It looks like US President Donald Trump is backing off his trial-baloon stance to open up the United States over the objections of governors who want their states locked down for longer. The blaring headlines are now that Trump has voiced support spefically for Nevada’s statewide closure for who knows how long. He said – get this – that he was “OK” with it. Las Vegas Mayor Carolyn Goodman disagrees, slghtly. She says that, rather than being “OK” with it, she thinks the shutdown is “total insanity”. Maybe Trump is OK with total insanity, generally speaking. That would actually be completely normal, and these times beg for a semblance of normalcy.
Why Trump has changed his mind on Las Vegas specifically is probably just because he doesn’t want to be seen as itching for the reopening of his Trump International Hotel Las Vegas. That wouldn’t look too great, as far as great things look. It could also have to do with the fact that the Las Vegas Strip is typically filled with people from all over the world, the prospect of which doesn’t seem too appetizing in a post COVID-19-apocalypse world. Not to mention public sentiment towards Nevada workers isn’t so great, associated with brothels and such. It just isn’t the same as sentiment towards Mom’n’Pop small business Middle America that sells…I don’t know…miniature American flags made in China for both pro and anti Trump rallies or something. All of middle America’s brothels are strictly off the books anyway. (I’d really like to see an in-depth feature piece on the plight of sex workers, and customers, during the COVID-19 epidemic.)
Anyway, the case of the Las Vegas shutdown may be largely irrelevant, at least for casinos. For all I can see, a mandated shutdown may actually be saving companies like MGM significant amounts of money. Remember, MGM was shutting down voluntarily before a Nevada-wide shutdown was mandated. There isn’t much reason for these casinos to be open now anyway, since operating costs would go up and nobody wants to fly to Las Vegas now anyway. Even the California neighbors probably have more urgent things to do than gamble. A mandated statewide shutdown could also end up giving MGM tax breaks it wouldn’t otherwise get. Think of it: governments are demanding taxes while at the same time forbidding us from leaving our homes to make any money to pay them. This doesn’t seem all that equitable. At least with a mandated shutdown, MGM might be able to get out of paying some taxes.
There are other issues. Take real estate. The whole market is about to seriously crash. Again. This time for decades. The baby boomers are starting to pass away, and the replacement generation is much smaller and has a lot less money. Boomers that are still in their 50’s and 60’s probably had a lot of savings back in February, and now many of them are panicking. If the rich ones have big houses or more than one, they’ll sell them and restock their retirement portfolios with ultra-safe holdings, hopefully with gold and not US Treasuries or Netflix. It’ll take a few months for prices to start coming down, but they will, and hard, just like oil is now. The only prices that will rise are consumer prices, as the global economy shifts from capital production to consumption in a big way. The coming real estate collapse is going to blow even bigger holes in the banking system and bring down the value of the Fed’s increasingly junk-infested balance sheet, which will seriously bring down the dollar’s purchasing power.
This is not going to be good for MGM, and it is most likely going to be fatal for Caesars. MGM is locked in to triple net leases on properties that are collapsing in value even if an alien invasion were centered right on the Las Vegas Strip. There is virtually no way that MGM can get out of any of its leases in Las Vegas: From its last 10-K:
Furthermore, our obligation to pay rent as well as the other costs described above is absolute in virtually all circumstances, regardless of the performance of the properties… [W]e would remain obligated for lease payments and other obligations even if we decided to cease operations at those …our ability to transfer our obligations under the MGP master lease to a third-party with respect to individual properties, should we decide to withdraw from a particular location, is limited to non-Las Vegas properties and no more than two Las Vegas gaming properties
MGM goes into the costs in more detail in its COVID-19 business update:
Additionally, the Company has certain fixed rent payments for the remainder of 2020 of approximately $184 million and $219 million under its leases related to Bellagio and MGM Grand/Mandalay Bay, respectively. The Company also has fixed rent payments under the master lease with MGM Growth Properties LLC (“MGP”) of $621 million for the remainder of 2020,
That’s $1.024 billion a year in triple net and ground leases for properties that are plunging in value and who knows how long the gambling industry in Las Vegas is going to be seriously depressed, especially if, two years from now, we look back and find that we just started The Greater Depression. So that should suck MGM dry of cash in about 2 to 3 years or so. Expect dividends to be cut to zero.
I don’t know if MGM can survive without a restructuring of some kind, but it definitely has a better shot than Caesars, which looks completely dead in the water. Rather than list all its assets and try to convince shareholders that it will survive the crisis like MGM did in its own business update, Caesars CEO Tony Rodio just sounded succinct and desperate:
“Given the closure of our properties, we are taking difficult but necessary steps to protect the company’s financial position and its ability to recover when circumstances allow us to reopen and begin welcoming our guests and employees back to our properties. The Company entered this crisis with strong operating performance, which, combined with the steps we are taking now, are critical to the future of our company.”
There was nothing about Caesars’ plethora of assets and balance sheet strength , because it doesn’t have any and its balance sheet is notoriously weak. I seriously doubt now that Eldorado will go ahead with $17.3 billion deal. How could a deal made at pre-COVID-19 valuations possibly be cemented after the fact? I would think that force majeure or something like it would apply here,but it’s not even necessary since the deal hasn’t closed yet.
Plus, if the market really thought that the deal would actually go through, then Caesars’ stock price would not have collapsed below the $12.75 combined per-share purchase price for long. Even if margin calls forced the price lower, which it did, market makers would have quickly bid shares back up to Eldorado’s bid if they thought Eldorado would actually buy them at $12.75 now. The fact that Caesars stock has been below $12.75 for two months shows that the market is calling Eldorado’s bluff. The deal is most likely off, after which Caesars stock will collapse and these people will cover their shorts.
