John Restrepo has seemingly spent his life observing the Nevada economy, when in actuality it has been less than 20 years. A former vice president with Coopers & Lybrand (now PricewaterhouseCoopers), Restrepo has become one of the most quoted and consulted economists in the region. He predicted the real estate collapse in Las Vegas and has consistently been correct about the slumping economy. A consultant who has clients in gaming, real estate and the financial industries, Restrepo Consulting produces several publications that present in-depth information available nowhere else. Restrepo met with Global Gaming Business Publisher Roger Gros and Associate Editor Greg Jones at his offices in Las Vegas in March to discuss the current state of the gaming industry.
GGB: What do you see right now in the economy?
Restrepo: What we see now is the expression about “known unknowns.” We know we are going to come out of this pretty deep recession eventually; the question is how long it will take. And, when we do, is the market going to be materially different?
Are we going through a transformational period now? Do we have to put the old business models-those developed between 1995 and 2005-on a shelf while we go back to an older business model, or do we have to find a new model? Is this recession going to have a material effect on how people view spending? If this becomes a period of time that people start saving, staying home and rebuilding their 401(k) plans, then we may have a different business model. People won’t stop coming to Las Vegas, but maybe they will come less frequently or spend less money.
We do know it is probably going to last longer than we thought it was going to last six months or a year ago.
The valuation of gaming companies changed a few years ago when real estate was considered a big part of a casino company’s value. How does the decline in real estate impact how a company is valued?
It impacts it quite a bit, not only from the asset value component, but also as the going-concern question. There is a lot of intricacy in all of this. The challenge is how you tie all of this in with a drop in asset values and how you tie it in to where the economy is going, not only nationally, but globally. The resort industry is struggling with how to deal with this new reality.
Some of the largest casino companies based in Las Vegas are in serious trouble with their debt. The debt load is too much for the corporations, so a sale of assets looks as though it will be necessary. Two questions: First, how will they value the assets? Second, who will be able to buy the assets if the current tight credit situation continues?
It’s very fluid, because the value of those assets is largely driven by the volume of visitation to the market, and that is also based on the volume of spending once the visitors get here-and their willingness to pay so much for a room, for entertainment and food. So at the end of the day, it is consumer confidence that is really driving the value of these properties, and that is a very fluid situation.
Until we get the economy stabilized and get people comfortable with knowing they are not about to get laid off, that they can spend a little bit more and that they can do things, then we have some challenges. But even then if there is a somewhat semi-permanent change in how people view the world and the psychology of spending, this may be a longer and more protracted recovery than we had thought it would be.
With companies looking to sell some assets, what will it take for buyers to become interested? Is it a matter of seeing prices drop low enough or credit markets opening up a little more?
It’s going to be a combination of both. There is always money on the sidelines, and a lot of that money is just waiting for these values to go even lower. They don’t think we’ve hit bottom yet. They’re waiting for that to happen, combined with seeing what the stimulus package does about freeing up credit to buy these assets. Because even if they wanted to buy today, they couldn’t get the financing to do it.
But even if the credit markets loosen up, we still have this issue of consumer confidence and a redefinition of how people spend and what they spend on. That is a different issue, so I think those buyers have to look at both the sides.
Why do you think the regional casinos are performing better than destination locations like Las Vegas or Atlantic City?
The most logical issue is that it is cheaper to get there. You just have to drive there. The value proposition has always been there and those are the major reasons.
One of the challenges Las Vegas faces is that it is isolated, so you have to fly in or you take a long drive to get here. Same thing going to Florida and these other resort destinations. So if you can go to your casino in Illinois or an Indian casino in California, why not if you can easily drive there, and they’ve always been offering that value proposition? In Las Vegas, we kind of lost some of that in the last 10 years. Everything became luxury.
It will be interesting to see how the resort industry in Las Vegas redefines itself to start servicing that value customer again. Not everyone wants luxury. That is the challenge.