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Best of Liz Benston

Gaming Guru

Liz Benston

Strip Real Estate Fuels Increase in Riviera Holdings Stock Price

28 December 2004

A blitz of merger and acquisition activity in the casino industry in addition to speculation surrounding skyrocketing land values on the Strip has lifted casino stocks to new highs in recent weeks.

But no longtime casino company has benefited more spectacularly than Riviera Holdings Corp., the owner of the aging Riviera hotel and casino.

Shares of Riviera Holdings are worth more than seven times where they traded in early January, falling more than $2 per share in early trading Tuesday to $39.10 on the American Stock Exchange.

With relatively few shares outstanding, the company is no stranger to choppy stock market activity. Surrounded by up and coming luxury projects on the north end of the Strip, Riviera has been the subject of takeover or joint venture speculation for years.

This time around, it hasn't even taken a juicy rumor for shares to rise several dollars per day.

Deutsche Bank Securities analyst Marc Falcone attributes some of the stock's run up to recent calculations of potential land values on the Strip.

The Riviera's 26 acres on the Strip represent "premier developable real estate" and at estimated Strip prices of $15 million to $20 million an acre, the stock "would be immensely undervalued" at its current share price, he said.

Donald Trump, whose money-losing casino company recently filed for Chapter 11 bankruptcy protection, made a 33 percent profit buying and selling Riviera stock.

Trump became a major shareholder in 2003 when he increased his stake in the company to 10 percent and triggered his application for a Nevada gaming license, which was approved this year.

But Trump sold his stake in April, netting a profit of about $900,000 on the $2.7 million he invested in Riviera shares in 2002 and 2003.

Had he held onto his Riviera shares, Trump would have made another $11 million or so for a total sale of about $14 million at Tuesday morning's share price.

The casino and real estate boss, who has found success developing high-rise condominiums and fronting the hit reality show "The Apprentice," may not need the extra money.

Trump said he has no regrets about his investment in Riviera, which he bought to get a Nevada gaming license.

"I bought it low," Trump said Monday. "In retrospect I could have kept it."

"I never regret anything," he added.

While some speculated that Trump might have been planning a takeover, he instead cultivated a partnership with New Frontier owner Phil Ruffin and in July unveiled plans for Trump International Hotel and Tower, a $300 million luxury condo tower with more than 1,000 units that will be built by 2006.

Riviera Chief Financial Officer Duane Krohn declined to say whether the company was talking to interested parties but said more broadly favorable news in the gaming industry tends to affect share prices.

Krohn also said more recent news stories and analyst reports discussing land values could be fueling speculation in the shares.

"Every time somebody says 'land values,' all the analysts see who's got land (to redevelop) on the Strip," he said.

A Houston Chronicle story last week speculated about hometown restaurant chain Landry's Restaurants Inc.'s interest in buying a casino on the Strip, saying the owner of the Rainforest Cafe and Joe's Crab Shack might be looking at the Riviera. A spokeswoman for Landry's today confirmed the company's interest in owning a Strip casino but said the chain was "disappointed" with increasing land price speculation in recent days.

A New York Times article Sunday quoted MGM Mirage President and Chief Financial Officer Jim Murren referring to the land under the Bellagio resort going for "$25 million an acre."

About six acres of the Riviera's 26-acre site isn't taken up by the hotel or casino and could be more intensely developed. The company has previously discussed the possibility of redeveloping the property in stages so as not to disrupt business.

The MGM Mirage-Mandalay Resort Group merger announcement in July has led Wall Street to revalue vacant or potentially developed land held by casino companies, Falcone said.

With the deal, MGM Mirage acquires vacant land held by Mandalay in addition to its own holdings and becomes a leading landowner on the Strip, he said.

Increases in other gaming stocks since the MGM-Mandalay announcement show a strong correlation with increasing land values ascribed to those companies, Falcone said.

In recent months residential high-rise developers, retail developers and other nongaming firms have moved in to snap up Strip real estate, further driving up prices.

"This goes beyond traditional casino interest in owning Strip real estate," Falcone said.

The spectacular rise in Wynn Resorts Ltd. shares to some extent mirrors speculation in casino assets, Falcone said. Shares in the company, which expects to debut its Wynn Las Vegas megaresort April 28, are up about 165 percent since MGM first announced a bid to acquire Mandalay, settling at $66.84 per share Monday.

Falcone declined to comment on which companies might be talking to Riviera about a deal, but analysts have previously said that any major gaming company looking for prime Strip land might well consider buying the company.

Speculation about buyers has included the cash-rich Venetian owner, Las Vegas Sands, as well as Wynn Resorts.

Riviera Holdings insiders and institutional shareholders have largely sold rather than purchased shares in recent months, locking in gains.

Since the end of October, company executives have sold about 91,000 of the company's roughly 4 million outstanding shares.