Las Vegas was ground zero for the real estate bubble and economic collapse in the U.S. No other city saw the rise in real estate prices, which eventually led the city to a financial crisis when home prices collapsed. The State of Nevada led the nation in foreclosures for 62 consecutive months until this year. Tens of thousands of families lost their homes due to a massive collapse in housing prices, combined with unemployment that peaked over 15%.
The Las Vegas real estate collapse did not just affect the housing market. The biggest industry in Las Vegas has taken some major hits to their balance sheets from declining values of their properties, as well as lower tourist spending. Even though 2011 was the second strongest year for visitors in Las Vegas history, there is still a lot of balance sheet damage several casino companies must resolve before Las Vegas’ largest industry can regain its financial health.
The two largest casino companies in Las Vegas, Caesars Entertainment and MGM Resorts, are over $33 billion in debt combined. While the debt for both companies skyrocketed late in the 2000’s, their asset values plummeted. That is because the biggest assets for both companies are their resorts located on or near the Las Vegas Strip, where property values have declined by over two-thirds in the past five years.
Caesars Entertainment desperately needs online poker in the U.S. to help with its heavy debt load. The company owns the World Series of Poker brand, and already uses that brand for real money online poker in the UK on the 888 Network. Caesars Entertainment is poised to use the same software in Nevada when real money online poker becomes live later in 2012. It will be almost as simple as turning a key to make the software live in the state.
MGM Resorts and Boyd Gaming also look for some debt relief from online poker. Both companies partnered with BWIN/Party to provide online poker to Nevada residents. While both casino companies will be minority shareholders in the partnership, there will be little expense involved with the start up company. This means most revenue should go straight to the bottom line of each company.
The debt load for some of these companies is astounding. Caesars Entertainment owes almost as much money as Apple’s net profit in a year. MGM Resorts carries two-thirds that amount in debt. These two companies have made some business decisions that look foolish in hindsight, but these companies got caught up in a real estate boom that looked like a real life Monopoly game. When the market collapsed, some questioned the future of these companies.
Caesars Entertainment made several business decisions that have proven to be disastrous to their balance sheet. On December 19, 2006, Harrah’s Entertainment was brought private by two private equity firms. These two firms, Apollo Global Management and TPG Capital, bought the public company for $27.4 billion. This included $12.4 billion in debt assumption. This transaction is the largest of its kind in the gaming industry, and among the largest private equity buyouts in history.
This purchase of Harrah’s Entertainment was made at the height of the real estate market in Las Vegas. Shortly before the equity buyout, Harrah’s Entertainment purchased the 24 acres that once hosted the Westward Ho. The purchase price for this land was about $380 million. In February 2007, Harrah’s Entertainment traded these 24 acres of land with Boyd Gaming to acquire the 4.3-acre Barbary Coast property, located at the corner of Las Vegas Blvd and Flamingo Road. This transaction priced the Barbary Coast at $88 million an acre, since the ultimate goal was to demolish it; the cost is actually more if you include the future demolition needed to improve the property.
Caesars Entertainment also acquired the neighboring Bourbon Street Casino just east of Barbary Coast for $60 million. The casino was imploded, but the property still sits vacant today.
This gave Harrah’s Entertainment an assemblage of property on the east side of the Las Vegas Strip from Harrah’s south to Paris Las Vegas. The company would later acquire Planet Hollywood and extend their empire further south. The intention at the time of the Barbary Coast purchase was to build a massive Flamingo casino addition on this property and others bordering it. The recession halted these plans, and not going through with the massive expansion has likely kept Caesars Entertainment out of bankruptcy.
Caesars Entertainment also made mistakes in what they did not do. They did not get into the Macau market. Macau is keeping several of their competitors flushed with cash during the Las Vegas recession. Caesars Entertainment is also heavily exposed to regional markets within the U.S. where taxes are extremely high, and population density is often low. This may hurt the company’s ability to repay the debt when it starts to become due starting in 2015.
While not as burdened by debt as Caesars Entertainment, MGM Resorts still carries $13.36 billion in obligations. Unlike Caesars, MGM Resorts is cash flow positive after servicing the debt. The debt is graded as highly speculative, causing MGM Resorts to pay as much as 13.25% on their interest, although most of the debt is priced between 7-8%. MGM Resorts has $1.5 billion in debt due in 2013. They will need to find a way to pay it, work out a deal with creditors to extend the maturity, or sell new paper to investors.
