The casino operator gets a piece of the future earnings from the property, along with management fees, and has bumped up his equity stake. If the joint venture decides to expand the property, the company will benefit without having to put in additional funding. The joint venture would develop the property, and the casino owner’s partner would provide the capital expenditures. The solution under the proposed structure, Chammas says, is to create a joint venture whereby the property is placed into a new entity with a development partner or equity investor. Wahid Chammas, a senior analyst with Janus Capital Group, a major investor in casino stocks. In that deal, Morgans brought in DLJ Merchant Banking Partners, a private equity investor that is part of Credit Suisse, to fund two-thirds of the equity piece in the $770 million transaction. Importantly, DLJ also agreed to pay for all of the initial capital expenditures required to expand the Hard Rock property. Neal Pomroy, managing director with DLJ Merchant Banking, which partnered with Morgans on the Hard Rock deal. But Morgans’ one-third equity stake in the project allows it to grab one-third of the property’s cash flow.
Morgans also will receive a management fee based on that cash flow. The exploration of the structure comes at a time when private equity is becoming ever more interested in the gaming sector, as evidenced by the Morgans deal and the buyout of Harrah’s by Apollo Management and TPG. 81.8 million an acre for the 4.5 acre Barbary Coast site, and private real estate developers recently purchased the Sahara Hotel and Casino for $22 million an acre. Harrah’s new private equity owners could also reap benefits from pursuing property-level joint ventures. Company Z wants to reap the benefits of growth in that property without having to bulldoze it themselves and make big capital expenditures. Assume the property is old and has limited growth. The aging Circus Circus casino, an MGM property that sits on 24 acres of land on the northern part of the Las Vegas Strip, is a prime candidate for such a joint venture structure. With land prices hitting north of $40 million an acre for prime spots on the Las Vegas Strip, sources say casino owners are eyeing joint venture structures that would allow them to monetize individual assets at the higher market prices of land, instead of the lower values the public market is rewarding them.
MGM on Thursday announced it had purchased another 34 acres of land adjacent to Circus Circus for $575 million, or $17 million an acre. President Ron Kramer both indicated they would not donate any of their Strip land into a joint venture for less than $20 million an acre or sell the land outright for less than $30 million an acre. For Las Vegas Strip assets, that equates to as much as $40 million to $45 million an acre, Chammas says. The structure is just one way that Las Vegas casino owners are exploring ways to harvest real estate value in what has become a land grab in the city. Casino owners with aging Las Vegas properties or excess land are wrestling with ways to reap additional value in light of historically high land prices in the city. February purchase of the Hard Rock Casino in Las Vegas. Several recent deals point to the record prices being paid for real Las Vegas Strip properties. Suppose Company Z owns a property in Vegas and it has a land bank associated with the property.
Deutsche Bank analyst Bill Lerner wrote in a research note. Selling the property would create a tax bill. And developing the property requires spending money. Traditionally, casino owners with older properties that sit on valuable land had two ways to realize that value: sell the property or develop it. As new investors continue to look for ways to enter the space, property-level joint ventures could be the perfect way to satisfy these appetites. Boyd is in fact using joint ventures to build the hotel and retail portions of the project, but wanted to keep full control of the gaming operations, says company spokesman Rob Stillwell. In short, gaming is being perceived as an investment that offers steadier yields. The joint structure also would also give the owner the added benefit of being able to grab a piece of the future profits of the redeveloped casino. By placing older land into joint ventures, MGM can bump up its equity stake, and reap management fees, development fees and capture a piece of the new casino’s future profits.
