There’s supply and there’s demand and there’s oversupply … Then there’s Resorts World Las Vegas … Will a Malaysian conglomerate spark the revival of Sin City’s fortunes?
Las Vegas was pumped for the arrival on the 4th of March of Lim Kok Thay. The chairman and CEO of Malaysian conglomerate Genting had come to announce Resorts World Las Vegas, a 3,500- room extravaganza the company says it will build on the 87 dormant acres occupied by the steel skeleton of Boyd Gaming’s moribund Echelon project.
Flanked by Nevada Gov. Brian Sandoval and US Senate Majority Leader Harry Reid, Mr Thay promised a development he said would be “transformational” for Las Vegas. He called it “exciting,” an “unparalleled opportunity”. Senator Reid hailed it as an “incredible addition” to the city and the state and a “boon to the Nevada economy”. The governor labeled it “dynamic, fantastic”.
It’s not so long ago that the US$4 billion Echelon Resort and Casino was generating superlatives like these. To be precise it was in 2007, the year before the crash, when just next door a new chapter was being written on how to make a pile of money in Sin City.
In May of that year, at the frothy peak of the real estate bubble, convenience store magnate Phil Ruffin took the US division of Israeli hoteliers El Ad Group for $1.24 billion for a rundown Eisenhower-era casino at the north end of the Strip called the New Frontier. CityCenter was well under construction at that point, Fountainebleau was going up across the street, Echelon’s girders were rising next door, and Vegas was minting money, or it seemed so at the time, and El Ad wanted some, having eyes for a $5 billion megaresort of its own themed off the group’s crown jewel, the Plaza Hotel in New York. They happily forked over something above $31 million an acre for Mr Ruffin’s 38 acres.
Mr Ruffin had bought the venerable Frontier in 1997 for $50 million he borrowed from himself and a $110 million note from the hotel’s sellers. The rooms already were 30 years old. The entire place was badly showing its age. The Culinary Union had been picketing out front for seven years. He quickly settled with the union and spent the ensuing decade talking up various multibillion-dollar plans for the property, which he renamed the New Frontier, and none of which amounted to anything. So in the end, the wily Kansan walked with a 675% profit on his investment, good for a cool $1.08 billion, about $100 million a year for every year he was there, not counting what he made off the gambling and the rooms and the restaurants over those years. He would later buy Treasure Island from a cash-strapped MGM Mirage (now MGM Resorts International) for $775 million.
El Ad closed the New Frontier in July 2007 and imploded it four months later. Bear Stearns imploded not four months after that. Lehman went under six months later. The bubble had burst. Credit markets were frozen. There was blood everywhere. Boyd halted construction on Echelon, never to resume it.
As for El Ad’s $1.24 billion patch of sand, it may be the most expensive empty lot of all time, save for some temporary fencing and a line of parched, hastily planted evergreens to conceal it from the tourists—a reminder, like the half-finished Fountainebleau and Echelon’s gaping substructure next door and the empty lot up on Sahara Avenue where James Packer’s $5 billion Crown Las Vegas never got built, of how badly things can go wrong. The company says Plaza Las Vegas is still a go. But they’re already in the hole for four times more money than Las Vegas Sands generates in EBITDA on the Strip in a year. MGM Resorts hasn’t turned a profit in five years. Caesars Entertainment’s 2012 operating loss exceeded $313 million.
And Genting Group has snapped up the Echelon disaster zone, which is more than twice as large, for $350 million, less than one-third of what El Ad spent for the New Frontier.
El Ad’s problem really is this, which is not to belabor a well-worn point, but Las Vegas’ bottom line, although it has improved measurably since the worst of the Great Recession, is designed around average Americans spending the kinds of money they thought they could spend when ballooning home values had them thinking they were rich, when in point of fact they are now considerably poorer. From the height of the boom to the depths of the bust, $16 trillion in national wealth disappeared. This is according to a recent report by the Federal Reserve. Less than half of that wealth has been recouped, adjusting for inflation and population growth, and that’s mostly due to gains in the stock market. This is supported by Census Bureau data analyzed earlier this year by Pew Research Center, which found that between 2009 and 2011, while the mean net worth of the 8 million households of the wealthiest 7%—the people who invest in stocks and bonds—surged 28%, that of the 111 million households in the other 93%, whose wealth is mostly bound up in their homes, dropped by 4%.
“A conclusion that the financial damage of the crisis and recession largely has been repaired is not justified,” the Fed stated.
This is not going to change anytime soon.
