Industry reaction: How did Caesars Entertainment perform in 2015?

By David Cook
Caesars Entertainment Corporation (CEC) rounded off its financial year by reporting a 13% increase in continuing CEC casino revenues to $2.14bn for the full year 2015.

Net revenues also went up, increasing 15% to $4.5bn while income from continuing operations, net of income taxes was $6.14bn, in comparison with a loss of $333m.

Caesars Interactive Entertainment produced improved net revenue of $766m, up 31%.

Notable events in the year were Caesars Entertainment Operating Company (CEOC) filing for bankruptcy in January and Mark Frissora, former chief executive of car rental company Hertz, replacing Gary Loveman as CEO in July.

To delve deeper into how CEC fared last year and where it is heading, we decided to speak to two expert US gaming analysts to provide their views.

A changing brand perception

Christopher Jones, senior gaming analyst, Union Gaming Group:

We are pleased with the results. It’s unfortunate for the company that they are all tied up with the ongoing bankruptcy proceedings, as I suspect in a normal world, CEC would have emerged the winner in the Q4 2015 earnings scoreboard.

For Vegas, it’s clear the company is resolute in its desire to shed its image as the low-end hotel room provider that only caters to regional market casino customers. I think that most people coming to Vegas for a conference, for example, would never consider a CEC property. Given the capital they continue to commit, I think that this is changing. At the very least, they are getting people into CEC properties that they wouldn’t normally venture on. They are even gaining traction with the millennials with offerings such as the Omnia nightclub. CEC updated their worst rooms first, so the improvements in average daily rate (ADR) from room remodelling in 2016 and beyond will likely yield far less in terms of incremental ADR.

I think for the Strip, the news is good. While there is potentially a more viable competitor on the Strip, it is likely to be a while before they start pressuring MGM’s group business. However, I think they have been one of the operators where customers could consistently find lower-priced rooms, when the rest of the market was trying to maintain ADR. So from a customer perspective, it means that finding a cheap room on the Strip will become increasingly difficult. For Las Vegas, I would expect more of this repositioning going forward. Stronger ADR and renovated rooms would make these assets all the more valuable to a would-be buyer. I suspect that MGM Growth Properties, Penn, GLPI etc. would be keen on getting a recently renovated property on the Strip.

Away from Vegas, I think that it’s encouraging that the company is investing in Atlantic City (AC). If we do eventually see casinos in North Jersey, it seems likely that not all of the existing eight operators will survive. On the boardwalk, the CEC asset needs some serious attention and I think that the company is making a statement that they look to be one of the survivors in AC.

Vegas driving success

Alex Bumazhny, director of gaming, lodging and leisure, Fitch Ratings:

The results were very strong with cost savings and room rate growth being the main drivers. We were a bit surprised on the cost-savings side with the company reporting $350m of cost-saving benefits in 2015. This number is especially staggering when considering that CEC has been taking out cost from its operations diligently for the last eight years.

The room rate increase is attributable to the favourable market tailwinds in Vegas, which benefited from no new supply and improving convention business. CEC also managed to invest considerably in its Vegas assets over the past two to three years when it transferred the Vegas assets from its financially troubled CEOC to subsidiaries better positioned to invest in these assets.

CEC seemed to emphasise non-gaming amenities and the millennials during the conference call. It remains to be seen how profitable these non-gaming segments are, but we view these investments positively given our bearish long-term outlook on US casino revenues outside Vegas.



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