Morgan Stanley (MS) analysts recently paid a visit to Las Vegas and discovered that the local market appears to be doing well. Venues are now busy midweek and bookings are outstripping current occupancy. Further improvement is expected in the coming summer months with the easing of government restrictions looking likely in May. The firm adjusted its Vegas EBITDA estimates accordingly in advance of Wall Street consensus, and also remarked on MGM and Caesars' intensified focus on sports betting and iGaming.
A statement released by the firm read, "The market is back to running at 95% occupancy on weekends, with the operators able to push room rates higher. Price has been a tool to drive midweek traffic, midweek occupancy is now running at 50-60% vs. Feb 30%."
The report further stated that the Las Vegas market is "in the midst of a fast, strong recovery, with especially positive booking trends."
In the report, titled "Gaming: Viva Las Vegas! Upgrade CZR and MGM to Overweight," Equity Analyst Thomas Allen and Research Associate Alexandra Ratzker stated that "consensus is grossly underestimating the earnings power of companies exposed" amid the pandemic, so the firm decided to upgrade MGM and Caesars to overweight from equal-weight ratings.
The Vegas visit further revealed to MS analysts that booking windows were lengthening while continuing to rise. The South Strip, with Caesars and MGM properties, were observed to be busier than the North Strip (Wynn and Las Vegas Sands properties) "as the market still lacked convention visitors and had made up for it with more price-sensitive, typically lower quality leisure customers. However, those customers illustrated demand for Vegas is there and are spending more per visitor than they have in the past."
The MS analysts predict further improvement with the arrival of summer as the 50% capacity cap and the 6 feet social distancing imposed by the government are expected to be eased by May. An excerpt from the report states, "All eyes are on 'The World of Concrete' conference on June 7-10 as the true litmus test of if the market can handle large scale conferences again, so all the operators and the state gov't want to be prepared for when it comes."
The analysts also pointed to the 2022 convention calendar as an indicator of a more lucrative future. Several large events planned for the second half of 2021 have had to convert to virtual experiences. It was noted that several new, state-of-the-art convention space from Wynn and Caesars have cropped up and could help push the market to surpass 2019 levels.
The recent activity of Airlines was also pointed to as a good omen as they have been delivering a flourishing supply to the market with the number of shows expected to increase shortly. MS did indicate a "big risk" in potential lower-than-expected attendance at future conferences with the recent rise of virtual/hybrid meetings.
The report goes on to state that "labour savings will be the biggest contributor to cost upside." Companies will be obliged to re-employ some staff due to the uptick in business volumes, but this may only be around 20% of the employees that have yet to be hired back.
Allen and Ratzker also stated that, in some instances, revenues from bookings, gambling and hotels were already coming close to 2019 levels, thanks to materially lower costs, with the report saying, "Notably consensus is looking for 2Q21 Vegas occupancy of just 60%, despite March appearing to be at 63-70% already and trends improving sequentially. We raise our estimates based on what we heard, and are now 14%/2% ahead of 21/22 cons Vegas revenue, which results in 28%/9% higher Vegas EBITDA."
MS revealed that it is currently ahead of Wall Street's EBITDA consensus estimate by 38% for the second quarter and by 36% for the third quarter.
Finally, the analysts were of the opinion that Caesars and MGM "now realize the importance of being successful" in the US sports betting and iGaming business, "and are willing to spend whatever it takes."