Las Vegas Sands: Sustainable in 2009?

With the final pricing news out Friday from Las Vegas Sands’ (LVS) massive preferred stock, common stock, and warrant offering, I finally feel like there’s enough “accurate” numbers available to determine whether the casino & resort operator can make it through 2009.

Big prizes certainly await shareholders if this modern-day Spruce Goose can make it to 2010 without defaulting on loans or breaching debt covenants that call for a 20% capital ratio to be maintained by the company (for more details, see my earlier post).

I’ll be including the estimated future costs (from the LVS 8k dated November 10) to complete the various construction projects through 2009; you’ll see the amounts underlined as they come up in discussion. At the end we’ll look over the totals versus the cash raised, and see if we’ve got a live investment thesis here.

Adelson’s All In

For now allow me to go back to the shareholders, specifically CEO Sheldon Adelson, who still owns over 50% of the company directly or via warrants after exchanging $475 million of his family’s 6.5% convertible notes due 2013 into 86.3 million shares of common stock @ $5.50 per share, the same price as the general secondary.

That’s another $475 million in forgone claims during a bankruptcy for the Adelson family, just in case anyone is still questioning the amount of skin the man has in his own company. It’s all-in for Adelson, who I believe has set a record for the most wealth lost by one person in one year (I doubt he’s called Guinness).

Offering Details

LVS was able to raise just over $2 billion from the utterly dilutive offering, which bypassed shareholder approval on the grounds of “immediate need”. But most shareholders who have been around for the past months know the dire state of affairs, and understand that we need to graciously accept whatever table scraps we can get to feed this dog. And I say that with love, because this dog could quite easily grow up to be the biggest, strongest alpha dog in the neighborhood.

Las Vegas Operations

Given the state of the U.S. consumer, it’s likely that Las Vegas operations -- consisting of the Venetian & Palazzo Casino / Resorts, and the Sands Expo Center -- will continue to report weak numbers, even negative growth year-over-year on some metrics. The Palazzo has been open for nearly one year now, and helped contribute to casino revenue growth of 36% from the year-ago period.

But the more important metric of revenue per available room (RevPAR) fell for the Venetian, to $191 from $233 a year ago. The Palazzo generated $218 RevPAR, down from over $240 sequentially.

The properties will add valuable cash flow to operations, but it is instantaneously sucked up into other construction, capex projects, and interest payments, to the extent that Vegas operations as a whole reported just over $6 million in GAAP income during the 3rd quarter - a paltry contribution considering the scope of the company’s presence on the Vegas Strip.

The only major construction project in Vegas is the St. Regis Residences build, which has been put on hold “indefinitely”. Las Vegas Sands will spend $95 million to finish just one portion of the project in Q1 of 2009, as it can begin providing lease income right away.

Sands Bethlehem

No, that’s not a Biblical desert, but a casino property going up on the site of an old Bethlehem steel plant in Pennsylvania. This project will be the company’s first foray into the American Northeast, and management has decided to complete just the casino portion for now, along with completing the parking structure. This stripped-down version should open sometime in the 2nd quarter of 2009, and will cost about $430 million to finish.

Cotai Strip Development

In addition to the $2.1 billion of capital from the equity offerings, we also heard news last week that LVS is in talks to secure another $2 billion through a syndicate of Asian banks. This capital would be used to resume Phase 1 construction of two lots on the Cotai Strip, parcels #5 and #6.

As of the company’s earnings release, construction on these two parcels has been halted, and the nearly 11,000 workers laid off until fresh financing can be obtained. While this is purely my speculation, I wouldn’t be surprised to see these talks stall out. Maybe in six months something will come about, but for now LVS is spending over $400 million just to get the proverbial tarp rolled over the lots ... expect them to collect some dust in the short term.

Four Seasons Macau, the second property to open on the Cotai Strip (following the Venetian Macau), opened during the 3rd quarter and provided 34 days of results in the period. This more upscale resort boasts an ADR $440, but was only about 30% full during its opening weeks. Management will be sinking another $463 million into completing the private apartments adjacent to the complex, to be completed over the next few quarters. This project is getting priority because the assets could be sold or sliced off in a financing effort once complete.

Venetian Macau a Lone Bright Spot

The Venetian Macau is the largest casino in the world, and it reached its one year anniversary during the third quarter. As the first and flagship property on the Cotai Strip, it’s vital for the Venetian Macau to provide revenue and earnings growth. Trends remained strong thanks to increased ferry traffic (more on that later) which brought in 15% more visitors to the Venetian in September and October versus 2007. RevPAR was $194, versus $180 in the 2nd quarter.

This growth comes in the face of stiff travel restrictions being put up by the Chinese government. In an effort to stem money laundering out of China via Macau casinos, China has limited citizens in the Guangdong Province to only one visit to Macau every three months. China actually upped the visa restrictions twice in one month over the summer, but there are rumors that the restrictions might be relaxed to keep the Macau region from falling into recession.

