Is This the Future of Las Vegas?

Las Vegas is always transforming itself to attract new customers and keep the city fresh. We've gone from the Rat Pack days to themed resorts to ultra-luxury in the late '90s. But even in those days, the casinos were the big draw. Over time, top chefs, nightclubs, and eventually pool parties were what new customers looked for in Las Vegas, until the point that nearly half of revenue on the Strip is non-gaming. But every party comes to an end, and when I was in Las Vegas last week I got to wondering if the city will soon become a bigger destination for shopping than for gaming or partying in the next decade.

Every resort in Las Vegas has some shopping options. But with Caesars Entertainment's (NASDAQ: CZR  ) Caesars Palace's addition to the Forum Shops, Las Vegas Sands' (NYSE: LVS  ) Venetian and Palazzo shopping centers, and MGM Resorts' (NYSE: MGM  ) CityCenter adding even more mall space with Crystals, the Strip became one big shopping mall.

Most of this mall space targets the same high-end customers, but so far that hasn't been a problem. Shopping Centers Today says that The Forum Shops generated the most sales per square foot of any enclosed mall in 2012 and was in second place overall. With all of this mall success in a place known for gambling, there are a few factors to look for going forward.

Too much of a good thing?
If we've seen anything in Las Vegas it's overbuilding when times are good, which is why Fontainebleau and Las Vegas Plaza (among others) were abandoned mid-construction when the financial crisis hit. With gaming struggling to regain old highs in Las Vegas and shopping booming, we could see malls be overbuilt on the Strip. The good news is that building on the Strip came to a virtual standstill after the financial crisis, and there doesn't seem to be much interest in picking up the shovels anytime soon.

If the mall fad goes out of style, it won't be the major casino companies that are affected, which also takes upside away in some cases. MGM owns just half of CityCenter and Crystals mall, but Las Vegas Sands' malls are owned by General Growth Properties (NYSE: GGP  ) and The Forum Shops are owned by Simon Property Group (NYSE: SPG  ) .

These mall owners are the two best ways to get exposure to the exploding shopping scene in Las Vegas, but with diverse holdings, they're not very leveraged to Las Vegas.

As I said above, MGM still has exposure to the malls with Crystals, and Wynn Resorts (NASDAQ: WYNN  ) also owns a fair amount of high-end mall space in Wynn and Encore Las Vegas. But the greater concern for gaming companies may come from the general trend of malls in Las Vegas.

The future of Las Vegas?
The problem is, the giant casinos of Las Vegas weren't built to house guests for pools or clubs or shopping malls -- they're there to house gamblers. MGM and Caesars may now generate half of their revenue off the casino floor, but with little exposure to the malls that are generating an increasing number of revenue from guests, I don't see how this doesn't detract some from the casinos.

With gaming revenue still well off the highs reached in 2007 and growth only in the low single digits, it's easy to see the challenge for casino companies going forward. Maybe more customers are coming to Las Vegas to shop and will stay away from the tables? Maybe it'll take another decade to reach gaming revenue of the mid-2000s and we'll have to hope that expensive food, drinks, and shopping will fill the gap? The challenge is that gaming companies don't have much exposure to much mall space, which may be the future of Las Vegas.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2013, at 8:19 PM, spokanimal wrote:

    You're missing the bigger picture, Travis... at least from an LVS perspective.

    Yes, the monetization of Sand's malls to GGP does eliminate the mall component from the palate of ancillaries that Sands can draw business from, but in economics, we often evaluate on the basis of "opportunity cost", so, in essence, the rabbit hole goes much deeper than the perspective that you've offered up here.

    To wit, the working capital that Sands raised via it's mall sale to GGP was "re-applied" to other development opportunities that have cash flows that are loosely related to the loss of mall revenues in a way that can best be visualized with the parable of the banking system's "money multiplier" concept. In layman's terms... you can't lament the loss of mall revenues without relishing in the revenues of some place like Marina Bay... which owes a small piece of it's existence to working capital that was re-cycled from the GGP proceeds.

    So, your comments in this article dismay me for many of the same reasons that big fans of "free cash flow" don't include the very relevant co-concept of "applied cash flow"...

    ... because, as I often pointed out in 2011 comparisons of Wynn's big free cash flow to LVS's weaker counterpart... it isn't what Elaine Wynn has available from her dividends to spend at Nordstrom that makes Wynn successful... it's what Sands was doing in 2011 to apply those funds to future growth that's moving the needle ( or lack thereof) on these stocks in 2013.

    Spokanimal

  • Report this Comment On January 11, 2013, at 2:37 PM, mcclvnv wrote:

    Only one Casino in Vegas understands GAF "gaming availability factor" in terms to guest arriving at the property. The others concentrate on making guest spend upwards of 3 hours waiting to check-in and in one proposed case wanting to charge an additional fee per night for checking-in prior to 4PM. A gaming relationship should always start out on a positive note. Everyone needs to go back to the basics and couple with new technology. The folks at eCasinoHostSMS and Custom-Contact understand what it takes to maximize GAF so now it is time for the others to follow.

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