MGM Resorts got themselves into this debt by constructing the $9.2 billion CityCenter project in the middle of the Las Vegas Strip. CityCenter was originally slated to cost about $4 billion to construct. Cost overruns and design changes caused a cost overrun of more than $5 billion, making it the most expensive construction project in the history of the U.S.
During construction, at the crater of the world economic crisis, Dubai World filed a lawsuit against MGM Resorts. This lawsuit was filed after Dubai World refused to pay an agreed $200 million towards financing a late phase of the project. Dubai World and MGM Resorts came to terms, and CityCenter opened on schedule. The CityCenter project is still marred by a construction flaw in the Harmon Tower, which remains vacant. A lawsuit between MGM Resorts and the builder, Perini Building Company, remains open. MGM Resorts plans to implode the building should they prevail in their lawsuit. Building inspectors state that the building may collapse during an earthquake and must be destroyed or reconstructed.
To avert a bankruptcy during the economic collapse, MGM Resorts sold one of its properties. Phil Ruffin, who owned Frontier before selling it to a speculator that imploded it, bought Treasure Island from MGM Resorts in 2009. The total purchase price was $750 million in cash and secured notes. In Phil Ruffin’s opinion, building the casino from scratch would cost over four times that amount.
Boyd Gaming carries $3.55 billion in debt, with a book value of only $655 million. The company spends about two thirds of its gross revenue on interest payments on this debt. The debt holds a speculative B rating. Boyd Gaming is in a much better position financially than Caesars Entertainment or MGM Resorts. The company still struggles with debt and an unfinished Las Vegas Strip property, the Echelon, which may never be completed.
Boyd Gaming’s mistakes came from building the mothballed Echelon. The Echelon was to be constructed on the former sites of Stardust and Westward Ho. The economic downturn caused this construction project to be suspended indefinitely. Construction on the property was halted on August 1, 2008.
Wynn Resorts carries $5.5 billion in debt, and is shopping to market $1.5 billion more. Much of this debt is tied to expansion in Macau, where Wynn has a large presence. Wynn is a profitable company that even pays an annual dividend of $2 per share. There is little concern about Wynn Resort’s debt load at this time.
Las Vegas Sands
Las Vegas Sands owns Las Vegas properties Venetian and Palazzo. The company has a major presence in Macau, and most of the debt is associated with expansion there. The company did have a failed venture in Las Vegas that caused some losses. Las Vegas Sands owns a shell of a property that was to be a high-rise condominium building. This building has been disguised by a large wrap around the structure, which is mothballed indefinitely. Sheldon Adelson, founder and CEO of Las Vegas Sands, has stated he is morally opposed to online gambling. For that reason, online gambling is not likely to help their balance sheet, which shows nearly $10 billion in debt.
Las Vegas Bankruptcies
While some of the aforementioned companies have flirted with bankruptcy, several Las Vegas companies actually entered into bankruptcy protection. Riviera Holdings, which also owned the Riviera in Black Hawk, Colorado, filed for bankruptcy in 2010 for the third time in its existence. The company was able to wipe $220 million in debt off its balance sheet, but was left with $50 million in debt on the books. The company still struggles to service its debt and recently sold off its Colorado casino so that it could concentrate solely on its Las Vegas Strip property that opened in 1955. The casino has since changed its strategy, offering some of the best gambling in Las Vegas. This includes 1000x craps, 3-2 Single Deck Blackjack, Single Zero Roulette, and Commission Free Pai Gow Poker.
Station Casinos was taken private for $82 a share in December, 2006, in a transaction totaling about $3.5 billon. A large amount of debt was created to buy the company back from shareholders. This debt came back to haunt Station Casinos. In July 2009, Station Casinos filed for bankruptcy. Assets totaled $5.7 billion, but the debt on the books was $6.5 billion. The company emerged from bankruptcy in July 2011. The company shed one casino and $4 billion in debt during its reorganization. Aliante Station was given to creditors, although Station Casinos still manages the casino under its gaming license.
Tropicana Las Vegas was constructed in the middle of the desert in 1955. It took nearly 40 years for the casino to see the Las Vegas Strip makes its way far enough south to be included. By that time, it was an aged properties surrounded by new properties. This presented a challenge for the owners, who could never do enough with the property to keep it competitive. The same company owned casinos in Laughlin, NV and Atlantic City, NJ. The Atlantic City casino lost its gaming license in 2007, causing the company’s financial position to crumble. In May 2008, the company filed for bankruptcy. The company spun off the Las Vegas property, and the property went from $2.7 billion in debt to debt free.