Hedgeye - ASCA: UPDATE FROM LAS VEGAS

Here are our notes from meetings in Las Vegas last week

Costs:

It looks like they have some more room to cut costs, unlike most regional operators
They have room to cut/close food outlets – too many amenities
It wouldn't take long to implement cuts
We think this could be the focus of the Q3 earnings call

General commentary:

Last year Labor Day weekend fell in August so it’s a tough comp. September will be better - look at August and September combined to see a real trend. Labor Day is a big weekend
Unemployment first, then gas are the major economic inputs
They think that the agriculture business is going to be down 38% and the effects of this will hit them
Jackpot is having a record year
No chatter of Nebraska legalizing gaming
Business isn't really improving - bumping along the bottom. It’s just not employment rate but also that people are working less hours and, therefore, receiving less pay. 17.5% is the real unemployment rate
Win per admission has gone up but the admissions are down. They have lost the bottom end - so the number is inflated because it’s also not an apple-to-apple customer
ASCA is the only operator that has seen win per admission increase – because they are just not marketing to the bottom customer

Missouri:

They think that table games would have been 10% better in Missouri – buoyed by the loss limit removal - if not for the economy

Colorado:

Black Hawk- July was a substantial boost, August not as strong (holiday weekend)
The hotel will open September 29th

Capex:

Colorado was the last of the big capex
Construction costs haven't really decreased. Labor has decreased slightly
Council bluffs and East Chicago were the only other projects they ever spoke about - but based on HET results - there is no way they would do it (Chicago). In Council Bluffs they would spend 100mm but they can't construct anything for that little
$50-$60mm in maintenance capex for 2009
2010 will include a little deferred maintenance so capex is expected to be somewhat more substantial that year

Credit facility:

East Chicago:

The 10th license in IL is 45 miles away from ASCA’s nearest property. They think it will be an immaterial event to them
IL unemployment increased there much more than in their other markets
They think that the Horseshoe impact has already been felt

Investment opportunities

Kansas - they already have $400mm invested in the Kansas City market so they are not interested
The tax rate is too high in other new jurisdictions
There are a few local assets in Vegas that are interesting but not cheap enough
Fontainebleau doesn't make sense and will cost 1.5bn to finish. It’s also in the worst location on the strip. No walk traffic (across from Circus Circus)
ASCA would only buy something that's immediately accretive
They don't buy into the cross marketing benefit so much (look at Harrah’s)
They also wouldn't do anything until City Center opens
ASCA took a look at Ohio - taxes and license fee too high
They wouldn't be building new projects now (à la PNK). Banks don't like lending south of 5x-ish. They need the multiple to increase to create money. Their problem is the issue of losing the license
ASCA would pay 6x EBITDA for an asset if they could improve that EBITDA

Balance Sheet:

River City (PNK) impact:

Very few customers come to ASCA from South County – ASCA is the most isolated
ASCA thinks that River City will do only $25mm in EBITDA - pay a few hundred million at most for that opportunity, not $250 million.