nor did Krohn think Riviera Holdings would have to sell assets, as New Frontier Hotel & Casino owner Phil Ruffin recently did, to finance a new edition of the property. "We might take on a partner or something," he said. "There are people willing to finance lots of building."

Borrowing sufficient capital to redevelop its Stardust hotel-casino is a non-issue for Boyd Gaming, given the company's recent track record, said company spokesman Rob Stillwell.

"Five or six years ago it might have been different. It is likely to be in excess of a billion dollars," Stillwell said of the prospective cost of the Stardust's eventual successor, "but that's not what will drive the process."

Boyd has commenced a master-planning process that will occupy the remainder of 2005.

"There certainly is no hurry," Stillwell said, adding that Boyd wasn't feeling any pressure from Wall Street. "This conversation has been around since the advent of the megaresort," he said. Stardust's customer base has been loyal, Stillwell added, but in today's Las Vegas the optimal use of the property would need to include something of much greater scope. Christiansen was less charitable.

"The Stardust is an obsolete property," he said. "Something has to be done with it. But once you get past those decision points, it's not as clear to me what the right thing is."

Stillwell countered by pointing to two decades on the Strip, a 31-year corporate history in a variety of markets and depth of management, finally flinging down the 'B'-word.

"What Borgata has done," Stillwell said, referring to the company's Atlantic City blockbuster, "has demonstrated to our peers that we have megaresort capability. We've always known that."

The financial condition of the privately held Imperial Palace has long been a secret. According to the company, though, the primary constraint on the property is physical.

"Given our location, we're hemmed in, so we only have so many things we can do," said Jeremy Handel, Imperial Palace public relations manager.

Wedged in between two Harrah's Entertainment-owned properties, the Flamingo and Harrah's Las Vegas, the Imperial Palace makes a logical acquisition target for Harrah's. Indeed, on August 16, Gaming Today, a local casino industry trade publication, ran an item saying a Harrah's-Imperial Palace deal was imminent. Harrah's refused to comment on the allegation, while Imperial Palace referred inquiries to its attorney, Owen Nitz, who did not return calls from the Business Press.

"The (Imperial Palace owners have) been dithering over this for quite some time," reported Christiansen. "Of the major players, the company that has the greatest strategic need for a new, major Strip development is Harrah's and I'm sure that's why (Harrah's Chairman and CEO) Gary Loveman is trying to buy the Imperial Palace. Harrah's does need a bigger presence on the Strip."

"They need something big and new just for strategic reasons," Christiansen added. "I do not think incremental improvements to Caesars Palace answer that need." Harrah's rolled out its new Augustus Tower at Caesars Palace on August 12.

In the meantime, the Imperial Palace is proceeding with a year-long refurbishment that began with building monorail access and extended from there. The hotel has even broken with the philosophy of its deceased founder, Ralph Engelstad, and added bathtubs to its guest rooms. Engelstad was notorious for, among other things, his belief that customers should not be taking baths when they could be gambling.

"All of the rooms I've been in have had them," Handel says of the tubs, adding with a laugh that Engelstad's bath-aversion was news to him.

The Tropicana's go-slow policy on conventions may be in response to its economy-minded competitors' advantage in booking those same gatherings. The Riviera's Krohn reported that convention bookings account for 35 percent of his property's room inventory.

"We're doing OK, numbers wise, as far as guest bookings," the Imperial Palace's Handel added. "Our business bookings have increased. Compared to what else is going on around town, a center-Strip property that can regularly offer rooms under $100 is a bonus for us."

Michael Hessling, of the San Remo Las Vegas Casino & Resort, soon to be re-branded as a Hooters-themed casino, also believes that incremental changes can do the trick. He cited the combination of a $130 million investment in the property and a popular restaurant brand, saying "That was a philosophy that resonated out on Wall Street."

Hessling does see shrinkage in the niche occupied by Strip hotels that offer rooms at $49 to $99 a night, a class that the Hooterized San Remo aspires to escape.

"We don't expect to be competing in that tier any longer," Hessling said, noting that the renamed property would shoot for average nightly room rates in the $105 to $115 range. "People are willing to spend more when they come to Las Vegas," he said, "but they demand a better experience" in return.

Medick's research shows that bargain-conscious consumers may find it important to stay on the Strip during their first visit but are defecting to off-Strip and locals properties during their second and third visits. Also, superior attractions at the megaresorts are inflicting "leakage" on their older Strip competitors. "They're almost being positioned as 'bed & breakfasts,'" Medick said of the Strip's senior hotel-casinos.

As venerable Strip resorts make dates with the wrecking ball, like the New Frontier and perhaps the Tropicana, or reposition themselves upwards, like the San Remo, Las Vegas Advisor Publisher Anthony Curtis sees an evolutionary process at work in which formerly cutting-edge properties take their place at the lower end of the food chain.

"There's still enough old properties, beginning with the Stratosphere," for the economy-minded Strip consumer. "I've seen good prices (at Luxor and Excalibur). Those were two places I would look at to try to find a bargain on the Strip if I wanted to be in the thick of things," Curtis observed, citing Boyd Gaming's Stardust as well.

Noting that a flotilla of new megaresorts is headed for the Strip, beginning with the Venetian's Palazzo, its long-delayed Phase II, Curtis cautioned that "you've got a whole new group that's going to make (resorts) that came in the early to mid-90s look a little passé. Ten years ago, Luxor would have been up-market. Maybe the best bargain around is the Mirage -- a really great property that has lost some of its luster."

Current owner MGM Mirage also has a new foothold in the super-bargain niche at Circus Circus, and company spokesman Gordon Absher forcefully stressed that the clown-themed casino-hotel wasn't destined for dynamite.

Paraphrasing company CEO Terry Lanni, he said: "We paid good money for these properties. We're not tearing them down."

According to Absher, MGM Mirage wants to retain the economy market, pointing out that the MGM Mirage buyout of Mandalay Resort Group brings upscale MGM into a market segment to which it formerly lacked access. Even so, it will still have to persuade institutional investors like Christiansen.

"It's pretty hard to lose money in Las Vegas right now with any kind of operation," he concluded. "I do not think, though, that milking older properties for cash is the best and highest use of the property unless the dirt under the property is going to continue to appreciate at astronomical rates, so (that) the end game is favorable to you."

dmckee@lvpress.com | 702-871-6780 x318

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