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From Record Highs to Historic Lows -
Las Vegas Room Rates Droping Fast

By Benjamin Spillman, Las Vegas Review-JournalMcClatchy-Tribune Regional News

Mar. 29, 2009 - The last time Greg Shymko came to Las Vegas $100 wouldn't buy one night in an average hotel.

This year a C-note will buy Shymko four nights at the Imperial Palace, a hotel in the heart of the action.

"I think it is an incentive to gamble more," said Shymko, 42, of Seattle. "It is probably allowing us to stick around longer."

Shymko, who visits Las Vegas annually to celebrate his birthday and watch the Kentucky Derby, is among millions of Las Vegas visitors benefiting as room prices drop from record highs to historic lows.

The global economic crash put a stop to annual increases in Las Vegas visitation quicker than massive resort companies could halt development of thousands of new hotel rooms.

Fewer customers and more rooms flipped the law of supply and demand to the benefit of visitors, and none too soon for Shymko, a blackjack player and horse bettor.

"The gambler in me is always looking for a fairer shake," he said.

The average daily room rate in Las Vegas in 2008 was $119.19, a regression to the 2006 level.

The overall Las Vegas 2008 rate average understates the decline. Much of the decrease occurred in the latter months of the year. And January rates were their lowest since 2004.

More troubling for resort owners, rates aren't the only business segment in decline. Gambling revenue on the Strip fell nearly 11 percent. Downtown gambling was down 8 percent. Like room rates, the declines picked up speed late in the year.

"The room rate is the mother's milk of the business," said Phil Ruffin, owner of Treasure Island. "That is free money if you can get the room rate up."

Ruffin recently purchased Treasure Island for $775 million from MGM Mirage, a publicly traded company that's struggling to finance the completion of CityCenter, a 67-acre project that will be the largest casino resort complex in Las Vegas if it opens.

MGM Mirage agreed to sell Treasure Island to get cash to manage billions of dollars of debt on CityCenter.

He said Treasure Island rooms are fetching as much as $100 on weeknights and $130 on weekends. Of that, he estimated costs of about $30 per day to clean a room, $18 to $20 for third-party vendors plus costs for utilities and other overhead.

"They are too damn low," he said of Las Vegas room rates in general.

Ruffin's Treasure Island purchase is a cash deal, which means he doesn't have to cover debt payments like MGM Mirage, Harrah's Entertainment, Station Casinos, all of which are struggling to make ends meet.

For debt-burdened operators, Ruffin said, "It is probably pretty hard to get much over your fixed costs right now."

The effect of the low rates on the companies, which employ tens of thousands of Nevadans, is mixed.

The companies that loaded up on debt during the boom have a narrow margin between revenue and expenses, which means even a slight dip in room rates can make for tough decisions to cut costs.

In a March 17 conference call with investors, MGM Mirage Chairman and CEO Jim Murren estimated 70 percent of the company's cash flow shortfalls are related to falling room rates.

"So, we are occupying the buildings reasonably well. We've sacrificed rate to do that," Murren said during the call.

The cash shortage has made it difficult for MGM to manage debt for construction of the $8.7 billion CityCenter project.

Also during the call, the company said it had $600 million in cash on hand. Three days later, the company collected another $600 million as the initial payment on the $775 million sale of Treasure Island to Ruffin.

MGM Mirage received a two-month waiver earlier this month from its lenders to avoid violating loan covenants. Still, many analysts believe MGM Mirage will have to file a bankruptcy reorganization to restructure $13.5 billion in debt.

But to people who research rates, it still appears rate-cutting is widespread despite the cost to companies.

"There's no dignity. They'll do anything to fill the rooms," said Matt Weatherford, a frequent Las Vegas visitor for 22 years and operator of the Web site www.cheapovegas.com.

Hotel companies that stood pat in the boom, especially those that don't have to satisfy shareholders every quarter, have more leeway to ride out the slump.

"We have the ability to survive at this level," said Terry Caudill, owner of Binion's and the Four Queens downtown.

In 2007 Caudill bought Binion's for $32 million. He's owned the Four Queens since 2004.

He said the Four Queens is stabler than Binion's, which was suffering from neglect when he purchased it. He has embarked on an effort to revive the property. The poker room has been upgraded, a top-floor restaurant was refurbished and a cigar lounge was added since Caudill took over.

But the sudden reduction in Las Vegas traffic has slowed activity.

Nevertheless, Caudill said he's confident he can guide the properties to the other side of the recession.

"I feel better about my ability than some other people's abilities," he said.

Room rates are the major factor Caudill can manipulate to manage the businesses in tough times.

Managers at Caudill's downtown properties watch occupancy rates daily and adjust rates accordingly, sometimes more than once a day.

If only 60 percent of the rooms for an upcoming weekend are full on Tuesday he doesn't worry. By Thursday he has a better idea of whether rates need to fall further to fill rooms.

"Generally speaking, a body in a room is always going to be worth more than an empty room," Caudill said. "If we get to Thursday night and we are still not getting a sniff, that means it is probably going to be a soft weekend."

Frank Martin, a Las Vegas resident who has researched the local hotel market extensively, said he's worried that the low rates could break some properties, particularly downtown.

Martin, who is retired from a civilian job in the defense industry, does analyses by cross-referencing public documents from the Nevada Gaming Control Board with publicly available company financial reports.

He recently studied the effect of room rates on the downtown and Strip markets.

In fiscal 2008, he estimates the typical Strip hotel rate represented a $32 profit per room, per night. Downtown that figure was only $8.80.

But the fiscal year ended June 30, and the fiscal climate has significantly worsened, especially downtown.

Martin said the downtown market as a whole made about $30 million in profit in the last fiscal year. Since then, gambling revenue alone has fallen by $40 million and room rates have also dropped.

"If room rates drop $5, you are at the point where sales just cover expenses and comps," Martin said. "At this point the rooms department is no longer a profit center, but just a promotion for the casino."

The good news for downtown is that most properties are run by individual owners who don't have an obligation to pay shareholders.

"A lot of these guys just have to pay salaries," he said. "They don't have to make profits."

Shymko, who is looking forward to his upcoming Las Vegas visit in May, said he's happy to see rates falling to more affordable levels. He said he'd rather properties cut back on frills and keep costs low for customers, who would then be free to spend their vacation budgets on food, booze and gambling.

"That's what attracted me there in the first place," he said. "I'm still coming back after nine or 10 years because the gambling options are great and it is a 24-hour fun time."

BEST DEALS IN TOWN

--Red Rock Resort for $111 a night plus resort fee from skoosh.com

--Trump International for $111 a night through easyclicktravel.com

--Binion's for $29 a night through hotels.com (buy two nights, get one night free)

--Gold Spike for $27 a night through expedia.com. Nothing special one has to do. For the adventurous.

--Sahara for $49 a night through hotels.com, expedia.com.

--Circus Circus for $53 through easyclicktravel.com

--Golden Nugget for $103 through easyclicktravel.com

--Hilton Grand Vacations for $84 a night, through hiltongrandvacations.com -- this is for a studio room.

--$45 a night for a three-star hotel on the north Strip through hotwire.com. This could be Circus Circus, Riviera, Sahara or Stratosphere.

--Golden Gate rooms for $19.06 a night on weeknights and some weekends.

--Wild Wild West has rooms for $17 on some nights.

Source: Matt Weatherford, www.cheapovegas.com

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To see more of the Las Vegas Review-Journal, or to subscribe to the newspaper, go to http://www.lvrj.com.

Copyright (c) 2009, Las Vegas Review-Journal

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