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Las Vegas Casinos See Opportunity Off-Strip

By Travis Hoium - Oct 8, 2016 at 2:00PM

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The Las Vegas locals market may be a lot bigger than you think, and that presents an opportunity for investors.

There's more to Las Vegas than the Las Vegas Strip. Image source: Getty Images.

In Las Vegas, the Strip gets a vast majority of the attention from both the national media and investors. Names most people know like MGM Resorts (MGM -2.21%), Caesars Entertainment (CZR), and Wynn Resorts are just a few of the large gaming operators in Las Vegas, but there's big gaming world off the Las Vegas Strip. And it's controlled by a relatively small number of companies. 

Station Casinos, which is partially owned by Red Rock Resorts (RRR -1.88%), recently acquired the Palms Resorts and Casino for $313 million to increase its Las Vegas exposure to 20 resorts, and Boyd Gaming (BYD -0.47%) recently bought the Aliante Casino for $380 million to bring its position to 10 properties. What do these companies see off the Strip? 

The vibrant gaming world off the Las Vegas Strip

Most people who don't live in Las Vegas probably don't realize what a big business the locals market is for gaming companies. In the past 12 months, $2.8 billion has been won by casinos in Clark County that aren't on the Strip or in downtown Las Vegas. That's up 5.6% from 2011, which isn't a lot of growth, but it's something. 

It's these casinos that Boyd Gaming and Red Rock Resorts own and continue to acquire. And the logic behind the acquisitions is easy to see when you look at what they're paying and the alternatives on the Las Vegas Strip. 

A lower risk than the Strip

We're seeing local and regional gaming companies stay out of the Las Vegas Strip because they can take smaller bets elsewhere. I mentioned above that the Palms (just off-Strip) cost Red Rock Resorts $313 million while Aliante cost Boyd $380 million. This is in comparison to Boyd's former plan to build the Echelon Resort on the Las Vegas Strip for $4 billion pre-financial collapse Smaller bets are a little easier for companies to stomach. 

Not only are these properties cheaper than being on the Strip, they're selling for cheap as well. It cost around $865 million to build the two hotel towers at the Palms, and Red Rock is paying just over a third of that price. 

M Resort went through a similar decline in value shortly after being built. The resort cost $1 billion to complete, but Penn National Gaming (PENN -1.92%) bought it for $23 million. Combined with Tropicana, acquired for $360 million, the two resorts generated most of the west segment's $68.5 million in EBITDA last year. That's nearly a 12% EBITDA return on investment even before a full year of Tropicana's operations, which is great for the gaming industry. 

The secret gaming investment in Las Vegas

The Las Vegas Strip gets a vast majority of the attention in Las Vegas gaming, but off the Strip there are still opportunities for investors, and they may be a better value than their larger competitors. Boyd Gaming, Red Rock Resorts, and Penn National Gaming are three of the power players in the Las Vegas locals market, and given the $2.8 billion that's spent in casinos in Clark County outside of the Strip and downtown, there's a lot of opportunity for all three to generate solid returns for investors. 

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Stocks Mentioned

Boyd Gaming Corporation Stock Quote
Boyd Gaming Corporation
BYD
$54.75 (-0.47%) $0.26
Penn National Gaming, Inc. Stock Quote
Penn National Gaming, Inc.
PENN
$31.18 (-1.92%) $0.61
Red Rock Resorts, Inc. Stock Quote
Red Rock Resorts, Inc.
RRR
$36.52 (-1.88%) $0.70
MGM Resorts International Stock Quote
MGM Resorts International
MGM
$33.61 (-2.21%) $0.76
Caesars Entertainment Corporation Stock Quote
Caesars Entertainment Corporation
CZR

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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