• Navigate This Market Turbulence: All Hedgeye Research → 3 Months 66% Off

    Preserve. Protect. Grow. Former hedge fund manager and CEO Keith McCullough has successfully navigated the Dot Com Bust, Great Financial Crisis and Crash of 2020. Get 66% off the smartest investing insights money can buy.

Apparently George Maloof (The Palms) has a solution to a weak condo market-self financing.  Speculation is that if The Palms is successful MGM may follow suit.  Well that sounds like a great idea - I wonder why no one has done that?  Oh wait, someone has thought of that - it's called Timeshare.  The difference is, in this version, the financing spread would likely be hugely negative and there would be a horrible duration mismatch with no securitization market. 

Maybe we're missing something, but last we checked the average Vegas operator's cost of borrowing is still around 10%, which is at least a few hundred basis north of the 30 year mortgage rate (even for Vegas condos).  Assuming $1000/month of maintenance charges on a $1MM purchase, any rate less than 8.3% would result in a negative carry on a 70% loan to value.  Then there's the whole issue of duration mismatch since the duration on the borrowings of most companies is less than 10 years while most mortgages have over a 20-year duration.  

Aside from perhaps an incremental 10% of equity from the buyers, we're not sure why financing condo sales makes any sense versus just putting them into the hotel rental pool.  Assuming $200 ADR, 75% occupancy and a 30% EBITDA margin, it seems like it would make a lot more sense to just rent out the rooms despite the probable cannibalization of existing room demand.

The other risk of providing 70%-80% financing is that operators will be left holding the bag on any pricing declines in excess of 20-30%, which is a reality given that many of these deals were struck at the peak of the market.

Looks like a pretty stiff wind to spit into.