THE HEDGEYE EDGE
We’ve commented before on regional gaming how a positive macro outlook can overtake negative demographic trends, but in the case of the Las Vegas Locals market, both demographics and Macro appear to be in a favorable position, at the same time supply is fixed. Las Vegas has been slow in its recovery, but we are starting to see what appears to be somewhat of a locals renaissance, which bodes well for Red Rock Resorts (RRR) which derives most of its EBITDA in the LV locals market. Add in a potential value creating real estate transaction, and this 2018 and beyond story is quite compelling.
INTERMEDIATE TERM (TREND)
Coming out of a depressed market environment, we see an accelerating local economy adding huge upside to GGR and ultimately both Palace and Palms EBITDA and margins once their respective transformations are complete (renovations at Palace and operational turnaround at the Palms).
Across our duration of 3-6 months, here is some more detail on the top four things to consider.
- Local economy is accelerating with more room to go – Key segments in Las Vegas housing, employment, and income growth are all accelerating, but are still well below their previous peaks. Housing inventory levels have finally stabilized and homes are experiencing substantial price growth. More importantly, household income is accelerating, but still remains well below the national average, while the cost of living remains contained. We expect these macro factors to drive GGR growth and believe that RRR, specifically, is well positioned to absorb these revenues as zoning restrictions will prevent any new gaming supply.
- Demographics are becoming favorable – We’ve said before in negative forecasts for regional gaming that generations below Baby Boomers don’t have interest in playing slot machines. In the coming years for Las Vegas, we expect to see a slowdown in population growth, much like the rest of the US, but to the advantage of regional gamers, we expect Southern Nevada will be taking on a steady flow of elderly people that tend to be avid slot players.
- Construction jobs to drive GGR – In addition to favorable demographics and a strong macro environment, Las Vegas has over $12B in pent up CapEx around the city, with major projects on the horizon, including a new LV Convention Center renovation/expansion and the new Raiders Stadium. The Southern Nevada Tourism Infrastructure Committee estimates that this stadium project alone will bring in 19k construction jobs. Construction workers have historically been known to be reliable, repeat gamblers.
- Strategy is adding value – RRR has invested heavily in the more recently acquired Palms, converting the entire property to their own systems (Gaming floor, Hotel, and F&B operations), and 2018 will be the year where upside is realized. Las Vegas is picking up an official NHL team for this upcoming season which will further drive visitation growth. Though these visitors will likely head to the Strip, Palms is still in a great location to take advantage of spillover visitation traffic and room night compression. With considerable catalysts, we see ROI for Palms in the mid-teens.
LONG TERM (TAIL)
We are bullish on the long term for RRR. The local economy of Las Vegas is growing off a very depressed base and continues to experience accelerating growth. Key drivers that are most significant to GGR growth are inflecting higher, but we still think there is a lot of room to go. With macro accelerating and demographics in a favorable position, we see RRR poised to capitalize on what is likely the top performing gaming market in the country over the next 3-5 years.