CASINOS: "If It’s for Sale, They Will Come" Or "There’s A Sucker Born Every Minute"

With very few exceptions (like #DerekStevens), casino guys don’t buy casinos anymore; and the current paradigm for owners inevitably ends up on a road to self-inflicted (and often goof-ball driven) failure. A review of casino business headlined transaction in the past few weeks not only confirms this but makes an observer wonder the proverbial “WTF?”.

The exemplary road to self-destruction (if not also regulatory failure and criminal activity) is brilliantly documented by @MaxFrumes and @SujeetIndap in their recent book The Caesars Palace Coup; which I repeatedly have reviewed. But that pinnacle tale is just the most glaring example of modern dumbass conniving in the casino industry.

The silver-screen-fodder gangsters (Meyer, Bugsy, the Purple Gang, etc.) were pikers compared to the exploits recently documented in the gambling rackets. Beyond the aforementioned book, I often point to the (less quotable) New York Post in a story headlined “How Atlantic City’s Revel Casino Took Wall Street for $2.5 billion.” Likewise, there are the aired dirty laundry shenanigans associated with the former Trump Casinos (a past employer of mine), the storied Atlantic Club, the Showboat, as well as the Lucky Dragon drama, the SLS EB-5 nonsense, and enough others to fill a few more books. Those tales do not even touch on the litany of failures of hotel operators who thought they could transition to casinos; notably Ramada, Holiday Inns, Columbia Sussex, Sheraton, SLS, even Hilton.

Whether miscalculation, regulatory failure, get-rich-quick schemes, analyst inexperience (therefore complicity), or hedge-fund monkeyshines, the hare-brained schemes and WTF transactions continue relentlessly.

Not that the attraction to the casino sector is not understandable, especially when one looks at actual cash flow. The average Las Vegas Strip slot machine win-per-unit-per-day of $298 for April of this year represents average cash flow (and replay) through each machine of $3,506 per day; that is $1.27-million per machine per year or pre-payout & OPEX cash flow of $2?-billion for a 2,000-machine slot floor. What other business can boast that? No wonder that there is such hunger for casinos (without understanding the intricacies of operations).

No wonder hedge funds and shark-y investors sniff around the commercial casino world. But it is their cannibal model of strip-and-churn that has been the bane of casino customers; taking away everything from “pencil power” comps to reasonable customer service to acceptable levels of maintenance and much more.

It also has replaced the once cordial comradery competition between casino operators to cut-throat take-no-prisoners contention. AND, it has generated a whole new world of financial wheelings-and-dealings that have absolutely nothing to do with the casino business.

 THE LATEST WTF-MOMENTS

Last month a real estate investment trust called Gaming and Leisure Properties Inc (GLPI). along with Penn National Gaming sold their recently-acquired iconic Tropicana Casino on the Las Vegas strip to Bally’s (not the 89-year-old casino industry stalwart; but the “new” Rhode Island based Bally’s —the former Twin River Worldwide Holdings which was the former BLB Investors which was a JV between Starwood Capital, Kerzner International, and the Waterford Group which is an offshoot of the Standard General hedge fund which was seeded from Reservoir Capital —the turnaround fund created by South Korean American Soo Kim and spun off from Bankers Trust.)

Whew! If that makes one wonder about the expertise in the complexities of gambler behavior, game mathematics, or casino economics, consider that a New York Times headline described Kim as “Drawn to Lost Causes” as he created his turnaround acquisition portfolio that includes Radio Shack, Media General, American Apparel, and other distressed companies, as well as 12 regional-market casinos in eight states.)

COMPLEX FINANCIAL TRANSACTION

According to news reports, Bally's paid $150-million for the non-land Tropicana "assets"; which includes the intellectual property (brand, trademarks, database, etc.) and the buildings (the 1957 casino building, three asbestos-infested motel buildings, a 21-floor tower built in 1977, a 22-floor tower built in 1986, and several support buildings including HVAC and physical plants with decades old technologies, parts, and energy consumption).

In a complex financial exchange, Bally's further agreed to additional payment through a sale-and-leaseback scheme of their Black Hawk Colorado and Rock Island Illinois casinos, for a $150 million fee (get it?) and an initial annual fixed rent of $12 million.

Baffling many of the non-Wall-Streeters among us, the deal did not include the purchase of the land. Instead, Bally's agreed to pay GLPI annual rent for the ±35 Tropicana acres of $10.5-million for 50 years; a transaction that lease-valuates the land at another $525-million. (Take that, potential buyers of Strip acreage!)

 REPERCUSSIONS vs. VEGAS-EXCEPTIONALISM

Almost immediately the repercussions hit the strip. Two weeks after that transaction, MGM was able to sell two undeveloped acres on the strip for $80-million. Forty-f'ing-million dollars an acre!

