Las Vegas Is Getting Another Facelift

No city in America reinvents itself more often than Las Vegas, and after a few quiet years on The Strip, the skyline is about to change again.

James Packer, an Australian billionaire and chairman of Crown Resorts, recently bought the land that once held the New Frontier casino, located north of the Fashion Show Mall. The 34.6-acre property will house the latest megaresort in Las Vegas and is located just south of an 87-acre property recently bought by Genting Group, which is building the $4 billion Resorts World Las Vegas.

The former New Frontier Hotel, which will be the site of The Strip's newest megaresort. Photo source: KyleLV via Wikimedia.

These two properties are being developed while resorts on the Las Vegas Strip continue to struggle financially, and when completed they will add capacity to an area that will arguably be oversupplied for the next decade. But reasons for these moves can be found if you dig deep enough behind the headlines.

The changing face of Las Vegas
First, let's cover exactly what we know about what Packer and Genting Group want to build.

Genting Group is building an Asian-themed resort on the site that once held the Stardust hotel and casino, a property Boyd Gaming tore down to build the $4 billion resort Echelon Place. Those plans were abandoned when the economy went into free fall in 2008, and the partially constructed resort was sold to Genting Group for $350 million. Genting intends to build on the existing foundation and construct a resort that some estimate could cost as much as $7 billion to complete.

The abandoned Echelon Palace site, which will soon become Resorts World Las Vegas. Photo source: Bobak Ha'Eri via Wikimedia.

Genting's plan is to construct the resort in three phases with Phase 1 including 3,000 hotel rooms, 3,500 slot machines and table games, and 30 food and beverage locations. Construction of the first phase is planned to be complete in 2017.  

Packer's plans are in a much earlier phase: Construction is expected to begin next year, with completion targeted for 2018. While a smaller footprint for the site means a smaller scale than Resorts World Las Vegas should be expected, the budget will still be in the billions. 

Why Las Vegas and why now?
The Las Vegas Strip isn't exactly a booming market right now. The region still hasn't reached gaming levels seen in 2007, and supply had already been added to the market in recent years by CityCenter and Cosmopolitan, among other smaller hotel resorts.

But Las Vegas' gaming revenue is recovering from recession lows more quickly than other regions in the U.S., particularly Atlantic City, New Jersey. The chart below shows that Atlantic City continues to see gaming revenue fall in the face of increased regional competition; meanwhile, Las Vegas is on the road to recovery.

Source: Las Vegas Gaming Commission and New Jersey Division of Gaming Enforcement.

Another attraction to Las Vegas is the fairly open market for gaming operators, unlike booming Asian gaming markets such as Macau, Singapore, and The Philippines. These Asian markets are restricted to a small number of players who had to win competitive bids to enter the market while the number of gaming companies in Las Vegas isn't as restricted. As long as Packer and Genting Group pass a stringent regulatory compliance check they can enter the market.

It isn't that they've ignored the Asian market. In fact, Genting has one of two licenses and casinos in Singapore and Packer's Crown Resorts is a partner in Melco Crown, which is one of six concessionaires in Macau. Singapore isn't expanding beyond two casinos any time soon while Macau's buildout of the Cotai region is under way, including a resort from Melco Crown. Beyond the resorts they already have operating or under construction in Asia, there just aren't many attractive opportunities to expand in Asia, so they looked to Las Vegas. It may be a risky move, but it's one they felt was needed to build a presence in one of the world's best-known gaming markets.

Can the new generation of Las Vegas megaresorts succeed?
The challenge now is building a resort that can be profitable, which is harder than it seems. The Cosmopolitan -- the newest megaresort on The Strip -- has reported annual losses of about $100 million per year since opening in 2010, and CityCenter just reported a $2.1 million operating loss for the second quarter.

What Packer and Genting have going for them in Las Vegas is location. I recently highlighted that north Strip residents Wynn and Encore Las Vegas make up the most profitable resort on The Strip, while neighbors The Venetian and Palazzo Las Vegas are also doing well targeting upscale customers.

You can see below that EBITDA -- a proxy for cash flow -- of $331 million from CityCenter over the past year doesn't exactly show a solid return on the $8.7 billion investment. But resorts on the north side of The Strip have fared better and show that decent returns are available.

Property 

Construction Cost

EBITDA (TTM)

Wynn and Encore Las Vegas

$5 billion

$501.4 million

Venetian and Palazzo Las Vegas

$3.3 billion

$321.1 million

CityCenter 

$8.7 billion

$331 million

Source: Company earnings releases. TTM = trailing 12 months.

