Detour Ahead: Strip construction has been
credited with profits, losses

October 15, 2002 - While expansion along Las Vegas Boulevard has been a source of excitement from Wall Street to Fremont Street, until the projects are done, the dust could could earnings.

Park Place Entertainment's recent earnings warning, which highlighted, among other things, construction projects at Caesars Palace as a reason for the revenue slump, is a tough example of the down-side to Strip expansion.

With an expansions currently underway at the Venetian, as well as plans on the drawing boards at Mandalay Bay and Bellagio, stock analysts are less concerned about construction hassles cutting into earnings for these megaresorts.

John Mulkey, a high-yield gaming analyst for Bear Stearns & Co., said expansion plans are factored into stock ratings, but he, like many others, said adding towers at the Bellagio and Mandalay Bay are of little concern because initial development factored future expansions into the equation.

Construction and the Strip have gone hand in hand for years. "Before we can determine the effects (of expansion) on the stock, we try to figure out where the add-on is going to be in terms of traffic coming in," he said. "You don't want the first thing people to see as they come over that corner bridge in front of the Bellagio is a big hole in the ground. That's a prime piece of real estate.

"But when you look at Mandalay Bay and Bellagio they were master planned for an additional tower."

In the case of Caesars, Mulkey said the facility has been expanded over the years and lacks the space and configuration to successfully conduct business and construct at the same time.

"That property (Caesars) is very old and has been kind of piece-mealed together, and whenever older properties add new legs they will have an efficiency issue," he added.

Another aspect of expansion Mulkey takes into consideration is the operational expenses the expansion will incur. In the case of additional towers, he said, the cost of adding new staff is minimal and therefore not seen as a problem for a company's earnings.

"They (Caesars) always had that walkway and dead space (where the new parking garage is currently being built), and that was not the best use of space. They made the right choice with their expansion projects, it's just that it's a temporary disruption," he added.

Robert Stewart, a spokesman for Park Place Entertainment, said there is a difference between a site expansion and a site redesign, the latter of which is what Caesars has been undergoing with ongoing construction projects for the past three years.

"You need to draw a distinction between a kind of redesign of a property, where you are creating new spaces. A redesign is clearly more disruptive than an expansion or adding a tower, where the disruption is minimal," he said.

The biggest disruption for Caesars has been a construction wall between the new Colosseum, Celine Dion's new arena opening in March, and the casino floor, said Stewart.

"The principal issue was the fact that we had to take tables and slots off the floor to accommodate the completion of the Colosseum," he said, adding that other projects at the property include a 500-space parking addition, new food plaza area and a fine dining restaurant. "Those projects significantly reduced the number of slots available."

Stewart said the property also was contending with recent road construction on the corner of Las Vegas Boulevard and Flamingo Road.

Kurt Oushida, a spokesman for the Venetian, which scheduled to complete its 1,000-suite expansion next summer, said the resort has not had to make any major changes in operations or marketing while building onto its 10-story parking structure.

The expansion has forced the resort to shut the top two floors of its parking structure, but Oushida said the property has compensated by moving staff parking to different areas and adding shuttle services.

"We've done our best to mitigate ... and it has shown in our quarterly results," he said.

Bill Thompson, a professor of public administration at UNLV, said the downfall for the Caesars property was having these projects in the works when Sept. 11 hit.

"Park Place has a little bit of an excuse," he said. "They, like everyone else, try to plan for the future and were looking into their crystal balls."

Thompson also said that Caesars' age and lack of space to expand has made it more difficult on the company.

"They're a little crunched. You look at the Venetian, it was built to have a second tower. The Palms is laid out for a 2,000-room (resort), but has started as a 500-room (resort). They are structured so that construction won't close down operations or traffic flow," he said.

Thompson added that the visibility of construction projects is quite positive, and gives tourists a glimpse of the Strip's future.

"Seeing the building is really positive, as long as there's activity. People don't mind seeing cranes putting up buildings, but they just don't want to have it in the way of where they are driving or where they want to go," he said.

The dust settles

Brian Gordon, a principal for Applied Analysis, a local economic research firm said his group has seen some soft tourism weekends leading up to the unveiling of a major expansion or grand opening on the Strip through the 1990s.

"We find that people may be holding off or saving to go to the new place," he said. "We call it the phantom room effect, where the market is selling hotel rooms that aren't there yet, which takes away business from other properties."

But Gordon added that the new rooms at the Venetian, Bellagio and Mandalay Bay may not have as huge of a phantom effect as a new facility or attraction.

"It would only be significant if you're talking about a customer who comes twice a year and only stays at (one place) and decides that he want to wait for the new tower or new room to open, but it probably won't be that significant," he said.

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Article Copyright ©: B. Sodoma, LV Business Press