Squeezing liquidity from fixed assets

The dramatic slump in Asia’s VIP revenue over the past two years has forced operators to trim costs and diversify income sources to plug the gap. While much of the focus has been on boosting non-gaming and tapping into the mass market, companies have also been looking at ways of unlocking shareholder value through monetizing extensive fixed assets.

Las Vegas Sands in April said it was mulling plans to sell its 800,000 sq ft of retail space at the Marina Bay Sands in Singapore after a government imposed moratorium expires next year.

Parent company Las Vegas Sands is one of the largest retail operators on the planet; Sands Retail owns, manages, and leases around 3 million sq ft of mall space across five locations in Asia – the Four Seasons, Parisian, Venetian, Cotai Central and Marina Bay.

Chairman Sheldon Adelson says the company has been contacted by several parties and may sell all, or a part of the Singapore property. “We have been approached. We have been talking to people,” Adelson said earlier. “We always have thoughts of monetizing anything except our core assets..”

Sands has used this square footage to great effect, generating $134.3 million from retail in 1Q16. Analysts have estimated the Singapore mall could be worth about $4 billion to $5 billion.

REIT advantages

In June last year, Adelson also told investors he was considering a similar plan for the company’s Macau retail assets. In that case, spinning the properties into a real estate investment trust, though nothing has so far come of that.

Daiwa Securities in a report said a spinoff would “limit share-price downside by crystallising the value of Sands China Ltd’s assets at a time of increasing political and regulatory uncertainties in Macau and China.” It would also help to attract new investors.

In fact, spinning of property into REIT’s has been popular with casinos, as the structures are seen as more tax efficient.

MGM Resorts earlier this year transferred 10 properties into a REIT, known as MGM Properties. The company, which had been under pressure from activist investors to improve returns, retained an interest of about 73 percent in the new vehicle which was listed on the New York Stock Exchange in April.

“The successful completion of creating this publicly traded premier triple-net lease REIT has allowed MGM Resorts to highlight the significant long term value in our real estate assets, strengthen our balance sheet and financial flexibility, and ultimately create sustainable shareholder value,” MGM chairman and CEO Jim Murren said at the time.

In August, Philippine company Calata announced it has partnered with Sino-America Gaming Investment Group and Macau Resources Group to create a REIT to develop the PHP65 billion ($1.3 billion) Mactan Leisure City project, which is expected to start commercial operations in 2020.

Timeshare options

Sam Sheng, a director at Double Square Consulting, says the structure can provide tax benefits and provide upside from real estate growth, but it’s not an option everywhere as some jurisdictions won’t allow the REIT to own the real estate on which the casino is operating.

For smaller operators without Sands’ massive footprint and particularly those in the development stages, there are other ways of driving revenue from fixed assets. In Vietnam and the Philippines, for example, operators are building timeshare condominiums and villas in order to attract foreigners and raise revenues.

The Grand Hotel on Vietnam’s Ho Tram strip has recently been given the green light to build a residential tower with around 900 condominium units, set to be sold via a range of timeshare options. This space could have been used to build a concert hall or alternative visitor attraction, but Sheng says the capital required to obtain an investment certificate with a gaming license attached means operators in the region are limited in the type of amenities to which they can allocate funds and still achieve satisfactory ROI.

“Developers are unlikely to spend heavily on retail, F&B, and other amenities similar to Macau or Singapore for two key reasons; demand and ROI. Development locations often don’t have sufficient demand or traffic to support such large-scale non-gaming options. Gaming revenue, without local participation and coupled with other restrictions, will not offset or alleviate the pressure of recouping heavy investment in such outlets. This, in turn, makes it difficult to achieve a satisfactory ROI. Real estate, on the other hand, is a viable option that can mitigate quite a lot of investment risk, when done right,” he adds.

Building incentives

A similar approach is being taken in other jurisdictions across the region. In the Philippines’ Aurora Pacific Economic Zone, a planned casino hub will contain hundreds of condo and villa units to be sold through timeshare packages. Developers looking to break ground in the area are being offered incentives to build such properties, including duty free importation of raw materials and equipment and fixed corporate tax of 5 percent. What’s more, foreigners who take up residence in the zone, either through purchasing a property or via a long lease, will be granted a permanent resident visa.

In particular, the region is targeting Japanese tourists. Archie Aldaba, attorney for the zone, says offering timeshare options is one of the most effective ways of doing this. “We are focusing on attracting tourists to the zone so we can boost economic activities in the area. We believe that an increase in tourists will attract the business sector to invest and operate their businesses in the zone, which will generate employment, and improve the standard of living in Aurora and nearby cities and provinces. Offering timeshare properties and ownership options seem to be really attractive to investors,” he adds.

Building and offering timeshare properties is a win win scenario for operators because they are able to generate significant income from each unit, while still owning the asset outright. Once the initial lease period has expired the property can be rented out again, or, if need be, sold.