CASINOS SEEN THROUGH THE REAL ESTATE LENS

Takeaway: ASCA is the most undervalued casino operator under the new valuation paradigm

How the PENN deal could impact other casino companies

 

 

Our view here is that the industry has and should receive a step up in valuation.  Maybe valuation does matter.  Our company specific commentary is below:

  • ASCA – Slam dunk in our opinion.  If there is one stock that should see a permanent valuation bump, it’s ASCA.  See our note from Friday. “RE-VALUING ASCA”.  Even after the big move, the stock is still trading at a whopping 18% FCF yield. 
  • BYD – If there was ever a stock that could use a valuation bump, it’s BYD.  A perennial underperformer, BYD is actually a very cheap stock if you factor in the significant unused real estate.  PENN’s deal should shed light on BYD’s 87 Strip acres that are non-producing.  However, it seems unlikely BYD could complete a PENN type transaction due mainly to prohibitively high leverage of over 6x.  Moreover, BYD has deferred CapEX and continues to spend well below normal on maintenance CapEX.  That is unsustainable. 
  • ISLE – At 6x leverage, it is unlikely ISLE could pull something off similar to PENN anytime soon.  However, they are in harvest mode, so debt pay down will occur fairly quickly.  We estimate that by the end of 2014, leverage will fall to about 4.5x and at that time they could consider a REIT spin-off.
  • LVS – Highly unlikely to pursue a PENN type transaction for a few reasons.  First, LVS maintains a deep backlog of potential developments that just doesn’t make sense within a REIT format.  In addition to Lot 3 in Macau, other Asian countries are likely to expand or open up to casinos and LVS is probably the most desirous operator because of its MICE focus.  Second, LVS generates most of its profits in international jurisdictions with significantly lower tax rates than in the US.  In fact, LVS pays almost nothing in corporate taxes in Macau.  The international exposure bites into the tax efficiency benefit of the REIT structure.  Finally, we don’t believe Sheldon would want to give up any control which he would have to do in a property company. 
    • However, the new focus on real estate should be a positive for LVS’s valuation.  LVS owns malls in Macau and Singapore that are worth a lot more to a separate real estate focused entity than the market is valuing them within LVS.  We would expect investors to begin to re-value LVS (again) using current cap rates on the Mall portfolio.  More on this later.
  • MGM – Just too much darn leverage.  The REIT structure probably cannot be pursued by this company.  However, with its low cost of capital, the new PENN PropCo should become a more aggressive buyer of casino assets.  We know MGM is a willing seller and PENN has been interested in The Mirage in the past.  So MGM could benefit from the PENN transaction.
  • PNK – We think PNK is a great candidate for a REIT split.  While leverage is a little high at over 5x, they should be able to pay down debt fairly quickly with the opening of Baton Rouge behind them.  In fact, the PNK situation is very similar to ASCA’s with one potentially major difference.  We wonder if this management team still views the company as a development company.  They’ve made a push in Vietnam and may be pursuing other growth opportunities.  We would rate the likelihood of PNK converting to the PENN structure to be lower than ASCA's.
  • WYNN – While leverage is low, we think the WYNN is an unlikely candidate for many of the same reasons as LVS.
  • CZR - Similar to MGM, CZR is way too leveraged in its current form for this to really move the needle for them (as an equity holder at least).  They can sell a few assets at higher multiples but their leverage is over 10x

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