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Best of Liz Benston

Gaming Guru

Liz Benston
 

North Strip: Brink of a Boom?

22 November 2005

By Liz Benston, Las Vegas Sun

With land prices continuing to rise and condominium towers coming out of the ground at the Strip's north end, the Stardust and the recent buyers of the nearby Westward Ho have redevelopment plans under way and say they aren't waiting for others to build first.

Meantime, the owners of the Riviera and the New Frontier are choosing to play a waiting game.

Officials with both hotels say they're in no hurry to redevelop their properties, which have benefited enormously in recent years from soaring land prices.

The Riviera's owner decided last week to end a nine-month search process during which the company discussed potential joint venture partners, refinancing deals, mergers and remodeling plans.

None of the plans would have improved earnings, officials said last week. Even selling the Riviera's 26-acre site -- worth well above its $21 million book value, with Strip land worth an estimated $10 million to $20 million an acre -- isn't an option because there would be a significant tax burden on the profit, they said.

Condo towers -- one of many options the Riviera and others have considered to optimize their land -- don't make sense right now because of the competition from other projects, Riviera Chief Financial Officer Duane Krohn said.

"In real estate, timing is everything," Krohn said. "At the present time there are way too many projects on the drawing board. Due to the large number of projects, the rising cost of construction and limited number of builders available, the well-thought-out projects will get built with strong companies behind them. The others will be delayed."

Seven projects with more than 4,000 condos have broken ground at the Strip's north end, creating potential customer traffic and more opportunity to raise room rates at the Riviera without spending money to remodel the property, executives said.

"We are surrounded by cranes as steel is being erected," Riviera Chief Executive Bill Westerman said during a recent conference call to discuss the company's third-quarter performance. With little land available for development at the southern and central parts of the Strip, "our neighborhood will be the epicenter of future Las Vegas development."

The opening of Wynn Las Vegas and continued tourism growth on the Strip have helped the Riviera, which recently celebrated its 50th anniversary.

Revenue and operating cash flow at the Las Vegas property rose about 1 percent in the third quarter, the best performing third quarter since 2000, officials said. Rooms going to higher-paying convention customers rose about five percentage points to 37 percent of all room nights during the quarter.

Expenses on the Riviera's debt of $215 million continue to push the company into the red, making major upgrades difficult. Even with declines of more than 20 percent last week after the company made no decision on redevelopment, Riviera's stock is up more than 35 percent from a year ago -- largely from speculation on Strip land prices and future prospects.

Krohn believes that his property and other older casinos at the Strip's north end could be redeveloped within the next decade. Wynn Las Vegas -- the farthest north of the modern megaresorts -- was the catalyst, followed by the pending redevelopment of the Stardust, he said.

While Stardust owner Boyd Gaming Corp. decided to wait until after the Wynn opening to announce its plans, the Riviera is going to wait until the Stardust redevelopment is at least under way.

"Growth on the Strip is coming our way," Krohn said.

New Frontier owner Phil Ruffin had previously discussed plans to tear down his hotel as soon as the first quarter of 2006 to pave the way for a major resort with as many as 3,500 rooms and costing upward of $1.6 billion.

Last week Ruffin declined to discuss a timeline for the project. Land prices continue to rise, improving his development prospects, he said, adding that the same is true for the Riviera across the Strip.

"I don't think there's any rush to jump in a deal that won't work for them," Ruffin said.

Ruffin is a partner with Donald Trump in the Trump-brand condo-hotel project that is expected to open in early 2008 with about 1,300 rooms behind the New Frontier. A second, duplicate Trump tower is expected to open in 2009.

Earlier this year, Ruffin sold a resort in the Bahamas for about $150 million. The buyer, Baha Mar Development Co., has since announced a partnership with Harrah's Entertainment and Starwood Hotels and Resorts Worldwide to build a $1.6 billion Caesars-brand resort and a series of hotels on the island.

"I knew that was in the wings, and it was going to take a major investment to bring it up to snuff," Ruffin said of the Bahamas resort. But he decided to place his money on Las Vegas instead.

"This is where we want to make our investment," he said.

Closing properties while profits continue to grow on the Strip makes the decision to redevelop tough, research firm Applied Analysis Partner Brian Gordon said. "Given the fact that Las Vegas is extremely hot, it makes that decision even tougher."

After years of speculation about what Boyd Gaming would do with its aging Stardust, officials recently said the company will announce a major redevelopment plan by the end of the year.

The Stardust posted its strongest performance in the mid-1990s after building a new hotel tower. But performance fell as it struggled to compete with the newer megaresorts on the Strip.

Boyd has attempted to spice up its entertainment offerings while controlling costs and installing new management. It has also benefited from the overall strength of the Strip's tourism business.

