As we near the end of 2018, it is time to start thinking about the big events of the year and current trends, and ask what they foretell about the coming year.
This year has been perhaps the best year gaming has seen in a decade or more, helped along by a strong U.S. economy and the U.S. Supreme Court opening the floodgates to legalized sports betting.
It seems unlikely to repeat in 2019, but here are some topics and to consider:
- The economy and interest rates. As fast as the U.S. economy raced ahead in 2018 in terms of jobs and consumer confidence, there are reasons for caution about the near-term future.
Among the concerns: The federal tax cut has had its initial impact, so there is a boost that won’t repeat. The booming economy might be planting the seeds of the next recession in wage inflation and higher interest rates.
Interest rates should be of special concern because gaming is a capital-intensive business in which casino companies have grown comfortable with debt leverage ratios of four to five times, and gaming equipment companies have high debt.
Higher interest rates could raise borrowing expenses, slow growth projects and, if they lead to a general economic slowdown, put some balance sheets under stress. And, while there might not be a collapse as in 2008, there could be pain for leveraged companies.
Further, the Great Recession put an end to the belief that casino companies are recession-proof. Today’s casino resorts are clearly more sensitive to the economy than when gambling was the sole driver of profitability. And that is more true today than in 2008.
Finally, nobody yet has repealed the business cycle.
- Sports betting has generated a lot of excitement, and early results from New Jersey, Delaware and Mississippi show its potential.
The excitement is justifiable, because what will happen throughout the country isn’t just the old-fashioned “sports betting is just an amenity.” Sports betting will include mobile in-game wagering and lead to legalization of online gaming. In other words, a significant gaming expansion to be carried out over several years.
- Consolidation appears to be accelerating with the likes of Caesars being mentioned as a target and REITs seemingly accelerating their deal-making pace.
It also wouldn’t be a surprise to see international players move into the U.S. Genting would seem a likely buyer for some or all of Caesars, for example.
A number of companies might want a Strip presence if Caesars would be forced to sell some Las Vegas properties. Boyd has long expressed an interest in returning to the Strip. Melco and Galaxy Entertainment might see the cross-marketing potential as enjoyed by their American-based counterparts, Las Vegas Sands, Wynn and MGM.
- Valuations. One question that could be answered in the coming year is whether valuations awarded to casino companies at around 10 times debt-to-EBITDA are the new normal thanks to REITs facilitating acquisitions, or whether “this time is different” will prove itself false as it so often does, and valuations revert back to seven and eight times.
- When is too much too much? It isn’t quite 2007 with Las Vegas mega-resorts proposed by everybody from “the Israelis,” as they were called, to George Clooney.
But it isn’t the past decade of abandoned projects, either.
However, big projects are in the works at a time when growth in Las Vegas visitation is slowing. Two of them aren’t so much new as revivals of Great Recession victims—Genting building Resorts World where Boyd’s Echelon was begun and Steve Witkoff reviving the 70 percent-finished Fontainebleau as the Drew.
However, combined with Wynn’s new project on the long-vacant New Frontier site, Las Vegazs is adding significant capacity that will raise the question of whether Las Vegas remains a “build it and they will come” destination.
It would seem that Las Vegas can absorb more hotel rooms after a decade without growth.
Perhaps the real building boom today is in convention space and arenas.
Right now, every one of those projects appears on paper to be headed for success, but that is the nature of booms—until they don’t.
- Las Vegas and Macau. As gaming and sophisticated casino resorts proliferate, Vegas and Macau face greater competition. But those cities are still enormous destinations, and they continue to develop the infrastructure and add the amenities that give them ever-stronger appeal.
In Macau, the bullish story remains penetration of the huge-growth Chinese middle class market just a stone’s throw away. Having said that, there is always a measure of risk in Chinese government policy. And, as the current slowdown in Macau illustrates, growth does not come in a straight line.
In Las Vegas, the convention and arena boom, plus the addition of major-league sports teams, is adding attractions, and the growing Sun Belt population in southern Nevada and nearby California and Arizona continues to grow the regional market.
Put another way, Las Vegas and Macau appear likely to be growth markets for years to come, though with hiccups along the way.
- Japan might finally get around to laying down the rules of casino development this year or early in 2020.
At present, Las Vegas Sands and MGM Resorts appear the favorites to land two of the three licenses, but there are a lot of issues ahead about ownership structure that will determine whether Japan licenses are game-changers, or just nice big additions.