US Labor Department data shows private employers added about 175,000 jobs in May, which is in line with the average over the last 12 months or so. It’s a rate at which it will take five more years before unemployment is down to pre-recession levels. Unemployment actually ticked up to 7.6% from 7.5% in April. Wages, in the meantime, are up only about 2% and barely keeping pace with inflation.
The Half-finished Fountainbleau
Yet, consumer confidence rose to a five- year high in May, according to both the Bloomberg Consumer Comfort Index and the benchmark monthly gauge of consumer sentiment compiled by the Conference Board. A preliminary reading of consumer sentiment for May compiled by Thomson Reuters/University of Michigan was the strongest since July 2007. How can this be? Well, the psychological high of a rising stock market is part of it. But it has more to do with the belief that housing prices are on the mend. The country has seen 10 consecutive months of gains in the closely watched Standard & Poor’s Case-Shiller 20-city index of property values. It was up 10.9% in the year to March, its largest increase since the bubble days. Consumer spending, which accounts for 70% of US gross domestic product, has responded, rising 3.4% in the first quarter, which was more than initially estimated, although this isn’t coming from robust home equity but from a decline in the rate of savings, which dropped from 5.3% in the fourth quarter to 2.3% in the first three months of this year.
At any rate, it’s not as if people aren’t coming to Las Vegas. They are, a record 39.7 million of them last year, a 2% increase over 2011 and about 500,000 more than the previous record set in 2007, that last year of living dangerously. Only they’re not coming as often and they’re spending less. Over the last five years, first-timers have declined from 18% of visitation to 16%, according to a survey of tourists conducted annually on behalf of the Las Vegas Convention and Visitors Authority. Repeat visitors polled last year have cut out one trip per year compared with five years ago. Passenger traffic at McCarran International Airport hardly budged from 2011’s total and, according to LVCVA figures, is down more than 12% from its 2007 high.
These aren’t the right numbers for a town entirely dependent on a single industry that has invested massively in non-gaming leisure spend and depends on it for 60% of its revenues. It’s not enough for some smart guys in Manhattan to think $31 million is a rational price for an acre of ground. To flourish, Las Vegas needs tens of millions of drunken sailors on a regular basis. It planned for that, laying down a pipeline of expansion and major new resort development beginning in the second half of the last decade—led by MGM Resort’s CityCenter, at $9 billion the most expensive commercial construction project in US history—that resulted in almost 20,000 new hotel rooms opening into the teeth of an economic whirlwind. The occupancy rate citywide is down from 94% to 84% and this has driven down the average daily room rate, which is off its 2007 peak by 20%. With 39 million visitors and more hotel rooms than any city in the country (150,000-plus), Las Vegas sold more room nights last year than ever, 46.5 million, 2.5 million more than in 2007, and it has come away with total room revenue that has fallen over the last six years by an average of $780 million.
A similar sort of inversion is apparent in the MICE sector. When it comes to the really big conventions and trade shows, Las Vegas is No. 1 in the country. Fifty-three of the 250 largest events were held there in 2012, according to Trade Show News Network, including four of the top 10, ranked by square footage, and that includes the largest, the Consumer Electronics Show. But the total number of events is down more than 9% since the recession. Tellingly, attendance is down more than 20%, which reflects the impact of the jobs lost since the crash and can be taken as a fair gauge as well of how the business community is feeling about things—and this hasn’t been good for Vegas either, because mostly it was MICE supporting occupancy rates and room prices that for about 10 years were the envy of hoteliers nationwide, not to mention the lavish spending on F&B and entertainment.
A recent Moody’s report may have said it all: “The Strip’s hotel capacity is built for stronger economic conditions than exist today.”
The Return of Cheap Money
Las Vegas wasn’t Genting’s first choice for its American super-resort. Miami was. Plans there were for 5,200 rooms in four hotels designed to look like skyscrapers of coral reef. There were going to be 1,000 condominiums, a convention center, a virtual city of shopping, dining and entertainment, and the largest casino in the world. But laws had to change for the all-important casino portion to happen, and you don’t buck DisneyWorld in the Sunshine State, and after two years of some of the most expensive lobbying in Florida history, Genting gave up.
Analysts aren’t so sure about Resorts World Las Vegas either. Fitch Ratings Service is guarded, pointing to the 1,620 rooms that will be entering an oversaturated market in 2014 at the new SLS Las Vegas, where the old Sahara used to be. Macquarie Securities’ Chad Beynon told the Las Vegas Review- Journal the city will need 800,000 more visitors when Resorts World opens in 2016 just to maintain current occupancy levels. Fortunately, he said, that’s three years away, otherwise it “would effectively wipe out the effect of the visitation growth we saw in a year like 2012”.
