How Real Estate Plays a Role in a Gaming Company’s ...davelords.com/files/casino_econ101_cb.pdf · Global Gaming Group 1 How Real Estate Plays a Role in a Gaming Company’s Valuation

Global Gaming Group 1

How Real Estate Plays a Role in a Gaming Company’s Valuation and

Strategy


Carlton L. GeerSenior Vice President, Global Gaming Group

(a dedicated business unit of CB Richard Ellis Worldwide)


Calculating Enterprise Value

**** EXAMPLE ****MGM MIRAGE• Enterprise Value = Long Term Debt – Cash + Market

Cap• Long Term Debt as of 2Q05 = $12.27 billion• Cash on Hand as of 2Q05 = $306.4 million• Market Cap as of 9/6/05 ($42.72 stock price) = $12.32

billion• EV = 12.27 billion – 306.4 million + 12.32 billion =

$24.90 billion• EV / 2004 EBITDA = $24.90 billion / $2.19 billion =

11.3X 2004 EBITDA Multiple (Note: 2004 EBITDA includes Mandalay Resort Group in whole)


Land Prices Can Impact Gaming Company Valuation

**** EXAMPLE ****RIVIERA HOLDINGS• Enterprise Valuation (based on EBITDA Multiple)

EBITDA $44.4 millionEBITDA Multiple 9.1xEnterprise Value $403.9 million

• Current Enterprise ValueMarket Cap (Stock Price $25.57) $319.6 millionCash and Cash Equivalents $20.7 millionLong Term Debt $214.8 millionEnterprise Value = $319.6-$20.7+$214.8 = $513.7 million

• The market is valuing Riviera LV land at $109.8 million more than the business opportunity of the property


Riviera Example (continued)

• How Riviera Las Vegas land is being valuedEnterprise Value = $513.7 millionLess Riviera Black Hawk $16.4 million X 8* = ($131.2) millionEquals Riviera Las Vegas Value = $382.5 millionDivided by Riviera Las Vegas Number of Acres = 26 Equals Riviera Las Vegas Value Per Acre = $14.7 million

* Note: 8x multiple is comparable for similar asset sales


Gaming Company EV/EBITDA Multiples

• Boyd Gaming 10.0x• Station Casinos 13.5x• Ameristar Casinos 8.0x• Aztar Corporation 9.2x• Pinnacle Entertainment 8.9x• Riviera 11.6x

Source: Deutsche Bank Securities 9/6/05 (Based on 2005E EBITDA)

Riviera data is based on LTM EBITDA


Convergence of Gaming and Real Estate

• GGG has always viewed gaming companies as the biggest real estate developers in the world.

• 16 of the 20 largest hotels in the world are located in Las Vegas.

• Gaming appears to be the highest and best use for land– However, largest Las Vegas gaming floors are

only 150,000 square feet forcing operators to look for other ways to maximize the rest of the land value on their property.

– Developers are now building vertically.


Las Vegas Land Supply/DemandWhat has driven gaming-land prices in Las Vegas• Top-Shelf Development

– MGM MIRAGE, Steve Wynn, Sheldon Adelson have been biggest drivers in increasing land value in Las Vegas as their developments have increased visitation to over 40 million per year.

• Scarcity of Strip land• Consolidation

– Fewer owners means fewer sellers and higher prices.• Senate Bill 208

– Off-Strip land has become more scarce meaning gaming-zoned land in the LV Valley has increased in price.


The Old Model vs.

The New Model


The Old Model• In Las Vegas, Bellagio was an example of a

development that had a low land cost basis– The Dunes was purchased for only $70 million

in 1993 (164 acres total with Bellagio accounting for 80 of the acreage).

– Our estimates indicate Bellagio uses only 55 of its 80 acres for revenue generation.

– Large surface parking for employees, guest parking garage with no revenue generation on roof, and an eight-acre lake are a product of low land prices.


The New Model

• Land prices have risen in Las Vegas resulting in operators creating “urban developments.”

• Future project densities will have to increase.• Operators will look for the “best utilization”

of land and employ yield management techniques to find these best uses.


The New Model• Sheldon Adelson was ahead of his time with

the retail space known as the Grand Canal Shoppes (located on the second floor) at The Venetian, which he sold in June 2004 for $766 million.

• Although the development of The Grand Canal Shoppes was viewed as innovative in the gaming industry, Mr. Adelson used a traditional real estate development model.


The New Model – Project City Center

• MGM MIRAGE’s newest development to open 2009/10

– Located on approximately 66 acres (Bellagio has 80 acres).

– 4,000-room hotel (Bellagio has 3,933 rooms).– 1,650 residential/condo-hotel units (Bellagio has 0).– Two 400-room boutique hotels (Bellagio has 0).– 550,000 square feet of retail space (Bellagio has

approximately 100,000 square feet).

Global Gaming Group 14Source: www.mgmmirage.com, GGG


The New Model – Other Locations

• Crown Casino located in Melbourne, Australia– Opened in 1997.– Located on approximately 21 acres along Yarra River.– 5.5 million square feet of constructed density (25%

more than Bellagio at opening).– Casino with 2,500 slots and 300 tables.– Underground parking.– 952 hotel rooms and serviced apartments.


