There's no disputing that Las Vegas Sands (NYSE:LVS) is the most profitable company in its industry. In 2014, the company posted $2.84 billion of net income, well ahead of Wynn Resorts (NASDAQ:WYNN) with $732 million for the year, and MGM Resorts International's (NYSE:MGM) loss of $150 million.
Why has Las Vegas Sands been so successful while other companies have struggled so much recently? Its integrated-resorts model and its big presence in Asia have helped the company to continue to post profits even when certain other segments or regions aren't performing so well.
In Macau, Las Vegas Sands owns five major properties, compared with just one each for Wynn and MGM. Las Vegas Sands also has a resort in Singapore, while Wynn and MGM have only their Macau properties in Asia. And while gambling revenue is taking a major hit in Asia right now, there's one way Sands is constantly winning at its Asian properties: retail space leasing.
Las Vegas Sands' easy money in Asia: retail space leasing
What makes retail space leasing so easy and lucrative for Las Vegas Sands and its many properties in China and Singapore is that Sands does not own or operate the stores at its properties. It leases the space to companies looking to sell to Sands resorts customers. These shops in turn pay rent to Las Vegas Sands, meaning LVS is running this segment at about a 91% operating margin on average across its Asian malls, as of last quarter. No wonder Sands is increasing its retail space so much!
From the Las Vegas Sands 2014 10-K report:
Upon completion of the remaining phase of Sands Cotai Central, we will own approximately 2.7 million square feet of gross retail space. Management believes that being in the retail mall business and, specifically, owning some of the largest retail properties in Asia will provide meaningful value for us, particularly as the retail market in Asia continues to grow.
During Q4 2014, Las Vegas Sands made over $173 million in retail space revenue at its Asian resorts alone, which was a 9.1% increase over 2013. This is an important trend, since gambling revenue itself is declining at Asian resorts, particularly in Macau.
The kinds of shops that are typically attracted to these resorts are luxury apparel brands and high-end jewelry shops, and Las Vegas Sands has been undergoing a "mall repositioning and tenant remix" geared toward bringing more high-performing (and high-paying) luxury brands to certain higher-end resort properties.
Las Vegas Sands CEO Sheldon Adelson had this to say during the Q4 2014 earnings conference call:
"Our combined retail mall operations in Asia achieved an operating profit just shy of US$0.5 billion in 2014. That makes us one of the largest and most valuable mall developers and operators in the world."
Even though gambling revenue has dropped significantly in Macau, Las Vegas Sands was still able to increase its total profit year over year in the fourth quarter of 2014. By contrast, Wynn experienced a year-over-year decline in net income and MGM posted a significant loss.
This recent win was due to Las Vegas Sands' diversification, not only regionally (it's the only one of these competitors with a resort in Singapore) but also from very well performing non-gambling segments, such as this retail segment. The strength and growth of Las Vegas Sands' retail segment is just one more reason to take a long-term bullish stance on this well-performing company, even at a time when casino operations in Asia look bleak.