Singapore Development - Early Opening Sighted

In another positive note, the government of Singapore has reiterated its support for getting the Marina Bay Sands casino/resort up and running, and Singapore has also granted permission for LVS to open the project in phases. So we’re likely to see the casino and retail shops open sometime in 2009, with full project completion (including 2 hotel towers and convention facilities) targeted for Q1 of 2010.

Marina Bay Sands is going to be a huge casino (1,000 tables, 1,400 slots), and Adelson & Co. are banking on (pun intended) the complex being an immediate and large contributor to earnings. The best carrot for getting the casino open is that the projected tax rate on gaming revenues is only 17.3% in Singapore, versus a whopping 39% in Macau. When Marina Bay is operating at full capacity, the tax benefit alone could add over $400 million to income per year, per the 8k filing.

Potential Catalysts

The critical mass concept keeps getting to me. I am starting to see in the operating results the positive effects of higher ferry traffic from the Cotai Jet Service, which can now funnel over 20,000 people a day into the Cotai Strip from the Chinese Mainland, most arriving from Hong Kong.

This transportation infrastructure was just one of many important pieces you’ve got to get in place before you can build a new city from the ground up. Because that’s precisely what Adelson is trying to accomplish with the Cotai Strip. Located just miles away from Macau itself in the Pearl River delta region of Hong Kong, Cotai is a chance to build a “Westernized” new Vegas Strip, and Adelson has plans to build a capacity of 20,000 rooms when all is said and done, with international brands like Shangri-La, Traders, Sheraton, and St. Regis.

And with the addition of the 100 luxury shops within the Four Seasons Resort, Cotai can add over 750,000 sq ft of high-end retailing and luxury amenities to its list of attractors, not just table games and slots.

The Brass Tax

Now that I’ve already dragged on two pages longer than expected, let’s figure out how bloated this Spruce Goose is, keeping in mind that the 20% equity measure (or rolling operating income) must continue to be met.

Given that the numbers are constantly in flux, let’s be conservative and assume that the company’s LT debt will end up around $11 billion (it’s currently $10.35B). So we’re talking about roughly $2.2 billion in either capital or operating income needed to support it; company-wide operating income from the last quarter was less than $25 million.

While I’m not expecting operating losses in coming quarters, I’m not expecting a rebound either, so my safe estimate calls for less than $500 million in operating income for 2009. That leaves a shortfall of between $1.5 and $1.7 billion in capital that must be able to essentially “sit around” on the balance sheet. The $500M number could prove very low if Bethlehem opens on time, if visa restrictions are relaxed, or if the broad economy makes an actual rebound in the second half of the year. One, or even two of those might happen, but management may also have cost overruns of a billion or more next year, so I choose to leave all the “ifs” out of the equation.

Cash Call

As of 9/30, there was $1.28 billion unrestricted cash available on the balance sheet, along with $1.75 billion available under the Singapore facility that has already been allocated to construction there. In addition, LVS says it will need another $261 million of capital to put towards completing Marina Bay Sands.

The sum of all the costs outlined above comes to $1.676 billion, plus another $200 million “buffer” for ancillary capex coming from me. Rounding it all off, this is the big picture:

Capital Needed To Retain Covenants: $1.7B
Capital Needed For Capex                   $2.0B

Cash on hand plus Capital Raised:  ($1.28 + $2.1) = $3.38B

We’re still $320 million short, an amount I see Las Vegas Sands being able to finance via a deal to sell part of its retail presence in Cotai or in Vegas, both of which have been discussed by analysts in recent months. But we’re close - within rounding errors - and much closer than the $2 billion shortfall that worried the company’s auditor just a few weeks ago.

Parting Thoughts

I added LVS shares to the Secular Trends Portfolio on October 17th, when the stock was just over $13 and the market cap was roughly $5 billion. Today, there are twice the number of shares in the nominal/implied base, and the market cap is a scant $2.1 billion.

Since this piece was never designed to highlight my market timing ability, I’ll humbly disclose that I knowingly reached out for a falling knife. But wounded hand and all, I still feel the potential upside from this holding remains exponential.

I haven’t dared to mention “property values” until now, what with us smack dab in the middle of the worst deflationary period in decades…..But if you believe that Vegas will be around in the future (and around the world, via Cotai and Macau), you can easily come up with breakup values well in excess of the company’s enterprise value of $12.5 billion.

This final brain tickle comes from Las Vegas Sands itself, which outlines the potential run-rate operating income that can be achieved when all the projects are up and running. The company estimates that can happen in 2012. The number? $2 billion in operating income - not including parcels 5 and 6 - which would theoretically be combined with a very low tax rate.

A long position here requires huge reward potential to compensate for the very real threats to current equity holders. If the company can execute and stay tight within its budgets, the reward seems within grasp.

Disclosure: Author does not hold a position in LVS.

Comments

[Potash:]

well i baught 1000 shares for a long time

2008 Nov 18 08:16 AM