Monday’s announced $516.3 million sale and leaseback of the Rio Hotel and Casino in Las Vegas may not be the final solution for the property that has been the subject of sales rumors for much of the past 10 years.
One analyst said the buyer might be thinking of another use for the Rio and the site west of the Las Vegas Strip near Station Casino’s Palms Resort and Boyd Gaming Corp.’s Gold Coast property.
IC 3700 Flamingo Road Venture LLC was listed in a Securities and Exchange Commission filing from Caesars as part of the transaction. The company is controlled by a principal of New York-based Imperial Companies, which has traditionally focused on residential and other hospitality properties.
“We are not aware of any meaningful gaming exposure,” SunTrust Bank gaming analyst Barry Jonas told investors in a research note Monday afternoon. “We would expect Imperial to reimage the property and its land bank potentially with a wider non-gaming focus and/or the use of third-party partners.”
Caesars, which is in the process of being merged with Eldorado Resorts in a $17.3 billion deal, the biggest in gaming history, said it will pay $45 million in annual rent under a lease agreement for at least two years.
According to the SEC filing, the lease provides the landlord with a one-time renewal option for an extension of up to 12 months. IC 3700 Flamingo Road Venture will need to exercise the renewal option “or before the end of the first year of the initial term.”
“We see it unlikely the management contract option is exercised,” Jonas said. “We believe this was structured to allow more time for the buyer to pursue strategic redevelopment options as opposed to more traditional sale-leaseback transactions.”
Caesars hopes to close the sale of the Rio by the end of the year, pending shareholder and regulatory approval. The Eldorado-Caesars merger is expected to close next Spring.
Eldorado CEO Thomas Reeg said in June the Reno-based company expected to sell one or two of Caesars’ nine Las Vegas Strip-area resorts. The company hopes to achieve $500 million in cost savings in the first year after the sale closes.
A sale-leaseback of the Rio takes the resort off the books and helps in the process to lower a portion of Caesars’ nearly $9 billion in long-term debt. However, analysts cautioned the figure won’t be a large number.
“Importantly, we believe this transaction is incremental to management’s (one-to-two) Strip asset divestiture target, which should be more deleveraging given higher purchase multiples,” Jonas told investors.
Shares of Caesars closed down 5 cents or 0.42% Monday to end the day at $11.85 on the Nasdaq. Eldorado shares closed at $42.60 on the Nasdaq, down 58 cents or 1.34%
Jefferies gaming analyst David Katz told investors the Rio sale “should be viewed as a positive catalyst” for both Caesars and Eldorado.
“The companies have indicated plans to divest in regions with significant overlap, which includes Las Vegas,” Katz said. “The result should prove to be deleveraging post the payment of rent.”
Katz added the Rio has been “challenged” due to its need for capital improvements.
“We expect there should be further asset sales pre-and post-closing, which (reduces the debt of) the combined entity and reduce exposures in certain markets,” Katz said.
Deutsche Bank gaming analyst Carlo Santarelli said Eldorado’s management is participating in the Deutsche Bank Leveraged Finance Conference Tuesday in Scottsdale, Arizona.
“We hope to have more following our meeting,” he told investors.
The Rio opened in January 1990 as a Brazil-themed resort. The property has 2,522 rooms. Caesars’ predecessor Harrah’s Entertainment acquired the Rio in 1998 for $880 million in stock and assumed debt.
Since 2004, the Rio has been home to the World Series of Poker, which runs for seven weeks from late May to the middle of July. This year’s tournament drew a record 187,298 entries. The World Series of Poker is credited with boosting the Rio’s visitation.
The tournament will remain at the Rio next year but may depart – possible to the under-construction $375 million Caesars Forum, a 550,000-square-foot conference and events center, being constructed behind the Linq on the Strip.
Howard Stutz is the executive editor of CDC Gaming. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
