The private-equity owners of the Venetian resort-casino and events center said operations have gone so well since the takeover from Las Vegas Sands Corp. in February that they want to issue a $620 million dividend and cited interest in acquiring additional regional and Las Vegas casinos for their portfolio.
During Apollo Global Management’s 90-minute appearance before the Nevada Gaming Control Board, board members questioned the wisdom of returning such a dividend so quickly and whether Apollo was taking steps to prepare itself for a potential recession. In the end, however, the three-member board recommended the Nevada Gaming Commission approve the distribution to Apollo’s shareholders, primarily pension funds and other institutional investors.
Apollo closed its purchase of the Venetian and Palazzo from Las Vegas Sands late last February following Commission approval. LVS sold the resorts, convention center, and adjacent land where the MSG Sphere is being built for $6.25 billion. VICI Properties bought the land, while Apollo acquired the operations and leases the property from VICI starting at $250 million a year.
Sonya Vermeys, a partner and gaming attorney at Brownstein Hyatt Farber and Schreck, told the Board that the acquisition was funded from Apollo equity capital and $50 million was allocated to the Venetian’s balance sheets to ensure the business was well capitalized after the transaction. Affiliates of Apollo also provided a first-lien revolving-credit facility to finance the ongoing capital needs of the Venetian, Vermeys said. It now plans to recapitalize the Venetian and distribute cash to equity holders and Venetian employees.
“This recapitalization plan is supported by the Venetian’s very strong financial position and the pending favorable financial transactions with J.P. Morgan Chase Bank,” Vermeys said.
Robert Brimmer, CFO of the Venetian, told the Board that the property has had an “exceptional start” over the first eight months of ownership, is “well above our expectations,” and is performing sooner than expected. The proposal for dividends “is a reasonable financial transaction to undertake,” he added.
“We’re run-rating north of $600 million of (adjusted earnings) for the business relative to 2019,” Brimmer said. “We’re up 27%. This is a very broad-based recovery across our business. You’re aware of the strength in the gaming numbers, but the hotel, food and beverage, and most importantly our meeting and convention business is recovering very nicely. To us, it appears to be a very durable recovery and our most recent numbers for October were the best numbers we’ve had in the last 10 years.”
Brimmer said they’ve made a number of improvements to drive the business, such as using their bars and four theaters more and investing in gaming capacity (adding slot machines) to capture demand. The hotel has one of the smallest gaming floors per room and Brimmer said they’re trying to expand that.
“There have been market tailwinds,” Brimmer said. “Everyone in the marketplace has seen tremendous growth. I think what we’re doing is differentiated and we’re gaining revenue and profit share.”
The Venetian has more than $300 million in excess cash on its balance sheets that it doesn’t need to run the business, nor does it have immediate investment needs, Brimmer said. It’s earning a 2% interest rate, which is below investors’ cost of capital, he said.
The Sphere entertainment venue will open in 2023 and benefit the property and Apollo is looking to upgrade rooms and other spaces. The distribution doesn’t impact any capital investment or ability to deal with an economic downturn, Brimmer said.
The company plans to invest more than $1 billion in the property in the next three to four years, according to Apollo board member Daniel Cohen.
Brimmer also brought up potential acquisitions. “We’re always looking for M&A (mergers and acquisitions) to create network effects around the Venetian asset. We think it could be a marquee asset you can build around with other regional assets or Vegas assets, so that’s something we’re analyzing as well.”
All three Board members questioned Apollo executives about making a distribution so soon after the takeover and if they might have underestimated performance.
“When the capital structure was put in place, it was based on a very different time in the world with a business that had negative cash flow,” Brimmer said. “It was unclear how quickly the business would recover and in the initial underwriting, we assumed it would be a multi-year recovery. We’re several years ahead of what we anticipated and even this year, we’re exceeding our business plan by more than 15%.”
Board member Phi Katsaros said the Board doesn’t have a lot of history in dealing with dividend requests from private-equity firms and fretted that it’s largely funded by debt rather than cash.
“We have to sit here and decide at what point would be too much,” Katsaros said. “I don’t want to tell you how to run your business, but on the other hand, we have to be mindful, because we have regulations and we have to ask at what point you put the financial stability and the operation at risk. Are we looking at another distribution here in a couple of months?”
Cohen said that wouldn’t be the case and that they never contemplated the distribution when they closed the sale in February. The casino was losing $1 million a day during the pandemic, but they’ve gotten comfortable with the business and seen how much opportunity there is compared to when they underwrote it.
“When we closed this transaction, we bought the property for $2.25 billion and we put in $1 billion,” Cohen said. “In a normal environment, we would have probably put in 30% of the purchase price in a traditional leveraged buyout — $500 million to $650 million. That’s roughly where we’re going after this transaction. We’re not so much taking a dividend as we are right-sizing to the point where it should have been, had the market been more normal. While it’s a $600 million-plus distribution, it’s really $450 million of debt and the rest from cash generation that wasn’t anticipated at closing.”
Board Chairman Brin Gibson said they have an obligation to protect the reputation of the industry and ensure “you’re not signaling the wrong thing to the marketplace,” as well as to the people who work for the Venetian and live in the state. He said he’s concerned about the property taking on debt to pay the dividend and noted that the Federal Reserve raised interest rates on Wednesday. “There’s an uncertain future,” Gibson said.
Board member Brittnie Watkins asked the Board if it wanted to consider a $520 million distribution instead, since that was part of the original Apollo proposal before it changed at the last minute, given improvement in the financial performance. The three-member Board instead decided to go with the full amount.
Vermeys said changing the distribution would send the wrong message.
“We do want to encourage private equity to come into Nevada and put their dollars here,” Vermeys said. “Approving this application sends that message to the market.”
Gibson said a distribution this quickly would not be an acceptable practice in a normal marketplace, but then voted with the other members to forward the recommendation to the Commission.