Thursday, May 9, 2013

Las Vegas Sands Has REIT Possibility


Las Vegas Sands Corporation (NYSE: LVS) is an integrated resort developer that offers world-class casinos, entertainment, restaurants and convention facilities. The company owns a majority share of Sands China Ltd, which currently owns an array of properties on Macau's Cotai Strip, including the Venetian Macau, Sands Cotai Central, and the Four Seasons Hotel Macau, as well as the Sands Macau. 
The company currently owns and operates luxury real estate in the heart of its Macau operations. This real estate is home to the world finest brands such as Coach, Calvin Klein, Louis Vuitton, Burberry, Lacoste, and the list goes on and on. This property is some of the most sought after in the world due to the limited supply and the concentration of wealthy Chinese patrons who flock to Macau.
In the latest earnings report, the company disclosed the most recent figures regarding its Asian Mall Operations. In the report, the company announced it has 94.4% occupancy throughout its properties, and this number should increase to 100% this year. Even more impressive, the company announced that its tenants had reached almost $1700 in sales per square foot, which is far above the industry average. Gross revenue from tenants in the company's retail malls on Macao's Cotai Strip (The Venetian Macao, Four Seasons Macao and Sands Cotai Central) and Marina Bay Sands in Singapore reached $84.9 million for the first quarter of 2013, an increase of 19.4% compared to the first quarter of 2012. Operating profit derived from these retail mall assets increased 23.4% for the quarter to reach $68.0 million. 
On the last two conference calls, Sheldon Adelson, Chairman and CEO, stated he would like to see these real estate assets eventually be monetized for financial flexibility, and to potentially increase the return of capital to shareholders in the future. In my opinion, these assets should be converted into a real estate investment trust to better reward shareholders. 
As of now, the company is not certain when it will be able to liquidate these assets due to the regulatory hurdles in the region. These assets should be spun off from the company and formed into a separate, publicly traded company. Shareholders would then receive a set share in this new company. If separated now, shareholders would reap the benefits today versus waiting for an uncertain future. By spinning off this business, shareholders would have the option of maintaining exposure to the in-demand real estate sector in Macau while seeing full value of these assets on the public market.
By forming a real estate investment trust, the company would avoid taxes at the corporate level; therefore it would be able to return more profits to shareholders. REITs are required to pay at least 90% of their taxable income to shareholders each year, which would be more rewarding for investors over the long term.
If you are looking for other ways to gain exposure the Macau region, consider the Market Vectors Gaming Index ETF (NYSEMKT: BJK) and Wynn Resorts (NASDAQ: WYNN). The Gaming Index offers investors broad exposure to the gaming sector and provides significant exposure to Macau specifically. The funds top holdings include Las Vegas Sands, Sands China, Wynn, and MGM, which all have strong assets in Macau.
Wynn is an owner and operator of destination casino resorts, including Wynn Macau. In the latest earnings report, Wynn announced a strong 4.4% increase in Macau gaming revenues. Wynn is currently in the process of completing a huge $3.5-$4.0 billion project on the Cotai Strip as well. The company is constructing a full scale integrated resort containing a casino, hotel, convention, retail, entertainment and food and beverage offerings on the Cotai land. Remain cautious, though, as Standard & Poor's Rating Agency issued a cautionary report discussing the company's financial situation late last year. The company has been rapidly increasing its debt load, which now sits at $5.8 billion. This debt load may slow the expansions of the country in the future. I prefer Las Vegas Sands over Wynn, as the company is better prepared and capable of expanding greatly in the future. 
Conclusion
Las Vegas Sands has a hidden gem in its vast portfolio of property. Management should consider converting its retail-based Macau assets into a separate real estate investment trust entity. This trust should then be spun off to reward shareholders and avoid an uncertain regulatory future. By doing so, shareholders would see full market value of their assets and hold the option to maintain exposure to this property in the future.

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