Will Gary Loveman expand the Caesars empire (ha ha) into the Las Vegas locals market? That's the theory that our intrepid columnist, Mr. Jeff Simpson, is putting forth in this latest edition of SIMPSON ON VEGAS.
Enjoy after the jump and leave your comments to tell us what you think about this possibility.
The Las Vegas locals casino market has emerged from quite a shakeup during the city's economic cataclysm but a few recent events have clarified what the market should like going forward. In today's column I'm going to share some thoughts about the locals market, its recent past and its future.
First, the big changes. The economy was obviously the biggest factor in the local market collapse. Casino operators that levered up with too much debt in their haste to build, buy or take their companies private was the second biggest contributor. The last big factor was the dramatic halt to the Las Vegas Valley's decades-long sky-high population growth.
The economic meltdown came in a few steps that crushed the locals casino market. The subprime mortgage market went south, a market that was particularly big in Las Vegas, given the number of workers who rely on tip incomes or hold jobs with uncertain income streams. Then the real estate bubble burst, and the valley's second biggest industry (residential development) came to a near-halt, throwing tens of thousands of construction workers out of work, many of whom were the bread-and-butter customers of locals casinos. Home values nosedived, erasing home equity, a once-significant source of consumer spending that made its way into locals casino coffers. The wider economy sank and unemployment soared, which hurt Strip and Downtown Las Vegas visitation and consumer spending, fueling massive layoffs and closures in the city's top industry -- the biggest employer of locals casino customers. At the same time several expensive locals casinos opened (M Resort and Aliante Station), adding capacity at a time when population growth stopped and local gamblers were losing jobs and home equity.
Some folks like to play Monday morning quarterback and criticize casino operators who took on too much debt in their desire to capitalize on the tremendous growth in all Las Vegas gaming markets during the middle of the past decade. I'm not one of those critics, although I do applaud the fiscal restraint shown by more conservative operators who refused to get carried away, like Steve Wynn on the Strip and Michael Gaughan and Bill Boyd in the locals market (Boyd moved quickly enough to halt Echelon on the Strip before it crushed his company and decided to delay locals casino development in North Las Vegas).
Others in the locals casino sphere were not so lucky. Station Casinos, the biggest locals operator, joined with the Greenspun family (my employer at the time) to build Aliante Station. Station's founding family, the Fertittas, and Colony Capital took the company private, a poorly timed gambit they thought would allow the owners to reap the upside to the company's ambitious expansion plans. They were wrong and Colony Capital took a bath on its investment. I described in August how the Fertittas were going to be able to come out of the Station bankruptcy with control of the company, a reality confirmed by last week's actual exit from bankruptcy protection. The company lost ownership of Aliante Station and the Greenspuns lost its shares of Aliante Station and Green Valley Ranch Resort (although I believe it does have an unlikely-to-be-exercised right to buy back a small stake in GVR and will collect a very small share of revenue from GVR).
Other locals operators also were hard hit. The two Arizona Charlie's were bought by an affiliate of Goldman, Sachs & Co., right before the downturn (along with the Stratosphere and Laughlin's Aquarius) and have bled a lot of red ink since the purchase. Anthony Marnell III lost ownership of M Resort to Penn National Gaming. The Terrible's casino chain went bankrupt and the founding Herbst family lost ownership and control, including its Paradise Road locals casino. The Maloofs lost most of their ownership stake in the Palms to a couple of private equity firms that acquired its debt (run up from the Fantasy Tower and Palms Place expansions). The remaining significant locals operators, including Boyd Gaming Corp., South Point, Cannery Casino Resorts and the Silverton were also hard hit by the Great Recession.
The locals market is obviously still fragile, but better than it's been for the past three-plus years. The newer capacity still hasn't been fully absorbed and the residential development expected to surround South Point, M Resort, South Point and Aliante Station by now looks years away at best. The rapid population growth that allowed locals operators to build a new property every year during the past decade (and still grow their tremendous profits) has yet to resume and may not for quite some time, if at all.
The locals market needs a couple of things to move from its current doldrums to growth. First, the national and Las Vegas economies need to improve and unemployment needs to drop significantly. Las Vegas tourism will fuel Strip employment and locals casino spending and improved Las Vegas employment will also boost locals casino spending as well as draw new residents to the valley. Population growth is a critical contributor to locals casino strength, and, with no new locals casino development on the horizon, would be an immediate boost to bottom lines.
Now I'd like to forecast some things I expect to happen in the locals market. First, I expect Caesars Entertainment to eventually fulfill Gary Loveman's hope to have a big stake in the Las Vegas locals market. He passed on opportunities to buy into the market before and later regretted his decisions, but I expect the Palms and Aliante Station will eventually make their way into the Caesars portfolio. It also wouldn't surprise me if, after taking over control of those two very attractive locals casinos, Loveman makes a strategic purchase of a couple of underperforming locals casinos in other Las Vegas neighborhoods, perhaps buying Fiesta Henderson from Station, Silverton from Ed Roski or South Point from Michael Gaughan.
The Arizona Charlie's casinos are much less attractive and significant locals properties, but I expect they and the Stratosphere and Aquarius will also be sold, sooner rather than later. Caesars could be a buyer there as well.
Station Casinos will remain the locals market's big dog and will continue to leverage its scale and powerful marketing ability to capitalize on any market improvement. Station still owns an impressive array of land available for future development and will be able to grow if and when the market allows. Station may sell some of its gaming-entitled land bank but I'd be surprised if it sells much, as its near-cornering of the best future casino sites has long been central to the Fertitta's long-term strategy for world (OK, Las Vegas) domination.
Boyd's Coast Casinos arm and its smaller local entities will remain the market's clear second banana, consolidating operations and attempting to grow same-store profits rather than by adding new capacity. The company has the ability to expand if and when growth comes, but I predict it won't be the first operator to build a big locals casino.
There are dozens of smaller locals casinos sprinkled around the valley and it wouldn't surprise me to see a few closures and a lot of sales in that stratum.
As bad as Las Vegas Strip results have been over the past few years, the locals casino market has been worse. But the locals market has proven its ability to produce profits before. Smart operators should learn from the recent mistakes they and their competitors have made but remain ready to capitalize on a revitalized market if a robust economy and population growth return.
-- Jeff Simpson, June 2011