Double your money on the real estate of Sheldon Adelson's empire
Mon Dec 17, 2012
Jonathan Litt explains the catalyst that would cause Las Vegas Sands to double.
By Jonathan Litt
After months of trying to initiate some very rational changes
at Las Vegas Sands (NYSE: LVS; $45), the company remains wildly
undervalued due to its perception by investors that it is a
consumer cyclical company when in reality it is a property
company worth $85.
The stock is likely a double when looked at as a property
company with best in class growth. LVS can realize this 100%
upside by splitting the company into a LVS Mall REIT, LVS
Lodging REIT, and LVS Gaming Company. Furthermore, the
company's EBITDA will likely double in the next 5 years given
it is in the crosshairs of robust secular demand trends in
Macao and Singapore, suggesting that the shares would be worth
over $170 in five years' time.
Such a revaluation is not without numerous precedents. A recent
analogous example would be Equinix (NASDAQ: EQIX). A year ago
Equinix, a non-REIT data center company, was trading at
less than half the value of Digital Realty Trust (NYSE: DLR), a
data center REIT, and Equinix saw its stock double as it
considered converting to a REIT and was no longer viewed by
investors as a technology cyclical, but as a property company.
This type of valuation expansion is possible because LVS trades
at half the cash flow multiple (11-12x vs. 22x) of REITs
despite twice the projected cash flow growth (25% vs 12%). LVS
would trade in-line with REITs at $85 per share.
In November, Penn National Gaming (NASDAQ: PENN), a US regional
gaming company, announced its intention to separate its gaming
operating assets and real estate assets into two publicly
traded companies, an OpCo and a PropCo. The following day, the
stock shot up ~30%. Penn National highlights the fractional
value real estate is given on gaming company balance sheets as
well as how sudden a revaluation can take place with the right
Las Vegas Sands is the pre-eminent operator and developer of
integrated casino resorts and is majority owned by Shedlon
Adelson. LVS resorts are exceptionally high-quality mixed-use
properties that feature a combination of gaming, lodging,
entertainment and retail facilities. LVS focuses its gaming
business on the higher margin mass market, owns retail catering
to the high-end luxury market and creates a lavish hotel
experience for guests. The company is also successfully
expanding into emerging markets; about 90% of LVS 2013 EBITDA
will be in Asian markets, with nearly half in rapidly growing
LVS Mall REIT would be the highest quality, most productive
public portfolio of mall assets in the world with sales of
~$1,600 per square foot and revenues growing at 15%+ annually.
The mall entity would be valued at $11 per share, a 4% - 4.5%
cap rate, substantiated by private and public market comps.
Using the current LVS share price, the implied cap rate is 10%,
a 50% plus discount.
LVS Lodging REIT would have the highest occupancy public
portfolio in the hotel industry at ~90%, 15% plus growth, less
cyclicality and locations in markets with demand growth far
outpacing supply. The lodging entity would be valued at $26 per
share. Given the substantial discount to replacement cost and
high-value private and public market comps, these assets should
be valued at EBITDA multiples of 14x-16x, yet trade at an
implied ~40% discount.
The standalone Las Vegas Sands Mall and Lodging REITs would be
highly sought after by institutional property investors as the
companies would own the most productive portfolio of assets
available in the public markets, have same store growth well
above that of peer companies and have no debt, positioning them
for high-return acquisitions and developments.
LVS Gaming Co would be the most profitable casino company in
the world with internal and external growth that will likely
exceed 20% annually for the next several years. The gaming
entity should be valued at $48 per Share, but the implied value
in the current stock price is $8 per share (just ~2x 2013
EBITDA) after adjusting for the fair value of the malls and
lodging. This valuation is severely penalizing a company that
has traded on average since its 2004 IPO at 18x forward EBITDA.
Fairly valuing the mall and lodging businesses reveals that LVS
investors are getting the gaming business nearly for free.
Appropriately valuing the gaming business would value LVS at
more than $85 per share.
The supply/demand fundamentals of Las Vegas Sands' real estate
are exceptional. In Macao, ~50% of 2013 EBITDA and the
company's fastest growing market, a bottleneck is brewing as
robust secular growth is constrained by supply. There will be
virtually no new casinos built until 2016 and the government
has mandated a limit on new supply of only 3% annual new table
growth. Conversely, visitation is expected to grow
double-digits percent the next several years as only 16 million
of China's 1.4 billion people, or 1%, traveled to Macao in 2011
compared to 11% of the U.S. population to Las Vegas. New train
services (Guangzhou-Zhuhai High Speed Rail), bridges (Hong
Kong-Zhuhai-Macao Bridge), ferries (Taipa Pac-On Ferry) and
improved entry capacity (Gongbei Border Gate expanded to handle
500K visitors per day, a 66% increase) will further drive
demand in Macao. In Singapore, ~40% of 2013 EBITDA, LVS has 50%
plus market share and a 10-year gaming duopoly, with no new
supply expected until at least 2020. Meanwhile,
government-sponsored tourism initiatives are targeted to drive
7% visitation growth annually through 2015 and a fertile
backyard of millionaires (~17% of Singapore households) provide
further drivers for demand growth.
Las Vegas Sands has created over $30 billion of value through
development since 2004 with substantially more value creation
on the way. Stabilized Macao and Singapore developments since
2004 are generating ~40% cash-on-cash returns on 2013
estimates, while new developments target a minimum of 20%
returns, a low bar on historical basis. LVS investors are
currently getting $25 billion ($23 per share split across the
three entities) of present value of in progress (Sands Cotai
Central) and planned developments (The Parisian in Macao) for
Anyway you cut it, this stock is a double. LVS is deeply
discounted at $45 given the market value of the malls, hotels
and gaming. Shareholders are getting the gaming business nearly
for free. It's a growth company at a value price since LVS is
trading at half the cash flow multiple of REITs despite twice
the growth. Sands' development platform has generated over $30
billion of value creation and shareholders are getting $23 per
share in present value of development plans for free.
Government mandated constraints on supply and the incredible
demand growth potential in Macao and Singapore are priming the
sector for a very high, continued, and sustainable growth rate.
What is needed now for LVS to unlock all this value today, and
more, is a catalyst: spinning out the mall and lodging assets
Jonathan Litt is founder and CIO of LANDandBUILDINGS, a
real estate-focused long/short equity hedge fund in Greenwich,
Conn. Please see www.landandbuildings.com for a more detailed
presentation on Las Vegas Sands and why the stock can
ISSN: 2151-1845 / CDC10004H