After Caesars challenges, Apollo allowed to operate on the Strip again; eyes Venetian/Palazzo room expansion

February 18, 2022 12:07 AM
  • Buck Wargo, CDC Gaming Reports
February 18, 2022 12:07 AM
  • Buck Wargo, CDC Gaming Reports

The Nevada Gaming Commission Thursday approved a private-equity company taking over the operations of the Venetian, Palazzo, and adjoining convention center, with plans to enhance the property, including the possibility of additional rooms.

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The Gaming Commission signed off on the Las Vegas Sands Corp. selling the resorts, convention center, and adjacent land that includes the MSG Sphere for $6.25 billion. VICI Properties Inc. will own the land and Apollo Global Management will operate and lease the property from VICI, with rent starting at $250 million a year. The deal is expected to close in a matter of days.

The approval came after a lengthy discussion between the commissioners and David Sambur, co-head of private equity at Apollo. Sambur addressed their concerns that Leon Black, a founder of Apollo and former CEO and chairman, would have no role with Apollo and the Las Vegas properties despite his 11.9% investment interest.

Black has been under the spotlight for his one-time business relationship with Jeffrey Epstein, who was later convicted of sex offenses and committed suicide in prison. In 2021, Black’s former love interest accused him of rape and harassment, accusations he denied.

Commissioners said they were satisfied he would play no role with Apollo.

“I was concerned about self-policing and the decision of one person who is the target of bad press and allegations. I just wanted something in place that the well-being of the company and reputation here in Nevada are being safeguarded and protected,” said Commission member Ogonna Brown, expressing her concerns and those of the other members.

The Commission spent less time talking about Apollo’s past experience in Las Vegas with its former ownership of Caesars Entertainment, which Sambur described as a “long, protracted, and arduous bankruptcy.” He said Apollo bought Caesars at the top of the market just before the Great Recession unexpectedly hit and hurt gaming and tourism to the point it couldn’t recover based on the investment. It’s buying the Venetian and its properties at the bottom of the market during the COVID-19 pandemic, he added.

“One of the questions we get asked is why won’t this happen again,” Sambur said. “I couldn’t think of two polar-opposite transactions. Yes, they’re Italian-themed casino resorts in Las Vegas, so there’s a similarity, but really, everything is completely different for this transaction, most notably the capital structure and the timing.”

The Venetian deal comes with $18 million in interest expenses, while Caesars was saddled with more than $2 billion, a full 60% of the company’s annual earnings, Sambur said. It’s 5% with the Venetian deal. They’ve also learned from other successful investments in the gaming industry since then, he said.

“The Venetian transaction took into account a very low level of earnings and cash flow that the property was generating at the height of COVID when the transaction was signed,” Sambur said. “We designed the capital structure to allow the business to operate for significantly long periods of time under arduous conditions.”

As part of the transaction, Sambur said Apollo enlisted VICI real estate investment trust to buy the land in order to generate the more than $6 billion the Las Vegas Sands Corp. sought in the deal. No traditional debt financing was available, he said.

“I’m looking for parallels between the Caesars experience and what we face here,” said Commission member Ben Kieckhefer. “I look at our economic challenges and uncertainty over a pandemic and what the economy will bring us that we can’t predict at this time. I think the scenario that Apollo is walking into here is vastly different based on the financing in place. The debt load is worlds apart. In the worst-case scenario, what happens is the Sands takes back the Venetian and the Palazzo. I believe the goal of Apollo to increase the value and profitability of the Venetian and Palazzo is good for our city and state.”

The property has 7,000 rooms, 225,000 square feet of gaming space and 2.3 million of meeting space. The MSG Sphere will open in 2023 with 17,500 seats.

“The Venetian is an irreplaceable iconic asset,” Sambur said, referring to it as the largest resort in the U.S. “When we got the call that they were interested in selling, despite the fact that it was in the middle of COVID, we really did believe this was a once-in-a-lifetime opportunity to buy an amazing asset. If there was any property that deserved to be purchased, it would be this.”

Business has recovered more quickly than they expected when they signed the deal with Las Vegas Sands in March, Sambur said. While the convention business isn’t back to normal, the financial performance is in excess of 2019 levels and much better than the money-losing position in March 2021, and it’s only going to get better, he added.

“We think the real opportunity is revenue enhancement and performance improvement,” Sambur said. “We have identified numerous opportunities to improve the property, some of which will require capital and some won’t. There’s an opportunity in entertainment, food and beverage offerings, an opportunity to grow the room base, and an opportunity to renovate the rooms. We see some further opportunities, like potentially M&A and potentially getting the property into online gaming, which is an incremental opportunity. We think there are customer-relationship marketing opportunities as well.”

The enhancements could also include new gaming facilities and experiences and added convention space.

The properties had four theaters open before the pandemic and Sambur said Apollo is considering ways to “improve the entertainment footprint.” The opening of the MSG Sphere in 2023 will drive “substantial traffic and revenues” to the property around their shows, he said.

“We’re pretty excited about that, and that’s a process that is going to start in earnest post-closing,” Sambur said. “I think there’s the potential for more rooms on the property, especially to support the convention business when it comes back.”

Apollo is focused on maximizing the equity value and the Venetian won’t have to compete with other properties, like it did when it was in the LV Sands portfolio and its focus on Asia.