LAS VEGAS – The big three Las Vegas operators, Wynns, MGM and Las Vegas Sands (LVS) must be really glad they decided before the financial meltdown to invest in Asia, specifically Macau and for LVS, Singapore as well. Asia is proving to be their salvation in this tough American recession.
In a report last week on Singapore’s decision to allow gambling, The Los Angeles Times used a dramatic bar chart that says it all: for 2010, Macau delivered $23 billion of gambling revenues, Las Vegas a very far $6.3 billion, the recently inaugurated Singapore casinos $5.1 billion and Atlantic City an anemic $3.6 billion. A CLSA analyst told the LA Times that Singapore will match Las Vegas this year at $6.5 billion and “surge past it next year with estimated revenue of $8.1 billion.”
In this visit to Las Vegas, I did see the obvious signs of a downturn. But there are also signs that investors are making fairly big bets on a resurgence. The question is, when?
The action is now pretty much confined in a mile long strip from the new and awesomely futuristic CityCenter complex to the equally impressive Wynns Encore development. This is where the tourists walk around to watch the fountains dance at Bellagio and a volcano erupt at the Mirage.
Circus Circus, where I stayed in my first visit to Las Vegas over a decade ago, is now by its lonesome at the far end of the strip. Beside it is a big vacant lot where, if my memory serves me right, Frontier and Stardust used to be. Two multi billion dollar hotel complexes to be built in their place and inaugurated last year have been held up by the financial crisis.
The old downtown is pretty much deserted even if there are still some lights up in a pedestrian mall. But then again, this visit is on a weekday with the Fourth of July weekend still ahead. Maybe things will be a lot busier three days or so from now.
The three main Las Vegas investors are still attractive to the stock market but mainly because all three have subsidiaries in the booming Macau market. All three are situated on the Las Vegas Strip, where about half the city’s close to 150,000 hotel rooms are located.
In addition to their expansions into Macau, all three have made major hotel/casino capacity additions in Las Vegas over the past few years–just as the economy was peaking. These are all multi-billion dollar projects, funded primarily with debt.
One analyst, in a blog, practicalinvesting.com, notes the Las Vegas problem is hotel room overcapacity, specifically in the high-end rooms on the Strip where the big three are. The blogger notes that “in 2006, the Las Vegas market had 132,600 hotel rooms and served 38.2 million visitors. By last year, visitor numbers had shrunk to 37.3 million, but expansion projects had increased the number of hotel rooms to 140,429.”
The blogger continues: “the need to repay construction debt and the fact that the out-of-pocket costs to a hotel from having a room occupied for a night are less than $20, mean price competition to sign up guests has been wicked. The Strip accounts for about half the room base, but virtually all the expansion–so the trouble has been most acute there. Although the situation for the big three is gradually improving, I think it could be several years before the market grows into the existing capacity.”
In the meantime, the blogger points out that Macau “is already many times the size of Las Vegas, measured by the amount of money bet in the casinos. So far this year, Macau gambling is expanding at a 40 percent + rate. I think the market will get to at least double the current size before it gives any sign of maturing.”
So Asia, in particular Macau, is the obvious source of profits for each of the Las Vegas parents. “But that money isn’t readily available for use in the US. For one thing, it will likely remain in Macau to fund expansion there. For another, the way shareholders receive income from their stocks is through dividends, which have to be declared by the management (only Wynn Macau has done so) and would be subject to US corporate tax if repatriated.”
Thus, the blogger points out that Wynn appears “to be the strongest company of the three, with its finances under much better control than the other two. Still, are the Las Vegas operations, generating $250 million in cash flow at an annual rate, but servicing $2.6 billion in debt, worth paying 22x cash flow for?”
A big hedge fund, on the other hand, is “betting on the large upside leverage MGM will have as/when Las Vegas turns for the better. After all, the company owns a ton of Strip real estate. Over the years, it bought the former Mandalay Bay as well as Mirage Resorts, and has built the gigantic CityCenter complex. Still, $12 billion in debt and cash flow of $110 million a year are a very risky cocktail to be involved in.”
As for LVS, the blogger points out “there’s $3.1 billion in debt linked to the US casinos + construction obligations that were suspended during the darkest days of 2008. But management fees from Macau and Singapore seem to me to be potentially large enough to service the debt, even without an uptick in the US business. Not for widows and orphans, however.”
Las Vegas, still America’s playground, is hurting. Some 53 percent of the jobs in Las Vegas are tied to gaming, real estate, food and drink, the largest percentage for any major U.S. city. And because consumers sharply reduced discretionary spending Americans cannot afford to gamble as much as before the recession struck. The area is also still reeling from the collapse of its housing market.
Today Las Vegas is one of only four metropolitan areas among the America’s 100 largest that is in the bottom 20 for both the severity of its recession and the sluggishness of its recovery, Brookings Institution, a think tank, found out. But if you just stayed within a one mile segment of the Strip, fountains still dance to music, a volcano explodes on schedule every hour and Manilow sings nightly. It is as if the good times continue at least for one night more.
Soft economy
I got this reaction to a previous column on the soft US economy from a Pinoy expat working with a financial services firm in New York.
“I think a better way to put it is that the US economy is not just soft, but has been deformed, perhaps permanently.
“You mentioned that there 25 million Americans were out of work. How is it possible to put even half that number to work quickly in jobs that pay well enough to sustain a prosperous way of life?
“Consider that the longer people stay out of work, the less employable they become. Two of the three industries that have driven job growth in the past – manufacturing, financial services and technology – are no longer able to pick up the slack.
“Because of automation and rationalization, manufacturing can no longer hire millions of workers in jobs that pay generous benefits. Wall Street is a dying sector; there is talk of thousands more jobs to be cut at the end of the year as the biggest banks continue to falter.
“Technology has become consumerized with gimmicks like iPad, Groupon and Facebook; it is no longer an incubator of earth-shaking innovations such as ENIAC and Cray from generations ago.
“College graduates who were educated under delusions of grandeur are now taking jobs that pay less than $20 an hour, while the government is struggling to find the best way to tell those who have been cast aside that there is simply no chance for them to recover.
“Fortunately, the future is bright for the few who have the right skills, especially in advanced math and science. If they start early, grow up subordinating themselves to imperatives (as per Amy Chua) and refuse to follow the herd, they will still be able to innovate, build wealth and live prosperously.”
Magic...
During a recent vacation in Las Vegas, a man went to see a popular magic show. After one especially amazing feat, a man from the back of the theater yelled, “How`d you do that?”
“I could tell you, sir”, the magician answered, “But then I`d have to kill you.”
After a short pause, the man yelled back, “Ok, then... just tell my wife!”
Boo Chanco’s e-mail address is bchanco@gmail.com. He is also on Twitter @boochanco