The capital markets meltdown and plunging economy have conspired to kill the most prolific casino hotel expansion ever. Struggling with liquidity concerns and plummeting earnings, gaming and lodging companies are halting projects midway through construction and are suspending design and other pre-development work on others still on the drawing board.

Through mid-November, casino-hotel developers canceled 21 projects in the U.S., reports Portsmouth, N.H.-based Lodging Econometrics, a global hotel research firm. There are still 93 casino hotels containing some 51,400 rooms in the construction pipeline. Of those projects, 38 are under construction. Developers plan to start building another 15 casino hotels in the next 12 months.

But experts anticipate that more projects will drop out of the pipeline as the economy continues to deteriorate and financing remains virtually nonexistent. “There's no new development going on anywhere,” says Eugene Christiansen, chairman of New York-based Christiansen Capital Advisors, a gaming consultant and management firm. “With few exceptions, the only projects underway are ones where they threw the switch before the credit markets paused.”

Luck sours in Las Vegas

While casino hotel developers have reined in construction across the country, a third of the 21 stoppages have occurred in Las Vegas. Long considered recession-proof, Sin City nevertheless has witnessed waning tourism.

In September, the number of visitors dropped 10% from a year earlier to roughly 2.9 million, according to the Las Vegas Convention and Visitors Authority. Over that same time period, the average daily rate fell 21% to $112.58.

The Travel Industry Association, a Portland, Ore.-based trade organization, predicts that business travel nationwide will drop 3.7% this year and 2.7% next year. Leisure travel is expected to remain stable this year and fall 1.3% in 2009.

“The wave of casino hotel cancellations started out as a capital markets problem when lending shut down beginning last year,” says Patrick Ford, president of Lodging Econometrics. “Consumers and businesses have really ratcheted back spending, which has brought about a decline in occupancies and room rates.”

Among the more notable casino hotel cancellations, Boyd Gaming of Las Vegas suspended construction of its $4.8 billion Echelon casino resort late last summer. Echelon was the company's first project on the Las Vegas Strip. Plans call for it to span 87 acres and include nearly 5,000 rooms.

Executives with Boyd Gaming, which owns 16 gaming properties in six states, originally hoped to resume construction in 2009. But by the end of the third quarter, they had abandoned those aspirations. The company's net income of $8.7 million in the third quarter was down 73% from a year ago. Boyd Gaming blamed hurricanes that shut down two Louisiana casinos and the economy.

Boyd Gaming is now considering alternatives at Echelon, including shrinking the development, changing the capital structure or adding partners, CEO Keith Smith told analysts during the company's latest conference call. But he added that the company remained committed to building a presence on the Strip.

“It will take several months to develop and consider the full range of options,” Smith said during the call, “and it will take several more months to properly evaluate these options against the backdrop of the credit market and broader economic conditions.”

Focus on operations

Meanwhile, Las Vegas-based MGM Mirage, which owns or has an interest in 21 properties in the U.S. and Asia, has postponed pre-development work on two proposed projects in Las Vegas and Atlantic City. MGM's 10 casino hotels on the Strip generated about $1.5 billion in third-quarter revenue, down 9% from the same period a year earlier, underscoring the gambling mecca's bad luck.

MGM Mirage's net income plunged 67% to $61.3 million over the same period. Subsequently, Felicia Hendrix, an analyst with Barclays, cut her full-year 2008 earnings per share estimate for the company to $1.29 from $1.43.

“We expect Las Vegas to continue to be weak through 2009, which we believe will pressure MGM's core business,” wrote Hendrix following the company's earnings release. She added that MGM is taking encouraging steps to manage costs and enhance liquidity.

Those efforts include the issuance of $750 million in senior bonds secured by its New York-New York Casino on the Strip. The notes feature a pricey 13% interest rate, and the company plans to use the proceeds to pay down the outstanding balance on its credit facility.

MGM needs to raise $3 billion to complete its $9.2 billion CityCenter project on the Strip, and so far it has secured $1.8 billion and commitments for another $500 million. The sprawling entertainment and residential resort is scheduled to open next year and will be anchored by a 4,000-room casino.

Like CityCenter, other casino hotels opening next year face severe headwinds. Fontainebleau Resorts, for example, is scheduled late next year to open the Fontainebleau Las Vegas, a $2.9 billion project of about 3,000 conventional rooms and 1,000 condo hotel units on the Strip. In early November, Moody's Investors Service warned that declining gaming revenues and softening demand for condo hotels had enhanced the risk that the development wouldn't cover debt service on $2.5 billion in bonds.

Given the tremendous amount of near-term uncertainty, Las Vegas could look a lot different once the economy begins to recover, Ford says. “We don't know to what extent demand will rebound, which hotels will continue in their same format or if ownership configurations are going to change,” he adds. “It's very difficult to put together a forecast other than to say we're not at bottom, and we don't know when the bottom will be.”

LAS VEGAS HOTEL DEVELOPMENT HITS A SNAG
Hotel Developer Room Count
Placed on Hold
The Plaza Las Vegas El Ad Properties NY LLC 4,100
Echelon Resort Hotel Boyd Gaming Corp. 3,150
Mondrian Hotel Las Vegas Boyd Gaming Corp. 860
Cancellations
W Westgate EJM Development 1,500
Conrad Magestic Majestic Entertainment 912
Loews Hotel Loews Hotels 400
Under Development
Fontainbleau Resort Fontainbleau Resort 3,812
The Cosmopolitan Related Companies LLC 3,000
Encore Resort Wynn Resorts 2,034
Ceasar's Palace Octavius Tower Harrah's Entertainment Inc. 665
Mandarin Oriental MGM Mirage Inc. 400
Source: Lodging Econometrics