First the good news: Las Vegas property level EBITDA margins have expanded 10 out of the last 15 years and were 4% higher in 2007 than the average over that period. The bad news: Mean Reversion is probably rearing its inevitable head. Why am I concerned about mean reversion? The impressive margin expansion was driven primarily by the hotel and the food and beverage product lines (casino margin has been stable) which should contract first and most dramatically as consumer spending slows and probably recedes. The following chart clearly shows the relevant trends.

In 2007, rooms and F&B contributed 40% of revenues and 38% of total departmental profits in Las Vegas, big contributors for sure. Room rates are already under pressure and casinos won't drop occupancy to hold rate. ADR's are the highest margin revenue source in Vegas. Do you see where I'm going? I'm not sure F&B traffic and pricing can hold up in this environment either. Restaurant traffic certainly hasn't across the country.
My partner Keith McCullough constantly reminds me that context is not just the last few years. Context in this case is at least 15 years. Unfortunately, when it comes to margin mean reversion, this context is not very comforting.


(previously posted under Keith McCullough: 06/08/08 10:12 AM EST)

Main Street vs. Wall Street: Whales vs. Minnows

I ate a $38 steak (the cheapest on the menu) at Sleek Restaurant at Lumiere Place in the city of St. Louis, of all places. As I looked at the suits and fashionable dress shirts in the restaurant and the t-shirts, baseball caps, and blue hair in the casino, I was struck by the contrast.

The obvious disconnect between the quality of this new US Gaming facility and the quality of the customers got me thinking about the Main Street vs. Wall Street dynamic in our current economy.

More important to the US Gaming investor than St. Louis is the gaming Mecca of Las Vegas. It's been at least 10 years since Las Vegas has been considered anything approaching cheap . Prior to the cheap money leverage boom of capacity builds, Vegas was always resilient because you could spend $3.99 for the buffet, $80 for a nice room, and drink for free.

Sure you lost a bunch in the casino, but that never factored into the decision to go to Vegas because it's so cheap . Even as the operators jacked up hotel rates, food & beverage pricing, and table minimums, the consumers were perfectly willing to lever up their balance sheets to spend, spend, spend. Why not? The value of their houses were probably going up 20% a year forever right?

The new new Vegas was built for Whales, Dolphins posing as Whales, and Minnows posing as Dolphins.

Something's gotta give here. Vegas runs on a model of high hotel room occupancy. My bet is we'll see a resurgence of the food court and the buffet you don't need a credit card to pay for.


(previously posted under Keith McCullough: 06/03/08 10:33 AM EST)

Yesterday, Ameristar (ASCA) CEO John Boushy resigned to pursue other interests . Hopefully, those interests do not include topping his own record for the worst casino property acquisition ever.

Luckily, for him, in the current environment sellers are probably willing to unload casino assets for under the 12x EBITDA Mr. Boushy and Ameristar paid for Resorts East Chicago. This acquisition was so bad that even private equity was unwilling to hand over $675 million in April 2007 for an asset in a market with increasing supply.

Of course, ASCA was still smarting over its loss to Columbia Sussex in the bidding war for Aztar in 2006, which rates as probably the worst Private Equity gaming company acquisition ever.


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(previously posted under Keith McCullough: 06/08/08 9:56 AM EST)

Robin Hood Regulating Gaming:

The Illinois Supreme Court ruled that it is legal for the state to collect a surcharge from the profitable casino industry and give that money to the unprofitable horse racing industry.

Ronald Reagan once said "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Horse racing stopped moving a long time ago. How telling is this form of economic populism occurring in Obama's home state?


(previously posted under Keith McCullough: 05/30/08 3:11 PM EST)

Back in 2006, 3 companies bid up the price of Aztar Corporation to a whopping 12x EBITDA, an unheard of multiple for a casino company acquisition.

With most of those assets now in bankruptcy, thanks to winning bidder Columbia Sussex's mismanagement (among other factors), the state-appointed conservator cannot give the AC Tropicana away.

Remember, along with Las Vegas land, the AC Trop was the prized asset in the acquisition. Yesterday, the conservator asked the New Jersey Gaming Commission for additional time to complete the sale of the casino.


(previously posted under Keith McCullough: 05/22/08 2:02 PM EST)

WSJ and Macau Article today detailing the junket industry and its impact on the US operators in Macau.

The big issue, which is not directly addressed in the article, is whether the government gets involved, directly or indirectly, in capping the junket commission rate.

Even with the higher rate, US operators are hardly stumbling however. With the exception of MGM, the US operators are generating excellent ROI's. Even MGM's run rate isn't bad and they are still in the ramp up phase with their issues more concentrated on the mass market side, rather than the VIP junket side.

Junkets clearly have pricing power though and unless the government gets involved, a distinct possibility, junket commissions should continue to rise.

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