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LAS VEGAS-Harrah’s Entertainment on Friday reported a 3Q ’08 loss of $129.7 million, compared with a 3Q ’07 profit of $244.4 million. Revenue for 3Q ’08 was $2.64 billion, down 6.8% from 3Q ’07. At its Las Vegas properties, earnings fell 27% on an 11% decline in revenue. At its Gulf Coast properties, earnings fell 60% on a 6% decline in revenue. In Atlantic City, income fell 12.4% on a 2.4% decrease in revenue.

“The economic upheaval weighing on the country continued to impact our results throughout the third quarter,” said Gary Loveman, Harrah’s chairman, president and chief executive officer. “Reduced spending by visitors to Las Vegas and the closure of our Gulf Coast properties in advance of Hurricane Ike also impacted third-quarter results.”

Harrah’s was acquired in January by private equity firms TPG and Apollo Management. The company is weighted down with $23.9 billion in debt, much of attributable to the privatization. TPG and Apollo, which each put up $1.3 billion in the buyout, have since written down their stakes by approximately 20%. Other investors include Blackstone Group, which put up $275 million.

Harrah’s interest expense increased significantly in 3Q ’08 from 3Q ’07. Interest expense in 3Q08 was $526 million, compared to $213.8 million in 3Q ’07. In a Friday conference call with analysts, company executives said they fully expect to be able to continue to access the company’s revolving credit line, notwithstanding maximum leverage ratio covenants.

Speaking specifically about Las Vegas, Loveman told analysts that while he’s not seeing a significant decline in the number of events being held in Vegas he is seeing a “substantial” decline in the number of people attending the events. In addition he said there is compression on room rates as attendees circumvent the group booking process and look for better deals on Expedia. “It’s corrosive to margins as people move in that direction,” he said.

With regard to the additional 2,000 rooms that will come to market this year with the opening of Wynn Resorts Encore tower, Loveman said the new tower may have a modest effect on Caesar’s–because it, too, is a higher-end product–but not much on the rest of the portfolio. The rest of the portfolio will be more affected by competitors offering up rooms for $49 to $59 per night, he said. “That’s a much more profound issue,” he said.

Riviera Holdings, which owns the budget-oriented Riviera casinos in Las Vegas and Colorado, also announced earnings this week. The company reported a 3Q ’08 net loss of $3.5 million, down from an $18.3-million loss in 3Q ’07. Net revenue for the quarter declined 23% to $40.2 million, including a 20% revenue drop at Riviera Las Vegas.

Earnings at Riviera Las Vegas fell 52%. Casino revenue fell 21%, primarily due to lower slot revenue, while hotel revenue fell 18% on a 700 basis-point drop in occupancy to 87%. Room rates fell about $4 to $75.17. Excluding unoccupied rooms, revenue per room was $65.44.

“This quarter was more challenging than the preceding quarter as business conditions continued to deteriorate,” Riviera CEO Bill Westerman said. “As a result of strong competitive pressure and weak customer demand, we lowered our Las Vegas hotel room rates in order to increase hotel occupancy and overall property revenues. The lower Las Vegas hotel rates and overall casino revenue decrease at both properties impacted our profit margins despite significant cost cutting.”

Westerman assured analysts that the company is well positioned to weather the economic downturn thanks to a $225 million bank loan at just under 7.5% interest that doesn’t come due until June 2014. The company also has a $20 million revolving credit line.

In addition, he said the company suspended its room renovation effort and has been cutting costs, including management-level jobs at both properties. The company has renovated rooms in four of its five hotel towers at its Las Vegas property at a cost of nearly $19 million and also opened a new $11-million sports book earlier this year.

Dan Lee, chairman of Pinnacle Entertainment, which is based in Las Vegas but has no casinos there, also spoke with analysts on Friday after posting a third quarter loss and indefinitely suspending plans to build a major development in Atlantic City due to credit market conditions and increased competition.

Lee speculated that Las Vegas “wouldn’t be in quite as much trouble if they hadn’t levered it up so much,” he said, mentioning Wynn Resorts as the exception. “If you have that much leverage and then your results fall a little bit shy, you’ve got a problem.”

Lee says Pinnacle could take a 50% hit to its EBDIT (earnings before depreciation, interest and taxes) before it had trouble covering its interest expense. “But some of these other companies, a 10% decline in EBDIT and they can’t cover the interest expense,” he said. “Or, actually worst case and I have one in mind, they had anticipated that a renovation of their facility would double their EBDIT, and so they borrowed enough money that they actually needed EBDIT to cover the double, in order to cover their interest expense. So there were some big dreamers in that bank line and now the renovation is done and the EBDIT if flat, and I think they’re headed for the wall. So there’s going to be a few of those.”

As to whether that would represent an acquisition opportunity for those that are more liquid, Lee doubts it. “I mean somebody who paid nine or 10 times cash flow for an asset, doesn’t really want to spin around and sell it at four times cash flow,” he says. “And, if they borrowed most of the money, then what happens is they eventually go bankrupt and the lender then has the asset they don’t want to sell at four times cash flow. A lot of times you have to go through two or three reorganizations before anybody gets realistic about what it’s worth.”

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