Casino operator MGM Mirage said on Tuesday that it plans to take a third quarter writedown of nearly $1 billion related to the company’s City Center project in Las Vegas. City Center is a 67-acre mixed-use complex on the Las Vegas Strip complete with residential, retail, and casino real estate. The project has been to the brink of financial ruin and back, almost done in by a difficult economic environment. The casino industry has humbled by the recession, which has caused steep drops in gambling revenues and room rates. Some fear that when the project opens in December, the excess supply could push rates down even further.
The fate of the City Center development reflects the harsh reality facing Las Vegas and the global gaming industry. MGM has also announced that it is cutting condo prices by 30% in light of the recent economic downturn. According to Kevin Kingsbury, many people who had signed contracts on the condo building indicated they would have trouble closing now that finance is harder to come by.
Few areas of the country have been hit harder by the recent recession than Las Vegas. Nevada’s 13% unemployment rate and declining population rate have resulted in a foreclosure rate that is the highest in the U.S., and has been for some time. One in 23 Nevada homes has received a foreclosure filing, nearly six times the national average.
Vices such as gambling and alcoholic beverages have long been thought to be non-cyclical (or even counter-cyclical) but Vegas is certainly feeling the pinch this time around. Tourism in Sin City is down by about 6% this year as consumers cut discretionary items out of their budgets.
Gaming Industry Bust…Or Boom?
While real estate values in Vegas have plummeted and foot traffic in casinos is way down, not all companies in the gaming industry have suffered. Facing steep budget shortfalls, several U.S. cities have turned to legalized gambling to fill the gap. The Pennsylvania State House is considering legalizing blackjack, poker, roulette, and other table games as it struggles with unprecedented budget deficits. Ohio has turned to table games in four cities as a potential solution to solve its budget woes. Similar plans have popped up across the country (and even around the world) as legislators have begun running out of options that will avoid a full-blown fiscal crisis in their home states.
So while Vegas casinos may have crapped out, the gaming industry has seen new sources of revenue pop up elsewhere. But its been hardly enough so offset a tough economic environment for a “discretionary services” industry. The S-Net Global Gaming Index, a benchmark that measures the performance of the global gaming industry, lost almost 70% of its value between the beginning of 2008 and the bear market lows in March.
ETF Plays On The Gaming Industry
For investors looking to gain exposure to the global gaming industry, Van Eck’s Gaming ETF (BJK) is an appealing option. This ETF tracks the S-Network Global Gaming Index, spreading its holdings across all parts of the industry. About 38% of BJK’s holdings are in casinos and resorts, while 34% are in technology companies such as IGT. The remainder of the ETF’s exposure is spread across sportsbooks, online gaming companies, and the horse racing industry.
Average daily volume of more than 40,000 shares and an expense ratio of 0.65% make BJK attractive from a cost and liquidity standpoint as well. The fund has returned almost 50% year to and about 45% over the last 52 weeks.
Disclosure: No positions at time of writing.