More on the theme of Strip Monopoly: Billionaire Carl Icahn is selling all of his Nevada casino holdings to Goldman Sachs’ Whitehall Street Real Estate Funds for $1.3 billion.
This is interesting on a number of grounds, taken more or less least to greatest.
Third, Icahn is going to net out about a billion dollars in profit on the deal. He’ll probably never make as much on casinos as Donald Trump has managed to lose, but a billion bucks is a billion bucks.
Second, Goldman Sachs is convinced that it bought a Strip-front property in the Stratosphere, along with 17 acres of underdeveloped Strip-front land the Strat has accumulated over the years. This is technically incorrect, and it’s an error buyers have made at that location since it was Bob Stupak’s Vegas World.
The Strip ends at Sahara — where the City of Las Vegas begins. The Strip developed in what is still unincorporated Clark County to avoid the kind of meddling municipal governments are best at. The Strat is not a grind joint like the dumps downtown, but it plays at a distinct disadvantage against its bigger, better-bankrolled rivals further south.
Today’s deal also includes a casino in Laughlin, and the two Arizona Charlie’s casinos in suburban Las Vegas. As with Boyd Gaming’s Sam’s Town properties, these are seen by analysts as being locals casinos, but, in fact, they draw their own segment of the tourist population — think of them as low-rollers with RVs. MGM Mirage’s announcement of the closing of the RV park at Circus Circus may prove a boon to these casinos.
But: First, if Carl Icahn is selling now, it argues to me that the bloom is off the boom for Strip-fronting (or pretend-Strip-fronting) real estate. MGM Mirage paid over $17.2 million an acre for the 33.4 acres it is acquiring at Circus Circus. That land come with a corner premium, to be sure, but is is for now the weakest corner on the Strip Monopoly board. If Icahn is selling, it’s because he believes prices are at their peak for now.
Is he right? Hide and watch. But with $4 billion in cash reserves, he has no urgent need to pull his chips off the table…
Technorati Tags: investment, real estate, real estate marketing
Jeff Brown says:
Greg – Your analysis seems pretty solid to me. My question would be aimed at the way casinos have historically amortized in less than five years, their development costs through massive revenues. How, in your opinion does that advantage offset over paying for the dirt?
>But with $4 billion in cash reserves, he has no urgent need to pull his chips off the table…
Now THAT’S a Sominex account! 🙂
Finally, what’s your take on Sachs’ ultimate conclusion that this acquisition would be a long term winner?
April 24, 2007 — 8:42 am
Greg Swann says:
> My question would be aimed at the way casinos have historically amortized in less than five years, their development costs through massive revenues. How, in your opinion does that advantage offset over paying for the dirt?
Say what? I would answer this question, but I don’t know what it is. 😉
The Mirage was the first of the Super Casinos (and it also sits on a huge piece of land). When it opened, the daily nut was $1 million. People said there is no way it can even cover its own costs. From day one, the daily cash flow was over $2 million. Michael Milken junk bonds, BTW, retired early.
I think the idea of retiring debt early may hint at an answer to your question: Casinos pay off debt as quickly as they can so they can borrow more to expand more. Steve Wynn is doing it right now with Encore. Wynn Las Vegas looked to Wall St like an under-performer, but part of the reason for that is that Wynn bought all the computing systems for both WLV and Encore when he built the first tower. Encore will look cheap to Wall St by comparison.
> Finally, what’s your take on Sachs’ ultimate conclusion that this acquisition would be a long term winner?
I was talking to Cathy about this last night. I think the shareholder’s at Sachs’ Whitehall Street were sold a bill of goods. The properties are worth owning at some price by an experienced casino operator. Mutual Funds are not experienced casino operators, and my expectation is that Harrah’s or MGM Mirage would have paid a lot less for Icahn’s stake. The key sentence in the news story:
Goldman Sachs, the investment brokerage, brokered half of a deal for a subsidiary mutual fund. This will have been good for the brokerage’s bottom line. How good for the mutual fund? I would watch for another sale of these properties in 18-24 months.
All that aside, the Strat is what it is, but The Top of the World is not to be missed.
April 24, 2007 — 10:21 am