Peggy Holliday at Moody’s says the increases in room supply post-2007 “will continue to depress growth.” She notes that “Even with visitation at a record, hotel occupancy has been essentially flat, and room rates have seen only modest increases.”
Las Vegas laid down a pipeline of expansions and major new resort developmentbeginning in the second half of the last decade that resulted in almost 20,000 new hotelrooms opening into the teeth of an economic whirlwind.
This year, a new Nobu Hotel, a rebranding of the Centurion Tower at Caesars Palace, has brought 181 additional rooms to the market, the Tropicana has added 127, the new Downtown Grand at the site of the old Lady Luck another 650. When Genting breaks ground next year, there will be 2,133 more.
Not that Mr Thay is worried. Not with a company flush with upwards of US$7 billion in cash and interests in five publicly traded entities with a combined market capitalization of $46 billion and a portfolio of gaming, leisure and hospitality assets stretching from Singapore to the UK to the Bahamas, including perhaps the most lucrative slot floor in the US right now at Resorts World New York City.
And it’s not like no one else in Las Vegas is building, although Resorts World is the only greenfield project on the drawing board, and the last one, the $3.9 billion, 2,995-room Cosmopolitan, struggled to get open in December 2010 and has struggled to make money in the casino.
Gaming revenue on the Strip was up 2.2% last year to $6.21 billion, which is a positive sign. But that’s almost all high-end baccarat play. The mass market is stagnant. Win as a whole is $600 million off its 2007 peak. Moody’s take is for gaming to inch up at 1.5-2.5% this year and 2% in 2014, together with room rates, in line with US GDP growth forecasts. Visitation and convention attendance could be flat or could grow up to 2%.
What has changed is all that liquidity the Fed is pumping into Wall Street. It has made money delectably cheap again. Five years ago, no one would lend to Las Vegas, or it took plenty of collateral, and interest rates were prohibitive. Interest rates have since come way down, as have equity requirements, making it possible for the big operators to refinance their considerable debt loads on easier terms, which is freeing up funds to renovate and remodel and invest in expansive new non-gaming attractions, about $1 billion of which is on tap in the next few years, indoors and out, on the Strip, off the Strip and Downtown. The LVCVA has master-planned a $2.5 billion “Global Business District” at the Las Vegas Convention Center that will unfold in phases with additional exhibition and meeting space, new food and beverage outlets, a new grand concourse, an international business destination called the “World Trade Center” and a transportation hub connected to the resort core in and around Las Vegas Boulevard.
“I’m not sure how much better things can get in terms of a cost of capital that’s rational,” said Bill Lerner of equity research firm Union Gaming Advisors in a recent interview in the Review-Journal. “Markets are trying to price in the good news, and they’re certainly demonstrating that the best is yet to come.”
Genting likes its chances. It has, as it claims, “one of the last major developable sites on the Las Vegas Strip”.
The company hasn’t assigned a price tag to Resorts World LV, but reports are of a phased project starting at $2 billion, climbing possibly to $7 billion, no doubt with partners. Plans call for acres of water attractions and amusements around a “cluster of hotels” along with a 4,000-seat theater, more than 400,000 square feet of restaurant and retail space, 500,000 square feet of MICE, a panda habitat, a replica of the Great Wall of China and a collection of terra cotta warriors modeled after the legions of little men unearthed from the tomb of China’s first emperor in a famous archeological find from the last century.
Conceptual design of the LVCVA’s master-planned “Global Business District”
Echelon, which might have been as grand, will fade quickly from the collective consciousness in this town of notoriously short memories, and no doubt, Boyd and its shareholders are glad to get out from under it. But the price was steep. Two operating casinos for openers. One, the legendary Stardust, was blown up to clear the site. The other, Bill’s Gamblin’ Hall & Saloon, named for Chairman Bill Boyd and located on prime real estate at Flamingo Road and the Strip, the site of the old Barbary Coast, was traded to Caesars in exchange for land Boyd wanted to add to the Echelon complex. (Caesars is rebranding Bill’s as an upscale boutique hotel in partnership with Gansevoort Hotel Group.)
That’s not the end of it. Talk about how not to make money in Sin City, Boyd is also out about $500 million in construction and other costs related to the failed development, and $187 million of the $350 million from the sale of the land goes to reimburse a utility consortium for a power plant it was going to build there. The total loss taken as a charge against last quarter’s earnings: $994 million.