The Vegas Bubble
Last week, the Las Vegas Sands Corporation (NYSE: LVS) saw its share price fall by 50% on the New York Stock Exchange after investors were told they may have to default on some loans if they are unable to raise sufficient capital. Just three years ago, the company was constructing its $1.8 billion "Palazzo" resort, one of several luxury casino properties to pop up on the Vegas Strip in this decade.
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Bad news has been commonplace in the Vegas casino industry over the past year. Publicly traded giants LVS and MGM have lost around 90% of their value in the past twelve months. The bleeding may not yet be over. With a global economic crisis only just now beginning to reflect itself in the tourism industry, casinos will be facing steep challenges to generate revenue in 2009. How could a company like LVS, which was worth over $50 billion just last year, now be staring down the barrel of bankruptcy? Good question!
The explosion in Vegas' size and popularity largely mirrored the poker boom. In fact, it was partially fueled by the poker boom. Thanks to TV poker, more and more people began to see Vegas as a means to satisfy their dreams of becoming a millionaire overnight. Additionally, ad campaigns like "What Happens in Vegas Stays in Vegas" helped lure millions of young singles to the Nevada desert for a weekend of debauchery. As Vegas transformed from a mere gambler's paradise to an adult candyland of clubbing, shopping, and golfing, casino operators erected billion-dollar resorts seemingly overnight to help meet the demand.
When LVS opened the $1.5 billion Venetian in 1999, a trend was established that led Vegas away from its family-friendly essence (created in part thanks to resorts like Treasure Island and Luxor) and into a world of excess and elegance. Soon after Venetian came the $600 million Palms which turned up the dial on Vegas' pretentiousness with its "VIP" privileges and "exclusive" nightclubs. Not one to be one-upped on the pretentiousness scale, Steve Wynn began construction in 2002 on a $2.7 billion casino which he named after himself. One of Wynn's biggest pulls was its full service Ferrari dealership, a far cry from the merry-go-round that brought people through the doors of Circus Circus in the 1970s.
Throughout all of this expansion, share prices of casino outfits exploded. MGM's stock shot up nearly four-fold in just three years. Harrah's Entertainment was taken private at $90 a share last year, a marked increase from it's price of $60 a share just 16 months prior. LVS went from $33 to $139 in a mere two years. Getting in on the fever just a little too late was Boyd Gaming. They began construction on a $4 billion resort called Echelon Place last year. Prior to beginning construction on Echelon, someone at Boyd Gaming would have been wise to ask, "how much money can people really blow in this city?" The project is now a giant eye-sore on the north side of the Vegas Strip; construction was halted this August on the realization that the Vegas bubble was ready to pop.
When the U.S. housing market crashed, Vegas was hit especially hard. Cities with recent, aggressive expansion were the ones most overvalued in the housing bubble. When the housing bubble burst, the Vegas market lost about 33% of its value. This plummet was only rivaled by the Miami and Phoenix markets. Lavish condominiums that were constructed during the height of the Vegas boom now sit vacant in face of a global economic slowdown.
At first, people thought Vegas would not be hit too hard by the economic slowdown. People reasoned that gambling may be recession proof. The reasoning goes, "if people have less money, they may try to make more by gambling," or "people are addicted to gambling and can't stop, like smoking." Both turned out to be patently wrong.
Others hoped that a drop in U.S. traffic would be supplemented by increased international traffic. The dollar's decline made it cheaper for Europeans and Asians to visit Vegas, as these parts of the world had not been hit directly by the housing bubble. This turned out to be wishful thinking as well.
Wynn Resorts and Las Vegas Sands were comically exposed to the Vegas bubble. After seeing what a success Wynn turned out to be, Steve Wynn started construction on a second hotel tower called Encore, an investment of $2.1 billion. Unlike Boyd's Echelon debacle, the construction of Encore was too far along to halt. Encore opens this February and will almost certainly not live up to its name. In an encore of their own, LVS made their Venetian property the largest hotel in the world by adding 3,068 rooms in the form of a new tower called Palazzo which opened earlier this year. LVS could sure now use the $1.8 billion it cost to build Palazzo in order to boost their chances of avoiding bankruptcy.
Bubbles come and go. Whether its tulips, dot com companies, or gambling resorts, the bust eventually happens and occurs swiftly and painfully. Kirk Kerkorian, the 91 year old founder of MGM, put it best as he saw his net worth drop from $20 billion to $2 billion in a year's time: "I guess I lived one year too long."