Double your money on the real estate of Sheldon Adelson's empire
December 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 catalyst.
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 Macao.
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 free.
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 into REITs.
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 double.