Two Way Hard Three | Las Vegas Casino & Design Blog

April 6, 2012

Crystal Balls and Financing Details

Posted by daveschwartz

We learned yesterday that all of the financing details for the soon-to-open SLS Las Vegas are in place. Well, actually, they aren't, and that's what makes this interesting.

To read the press accounts, you'd believe that they were ready to start painting over at the former Sahara. A look at the property suggests that this isn't so. It's not only inactive--it's dilapidated. SBE didn't even show the effort of taking down the Rick Thomas wrap that decorates the south flank of one of the towers. It just doesn't appear that this is a property that's about to be reborn as a hotel that's "just below luxury."

Which, by the way, would make a great album title.

And the financing announcement, as others have said, isn't really much of an announcement: SBE needs to borrow at least $415 million of the $744 million needed to remake the Sahara into SLS Las Vegas. These days, there's not exactly a long line of people waiting to loan money to build more hotel rooms in Las Vegas. So this is far from a done deal.

But there's always the possibility that it might happen and, just like a stopped clock is right twice a day, eventually something probably will be built on that land, "vindicating" Sam Nazarian. Of course, it's highly unlikely that it'll happen in 2014.

If you're wondering why I'm so bearish on the prospects of the SLS Las Vegas, here's why: the plans don't make sense to me. SBE wants to spend $744 million which for about 1,600 rooms and a few amenities. This is in the awkward in-between place, above the range of the Tropicana's $165 million makeover but less than the $4 billion or so the Cosmopolitan cost to build. Which sounds great, if you're a "lets meet in the middle" kind of guy, but in fact just means that you don't get the savings of more modest renovation but also don't get the benefits of completely new construction. And it's difficult to see how this prices out.

Now I'm going to break out some numbers, with the caveat that these are very, very speculative, and not at all my projections of what the property would do financially.

With 1,622 rooms and an ADR of $200, the SLS would pull in $118 million in room revenues a year, with 100% occupancy.That's being pretty generous, since the Bellagio, which is definitely luxury, is starting at $149/night on Expedia right now. Of course, the SLS would have a casino, dining, and nightclubs as well, so lets say that rooms only represent a quarter of the property's total revenues. That gives me a best-case scenario of $474 million in annual revenues, which looks pretty good, until you consider that we haven't accounted for any expenses yet. Payroll will probably eat up about 33% of that, so we're down to $365 million. Then you've got to account for comps (probably about 26% of gaming revenues), cost of sales, and other expenses. Which tells me that, even if everything broke perfectly, it's tough to project out how this makes money, particularly when the project is carrying a debt load of $415 million.

To be fair, I've been wrong before. I was very, very skeptical of the Plaza's chances of reopening Downtown. It wasn't until I personally saw the work happening in the rooms (and a ballroom filled with Fontainebleau furniture) that I changed my tune. Maybe I'm missing something here.

On the other hand, maybe I'm not. Back when the mini-casino idea in Atlantic City was first mooted, I looked at the numbers and decided it made absolutely no sense. But no, press reports insisted, Hard Rock wants to spend $300 million on a mini-casino!

So I looked at the numbers more closely, and decided that, instead of building a mini-casino for $300 million, you'd be better off buying the Trump Marina and renovating it. That was back in March 2010. In February 2011, Landry's bought Trump Marina for $38 million and is currently renovating it into the Golden Nugget Atlantic City. Hard Rock recently announced that its mini-casino will be "delayed," or might not happen at all. Not really surprising.

A few years ago, it seemed like the market would support anything in Las Vegas. That was never really the case, but smart people convinced themselves it was true. There is room for growth in Las Vegas, and undoubtedly something new is going to be built, maybe sooner than we think. I just don't think, for the reasons explained above, it's going to be the SLS Sahara.


Read archived comments (16 so far)
April 6, 2012 3:04 PM Posted by Tim

Great analysis. It looks like S&P agrees with you...