Crown Casino – Melbourne, Australia

Source: www.gfethers.com.au


The New Model – Other Locations

• City of Dreams (Melco/PBL JV) located on Cotai Strip (Macau)

– Expected to open in 2008.– Located on approximately 25 acres.– Constructed density of approx. 4.8 million square feet

(Bellagio originally had 4.2 million square feet of development on 80 acres when it opened in 1998).

– 450,000+ square feet of gaming space including 450 tables and 3,000 slots.

– 2,000 hotel rooms (500 of which are 5 Star).– Approx. 1.5 million square feet of area for serviced

apartments.– Approx. 100,000 square feet of retail, which offer

traditional development returns through leasing.


“In Las Vegas, You Can’t Have $2 Blackjack Tables on $20 Million Dirt”

• To get the appropriate ROI on projects, gaming companies will concentrate high-end play on the Strip.

– Use Macau and other “high gaming tax” markets to drive play to LV.

• Develop using “yield management” techniques to maximize projects.

• Use condo-hotels and high-rise projects to finance construction in an environment of high land and construction costs.

• Hotel rates and restaurant prices on the Strip will continue to rise as developers will have to embark upon high-end projects to get an appropriate return on investment.


“Laughlin Baby, Laughlin”

• With $20 million per acre land costs, the four corners approach may not make sense much longer.

– For example, the owners of a “fictitious” 25-acre property that generates $25 million in EBITDA would be better off selling it for $15-$20 million an acre or redeveloping than continuing the status quo.

• Look for destinations like Laughlin, Reno and Downtown LV to be marketed as more than just regional destinations and more as destinations for value oriented travelers from all over the country -- LV will become too expensive for many people.


Multiples of Gaming Companies May Continue to Expand

• As more non-gaming real estate components become part of projects, look for multiples to increase to reflect the less-risky nature of those sorts of assets and their traditional returns.

• Our analysis indicates gaming assets have sold at an average of 9.1x – 9.4x trailing EBITDA over the last two years.

• Felcor Lodging REIT stock is trading at 11.2x Enterprise Value / 2004 EBITDA.

• Las Vegas Sands selling the Grand Canal Shoppes II retail space at the Palazzo for a 6% to 8% cap rate (or 12.5x to 16.5x EBITDA).

21

Year Acquirer AcquiredAmount

($Millions)

Trailing EBITDA

Multiple (1)

2004MGM MIRAGE Mandalay Resort Group 7,900 10.9xHarrah's Entertainment Caesars Entertainment 9,440 8.6xPenn National Gaming Argosy Gaming 2,205 9.0xHerbst Gaming Lakeside Casino, St. Joseph Frontier,

Mark Twain Casino287 6.6x

Opbiz LLC Aladdin Casino LV 653 12.4xColumbia Sussex Bally's New Orleans 24 24.0xAmeristar Casinos Mountain High Casino 122 11.5xColony Capital AC Hilton, Bally's Tunica, Harrah's E.

Chicago, Harrah's Tunica1,240 8.5x

Barrick Gaming Plaza, Vegas Club, Gold Spike, Western

84 8.7x

Legends Gaming LLC Fitzgerald's Black Hawk 66 6.6xStation Casinos Castaways 34 NAGolden Gaming Mardi Gras Casino - Colorado 37 NA2004 Total 22,092 9.4x

2005 (2)Columbia Sussex Caesars Tahoe 45 5.6xGrand Sierra Resort Group Reno Hilton 150 13.6xLandry's Restaurants Golden Nugget LV and Laughlin 290 17.1xMarian Ilitch Motor City Detroit (53.5%) 525 6.8xBroadwater Development LLC President Biloxi 82 NAHenry Brent Company Lady Luck LV 10 NAColumbia Sussex President Admiral 57 5.4xColumbia Sussex Argosy Baton Rouge 150 7.4xEl Dorado Hollywood Shreveport 153 12.6xHarrah's Entertainment Imperial Palace LV 370 10.6x2005 Total 1,832 9.1x

(1) EBITDA based on the twelve months following the transaction

(2) Transactions in 2005 have not closed

Source: GGG/SG Americas Securities (Transactions in 2002 and 2003 available upon request)


Our Conclusions

• Gaming companies are in the real estate business.

• With the rising land prices, gaming companies have to maximize density, which means more traditional real estate development approaches such as retail and residential must be woven into an integrated resort.

• Consequently, gaming company multiples may increase as total project returns increase while becoming “less risky.”


Our Prediction

• In the next ten years, we would not be surprised to see the lake in front of Bellagio cease to exist in its present form and substituted with a higher density, more profitable use.


Thank You

Contact Information:

Carlton L. GeerCB Richard Ellis

3993 Howard Hughes Pkwy, Suite 700Las Vegas, NV 89109

702.369.4878

Documents

How Real Estate Plays a Role in a Gaming Company’s ...davelords.com/files/casino_econ101_cb.pdf · Global Gaming Group 1 How Real Estate Plays a Role in a Gaming Company’s Valuation