Nevada gaming casino recovery will be slow, investment banker says

Joel Simkins, head of gaming and leisure investment banking for SunTrust Robinson Humphrey in New York, authored a research report on the casino industry and the pandemic that he distributed this week to gaming company CEOs, CFOs, and other industry decision-makers, to which The Nevada Independent had access.

According to Simkins, who spent much of his career as an equity research analyst before moving to the investment banking side, an economic recovery on the Strip from the coronavirus pandemic shutdown will be slow, accomplished in phases and is dependent on McCarran International Airport traffic returning to a high volume.

However, the Las Vegas locals market, Simkins says, primarily properties operated by Red Rock Resorts and Boyd Gaming, is better positioned to rebound along with the local economy.

The casino industry in Nevada and nationally has faced numerous challenges and risks, including the Great Recession in 2008 and travel disruption caused by the terrorist attacks of Sept. 11, 2001.

But since the middle of March, governors, regulators and tribal governments have ordered the shutdown of nearly 1,000 commercial casinos and Indian gaming properties in 43 states.

“While there are many risks (that) I have considered for our sector, the concept of a pandemic that would cause every building to close might have been out of science fiction, dystopian thriller,” Simkins wrote.

Gov. Steve Sisolak ordered social distancing guidelines and closed Nevada’s casino industry, schools and nonessential businesses on March 17 to try to slow the coronavirus spread. The closure order ends April 30, but most analysts and gaming operators expect casinos to remain closed into May.

Simkins said the Strip’s recovery “will be measured” and take on a “rational approach,” hinting that ancillary fees, such as resort and paid parking fees, could be reduced or eliminated.

But it will take time for revenues and cash flows to return to meaningful levels.

“Not surprisingly, operators will need to use incentives to drive traffic, as was experienced in the last recession,” Simkins said. “We are all learning that you cannot outrun a total cessation of the business.”

Casino companies have drawn billions of dollars from credit facilities in order to keep their properties in operational shape until they are able to be reopened. In Nevada, according to a study conducted for the Nevada Resort Association on March 20, some 320,000 gaming and tourism workers faced layoffs, furloughs or salary reduction. Only three companies — Las Vegas Sands, Wynn Resorts and Red Rock — have agreed to pay workers through May 15.

MGM Resorts International acting CEO Bill Hornbuckle told CNBC earlier this month the company will begin reopening its 13 gaming and non-gaming Strip properties, “when it is safe.” He added that the state’s largest casino operator, “won’t necessarily want to be the first to open. We’ll open this intelligently and hopefully with some forethought.”

Simkins agreed with that approach for all Strip resorts, primarily because there won’t be enough visitation to fill hotels until McCarran Airport sees an increase in flight traffic.

“We expect a phased approach to the resumption of operations, particularly as the pace at which airlift comes back to feed the beast,” he wrote.

McCarran, which drew a record 51.5 million passengers in 2019, has consolidated services as airlines have reduced the number of flights because of the pandemic. 

“An important factor in the recovery of Las Vegas will be airlift into McCarran,” Simkins noted.

On Tuesday, the U.S. Department of Transportation said Nevada’s 30 large and small airports will receive more than $231 million as part of the $2.2 trillion Coronavirus Aid, Review, and Economic Security Act (CARES Act). McCarran will receive nearly $196 million of the funding.

Congresswoman Dina Titus said the funding will help the airport cover lost revenue during the pandemic and assist with the preparation for a return to normal operations.

“Getting our airport back at full capacity will be vital to boosting Southern Nevada’s tourism economy,” Titus said in a statement.

When customers do return, Simkins told gaming leaders, he would expect safety measures and social distancing protocols for guests and employees to remain in place, such as fewer operating hotel rooms, a limited number of restaurants being open with reduced hours at those locations, and other measures to accommodate varying levels of demand. Space restrictions in between operating slot machines will limit the number of active games and seats at table games will be reduced.

“Mega Resorts may initially feel like boutique (hotels),” he noted.

Staffing levels will also be brought back slowly. Simkins said casino operators will want to bring back as many employees as possible, though.

“While we believe staffing levels will be meaningfully lower, retaining legacy employees as opposed to beginning another onboarding process will be far more efficient,” he wrote.

Meanwhile the consolidation of companies within the locals market – which has placed the bulk of the business under Boyd and Red Rock – will be “more constructive” to the recovery. The challenges include how quickly unemployment in Southern Nevada rebounds and whether customers are willing to spend discretionary money after losing weeks or months of pay.

“Understandably, how the core retiree group that populates most local casinos during the mid-week feels about gaming after pain in their investment accounts will likely dictate the pace of the gross gaming revenue recovery,” Simkins wrote.

The slot machine route and tavern operations were “hit hard” during the recession, and it’s “unclear” how quickly the businesses will rebound, “granted the product offering has improved materially since 2008,” he wrote.