.svg)
Body
The Las Vegas casino market is set to enter 2022 looking very different to the start of the year, as MGM Resorts and Caesars Entertainment prepare to offload properties, while inexpensive capital and the prominent role of real-estate investment trusts (REITs) encourage merger and acquisition activity.
Las Vegas remains the largest gaming market in the U.S., but ever since gambling was legalized in this desert town 90 years ago, the industry has benefited from an evolutionary process that has seen casinos and their owners come and go.
That trend has continued this year with the sale of existing properties to new market entrants or REITs picking up Las Vegas Strip assets with sale-leaseback agreements.
Rick Arpin, managing partner at KPMG in Las Vegas, attributed the Strip’s ability to regenerate itself through mergers and acquisitions, as well as attracting billions of dollars of investment in new projects, to the uniqueness of the market.
“Las Vegas still has infrastructure advantages over other gaming and resort markets — things like an airport conveniently located to the Strip, large-scale convention centers, and a critical mass of entertainment, sports, dining and other amenities,” Arpin told VIXIO GamblingCompliance.
“So, it’s real estate value is one of the premier outliers, like South Beach (in Miami) or midtown Manhattan,” he said. “These are unique places that can’t be easily replicated.”
Last week analysts were surprised when MGM Resorts International CEO Bill Hornbuckle said his company was in the “early stages” of selling the operations of the iconic Mirage casino.
“Doing so will allow us to maintain our existing Las Vegas exposure while focusing on the complementary and diverse nature of our offerings in our hometown,” Hornbuckle said.
Meanwhile, Caesars Entertainment CEO Tom Reeg confirmed the company plans to sell one of its Las Vegas assets sometime in early 2022.
MGM and Caesars have been the dominant casino-owners on the Las Vegas Strip in the 21st Century.
Hornbuckle did not put a price tag on the Mirage, which the company has operated for 21 years, and Reeg has yet to identify which property will be sold.
Both companies are looking to use some of the proceeds from deals to pay down debt. As of September 30, Caesars had $15.2bn in debt outstanding, while MGM has $12.7bn in long-term debt.
Reeg acknowledged during the approval process of Eldorado Resorts' $17.3bn acquisition of Caesars in 2019 that the company would sell a Las Vegas asset to pay down debt.
But the coronavirus pandemic has delayed Reeg’s plan to offload a Strip property.
Analysts have speculated that Caesars would sell Planet Hollywood, but Reeg has consistently dismissed those rumors.
Barry Jonas, a gaming analyst with Truist Securities, expects the potential sale by Caesars of a Las Vegas asset to “fetch close to $3bn” in the first half of next year.
“The CityCenter and Cosmopolitan deals have supported healthy industry comps and increased the scarcity of available assets located on the mid-Strip region,” Jonas said, referencing two recent deals involving MGM that have seen the company consolidate its interests around the center of the Las Vegas Strip, away from the Mirage.
Coronavirus M&A
Waiting to sell a Las Vegas property until business levels return to pre-pandemic levels appears to have been a prudent move, given the prices that properties or their operations have sold for in recent months.
“Private equity and other owners have funds they need to invest, and this is a good space for them as well with a solid expectation of the return they will achieve through rents relative to other investments … like commercial office space,” Arpin said.
Most of the larger transactions in Las Vegas in 2021 have included REITs, private equity firms and sale-leaseback agreements with casino operators.
MGM in September acquired the operations of The Cosmopolitan for $1.65bn from private equity firm Blackstone Group, while its real estate assets were sold to the Cherng Family Trust, Stonepeak Partners and Blackstone Real Estate Income Trust for more than $4bn.
In May 2014, The Cosmopolitan was sold by Deutsche Bank to Blackstone Group for $1.73bn.
MGM in July also bought out Infinity World Development Corporation, its partner in CityCenter, for $2.1bn to take over the Aria and Vdara resorts before selling the real estate assets connected to those two properties to Blackstone for $3.9bn in a leaseback deal.
Other recent deals include VICI Properties' $17.2bn pending purchase of fellow REIT MGM Growth Properties, which would create the Las Vegas Strip’s largest landowner, and Las Vegas Sands selling the real estate associated with the Venetian, Palazzo and the former Sands Expo and Convention Center to VICI Properties for $4bn.
Apollo Global Management acquired the operating assets from Las Vegas Sands for $1.2bn.
“The casino industry has long thought about ‘separating’ the ownership of real estate versus operations, much more akin to how hotels operate in the U.S.,” Arpin said. “It has gained momentum as investors saw early success from the REIT perspective, especially with rent security not having been negatively impacted by the pandemic.”
Brendan Bussmann, a partner and director of government affairs a Global Market Advisors, told VIXIO GamblingCompliance that the series of recent deals are unlikely to have a negative impact on Nevada’s largest industry.
“[The] announcements by MGM Resorts and Caesars on potential sale of Strip assets is just a continued evolution of the players and properties on the Strip,” Bussmann said.
“Just as we saw with Cosmo a few weeks ago and we will likely see with others, this is about what works best for these organizations’ operations today and the ability to have other players in the market,” he added.
Arpin agreed the trend of ownership by non-operators and the level of M&A “we’ve seen generally, have certainly been assisted by access to inexpensive capital.”
“So yes, increases to the cost of capital could reduce deal volume,” Arpin said. “But we are also seeing strategic deals and strategic needs for deals across land-based and online sectors. So, we still expect robust M&A volume, IPO activity and other transactions to be quite prominent in the near- to mid-term.”