"A rising tide raises all ships," Boyd Gaming Chief Financial Officer Ellis Landau said.

The Stardust's annual operating cash flow -- a key measure of casino performance -- has since rebounded to nearly twice what the property earned a few years ago.

In the third quarter ended Sept. 30, the Stardust reported a 60 percent increase in operating cash flow to $5 million from the same period last year -- the seventh straight quarter of year-over-year increases.

The opening of Wynn Las Vegas across the street helped boost performance somewhat, Landau said.

But Boyd isn't dwelling on the Stardust's performance this past quarter. It is pushing forward with its long-planned redevelopment effort for the 63-acre site, which runs from Las Vegas Boulevard to Industrial Road and includes the Budget Suites motel behind the hotel.

While the announcement comes after the Wynn opening, the company wasn't waiting to see how that hotel did before devising its own plans, Landau said.

"This was a matter of our own internal timing to think about what we wanted to do," he said. "We wanted to give ourselves enough time. This is a very large investment, and you really only have one chance to do it right. We felt confident that Wynn would do well, which built our confidence as we saw how Las Vegas would continue to do well."

In a research note to investors this month, Bear, Stearns & Co. stock analyst Joe Greff said the development is likely to include a casino and hotel with more than 3,000 rooms and a "mixed-use residential and retail component" costing more than $1 billion. The project could be built in two to three years and open by 2009.

While the Riviera, New Frontier and Sahara hotels wait for the right deal to come along, the 1960s-era Westward Ho has already been snapped up by resort developers.

A limited liability company including condominium and resort home developer Centex Destination Properties bought the 15-acre site in September for about $146 million. The property closed Thursday to make way for a new development that is expected to be announced by mid-2006.

The partners are working on a master plan for the site that could include multiple hotels, a casino and residential component, said C.J. Julin, Centex Destination Properties' vice president of marketing.

Centex Destination Properties, the managing partner of the Westward Ho project, is a division of Houston-based Centex Homes that formed about four years ago to build homes and condominiums in resort destinations.

The company's only Nevada development to date is a condo complex at Lake Las Vegas in Henderson. That will change with the Westward Ho development, and the company is also looking elsewhere on the Strip for other projects, Julin said.

Centex has formed a Henderson-based team that is exploring other resort development projects such as hotels, he said.

"We do what we say we're going to do," Julin said of Centex. "We want to make sure we have a solid plan before we move forward. But we're not just going to sit on the property."

The partners are considering incorporating the shell of the existing Westward Ho facing Las Vegas Boulevard into a new building, Julin said. The casino would no longer continue to operate while the redevelopment project takes shape, he said.

The Stardust and Westward Ho aren't alone.

The Lowden family, owners of the 28-acre site of the former Wet 'n Wild waterpark south of the Sahara, has been talking with potential buyers about selling the land despite receiving preliminary Clark County Commission approval in 2003 for a resort on the site.

Just north of the Wet 'n Wild site sits the Sahara, which has long been rumored for sale. Real estate experts say the owners of the roughly 17-acre site could combine a potential redevelopment with a vacant, 26-acre site they own across Las Vegas Boulevard.

The privately held Sahara has closely guarded its plans and hasn't disclosed any interested parties.

Nearby, condo developer Turnberry Associates plans to build a resort with several former Mandalay Resort Group executives, including former President and Chief Financial Officer Glenn Schaeffer.

A resort with up to 4,000 rooms will be built by 2008 on the 25-acre site of the former Thunderbird and later El Rancho hotels on Paradise Road. Turnberry also purchased about 3.6 acres of Strip frontage at the former Algiers for the resort.

Farther down the road, investors are anticipating a major redevelopment project at the site of the contiguous Flamingo, O'Shea's, Imperial Palace and Harrah's.

Harrah's Entertainment, which is buying the Imperial Palace for $370 million to complete its ownership of all four properties, expects to reveal a master plan for redeveloping the 150-acre site by mid-2006. The company has already discussed renaming and remodeling its Bally's property, which sits south of Flamingo Road.

Harrah's is exploring "what range of entertainment offerings should be in that location not just in 2005 but in 2012 and 2015," Chief Executive Gary Loveman said during the company's third-quarter conference call to discuss earnings.

While some of the company's hotels, such as Caesars Palace and the Rio, will largely remain as they are today, others "are going to require very substantial modifications or complete tear-downs and rebuilds," Loveman said.

As land prices and redevelopment costs rise, all but deep-pocket investors are priced out of the market, Gordon said.

"No longer can you build a $300 (million) to $400 million property," he said. "Projects are starting at $1 billion these days," he said.