Stevens’ acumen questioned; Deejay era on downturn

A report has surfaced questioning the financial viability of $800 million Circa (written back when it was still 18 Fremont). In what
seems like a preliminary shot fired across Derek Stevens‘ bow by Unite-Here, it asserts ” the project is likely to generate low- to mid-single-digit returns on investment.” In case you’re wondering, that’s not good. Indeed, the Downtown casino market is a tiny fraction of what the Las Vegas Strip makes and a nearly billion-dollar investment bespeaks either great confidence or obliviousness to risk factors. (The union is clearly on the side of the latter.) Stevens is called for a “lack of institutional investment experience” and due diligence.

Noting that Boyd Gaming has quietly preparing to renovate the Fremont Hotel (or so its sources say) the union adds “the sheer size of ’18 Fremont’ still comes as a surprise.” It also questions the published cost of Circa, noting city documents that place the budget at $1.1 billion. Using Nevada Gaming Control Board figures for Downtown casinos, the union extrapolates a $39.5 million annual cash flow for Circa, giving a measly 3.6% ROI. (Even at $800 million you only get to 5% ROI.) In other words, Circa would have to perform well above average for its market. Unite-Here questions whether Circa could even service its own debt. To be fair to the union—which has issues with Stevens, to put it mildly—its estimate of hotel revenues is higher than Stevens’ and it also has published an “Optimistic Model” in which Circa grosses $395 million for $98 million in cash flow, which brings it into the 9%-12% range of investment return, not great but much closer to what Wall Street likes to see. To get to 15% ROI, Circa would have to be a blockbuster, bringing in $165 million in annual cash flow.

That’s Mirage-sized money. Writes Unite-Here scathingly, “To generate that amount of hotel revenue with 18 Fremont’s 777 rooms, even assuming 100% occupancy for the year, the average daily room rate will have to be $658.16.” Ouch. The union also estimates that Circa’s casino floor would have to generate $1,816 per square foot versus a Downtown average of $1,213. Mind you, that number is skewed downward by bottom-feeding Downtown casinos. We’d need to know what the Golden Nugget averages to get an idea of how Circa will do. Then Unite-Here gets into the juicy stuff, getting in some digs at the experience of CFO Susan Hitch and questioning the ability of Stevens’ various business entities to swing Wall Street financing. Obviously, Unite-Here’s endgame is to cow Stevens into unionizing Circa—and punish him for holding out so long in last year’s labor talks—but I’m not sure this is a Dale Carnegie-approved method of doing so.

* In the same week that “MGM 2020” went all Ayn Rand on the workforce, Livability.com named Las Vegas one of the top 100 places to live in the United States. A thousand Millennials were surveyed and their “top responses — affordability and job

opportunities — were factored into this year’s ranking criteria, including, for the first time ever, a cap on housing costs.” Continues the press release, “Can residents still enjoy the entertainment and amazing food that draws millions of tourists to this city every year? Of course. But look beyond The Strip, and you’ll find a culturally diverse, tight-knit community that’s obsessed with exploring the stunning natural areas surrounding the city.” Well, ‘obsessed’ may be putting a little strongly and there are certainly plenty of folks who enjoy scaling the escarpment out at Red Rock Canyon.

The future of the service economy is starting to look a little bleak but “Las Vegas earned high scores for diversity, amenities (obviously — good luck running out of things to do here!) and economics, thanks to a strong local economy with a steady stream of job opportunities in hospitality, marketing and, increasingly, technology.” That may not hold out much upward mobility to the average Las Vegan but we can certainly import it.

* If you remember the DJ insanity that accompanied the opening of Hakkasan, well the era of the $250K/night deejay has passed. Credit Suisse analyst Cameron McKnight reports that casinos’ entertainment and music expenses are around $270 million, compared to $335 million in fiscal year 2014 (they were $182 million in fiscal 2008). Such an intense storm of spending was bound to blow itself out sooner or later and would appear to be ‘later’ in this case.

* Ocean Resort may have some new cost issues. Seventy-four percent of its workforce has signed card-check forms indicating their support for unionization. The paperwork was approved by the New Jersey State Board of Mediation, an outcome that Unite-Here President Robert McDevitt called “really satisfying.” Ocean Resort withheld comment but a union election can hardly be a welcome prospect when you’re struggling to make your nut. Meanwhile, unionization talks at Hard Rock Atlantic City are proceeding quietly.