Wall Street investors continue to be interested in investing in quality casino-resort projects despite tight capital markets, but operators will pay a premium in markets like New York City, where there will be a lot of competition for customers.
New York has authorized three casino licenses for the downstate region centered on New York City, for which 11 applicants are vying, including Caesars Entertainment, Wynn Resorts, MGM Resorts International, and Las Vegas Sands.
“A U.S. Treasury is a risk-free investment at 5% and if I’m thinking about investing in a brand-new New York greenfield project that costs $5 billion, that’s going to require a pretty big premium above 5% for me to get excited,” said Howard Wang, managing director at Ares Management during a panel session at the Global Gaming Expo. “It’s just a matter of whether the company is able to pay that interest rate for a specified amount of time.”
Wang said the commercial mortgage-backed securities (CMBS) market and bank lending for new projects “has sort of dried up.” Other asset classes, like leveraged loans, are typically at the top of the priority list and secured by the collateral of the property, and “if for some reason things go wrong, they can take the keys to the casino.”
High-yield bonds are below that in terms of priority, but the gaming index today for high-yield bonds is about 8% for a diversified operator, Wang said.
“If you have a Caesars, it costs a little less money. If you have a single property, or two or three, it costs a little more,” Wang said. “Eighteen months ago, that might have been 4% to 5%. The capital will be there at a price and as long as the projects are compelling, you’ll see capital emerge.”
During the last 12 months, there have been a lot of headlines about the private-debt market, Wang said. These are investors who are less concerned about liquidity and don’t care about credit quality. Instead, they’re more focused on price and structure.
“That’s a new source of capital,” Wang said. “A lot of these new investment managers are starting to provide that. If the capital project is compelling, there will be a price and funding waiting on the sidelines.”
Teddy Swigert of Santander Corporate & Investment Banking said not only will there be big projects in New York, but Chicago as well, and the amount of capital that’s necessary requires “some sort of nuanced layering of a full capital stack and multiple players. When you can start to slice up the capital stack better, you get REITs participating and that will be a driver in this and other participants willing to trade certainly for yield.”
Interest rates at today’s elevated levels make funding giant casino projects even more difficult, Swigert said.
“The saving grace is these are compelling projects that raise the bar for projects to get financed, When you’re in massive markets that make sense, the capital will be there. There’s opportunity for everybody,” Swigert said. “On the other side, less compelling projects and ideas have to take a seat before coming to the market to get capital.”
Raf Mercado, vice president in the investment banking division at Goldman Sachs, said a lot of projects look great on paper, but their risks need to be evaluated. Besides New York, where the timeline is unknown, MGM has a project in Japan for 2030. Wynn Resorts is building a resort in the UAE. And there are ongoing projects in Macau and Singapore.
“A lot of these are across the spectrum of various degrees of execution risk,” Mercado said. “Capital is there if the project is compelling enough, but as we get closer to the project and we learn about tax rates in New York, that’s where uncertainty gets introduced. Once we get to that point, there will be a reevaluation of consumers and the economy and whether any macro events are expected to be ongoing or are ongoing come 2024, 2025, and 2026.”
Swigert said there’s been a view that gaming “is getting too concentrated or that there’s “less green territory out there.” While he said that’s “somewhat true,” casinos could happen in states that have been talking about them for years, such as Texas and Georgia. Besides unsaturated areas, there’s a need for replacements for aging facilities, he said.
“Chicago has had gaming for decades, but still major projects are being built here,” Swigert said. “It’s slowing down a bit, but the growth continues as new projects come up. People out there like more convenient gaming and will show up when these get built.”
In the end, Wang said it will come down to a risk-reward exercise. If those allocating capital feel they’re getting paid properly for the risk, they’ll invest. But he reiterated that it will “cost a pretty penny” for the New York City projects.
“If I’m the first casino in Texas, I’m sure a queue of investors will be waiting to jump on that,” Wang said. “At the end of the day, I’ll look at anything, though what I think is the right price may not be what other investors think. Gaming has been around for a while and a lot of investors have invested in gaming properties all over North America and internationally, and it will be pretty easy to find that equilibrium price for a project to get done. It will be more of a function if the company is willing to pay that price.”
