THE LEISURE LETTER (03/20/2014)

TICKERS:  HLT, RCL, PNK, BYD, ISLE, PENN

EVENTS TO WATCH:  UPCOMING EARNINGS/CONFERENCES

Thursday, March 20

  • None       

Friday, March 21

  • None       

Monday, March 24

  • None       

Tuesday, March 25

  • CCL to report earnings pre-market, conf call at 10 a.m. EDT

COMPANY NEWS

PNK - The former Westinghouse site, located on Page Boulevard in Springfield Massachusetts which was almost an Ameristar Casino, could now be the North American hub for Changchun Railway Vehicles Company.  The Westinghouse site is now owned by Pinnacle Entertainment following PNK’s acquisition of Ameristar.  Ameristar purchased the 41 acre site for $16 million in January 2012.

TAKEAWAY:  Unlocking hidden value in the balance sheet of approx $0.25/share assuming Ameristar's $16 million basis. 

Universal Entertainment  -  Investigation efforts are focusing on a $25 million payment Universal Entertainment made to Rodolf Soriano, a casino consultant, who was linked to a former Philippines gaming regulator.  Subic Leisure, “the receptacle for $35 million of the $40 million in payments,” was controlled by Soriano. Subic Leisure is registered in the British Virgin Islands where there is no requirement to disclose the names of its shareholders or director

TAKEAWAY:  Based on this information, it appears WYNN was justified in cutting ties with Okada and Universal Entertainment.

HLT - announced the signing of a new management agreement with PT Putragaya Wahana to introduce the Waldorf Astoria Hotel & Resorts property in Jakarta, Indonesia. Scheduled to open in 2018, the 181-room Waldorf Astoria Jakarta will be the second property of the legendary luxury brand's portfolio in Indonesia.

TAKEAWAY:  Hilton continues to expand it's footprint globally via capital light. 

RCL - will not attend the London Cruise Show this weekend but announced it will instead make a special offer available to all UK trade partners to encourage new to cruise bookings.  Cruise holidaymakers no longer have to go to Olympia to get the best deal, instead RCL is offering a special offer of $400 onboard credit for all potential guests to enjoy, not just restricted to those who attend the show.  The $400 onboard credit applies when a guest books a stateroom on selected sailings of seven nights or more departing between April 1 and December 31, 2014.  The offer excludes sailings on Quantum of the Seas and is applicable for bookings made between March 20 and 24.

TAKEAWAY:  Despite Wave Season coming to a close, widespread discounting and promotions continues across the industry. 

RCL- Norwegian Cruise Line announced that Guy Harvey, widely recognized as the world's finest marine wildlife artist and champion of ocean conservation, has been named to design the signature hull artwork of the line's largest ship to date, Norwegian Escape, scheduled to debut in October 2015. Norwegian's newest ship is Harvey's largest canvas to date, at 1065 feet in length, with his artwork spanning from the hull to the aft featuring two undersea scenes that blend seamlessly

TAKEAWAY:  While interesting, we are unclear how such art projects increase shareholder value versus increasing onboard maintenance capex to maintain the hull painting. 

 

INDUSTRY NEWS

GAMING               

China’s Invisible Hand on Macau – China’s Central Commission for Discipline Inspection, the central government’s anti-corruption arm, announced it will keep watch on the central government’s liaison offices in Macau and Hong Kong.  Political analysts say the announcement may indicate that Beijing is serious about cracking down on corruption, but that it may also be just a gesture, meant to deter mainland officials from gambling in Macau.

TAKEAWAY:  This is yet another example of increased scrutiny over Macau and the gaming business. 

On Line Poker - California lawmakers introduced two separate bills to legalize online poker in the state.

TAKEAWAY:  California would be a key U.S. state in the legalization process. If the California legislature moves ahead with plans, then numerous other states might follow their lead.

Louisiana Gaming Revenues  - the Gaming Control Board reported statewide revenues increased 1.5% to $209.7m for February.  Same-store revenue (excluding Margaritaville) gaming revenues decreased 3.3%.  On an operator basis, BYD, decreased 5.4% to $45.4m, ISLE increased 12.4% to $12m, PENN decreased 11.8% to $6.7m, and PNK decreased 3.5% to 53.9m,

TAKEAWAY:  Not surprisingly, LA led the way in the regional markets given the cold, wintry weather elsewhere.  February would have been one of the better months for regional gaming in general if not for the weather.  We expect March to disappoint even with good weather.

Clark County Slot Parlors – Clark County imposed a moratorium on applications for “tavern” slot machine licenses. Under the 2011 regulations, taverns with the proper gaming license could have up to 15 slot machines, so long as the revenue from gambling was incidental to the primary business of serving food and alcohol.  However, “incidental” was never defined, meaning some taverns could generate up to 80 percent of their revenues through gaming.

TAKEAWAY:  Any reduction in slot parlor business would likely benefit Stations Casinos and Boyd Gaming's locals business.  We will examine this issue during our upcoming Las Vegas trip.

Atlantic City - United will begin serving Atlantic City International Airport on April 1 with daily flights from its Chicago and Houston hubs. Service will start modestly, with only one flight per day from each city using 50-passenger regional jets.  The Atlantic City Alliance has a $1 million annual subsidy program to entice conventions and meetings to town. Overall, the convention subsidy, the United flights and a promotions campaign for Atlantic City’s special events will be a catalyst for more business.

TAKEAWAY:  This is a good first step and we look forward to additional airlines introducing additional service to Atlantic City.  

Las Vegas Culinary Workers Union 226 - The union delayed its strike authorization vote to March 27 as negotiations continue with the 11 downtown Las Vegas casinos that are operating without labor agreements.  Casinos that still haven’t reached agreements with the union include Golden Gate, Golden Nugget, Binion’s, Main Street Station, Four Queens, the D Las Vegas and Margaritaville

TAKEAWAY:  It appears the Culinary Union is having success negotiating new contracts with the larger casino operators.  We would not be surprised to see the remaining casino operators fall in line. 

Atlantic City - The Tropicana Casino and Resort plans to carry out a $35 million renovation to its Atlantic City buildings, including the addition of a choreographed LED light show on its exterior.  The project also would re-do the 434 hotel rooms in the Tropicana's north tower.  The resort's parent company, Tropicana Entertainment Inc. is owned by billionaire Carl Icahn.

TAKEAWAY:  Is such capital reinvestment and redevelopment too little too late?

Foxwoods Casino - laying off 65 people, according to a recent filing with the state Department of Labor.   Foxwoods revenues dropped from $1.2 billion in 2011, to $1.14 billion in 2012, to $1.04 billion in fiscal 2013, which ended Sept. 30. Foxwoods and Mohegan Sun are competing with new and expanded gaming facilities in New York, Rhode Island and elsewhere in the Northeast.

TAKEAWAY:  Falling revenues unfortunately leads to operating margin pressures in this fixed cost business as operators attempt to maintain profitability. 

 

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.