Seemingly insanely inflated pricing for Las Vegas property is not new, nor a byproduct of the Bally's - Tropicana scheme. More than 15 years ago, Mark Brandenburg priced the Golden Gate Casino to me at a more than 20x multiple of EBITDA (before the aforementioned Derek Stevens scooped it up in a better deal). In 2007, Phil Ruffin offered 36 strip acres to Israel-based real estate developers El-Ad Group for $33.33-million an acre. As recently as 2018 Spectrum Group listed 16 acres on the strip for $50-million an acre.

So there always has been a special fantasy of perceived future-value of Las Vegas real estate; a genuine Vegas Exceptionalism when it comes the schism between asking price and buying price.

But since the hi-jinks of using casino cash flow as targets of leveraged, long, short, and derivative positions (the hedge fund business model) basic operating sanity for casinos has been replaced almost completely by scavenge-and-flip mentality with less-than-zero regard for the customer-centric models that made Las Vegas work in the first place.

Even the hybrid operators like Steve Wynn and Sheldon Adelson are relics among the strip-and-burn owners today; and operators have become fee-for-services wage earners with resumes hopping between hedge owners. There are few of us in the industry whose CV’s don’t include selling our services to multiple strip-and-burn entities during our careers; the major notable exception being work in Indian Country (where the use-of-revenue paradigm is vastly different).

 GOOD DEAL OR DESTINED FOR FAILURE?

To avoid sounding like a sour grapes rant, and for full disclosure and transparency, I need to note that I have a group of financial backers with whom I was actively going after one of those properties. Having disclosed that, I openly add that under no circumstances would I have ever agreed to a deal at such numbers; even "paying nothing" for the buildings and I.P.

The model of land lease is not the issue; almost all of the downtown-Vegas casinos are on long-term land leases. But without real estate assets, the value proposition for acquisition becomes (1) a multiple of EBITDA, (2) the valuation of the improvements (buildings and facilities) with FF&E, and (3) some intangible assignment to the intellectual property.

There is just no way in hell that I would pay those prices for 35 to 64 year old buildings (some with asbestos and all with antiquated energy plants) and not even own the real estate. Not even if my financing had been finalized (it was not) and the cash was in the bank! No way (more on why shortly).

In fairness to the sellers, it was a hell of a good deal. Imploding or rehabbing crappy buildings would cost more than they fetched in the sale; and hanging onto the actual asset (the real estate) is brilliant when you factor in the induced valuation that comes with a 50-year lease.

Likewise in fairness to the buyers, if the interest is the hedge fund mentality without regard to quality, experience, or a future; it was a near no-investment tradeoff of the Colorado and Illinois land for the non-land assets to be stripped.

In those cannibal business models the goal is churn and burn. Admittedly, I am “old school and thus start from a different world. In my model, I start with perception.

When people think of Las Vegas, there are two Las Vegas’: There is the image of Las Vegas that is conjured by movies, television, novels, and some advertising; and there is the stark reality of a trip to hedge fund owned Las Vegas ― the long “cattle call” lines of sweaty flip-flop wearing tee-shirted people, unmatchable levels of demoralized staff and patron rudeness, a Walmart-like lack of customer service, a warehouse-style industrial feel with no sign of the idealized Las Vegas atmosphere, haphazard (at best) maintenance & upkeep, and a post-covid set of cleaning protocols that beg the question of how slapdash procedures must have been before the pandemic. Even the most “upscale”, nicest, luxury-properties are usually impersonal, alienating, and a far cry from the “personality” of the perceived Las Vegas experience.

My vision is to provide the PERCEIVED Las Vegas as a REALITY. My vision is to deliver a Disney-esque suspension of disbelief to patrons. My vision is to offer an entirely different Las Vegas than any other current property.

Once a visitor steps underneath the porte-cochère, the experience should begin ―transporting them into a seeming fantasy-world of the absolute best idealization of what they think Vegas should be. My vision is to restore the luster, mystique, and iconic status to the property so that once again it becomes synonymous with Las Vegas itself. My vision is for the property to become the must-visit casino-hotel-resort on the Las Vegas Strip. My vision is to create an aura which translates to any visit to Vegas without a visit to this property is hollow. My vision is to present an essential Las Vegas experience that is different not only from the 989 casinos across 25 gaming states but also substantially different from the 30+ casino resorts on the Las Vegas Strip. (Keep in mind that at the end of the day, most casinos have the same games with the same payouts, the same floor layout, the same ugly carpeting, similar hotel rooms, a comparable mix of restaurants, even similarly clad cocktail waitresses. What makes one property successful and the one next door a failure is the customer experience. My vision is delivery of that experience.)

That model, that vision, is the historically proven formula that MADE Vegas. It stands in stark contrast to the historically repeatedly failed formula that ultimately left carnage, unemployment, and very-very wealthy hedge funds.

I guess it boils down to philosophical differences and how to focus the revenue models. 

—Gary Green, May 2021