Caesars Entertainment has started the process of selling one of its Las Vegas Strip hotel-casinos, which could come as early as this spring, but the company said it has no interest in bidding to build a New York City casino or taking on any new land-based projects at this time.
CEO Tom Reeg outlined the strategy Tuesday during a fourth-quarter earnings call in which he reported record fourth-quarter adjusted earnings and margins in both regional and Las Vegas properties. He also stated that prospects are strong for 2022 after omicron clipped revenues in December and early January.
“We expect to sell a major Strip asset and launch that process in early 2022,” Reeg said. “That it is in motion and the next time we talk to you about a Strip asset sale it will be to announce that sale.”
That sets the stage that it could be announced by the first-quarter earnings call in May.
Reeg said VICI Properties, the real estate investment trust, has the right of first refusal when Caesars sells a Strip property. The Flamingo Las Vegas and Planet Hollywood are considered two of the prime candidates by some Wall Street analysts.
“With that, we can invest in digital and (ongoing) projects that are going to generate significant returns and we can significantly de-lever this year,” Reeg said. “We expect to accomplish all of that and we’re excited to keep the momentum going in 2022.”
Reeg said Caesars would lose 3,000 to 4,000 rooms with the sale and be down to 16,000 to 17,000 rooms in the market.
“That’s a quarter of our capacity, so it will clearly have an impact on our ability to yield the remaining rooms,” Reeg said. “Part of this is, where do those rooms come out of our system? You should expect that to be a factor in terms of how we decide which (casino) to divest. The less we need to rely on (online business) to fill our rooms, the better both from customer-quality and ultimate-profitability perspectives. Removing those rooms from the system, while introducing those customers who came in through Eldorado Resorts, should have an extremely positive effect on rates once all of the deals are closed.”
Eldorado Resorts closed on its acquisition of Caesars Entertainment for $17.3 billion in July 2020.
Reeg agreed with an analyst view that “time has been an ally” in pursuing the sale.
“No question,” Reeg said. “If you look at the last two trades (Encore Boston Harbor and the Mirage in Las Vegas), it’s an exceedingly good time for anyone who wants to market a center-Strip asset. We feel like waiting to pursue this now was the right decision.”
Reeg said with the synergy from the Caesars and Eldorado merger, they bought it for less than six times adjusted earnings. The Las Vegas casino sale will bring back 15%-plus of those proceeds onto the balance sheets.
“We couldn’t be more pleased with the position we are in, in terms of selling the Strip asset,” Reeg said.
As for future projects, Reeg called New York (where there’s a plan to seek bids for three casinos in the New York City region), a “difficult regulatory state” and that it will be extremely challenging to build there, especially with the expensive license fee. Caesars has a digital presence in the state.
“It won’t be enough to pick a site and build a casino. There have to be other investments there as well. I would say on our balance sheets, it is extraordinarily unlikely we make a material investment in New York land-based.”
Others take a different perspective for a variety of reasons, Reeg said. If one of those developers wants to talk to a manager that brings 65 million Rewards members and a powerful brand, Caesars “would be interested in having that discussion,” he added.
“Away from New York, we’re doing the Columbus, Nebraska, project, which is a very small tract in the middle of the state that helped us get into digital there,” Reeg said. “There are other things kicking around that might be interesting, but it’s unlikely that greenfield new license activity becomes a huge stock of our time from Caesars standpoint.”
As for Dubai, where the company has Caesars Palace Dubai, a non-gaming hotel, Reeg said the original plan for Caesars was to have gaming at the property if legalized. In January, Wynn Resorts announced plans to open a resort in the United Arab Emirates that will have a casino.
“In Dubai, if there’s an opportunity, you should expect we would be active, because our brand and building are already open,” Reeg said.
Reeg was asked by an analyst if, in 2023 when capital expenditures wind down, balance sheets are de-levered, and cash flow is freed up, Caesars would be willing to deploy those funds.
“I would say it does seem to be a core competency of ours to squeeze more cash flow out of assets owned by others,” Reeg said. “We recognize that. The larger you get, it becomes tougher from an antitrust perspective, but that would certainly be a consideration. Until we (move to adjusted earnings positive) in digital, I don’t anticipate any material buy-side (mergers and acquisitions).”
President and Chief Operating Officer Anthony Carano said 31 of 52 properties during the fourth quarter set records for the highest adjusted earnings, while 35 set records for the highest adjusted margins.
Demand was strong during the fourth quarter in Las Vegas, with a record $494 million in adjusted earnings, including the rental of the Rio Las Vegas. Adjusted earnings were up 33% compared to the fourth quarter of 2019, Carano said.
Occupancy was 86% during the fourth quarter, with weekend occupancy at 94% and midweek at 83%, Carano said.
“Despite an increase in COVID cases in December and into January, we remain encouraged by booking trends in 2022 and beyond,” Carano said. “While group attrition remains elevated, we began to see conventions return to Las Vegas in the back half of 2021 and the segment represented about 10% of occupied room nights, a dramatic improvement from the first half of 2021. In the fourth quarter, we booked a record $160 million of new business in the group segment company wide.”
Reeg estimates omicron cost the company somewhere between $25 million and $50 million in the fourth quarter.
In regional markets not impacted by COVID restrictions, construction disruption, or property closures, operating results remained strong, Carano said.
Reeg said Caesars was on track for an all-time record in Las Vegas until the last two weeks of the quarter, when omicron spiked across the country and “nipped us in the bud.” It continued to impact January with occupancy about 75% in Vegas, but has picked up to 80% in February. March is expected to be in the mid-80s, he said.
Cancellations in group bookings in Las Vegas peaked in early January and have been coming down since, Reeg said.
