Archon Corporation: Betting on Its Real Estate

| About: Archon Corp. (ARHN)

The most recent recession hit real estate and gambling stocks very hard. Unfortunately for Archon Corporation (OTCPK:ARHN) those are the two areas which drive the company's revenues and the underlying value of the stock.

Archon derives most of its revenue from its Pioneer Hotel, Inc. subsidiary. Pioneer operates a casino and hotel in Laughlin, Nevada called the Pioneer Hotel & Gambling Hall. In addition to the hotel and casino, Archon owns various real estate located in Las Vegas, Boston, and Gaithersburg, Maryland. While many gambling and real estate stocks have at least recovered some of their losses, Archon's stock is still near its lows and is currently trading at $12.00 per share. Before the recession took hold, the stock briefly traded at over $50.00 per share.

I believe the stock is suffering from severely depressed real estate prices in the Las Vegas area, a struggling gambling operation and a lawsuit. Below I discuss the gambling operation and the real estate holdings in more detail.

Pioneer Hotel, Inc. (The Pioneer)

The Pioneer is a western architecture hotel and casino located on Casino Drive in Laughlin, Nevada. The Pioneer was built in 1982 on 12 acres, of which 6.5 acres are leased through a 99-year ground lease that expires in 2078. The company owns the remaining acreage. The property has approximately 770 feet of frontage on the Colorado River. There are four buildings on the property consisting of 50,000, 66,000, 54,000 and 30,000 square feet. The casino uses 21,500 square feet of the 50,000 square foot building. The rest of the space is dedicated to restaurants, bars, banquet rooms, administrative offices, a gift shop and a book making tenant. The other three buildings house the guest rooms for the hotel.

According to the company, the casino has 686 slot machines, 6 blackjack tables, 1 craps table, 1 roulette wheel and 5 other gaming tables. The casino has struggled over the last several years as competition has increased from Native American casinos. This has been compounded by a poor economy. Casino revenues have been in a steady decline since 2007 and suffered large setbacks as the economy deteriorated. Casino revenues have been cut in half since 2006. The company recently reported its first quarter ended December 31, 2010 and casino revenues had taken another big hit. Revenues from the associated hotel and food services have also been in decline. The company does not expect casino revenues to improve until there is material improvement in the economy.

Real Estate

1. Archon owns 12 acres in the Dorchester area of Boston, MA. The property contains several commercial buildings with a total of approximately 425,000 square feet. The property was acquired in 2001 for approximately $83 million. The entire property is leased by a singe tenant under a net lease which makes the tenant responsible for nearly all of the obligations associated with the property. The lease does not expire until 2020.

2. Archon owns approximately 27 acres of land located on the Strip in Las Vegas, NV. The property is located on the east side of Las Vegas Boulevard South and is just south of Sahara Avenue. The property was acquired in October of 1995 as part of a transaction that included the sale of its formerly owned Sahara Hotel and Casino. The property has not been depreciated and has a carrying value on the books of approximately $21.5 million. In 2006, the company entered an option agreement which allowed for the sale of the property for an amended price of $475 million. The optionee was required to make carry option payments. The company received these payments until the agreement was terminated in June 2008, due to the failure of the optionee to pay the required option payment. However, the company did receive several option payments, including the largest for $40 million in April 2007.

3. Archon has a property located in Gaithersburg, MD which is under contract to be sold. The selling price of the property will be $76.34 million. The company acquired the property in 2001 for $65.3 million. The property is 51 acres containing approximately 342,000 square feet of commercial office space. The buyer of the property is Montgomery County of Maryland. According to the contract, the sale of the property is to close on or before April 30, 2014. The property is no longer being depreciated and is carried on the books as an asset held for sale. Assets and liabilities associated with the property are approximately $54.7 million and $36.4 million respectively.

4. As mentioned above, the company also owns approximately 5.5 acres in Laughlin, NV which contains the casino, hotel and food service operations. The rest of the total of 12 acres containing the operations are under a 99-year ground lease that expires in 2078.


There is no doubt that the negative impact from the casino, hotel and food service operations in Laughlin and depressed real estate prices are weighing very heavily on the stock price.

In addition to the impact of The Pioneer and depressed real estate prices, the company is in a legal dispute regarding the redemption of the company's preferred stock in 2007 for $5.241. The Plaintiffs in the case believe the preferred shares should have been redeemed for $8.69 per share. There were 4,416,577 preferred shares outstanding. It would appear that a ruling in favor of the Plaintiff's in the case would have a material financial impact on the company. This is without a doubt keeping a lid on the price of the stock.

However, the company is pursuing claims against a third-partly law firm that drafted the Certificate of Designation in question and is also looking at its rights and the potential remedies it may have against other parties which participated in the issuance of the preferred shares. The dispute with the third-partly law firm has moved to arbitration where the company intends to pursue its claims. With the outcome of these disputes still unresolved, it does add significantly to the risk of an investment in Archon.

It is also important to note as an additional risk that the company is very closely held, with insiders owning 83% of the shares outstanding. Paul Lowden, the President and CEO, owns 81.1%. This can be a positive as it may align the goals of insiders with those of the minority shareholders. However, it also allows insiders to take actions that might enrich themselves without regard to the impact on the minority shareholders.

I purchased shares in Archon at the low-end of its 52 week range where the price remains today. I understand there are certainly legal and operational risks associated with the shares. However, I believe that at these prices, my downside is limited. An improving economy and real estate market should provide some additional support as well. Furthermore, I believe the company's real estate assets are just too undervalued to be ignored. I do not expect a quick move to the upside and view my investment in Archon as a long-term holding.

Disclosure: I am long ARHN.OB. I receive no compensation to write about any specific stock, sector or theme. I believe an investment in ARHN.OB to be highly speculative and not appropriate for all accounts. The shares of ARHN.PK are very illiquid and caution should be used when buying or selling shares. Limit orders are highly recommended.