Caesars CEO optimistic about continued demand; Boyd and GLPI also upbeat Buck Wargo, CDC Gaming Reports · September 15, 2021 at 11:50 am Pent-up demand for hospitality remains high and consumer savings that are two times their normal rate should continue to bolster the gaming industry through the end of 2021 and into 2022, Caesars CEO Tom Reeg told an investment conference Tuesday. Reeg, who appeared at the J.P. Morgan Gaming, Lodging, Restaurant and Leisure Management Access Forum in Las Vegas, said demand remains strong and Caesars is seeing a much higher-quality customer today than 12 months ago. He also sounded optimistic about the benefit of selling a property on the Strip in the future. The conversation was reported by Joseph Greff, gaming analyst with J.P. Morgan, who noted that occupancy for the third quarter is expected to be in the mid-to-low 90% range, up from 83% during the second quarter. The increase was driven by an improvement in group-centric midweek demand in the second quarter, he said. Caesars Entertainment opened the second quarter by hosting the National Indian Gaming Association’s annual conference at the Caesars Forum convention center. “Caesars expects to run 50%+ (adjusted earning) margins in Las Vegas and 40%+ in regionals, driving 40%+ consolidated margins through the foreseeable future,” Greff said. “Helping the Las Vegas Strip segment is the ramp of Caesars Forum and high-margin mid-week business, which pre-COVID was a significant (adjusted margin) generator. If viewed as a single property, it was one of the largest in the portfolio.” Greff said drive-to regional properties’ performance remains solid, while regional destination properties have “more room to run.” Management views the healthy consumer backdrop, pent-up-demand environment, and a savings rate twice the normal level as “supportive of this demand environment and providing visibility through next year,” Greff said. Management discussed its previously announced plans to divest a Strip asset in the near future, although no specific property or timeline has been noted yet, Greff said. “Importantly, while Caesars plans to sell a Strip property, the strength of its loyalty program should enable the company to redirect a large portion of its customers/players to neighboring properties,” Greff said. “Management views recent transaction multiples on the Las Vegas Strip as encouraging and supportive of a transaction.” Caesars management emphasized a focus on long-term strategy for online sports betting and igaming, cautioning against letting monthly revenues and market-share figures dictate winners and losers in the market in the near-term, Greff said. “Caesars now feels that it has everything it needs — brand, tech, market access — which gives confidence on a level of return on its investment here,” Greff said. “The company is closely watching Arizona, which last week launched and represents the first state that Caesars was there with peers on day one. The company’s brand, database, ample regional properties with no access fees, and in-house tech stack should inherently result in lower customer acquisition costs than peers and in turn a higher-margin profile. If any partnerships were to come to fruition, management was very clear that the company would be compensated for the full value of the Caesars brand and database. Caesars expects to invest here using free-cash-flow generation from the land-based business and proceeds from divestitures.” Boyd Gaming CEO Keith Smith and CFO Josh Hirsberg spoke Tuesday afternoon about Las Vegas and the regional markets at the forum. Boyd described the regional gaming consumer as resilient and “amazingly consistent,” with minimal impact seen from mask mandates and higher COVID-19 new-case trends, Greff said. Downtown Las Vegas, however, has been a bit more challenging, given the segment’s reliance on Hawaii travel, he added. Similar to other casino operators, Boyd management said it’s seeing spend-per-customer tracking above 2019, which they attributed to a healthy consumer backdrop and a higher-value customer coming through the doors, Greff said. Spend trends are similar across Las Vegas local properties and drive-to regionals, while destination regional properties are lagging slightly. “The database today is intentionally different from pre-COVID, with no marketing to the lower end of the database,” Greff said. “From a demographic standpoint, the 55+ core customer is coming back, though still has room to grow toward 2019 levels.” Labor “remains a headwind,” with management noting that the shortage is somewhat limiting the amenities that can be offered, Greff said. As these pressures ease, Boyd is expecting to see revenue growth as well. From the standpoint of full-time employment, including open roles, Boyd is currently 40% below 2019 levels. Higher margins are also driven by slashed marketing spending. Boyd is running at or near record margins and management is gaining more confidence on its ability to execute at these levels, Greff said. “Longer term, management noted that it becomes less about margins and more about (adjusted earnings) growth,” Greff said. “Also, recall, these margin improvements have been despite the company’s Eastside Cannery property remaining closed. Management has no plans to reopen the property over the next three to six months. Business levels at Sam’s Town, right next door, is strong, but not overdone to a level where additional capacity is needed.” Management, meanwhile, is comfortable with leverage in the low-times range today, prioritizing reinvesting in the business in the near term, Greff said. Two other speakers Tuesday were Gaming & Leisure Properties CEO Peter Carlino and CIO Matthew Demchyk. GLPI will sell Tropicana Las Vegas to Bally’s Corp. for $308 million in a deal expected to close by early 2022 at the latest. “The company sees ample white space with its existing tenant base in regional markets, noting that its newest tenant, Bally’s, remains very active,” Greff said. “The key driver of deals for GLPI is the spread to its cost of capital, so this could resemble both single-asset and portfolio transactions. While the market for gaming real estate is at the highest point ever, this still resembles a discount to traditional REIT assets.” GLPI expects this gap to continue to narrow, noting the gaming REIT’s collection of nearly 100% of rent over the pandemic, Greff said. Regarding tenant diversification, management noted that it helps, but it reiterated that what matters more is the quality of tenants and assets. “Management discussed its preference for regional as opposed to Las Vegas Strip assets,” Greff said. “While the market seems to ascribe a higher value for Strip assets, GLPI emphasized its preference for income as opposed to asset quality.” In regional markets, GLPI highlighted the importance of scale and relationships, while on the Las Vegas Strip, competition can be more intense, supplemented by alternative sources of capital. GLPI’s balance sheet remains strong, positioning the company well for future deals, Greff said. Additionally, as shares have traded better, the stock represents a better currency with which to potentially transact, he added.