NEW YORK - April 14, 1998 - U.S. gaming revenues will grow 5.8 percent this year to $27.3 billion, down sharply from 1997, when gaming revenues grew 15.1 percent to $25.8 billion, according to the just-released 588-page 1998 Bear Stearns Global Gaming Almanac. Of all U.S. gaming markets, Las Vegas will be most severely challenged in the current environment, lodging and gaming analyst Jason Ader reports.

"Growth in U.S. gaming revenue in 1997 consisted of modest increases in the traditional gaming markets -- and expansion in riverboat and Native American markets," Ader notes. "Gaming revenue growth in 1998 will consist mainly of full-year revenue coming from new casinos that were completed during 1997 and operated for only part of last year," he observes. "This is a challenging, slow-growth time for U.S. gaming, with few new gaming jurisdictions save Detroit. In this environment, few entities will be more greatly impacted than operators on the Las Vegas Strip."

Las Vegas

In Las Vegas, several factors combine to create less than optimum market conditions, according to the Almanac. Hotel occupancy rates and average daily room rates in Las Vegas are expected to decline this year, and there is the threat of hotel room oversupply with 21,000 new rooms slated to open in the city by 2000, Ader notes. Insufficient air service to Las Vegas, particularly from the northeastern U.S., could limit the number of visitors to the market. Furthermore, the Asian economic crisis could lead to a 10 percent to 15 percent reduction in baccarat revenues through the end of 1999, according to the Bear Stearns 1998 Global Gaming Almanac.

"In Las Vegas, there will only be a handful of winners," Ader predicts. "A solid strategy is to invest selectively in large companies that have strong management teams, access to low-cost capital and a solid track record in developing new properties. It is prudent to focus on companies that control leading properties on the Strip and have solid growth opportunities, including Mirage Resorts, MGM Grand and Rio Hotel Casino Corp."

Atlantic City

The Bear Stearns 1998 Global Gaming Almanac pegs Atlantic City's ultimate market potential at $5 billion, assuming planned resorts are developed and the current capacity of the Atlantic City airport is unchanged. By comparison, in 1997, Atlantic City's casinos generated more than $3.9 billion in gross revenues, a 2.6 percent rise over 1996, according to the Almanac.

Despite this overall optimistic outlook for the market, the Almanac notes Atlantic City remains a highly competitive market -- and one that faces pressure from Indian gaming in Connecticut and slot machines at Delaware racetracks. The earnings outlook for Atlantic City operators is mixed at best, according to the Almanac. In its trend toward Las Vegas-style themed resorts, Atlantic City operators are making significant investment in casino, hotel, infrastructure and ancillary developments. For example, over 7,500 new rooms are expected to be built between now and 2002, the Almanac reports. While Atlantic City hotels enjoy occupancy rates greater than 90 percent, most rooms historically have been given as comps in an effort to attract gamers. "There are grounds for some optimism that $2.75 billion in large scale mega-resorts planned for Atlantic City can revitalize the market," Ader says. "But we also believe that the new operators making those investments, such as Mirage Resorts, MGM Grand, Circus Circus and Sun International, will receive the largest share of incremental market growth," he adds.

Other Markets

Among other U.S. gaming markets, the Mississippi Gulf Coast and Tunica stand out as new markets offering prospects for substantial growth, according to the Bear Stearns Global Gaming Almanac.

"Gaming revenues on the Gulf Coast may have the potential to grow 58 percent to $1.2 billion by 2002. In Tunica, Mississippi, revenues could reach $1.2 billion by 2002, a 31 percent increase over 1997 revenues of $933.3 million," Ader says. While the Gulf Coast eagerly awaits the early 1999 opening of Mirage Resorts' 1,800-room Beau Rivage, development in Tunica has focused primarily on amenities expansion, which has helped turn Tunica into a destination, the Almanac reports. With the opening of a 1,200-room hotel tower by Circus Circus and Sheraton's 140-room luxury hotel, all of Tunica's casinos now have hotel facilities. Hotel room additions and increased amenities will likely continue to be a primary driver of revenues and profits, the Almanac predicts.

Consolidation

Consolidation in the gaming industry will continue this year, following recent transactions including Starwood Hotels  Resorts' purchase of ITT Corp., Crescent Realty's pending acquisition of Station Casinos, Harrah's pending purchase of Showboat and Colony Capital's pending purchase of Harvey's Casino Resorts.

Most recent transactions have valued targets between 6.8 and 9.0 times estimated cash flow, the Almanac notes. Starwood's acquisition of ITT at a 13.4 times cash flow was driven by lodging assets, the Almanac reports. While real estate investment trusts (REITs) have surfaced as one important structure in gaming industry consolidation, they represent only one structural alternative, Ader says. "Some companies, including MGM Grand and Mirage, perceive the REIT structure as inappropriate for their own growth," Ader says. "This rejection is based on REITs' high level of cash flow distribution -- and the potential shortage of working capital that may result. Overall, as gaming consolidation continues, we expect potentially greater activity between the gaming and lodging industries."

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