LVS: DID I JUMP ON THE WRONG CALL?

Big mismatch between numbers and conference call propaganda. Aside from Macau cost cutting, the numbers were disappointing. In fairness, expectations probably got out of whack following the huge stock run.

 

The LVS results released after the close were disappointing.  In fairness, the stock has been on a tear and whisper expectations had been ratcheted up.  However, since Sheldon was out and about touting how strong results were for his properties and dressing his Macau operations for an IPO, LVS should’ve done better.  At least we figured out the mystery of why WYNN scrambled to report its numbers first.

LVS's discussion of its options and strategy sounded completely unrealistic to us.  I kept looking back at the numbers and double checking that I wasn’t dialled into the GXDX call by accident last night (our healthcare guy Tom Tobin nailed this one last night).  I don’t think Sheldon pulled the wool over anyone’s eyes by proclaiming that he can actually sell his real estate assets.  That story is a rerun of a rerun of a rerun.  While the strategy of selling non-core assets worked when the real estate market was booming, we seriously doubt we will see any deals, particularly as Sheldon put it, at “exaggerated prices”.  Repeating a lie over and over may work in the political spectrum, but not when it comes to the real estate market. 

With the stock up here the trade has played out.  Our intermediate and longer term concerns are now in focus.  Those concerns do not include covenant issues, however.  We still believe that Sheldon will get his amendment in Macau and resolve his credit issues in the US (See “LVS: CHINA FORCING THE ISSUE” from 7/17/09).  That is still a potential positive catalyst since there is much doubt in the investment community.  Rather, in our view the real issues are:

  • A 25% increase in Mass table supply in Macau (“BEIJING WON’T OFFSET MASS TABLE SUPPLY INCREASE” from 7/5/09)
  • The worsening supply/demand situation on the Strip (PLENTY OF ROOMS AVAILABLE AT THE STRIP INN IN 2010, 7/17/09)
  • Overblown excitement about commission caps (COTAI COMMISSION CAPS, 7/16/09)

Please read on for details of the quarter and conference call:

 

Las Vegas Operations

Revenues came in 21MM below our estimate and EBITDA was 19MM below our expectations.  Our lofty expectations were based on the expected ramp of Palazzo and the relatively easy comps for Venetian, which was hit pretty hard in 2008 when Palazzo opened.

We’re not sure what Sheldon was referring to on the call when he spoke about how he’s holding rate and his properties are differentiated and therefore are faring better.  RevPAR at Venetian was down 25%, led by 24% ADR decreases.  However occupancy held up pretty well, so I suppose that’s what he meant when he said filling the rooms wasn’t an issue; it was simply a matter of rate.  Room revenues were $5.6MM light of our estimate due to the lower ADR.

We were also confused when LVS said it felt good about the slot business despite a decline of 27% in slot handle at both properties.  Slot hold was a little high and table win % was a little light.  We think that the Venetian suffered from low win % in the 13% range, while Palazzo experience high win % in the range of 24%. Net/net, gross casino revenues missed our number by $15MM.

Food and Beverage, retail, and other was 8MM below our estimate... lower rates attract lower end customers.

We expected operating expenses to be down materially and they actually came in $2MM below our number. While LVS gives very little detail around its cost cuts, we think that fixed costs decreased 12% y-o-y. 

Sands Macau

Sands Macau was the only property in LVS’s portfolio that beat our EBITDA expectation.  Of course, Oceanus will be a major impediment to this happening again.  Our estimate was $50MM, while Sands reported $61M of EBITDA for the quarter.   One thing to keep in mind for Sands Macau is that like Venetian Las Vegas, this property was hit pretty hard last year as Venetian Macau ramped and cannibalized some its customer base.

  • Slot hand grew an impressive 15% y-o-y (2Q08 was down 18% though) and slot hold was high at 8.1%, contributing an extra $2.5MM of EBITDA
  • Once again Sands reduced its table count, we suspect on the Mass side, by 36 tables sequentially and by 170 tables y-o-y.  We estimate that there were 317 tables on average at the Sands... as a reminder, at one point this property had over 700 mass tables.  This is certainly one way of reducing costs.
  • We estimate the fixed costs were down $25MM y-o-y to roughly $30MM.  Our best guess is that fixed property expenses will be down to $117MM in 2009 from $190MM in 2008.

Venetian Macau

Despite Sheldon’s commentary on how solid Venetian Macau’s results were, they came in below our revenue and EBITDA estimates.  While LVS may want to blame low hold in its rolling chip business, we believe that the low hold on RC was largely offset by high hold on higher margin Mass business.

  • Once again the number of tables was reduced by 18 sequentially.  We suspect the reductions were at Mass level.  This property originally opened with over 730 mass tables, and now only has 460. 
  • Mass drop was down 10%, but high hold saved the day.  If hold was at the normal 19% level revenues would have been $44MM lower
  • While mass drop was disappointing, VIP rolling chip impressed, flat y-o-y despite a declining market.  However, strong drop was offset by weak hold, impacting revenues by roughly $55MM.
  • Net/net we think the hold issues were a wash this quarter
  • It was harder to figure out cost reductions at this property, but our best guess is that fixed costs were around $70MM for the quarter, down about $15MM sequentially. We have fixed costs at this property down $60MM y-o-y to $300M.

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