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Chris Jones

Grand Canal Shoppes: Venetian May Sell Mall

13 January 2004

Visitors to the Grand Canal Shoppes inside The Venetian walk past men's apparel store Gandini in September. The mall generates more than three times the U.S. average in sales per square foot.

The owner of The Venetian announced late Monday that it had hired Goldman, Sachs & Co. to help manage the possible sale of its 500,000-square-foot Grand Canal Shoppes shopping complex.

The proposed sale, which some analysts said could raise as much as $400 million, could provide part of the capital needed for the company to proceed with development of the Venetian Casino Resort's second Las Vegas resort, sources close to the deal said.

David Friedman, assistant to the chairman of the Venetian Casino Resort, said the Grand Canal Shoppes "has grown tremendously beyond our expectations, and it's extremely successful in its own right.

"We thought it would be a good idea to retain Goldman to tell us what we should do with it," he said.

In 2002, the Grand Canal Shoppes averaged about $1,000 in sales per square foot. That figure easily eclipsed the U.S. average of $330, according to data supplied by the International Council of Shopping Centers, a New York-based trade organization.

Plans for the new resort call for a 3,000-room hotel tower on the corner of Twain Avenue and the Strip. It will cost about $1 billion.

"The priority for (Venetian owner) Sheldon (Adelson) is to go ahead with Phase II of his master plan for the site," Deutsche Bank analyst Andrew Zarnett said.

Goldman, Sachs & Co., a New York-based investment banking firm, was retained as financial adviser "to explore various strategic alternatives" for the Grand Canal Shoppes. A company statement said no decision has been made about whether there will be a sale or any other transaction. But Zarnett said Goldman, Sachs & Co. had been hired to evaluate such a deal as an alternative to raising development capital for the proposed hotel-casino from an initial public offering.

Bob Sorensen, who until last month oversaw operations at the nearby Desert Passage at Aladdin shopping center, said U.S. retail projects have been selling at an unprecedented rate in recent months. As a result, he said Monday's action could be The Venetian's way of determining just how much it could receive for selling the Grand Canal Shoppes.

"Retail is so highly desired right now that this may be the best time to sell," said Sorensen, a 30-year veteran of the shopping center industry who recently launched his own retail consulting firm, Las Vegas-based Retail Real Estate Resources. "If I'm Sheldon Adelson, I look at this saying, `I don't know that I'd want to sell the center, but it may be worth it to take a look.' "

Retail-related real estate investment trusts are popular among investors, thereby driving up stock values and creating available cash for new acquisitions, he said. Interest rates are also low, Sorensen added, which has drawn more buyers into the market for shopping center acquisitions.

Wall Street sources said that retail properties sell at a higher multiple to cash flow than casino operations. Cash flow, a key measure of profitability for the gaming industry, is generally defined as earnings before interest taxes, depreciation and amortization.

With debt, or bond, financing adding $800 million to $1 billion, The Venetian could raise $1.4 billion to finance the new development and avoid making an initial public offering, the most frequently rumored source for the development financing.

Venetian officials said no decision has been made on when construction will start or what the theme will be for the new resort, although it is not expected to be Venice-themed.

The existing $1.4 billion, 36-story Venetian was opened on the site of the old Sands in 1999 by Las Vegas Sands, which Adelson controls.

A new 22-story tower, consisting of 12 stories of rooms and 10 stories of parking, opened last year, bringing the resort's room total to 4,049.

Sorensen said the Grand Canal Shoppes' lack of anchor tenant space may cause some investors to avoid the project, as could uncertainties related to how ownership of the center might be separated from The Venetian and its parent company. A buyer would likely also want parking considerations, which could be a problem at a center that's now almost entirely reliant on The Venetian's parking structures, he added.

Cleveland-based Forest City Enterprises, which owns 60 percent of Henderson's Galleria at Sunset mall and 20 percent of the Showcase mall near MGM Grand, manages the Grand Canal Shoppes. Its management contract is expected to expire sometime this year, but efforts to confirm an exact date were unsuccessful Monday because the company's offices were closed for the day when news of the Goldman, Sachs & Co. deal was announced.

Fred Walters, general manager of the Grand Canal Shoppes, was also unavailable for comment.