Two Way Hard Three | Las Vegas Casino & Design Blog

June 21, 2011

SIMPSON ON VEGAS #024: Loveman The Local

Posted by Hunter

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


Read archived comments (6 so far)
June 21, 2011 2:01 PM Posted by Ted Newkirk

Station might as well sit on their land in this market. They still own a good 1/4 of the neighborhood surrounding Palace, land which they grossly overpaid for during the boom, thinking that they were going to build their version of The Palms on. They are renting out the homes for around $1000 a month. At that rate, it will take decades for them to recoup. I'm guessing that I won't see that project completed in my lifetime.

I'm not sure that I see value is someone scooping up Aliante Station. It is somewhat interesting karma: The Greenspuns were slamming up homes in that area at the height of the boom (and at a time when many of us already realized that the unsustainable boom was about to go bust). With that part of town almost entirely upside down (because of those top-of-the-boom home prices), it could be many years before the property sees the original projected revenue. Now that Station is out of bankruptcy, why fire-sale Aliante? Might as well stick it out.

I simply don't see Michael Gaughan selling unless a health issue prohibits him from being active in running South Point. It is his baby. It gives him a reason to get up in the morning.

I'm dubious as to how Harrah's would do in the locals market. You can treat Strip visitors like crap (bad VP, 6-5 blackjack, expensive food) but not the locals.

Anybody who buys Palms will have their hands full, especially if Maloof doesn't come along with the deal. It is a very unique hybrid with no textbook on how to run the place. If Harrah's buys it, a Palms/Rio/Caesars tram would be interesting to see. A la Mandalay/Luxor/Excalibur.

June 21, 2011 8:13 PM Posted by Jeff Simpson

Ted, thanks for reading my column.
A couple of points.
First, Station has already lost ownership of Aliante Station, as has its partner, the Greenspun family. The ownership has transferred to its lenders, who bought the property's debt at dramatic discounts. (Similar to the way many other properties have changed hands over the years, including: Stratosphere and Arizona Charlie's Decatur, to Carl Icahn; M Resort, to Penn National; and, most recently, the Palms, to TPG -- formerly Texas Pacific Group and Leonard Green, two private equity firms.) TPG and Apollo Global Mgmt. are the new owners of Aliante Station and Station Casinos manages the property for them.
Since TPG and Apollo are the majority owners of Caesars, it wouldn't be a difficult transaction to fold Aliante into Caesars portfolio if TPG and Apollo choose to do so.
As for Caesars ability to run locals casinos, many of its properties around the country are already locals casinos. I know Gary Loveman likes the Las Vegas locals market (LV residents like to gamble) and if market dynamics improve (economy and population growth) I bet he 'll want to be a player. I doubt the company would run Las Vegas locals casinos like it runs its Strip properties, although I'm sure they'd eventually use their Total Rewards platform. The locals market is highly competitive and LV customers are savvy, so Loveman's smart enough to know that "bad VP, 6-5 blackjack, expensive food wouldn't cut it," as you put it.
I don't know that Gaughan will -- or even wants to -- sell, but his willingness to sell Coast Resorts to Boyd Gaming makes me think he might someday decide to, if the price is right (like Jack Binion did).
Any smart owner would want George Maloof operating the Palms and, as long as he has incentive, I think he'll want to too. TPG/LG obviously realize Maloof's value and, maybe in the future, Caesars will too.

June 23, 2011 12:58 PM Posted by Carl Pankowski

Great article, Jeff. This just about sums up about everything that has gone on in this town over the last year.
Only item I do not agree with at this time: Loveman does enjoy the locals market, and he knows, as you stated, 6-5 black jack and expensive food does not keep locals loyal. However, by changing the name and branding to Ceasars Entertainment, he is trying to get away from the old mid-market Harrah's model. They have changed everything to increase the 1000+ADT market, including 3 day orientations trying to (once again) stress customer service in the front and back of the house. I know you understand the Maloof situation with debt and the Kings. He needs to show strong numbers as the family is trying to build a new stadium and keep a strong interest in the Kings. I think he will sell, but not for some time. The Greenspun family did not keep their family fortune by making bad business deals, so I believe they already knew what was going on with Stations and were able to pull out. The Strat has brought in a new marketing team and is trying to make the property profitable again. Not sure if the methods are progressive enough to keep guests loyal. Too much of a numbers game.
If only these "Managers" would have come out of their offices and meetings to see what was coming. A little appreciation for long time guests of the properties before the bust would have made it a little less of a struggle to bring them back.

June 26, 2011 4:01 PM Posted by mike_ch

I have quite liked what the Stratosphere has done in producing a sort of locals casino on the strip. I always felt downtown was underutilized by locals, though, and wish Boyd would have done more to connect their Coast properties with their downtown ones sooner. It probably hurts them that the Fremont isn't as attractive from a food & beverage standpoint as their casinos a block away from the action.

June 29, 2011 8:40 AM Posted by jinx

Great stuff as always Jeff. I can definitely see Loveman trying to move into the local's markets based on their other offerings, although I do wonder whether they are savvy enough to recognize the differences in the LV locals market. In most of the markets where they are locally, they are the only option for miles around, they don't have to worry about strip style competitiion and locals level margins. I can see the possibilities for them with TR, but I have to believe they'd get their lunch handed to them a bit by Boyd and Stations, except for hybrids like Rio and Palms. Although I think without WSOP, Rio would look even worse then it does, since the strip explosion of 2007.

June 29, 2011 11:26 PM Posted by Jeff in OKC

I find your columns inspirational, Mr. Simpson, and this one has reignited my fire to "Get Boyd Back To The Strip". My lovely wife and I went to the Stratosphere during our March trip to Las Vegas (we decided to see one of the last 5 shows of American Superstars). I mentioned to her how much the Strat reminds me of the Stardust; the remodeled casino floor now has neon in the ceiling and dark carpet and the 50's diner and entertainment choices could just as easily be at the Orleans or Gold Coast. If Goldman is really ready to sell, then I could see how easily the Strat could fit into the Boyd portfolio. I think the Arizona Charlie's could blend in seamlessly, as well. And I think shareholders (such as myself) would be OK with increased Las Vegas market presence through well priced acquisions rather than continuing on Echelon before 2018, or so.