Las Vegas real estate prices dampen merger talk

Mon May 29, 2006 9:12 PM ET
By Paritosh Bansal

NEW YORK (Reuters) - Taking a gamble on Las Vegas is getting expensive these days.

Several casino companies are looking for ways to enter the largest U.S. gambling market, but doing so has become too costly after some pricey deals for Las Vegas properties.

"We were very interested in Las Vegas until the price got so high," Trump Entertainment Resorts Inc. Chief Executive James Perry told Reuters in a recent interview. "We don't see ... having an opportunity there in the short term."

Deals such as the buyout of Aztar Corp. by closely held Columbia Sussex Corp. for more than $1.9 billion and the acquisition of Hard Rock Hotel & Casino by Morgans Hotel Group Co. for $770 million sent shivers down the spines of other companies hoping to enter Las Vegas.

Aztar, which owns 34 acres of land on the Las Vegas Strip, saw a fierce two-month bidding war that involved as many as four suitors.

Columbia won. But it could be paying more than $30 million an acre just for the land, the highest price ever for a parcel of that size in Las Vegas, according to Deutsche Bank analyst Marc Falcone.

"The costs are getting to be prohibitive," Penn National Gaming Inc. Chief Executive Peter Carlino said in a recent interview.

"The numbers are out of control over there," Carlino said, referring to the Hard Rock deal. "They are paying way too much for that for our taste."

REAL ESTATE BOOM

A limited amount of available real estate on the Strip, coupled with the ever increasing popularity of the gambling mecca, is helping boost prices.

"Land is not available in that area," said Peter Dunay, chief investment strategist at Leeb Group. "So it is very competitive and very tough."

Things have gotten worse as private companies with deep pockets turn to the gaming industry, which offers stable cash flows and high returns.

"There's a lot of money around right now ... looking for a place to land, and gaming seems to be one of the places they want to go," Perry said.

When shareholders in companies that own casinos in Las Vegas see other deals, they too want more.

Last month, when casino operator Riviera Holdings Corp. agreed to go private in a $211.5 million buyout, one large shareholder opposed the deal, saying it undervalued the company's land on the Las Vegas Strip.

But there is a limit to how much public companies are willing to pay for a piece of the action.

Pinnacle Entertainment Inc., which started the bidding war over Aztar with an initial offer of $38 per share, bowed out of the contest when Columbia bid $54 per share. Ameristar Casinos Inc., another bidder, quit when offers started pushing $50 per share.

VEGAS BECKONS

Still, the lure of Las Vegas is too powerful for companies to completely ignore.

The city offers a stable regulatory environment and its fame as an entertainment destination is so widespread that it affects competition even in regional markets, Calyon Securities analyst Smedes Rose said.

Harrah's Entertainment Inc., the world's largest gaming operator by revenue, promotes its casinos in smaller markets through offers such as discounts at its Las Vegas properties -- a competitive edge that companies such as Pinnacle want.

Having a casino in Las Vegas also boosts the value of a company's brand, Dunay said. "It's a prestige thing to say that I own a casino on the Strip."

Pinnacle, Trump and Penn National all continue to look for ways to get into Las Vegas.

Trump's Perry said he would be open to talking with Morgans Hotel, which would like a partner to run the casino, as well as any other opportunity that may arise.

Penn's Carlino said his company would also continue to look for a point of entry, such as a joint venture.

But he added, "That's going to be tough."

More buyers leaving contracts, huge deposits on table

By SANDRA FLEISHMAN
THE WASHINGTON POST

WASHINGTON — As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits.

Nationally, some big builders are beginning to report cancellation rates upward of 25 percent.

"But 10 to 15 percent of people deciding to cancel is not going to be unusual most of the time," said Jonathan Dienhart, director of research for Hanley Wood Market Intelligence, a home-building research firm. "It's just that in the last couple years when we had unusually high demand, where people could just buy a property and flip it, there were fewer cancellations. It's not a cakewalk anymore."

The percentage of buyers backing out of new home purchases is significantly higher in some parts of the Northern San Joaquin Valley than elsewhere in the nation, according to Steve Smiley, another Hanley Wood executive.

"We're seeing cancellation rates as high as 30 percent in some projects," Smiley told builders gathered at a Modesto conference Thursday morning. His talk focused on new home sales in Stanislaus, San Joaquin and Merced counties, which have slowed dramatically since last year.

When a housing market is hot and prices increase, as they did dramatically during the past five years in many areas, cancellations are rare and builders generally aren't concerned because they typically can sell the units at even higher prices. But if the market is slowing, as it has been this year, builders might need to add incentives such as upgrades and price cuts to move their product. That reduces profit but provides opportunities for people who couldn't afford to buy before.

People who are buying for investments rather than residences are the most likely to bail out, experts said. They reason it would be better to lose a deposit than to go ahead with an investment that could lose value, particularly if builders are cutting prices in the same or nearby projects.

Typically, buyers of new homes pay upfront deposits calculated either as flat amounts as low as $1,000 or as a percentage of the price, generally about 5percent of the home price. In recent years, some builders increased deposits to discourage speculators and get more upfront cash from desperate buyers. Some require deposits of 7.5percent to 10 percent.

Despite the pain of giving up that much money, some buyers are canceling to cut their losses because builders are pricing the same houses for so much less, Alexandria, Va., lawyer James "Beau" Brincefield Jr. said.

"I have seen people literally walk away from $125,000 deposits rather than go forward with the closing because the value of a house identical to their own was being sold by the builder for $100,000 less," said Brincefield, who is preparing litigation for buyers who want to sue builders to get their deposits back.

Builders are trying to make it harder for people to split, lawyers and real estate agents said. While contracts "always favor the builder" and are always hard to contest, now that it is harder to resell, "builders are fighting attempts to get the deposit back tooth and nail," Washington lawyer John Gerardo said.

Hanley Wood's survey showed the Sacramento area with the highest cancellation rate, 28 percent, up from 2.6 percent in March 2005.

Rates in Las Vegas, Denver, Phoenix and Orange County also were higher than those inthe Washington area.

Bee staff writer J.N. Sbranti contributed to this report.