As Genting Group and James Packer build Las Vegas' newest megaresorts, they'll be betting that this city as a whole can continue to grow and that the north side of The Strip can attract more traffic. It's a risky move, but I wouldn't bet against these two as they are the latest to reshape the skyline of Las Vegas.

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Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

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 August 11, 2014, at 2:59 PM, miteycasey wrote:

    These casinos aren't on the North side of the strip. The strip runs mostly North and South.

    You mean to say they are on the North end of the strip on the west side.

  • Report this Comment On August 11, 2014, at 4:31 PM, walleye117 wrote:

    Vegas has gone down hill when attracting people who want to come there. Why should I spend $600 on a flight. Spend $3000 on gambling and $500 on shopping food etc. Then on top of that pay a resort fee for a place to sleep.

    The only place I actually felt welcomed was at Treasure Island. The casino manager walked by and said hi and B.S'd for a little bit. Asked us how we are doing.

    You have table attendants that are crabby and don't care if you lose your money. Comps suck compared to what they use to be. I could spend $500 and get a free meal out of the buffet. Now it's $3000 and I'm lucky if I get enough comps off the tables for a free over priced buffet. I am more welcomed at the local Indian Casino. Security opens the door and say hi, good luck. I actually can win on their slots, and tables. Vegas slots have gone down hill and tightened up so much that it's not even fun if you don't win something once in a while. The last time I went 2 years ago, I spent $5000 for the week and don't' think I had anything much over $20 for a hit.

  • Report this Comment On August 11, 2014, at 5:08 PM, Commentor1 wrote:

    Also it has not been called Echelon Place for almost a decade it is called Echelon.

    This Travis guy should do a little research before posting a story like this.

  • Report this Comment On August 11, 2014, at 7:10 PM, dps702 wrote:

    @walleye117

    Living here, I would agree the quality of service in nearly all the casinos has gone significantly down hill in recent years. Couple that with the exorbitant costs of things inside the resorts (the Cosmo nailed me $9 for A club soda...real incentive to be the designated driver), the chiseling odds on the slots and blackjack, and the dishonest resort fees, it's like this place is run by some bottom-of-the-barrel MBA students with an Excel spreadsheet as their guide.

    While standing in line at a certain membership warehouse a few days ago, I was talking with a longtime resident about quality of service, and I made an offhand comment that guests were treated far better and honestly when the mob ran this town. He wistfully nodded in agreement.

    On another note, this article is poorly researched. The author has failed to note one new resort -- the SLS -- opening this month where the Sahara once stood. How that casino performs should be a bellwether on how the two casinos would do when they open later this decade.

  • Report this Comment On August 11, 2014, at 7:29 PM, roughday wrote:

    Vegas is going the way of Atlantic City.

    This is a good thing for the gorgeous surrounding desert rocks that are being annihilated by kid dirt bikers looking for something to do.

    Hopefully they will move out and leave the gorgeous desert for our grandchildren. What's left of it, anyway.

  • Report this Comment On August 12, 2014, at 12:15 PM, Staypositive wrote:

    I read about how the casino's aren't making any money. I think that is COMPLETELY FALSE. There are so many casino resorts that are remodeling and making renovations, but then they state we didn't make a profit, well if everything they do is included, then no you will never make a profit. I feel that the true money should be reflected. I feel that if a company spends MILLIONS/BILLIONS of dollars on renovations, bonus, etc that should be disclosed, that is not a loss it is money you chose to spend on your facility and I think the true figures will come out that these Casino's/Resorts are not as bad as they say.

  • Report this Comment On August 12, 2014, at 12:16 PM, EquityBull wrote:

    Vegas will never be Atlantic City. Not in our lifetime at least. Only way that happens is if Lake Mead goes dry. Short of that not a chance. Vegas is "the" destination and the reinvention and reinvestment is why it always wins. Plus the weather is incredible.

  • Report this Comment On August 12, 2014, at 12:25 PM, Staypositive wrote:

    So here is an example of what is being paid out plus or minus some but still when you add it up, the Casino's/Resorts are doing really well because they are still paying and giving their upper management much more then they should get. If they are doing so bad, why don't they cut back and start thinking about the people who are going there and the people they are losing because of their GREED. $20,000,000 Total compensation, yes, that is millions, not thousands being paid and it keeps increasing. Year-end stock, Salary, Cash bonuses, Option awards,

    Nonequity incentives, Other,like security, company jets, lodging in Las Vegas, tax reimbursement,

    Severance payments. Yes and every time we go in there an lose our money this is what it is going for. Someone else to have the finer things.

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