Fitch Calls Macau Gaming 'Stronger,' US Regional Gaming 'Weaker'

Fitch Ratings-New York-05 April 2013: Fitch Ratings says demand in U.S. lodging and Macau gaming has been stronger so far this year versus our previous expectations, while U.S. regional gaming has been weaker. Same-store gaming revenues are down approximately 10% year to date through February for states that have already reported (all major ones except Nevada), highlighting that 2013 is off to a rough start for regional gaming operators. Revenue is down approximately 4% including new openings, principally in Ohio and Maryland. The sunset of the 2% payroll tax break, higher gas prices, and tougher comparisons to 2012 (the winter was milder and February had one extra day) are commonly cited reasons for the steep declines. We expect the same-store declines to moderate as the year progresses to be more in line with our 2013 outlook, which called for flat to slightly lower same-store regional revenues in 2013. We now expect same-store revenue declines in the low single-digit range. Our sovereign analysts project 1.9% U.S. GDP growth for 2013, with improvements in the labor and housing markets offsetting the negative impact from the sequester. The GDP forecast for 2013 is more robust at 2.8%. We think regional gaming trends will track slightly below our GDP forecasts, as regional markets are becoming increasingly saturated. U.S. lodging demand remains strong so far this year, contrasting the U.S. regional gaming trends. We are increasing our 2013 RevPAR base case outlook to 5.5% from 4.5%. A benign supply environment and solid corporate demand has fuelled the relative outperformance of lodging and resulted in roughly an 8% gain in RevPAR YTD, driven by rate increases of nearly 5% and occupancy gains of 3%. Generally, lodging operators are guiding to full-year U.S. RevPAR growth of 5%-7%, providing ample cushion for demand deterioration relative to current base case rating levels. Our lodging outlook remains conservative due to continued high (albeit slightly improving) unemployment of 7.7% (as of February), the potential lagging negative impact from the sequester, and our sovereign team's recent downward revision of its 2013 U.S. GDP forecast to 1.9% from 2.3%. Separately, the rebound in Macau VIP growth picked up in Q412 and continued in 1Q13 despite the partial smoking ban in the market that was implemented at the beginning of this year. Based on VIP growth of 4%-5% and mass market growth of 20%-25%, we are increasing our 2013 forecast for total Macau gaming revenue growth to over 11% up from over 8%. Total market revenues grew 25% in March and are up nearly 15% for 1Q13. Additional information can be found in Fitch's gaming, lodging, and leisure (GLL) electronic newsletter. In the newsletter, we provide brief sector comments, highlight recent/upcoming events, and offer links/summaries to rating actions and detailed reports.