April 7, 2012 8:38 AM Posted by Jeff in OKC

This is a great post, Dr. Dave!
I have one idea of how this is going to be done. Number one, Nazarian has access to a lot of money. If he has been able to pay off the Sahara purchase in five years and have $325 million on hand to invest in this renovation, he's either making a lot from his businesses, or is being given a lot from other people.
Number two, like all of us here, Nazarian likes Las Vegas in a romantic sense and sees the benefit of owning and operating a casino on the Strip to make his name bigger worldwide.
I think Nazarian has the financial ability and desire to subsidize a money losing Strip resort for as long as it takes to make it work. Because being a Strip casino operator can take him in they eyes of the world from Sammy Boy to Style, Luxury, Sophistication.

April 7, 2012 8:58 AM Posted by Hunter

Jeff - what makes you think that the original purchase has been paid down completely? Did you read that somewhere? I'd not be surprised if some of that was still on the books at the parent company - doesn't make a lot of sense to pay down a low interest rate mortgage ahead of schedule as that capital almost certainly would make more invested in other things.

Looks to me like Stockbridge is the one with (access to - they're trying to raise it, it's not in the bank) the money here, not SBE. They are a real estate fund - their investors will want a return and may not have endless patience.

The problem with the reporting on this is that everyone is giving this guy the benefit of the doubt and assuming he's going to pull that off. I'd argue there's still 3/4 of the game to play and just having a promising offense on paper isn't a guarantee of the result.

April 7, 2012 12:08 PM Posted by Jeff in OKC

I sure could be mistaken, but I thought I read a story a few months ago that Nazarian and his partners had bought the balance of their debt on the Sahara at a discount. That was the basis of my comment.
I agree with the sceptical opinions, but I wanted to offer a different viewpoint, for discussion pruopses.

April 7, 2012 12:34 PM Posted by Hunter

SBE/Stockbridge bought the note, yes... but looking back, it never says they used cash - I believe the correct assumption for a transaction that large is that it's financed, likely through the Stockbridge REIT funds.

I guess my bigger point is that I don't think his pockets are any deeper than any other average Strip casino operator and I wouldn't expect his partners to absorb big losses.

I predict Simpson's original line on this is correct - Nazarian is going to sell once the market improves. The hotel is still going to be junky - small rooms, bad location. I'd say on Fremont 10/10 times before I'd stay at SaharaLS - that's not a good sign for Sammy.

The dude didn't even stay in his own hotel when it was operating. That says it all.

April 7, 2012 1:49 PM Posted by parchedearth

My understanding is that SBE is trying to stave of bankruptcy. Although not said, I believe some of this Sahara money will be used to cover operational and debt expenses until they can sell the company and cash-out. Stockbridge is facilitating the ruse because otherwise they are looking at a total loss as well.

This amount of money is not enough to rebuild the property. Will the SBE party crowd really want to stay in small rooms with crappy bathrooms? What about the pool? I just don't say any of this making sense.

April 7, 2012 8:04 PM Posted by Jeff in OKC

I am not saying you are wrong @parchedearth, but I think the dollar amount floated in the stories will work over the property in a nice fashion, IMO. And the analyists quoted in the same stories have devoted their careers to these issues.
I have serious doubts about this scheme working, but I sure hope it does! I want to see ALL of the Strip be as vibrant and profitable as possible.

April 7, 2012 8:46 PM Posted by Hunter

In addition to Vegas stuff, I also follow Apple very closely and one thing I've learned is that most analysts are either morons or liars.

April 8, 2012 3:13 PM Posted by Jeff in OKC

I was gonna try to be offended on behalf of all the hard working Las Vegas anaylists, then I got to thinking of some of the idotic crap we've seen them throw out in the past 8-10 years that I've been following it closely. I reealized...I got nothin.
Defending Nazarian is almost impossible, but with the analyists thrown in, I just gotta cry "Uncle". Wonder what else I can get worked up about?

