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A New Beginning

How will financiers view gaming investment opportunities in 2013?

A New Beginning

The year 2012 saw sentiment about the gaming industry swell and ebb, ending something like this:

• Las Vegas. Bullish in the spring as the market recovered, more doubtful as the year progressed, and ended with optimism resumed, as advanced group bookings look strong.

• Regional U.S. gaming, like Las Vegas, saw optimism in the first half of the year grow along with revenues, then dissipate as growth disappeared and new casinos began to seriously bite into incumbent operators.

By year-end, the mood remained dismal.

• Macau was a roller coaster. Giddy optimism at the start of 2012 fell into deep concern by summer not only as growth slowed to mature market-like single digits, but as the vaunted VIP business actually declined.

However, growth resumed and accelerated late in the year and a bounce in the Chinese economy had everybody feeling better again.

Near the end of the year, we had a flurry of excitement as Penn National announced it is splitting into operating and property companies, and Wynn Resorts and Las Vegas Sands gave shareholders big special dividends and promised much bigger regular dividends in 2013.

The general opinion was that, despite the excitement over PENN’s bold move, few other casino companies could copy it, though if one could, it would be Las Vegas Sands.

As for the dividends, a lot depended on how federal income tax would treat them starting in 2013.

Here’s our take on each of these for 2013:

• United States. A lot depends on the economy, which has shown fairly steady signs of accelerating improvement.

That should bode well for both Las Vegas and regional markets.

Las Vegas will benefit from stronger corporate spending and a housing market recovery that could especially benefit the locals casinos.

The big Strip operators also get a boost from Asian high-end play that continues to strengthen.

Finally, 2013 may be the year that MGM Resorts gets to refinance debt at lower prices, thus freeing up $200 million or more by lowering interest expense.

The regional markets are more complicated.

A stronger economy will lift regional revenues generally, but increased competition will continue to hurt incumbent casinos in the East Coast and industrial Midwest.

Here’s an example of the mixed picture from the October edition of Fantini’s National Revenue Report. It shows total revenues of three companies benefiting from new casinos, but then shows that they are negatively affected by new competition:

Operator          Total Revenue    Revenue without New Properties
MTR Gaming      +14.80 %           -18.09 %
Penn National     +11.69 %           -14.88 %
Pinnacle             +9.73 %             -3.47 %

That kind of give-and-take will continue into the new year as more casinos open.

One company to watch next year will be Boyd Gaming. Boyd has quietly expanded with the acquisition of IP in Biloxi and Peninsula Gaming in Iowa, Kansas and Louisiana.

• Macau. We’ll see what the new Chinese government does, but if its policies are fairly sanguine toward Macau, this might be the year the market begins another surge.

That is because Macau is nearing some huge building blocks being put into place. One is vast improvements in transportation infrastructure, such as the bridge that will connect it to the mainland and to Hong Kong.

Then there is adjacent Hengqin Island. It is planned to be developed into a tourist destination drawing 10 million people a year, and with its own resident population of 200,000, creating two new markets for Macau.

The Chinese economy appears to be growing again, and its potential remains enormous.

Fingers crossed on national government policy, but Macau could still be in the early stages of its phenomenal story.

• Dividends. As of this writing, we don’t know the future of the federal tax on dividends, but if the tax rate remains favorable, expect several casino companies to become total return stories.

Las Vegas Sands and Wynn stand out among them. The companies generate billions in cash flow, well in excess of future expansion costs.

When LVS held its latest quarterly conference call, the company announced a 40 percent dividend increase for 2013 from $1 to $1.40.

“Go dividends!” CEO Sheldon Adelson crowed in the background.

How much he meant that became clear when LVS gave shareholders a happy Thanksgiving by announcing a special dividend of $2.75 a share.

Given that he owns more than half LVS’ shares, Adelson was also giving himself a $1.2 billion treat, reason enough for hurrahs.

LVS followed WYNN, which paid an $8 dividend in November and announced it is doubling its regular dividend from $2 to $4 a year.

A few months ago, Goldman Sachs analyst Steve Kent did an exercise showing that LVS and WYNN could become debt-free in several years even while financing current growth projects.

Imagine the dividends then.

• REITs. In splitting into an operation company and a real estate investment trust, PENN executives talked about all kinds of flexibility to make different investments and get around limits that some states have on how many gaming licenses a company can hold.

But the big positive reaction is really more simple: REIT stocks sell at higher valuations than casino companies, and they generate big dividends for shareholders.

Attention turned to other casino operators and, as mentioned, the belief is that the REIT-operating company split is unlikely for most, except for LVS. Several observers said LVS shares could double if non-gaming value is unlocked.

Adelson, however, in the past has suggested it is too early to monetize the company’s non-gaming assets.

Still, we suspect LVS shareholders will gain the benefit of those values, whichever direction he chooses to go.

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