INTERNATIONAL REPORT—The transaction market for casino hotels has ground to a halt during the past year, but activity is expected to eventually pick up.
In the U.S., the casino-hotel transaction market has been almost nonexistent during the past 12 months because of the lack of financing and the poor performance of the casinos themselves, according to Hank Jones, a founding principal of Kallenberger Jones & Company, a hotel investment consulting company.
“The sellers have been distressed owners,” he said. “The buyers have been ‘vultures’ looking to buy distressed properties at rock-bottom prices. The sellers are those that feel forced to sell, and the buyers are those that may not need financing and are risk-takers.”
Just as the poor economy dampened the market last year, the improving economy is having an effect on the market today.
“There has been a surprisingly low amount of transactions as many companies that were once in distress have been able to restructure debt and/or push out debt maturities,” said Dan Lesser, senior managing director-industry leader for CB Richard Ellis’ hospitality and gaming group. “The transactions that have occurred have been debt-to-equity type deals such as the Tropicana Atlantic City, Tropicana Las Vegas and Planet Hollywood. Internationally, there have been a few one-off deals involving noncore assets.”
Jacob Oberman, director of gaming research and analysis for CB Richard Ellis, said the buyers for the Tropicana properties were both investment funds, and Planet Hollywood was acquired by Harrah’s.
Domestically, there have been only two deals not involving debt-to-equity that have been announced since the beginning of 2009: During 2009, Peninsula Gaming agreed to purchase the Amelia Belle in Morgan City, Louisiana, for US$107 million; and during 2010, Isle of Capri agreed to purchase the Rainbow Vicksburg (Mississippi) from Bally Technologies for US$80 million, according to Lesser. The last casino hotel transaction in Las Vegas closed in March 2009 when Phil Ruffin acquired Treasure Island from MGM Mirage for US$775 million.
Supply and demand … and transactions
Hank Jones said the weak demand and high supply growth in Las Vegas also are inhibiting the transaction market, and investors are waiting to see what happens with the new supply.
“In the last 18 months, about 10,000 new hotel rooms have opened in Las Vegas, primarily in six properties (Encore, Hard Rock, M Resort, and Aria, Vdara, and the Mandarin Oriental in CityCenter),” he said. “Still to come on line in the next 12 months are the Cosmopolitan, Fontainebleau, and Harmon hotel. That's a lot of supply to absorb in a down economy.”
Kallenberger Jones & Company
The fact that the industry is so regulated in other countries has helped keep transaction volume down, according to Christopher Jones, director, senior gaming and lodging analyst for Telsey Advisory Group.
“In many regions the licenses are operator-specific,” he said. “A change in control doesn’t mean they get the license. It’s a risk. If the potential buyer doesn’t get the license, they can’t buy the casino.”
As the economy and overall hotel industry improve, the outlook for casino-hotel sales is expected to heat up as well.
“There will be more transactions in the next 24 months than the last,” Lesser said. “It is quite possible that the sale of existing properties could be robust during the next two years.”
Lesser said to expect a few more distressed deals.
“If things take a turn for the worse economically, you could see some companies have difficulty rolling over debt, triggering asset sales,” he said. “If things continue improving economically and in the financing markets, one would expect a pick-up in traditional strategic deals and maybe even some corporate M&A.”
Hank Jones said he doesn’t expect much activity in Las Vegas during the next 12 months because investors are going to be cautious about the economy and will want to watch what happens with new supply. But assuming the economy picks up, there should be more activity between 12 and 24 months from now as investors gain confidence, he said.
“However, a lot will depend upon lending,” he said. “Lending on mega casinos will likely lag that of other types of real estate due to the large transaction size as well as the risks that were exposed in the current recession. The casino industry was previously thought to be somewhat recession-proof, but the current recession exposed the casino industry’s vulnerability.”
The declines have stopped, people have access to a little more capital, and there is certain to be some recovery, according to Christopher Jones. He expects some transactions in Atlantic City, and said Accor is looking into selling its stake in Lucien Barriere, a casino-hotel company it owns.
senior managing director
CB Richard Ellis
“It’s going to continue to be a pretty tight market,” he said. “It’s going to be more challenging as the economy improves. There aren’t as many distressed properties as there were. When an asset does come on the market, it attracts a fair number of bidders. It’s more of a supply-and-demand issue.”
Oberman said CBRE has seen interest in acquiring assets by investment funds, private wealth, new companies and gaming companies, but it takes more than interest to stimulate deals.
“In order for there to be more activity, the financing environment will have to improve for potential buyers,” he said. “The leverage ratio (debt/EBITDA) does not allow for companies to readily sell assets for what buyers are able to pay.”
Hank Jones is expecting buyers to be old faces in the casino-hotel business.
“In the next 12 months, I expect that the sellers will be those that feel compelled to sell either because casinos are not their primary business, like Deutsche Bank, which took back the Cosmopolitan to finish its construction and will hope to be a seller as soon as possible, or because they need to raise capital, such as what MGM did when it sold Treasure Island to help fund CityCenter,” Jones said. “The buyers will likely be knowledgeable casino owner/operators because they will be the ones that will be able to obtain the gaming licenses and they will be the ones the lenders are most comfortable loaning money to.”
Supply will continue to be an issue in the United States going forward, according to Christopher Jones.
“There’s been no movement to limit licenses,” he said. “They’ve put in too much competition. In Macau or Singapore where they control the construction in the casino industry very tightly, it ensures that every single asset there will be a profitable operation. You won’t overbuild the market.”
Christopher Jones cited the four new casinos slated to open in Ohio as an example of a significant amount of supply for a regional market.
As for hot spots around the world, Hank Jones said Macau dominates, but other countries in Asia, including Singapore and the Philippines, are areas that are likely to see continued gaming development.
Oberman said the industry also is following how two newly opened casinos in Singapore are performing, and if that will entice Japan, Taiwan, Vietnam and other Asian countries to advance the introduction of casinos.