April 8, 2012 4:47 PM Posted by briguyx

While the SLS Hotel in Los Angeles is one of the most beautiful hotels I've ever seen and the hip have shown they don't always mind staying in small rooms if the place has cachet and a hot nightclub (check out the W Hotel in NYC for instance), we've already seen Sammy's business plan in action in a much better location. It's called The Cosmopolitan and it's not exactly raking it in!

April 9, 2012 3:56 AM Posted by Dr.Dave

^^Exactly. I was saving this for the Vegas Gang, but I'll share some of it now: in other markets, the Sahara would be considered a relatively new building and its rooms relatively big. I stayed at the Palmer House in Chicago once. Ancient rooms, literally just a little bigger than the bed: $209/night conference rate. Think of what you'd get in Las Vegas for that.

So while Sam's plan--to rehab an older property, kicking the luxury level up--would work well in other markets, it doesn't make a lot of sense in Las Vegas, with a few exceptions (Cabana Suites at El Cortez jumps out at me). Even at the El Cortez, the managers were very realistic about their expenses and their post-renovation pricing, which is why the property is a success.

April 10, 2012 10:44 AM Posted by jinx

The Palmer house is a great example. Absolutely ancient, I was always worried when I plugged my computer in, I was going to short out the entire floor.

Very nice analysis, Dr. Dave. I do have a question though, what would work at that location for a resort?

April 10, 2012 12:46 PM Posted by Dave

^ My first thought is, what they already had, with some hands-on management and a modest renovation--freshening up the rooms and public areas, improving the restaurants, and creating a more ambitious entertainment program. In other words, you'd have to give reason a people to stay there.

It would have been rough going 2008-10, when room rates all over town were low, but now that they're picking up it would be well-positioned.

Now that the place has been gutted, I don't even know what a simple renovation would cost. I didn't see for myself, but the liquidation guys said they were selling off the escalators and other big, expensive things like that (Yet the roller coaster is still there. Strange.). So with the place absolutely empty, and now out of action for almost a year, I don't know whether it would be worth it to bring it up to a four-star standard.

I think value proposition is the way to go--working together with Circus, the Strat, the LVH, and the Riviera, you could do some interesting things down there. I'd also explore a shuttle to Downtown, playing up the property as the northern terminus of the monorail. Maybe charge $2 for the shuttle, but give them a $5 matchplay or $5 slot freeplay when they get back? At least you'd grow your database.

April 12, 2012 3:33 PM Posted by chuckmonster

"While the SLS Hotel in Los Angeles is one of the most beautiful hotels I've ever seen"

seriously? did we go to the same place? all style no substance... and "too smart for its own ironic good" style.

April 13, 2012 5:42 AM Posted by jinx

Thanks Dr. Dave, it definitely helped me get a clearer picture of what you thought. I think you are right on with that.

If there is one thing I think the recession should have taught the operators on the strip is that there is a middle base that is potentially under served on the strip. In some senses that base was catered too during the recession, but I still believe that forward thinking properties would have a chance at building some brand loyalty if they only took a look at the market. (I fear the Riv. is too late to the game, given what's happened down there, but hoping it does work out)

I do understand that downtown is becoming a very solid alternative, but I do think there is a segment that prefers the feel of a 1500+ room resort with the amentities it can offer and downtown still lacks certain resort style amentities as a whole.

May 18, 2012 1:02 PM Posted by David McKee

For about 15 minutes, back in '98 or so, several of the major casino operators started babbling about converting themselves into REITs ... mainly because the Clinton administration was about to close some loopholes that would have facilitated the conversion. (Station Casinos went the furthest off the deep end with REITmania; a foreshadowing of worse things to come.) The structure of REITs at the time didn't allow for much reinvestment of revenue, as I recall; I wonder if things have changed in that respect, given that a REIT is ultimately pulling the strings on this Sahara makeover.