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Casino owners with aging Las Vegas properties or excess land are wrestling with ways to reap additional value in light of historically high land prices in the city.

With land prices hitting north of $40 million an acre for prime spots on the Las Vegas Strip, sources say casino owners are eyeing joint venture structures that would allow them to monetize individual assets at the higher market prices of land, instead of the lower values the public market is rewarding them.

The joint structure also would also give the owner the added benefit of being able to grab a piece of the future profits of the redeveloped casino.

Traditionally, casino owners with older properties that sit on valuable land had two ways to realize that value: sell the property or develop it.

"Now there is this third option of sharing the development with somebody else by minimizing your capex (capital expenditures), and by monetizing your asset at current land prices," says Wahid Chammas, a senior analyst with Janus Capital Group, a major investor in casino stocks.

The structure is just one way that Las Vegas casino owners are exploring ways to harvest real estate value in what has become a land grab in the city.

MGM Mirage

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is at the forefront of such discussions, and the company has stressed in recent months that it was exploring

numerous options, including joint ventures, to unlock value.

Chammas says casino CEOs have talked about the individual property-level joint venture structure in recent months, but he declined to name individual companies.

Cashing In

Chammas uses the following hypothetical example of how a deal would work. Suppose Company Z owns a property in Vegas and it has a land bank associated with the property. Assume the property is old and has limited growth.

Company Z wants to reap the benefits of growth in that property without having to bulldoze it themselves and make big capital expenditures. The solution under the proposed structure, Chammas says, is to create a joint venture whereby the property is placed into a new entity with a development partner or equity investor.

The joint venture would develop the property, and the casino owner's partner would provide the capital expenditures. Company Z gets an equity interest that would be the price of the land at market rates. For Las Vegas Strip assets, that equates to as much as $40 million to $45 million an acre, Chammas says.

The casino operator gets a piece of the future earnings from the property, along with management fees, and has bumped up his equity stake.

This joint venture structure is similar to what

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Morgans Hotel


did with its February purchase of the Hard Rock Casino in Las Vegas. In that deal, Morgans brought in DLJ Merchant Banking Partners, a private equity investor that is part of Credit Suisse, to fund two-thirds of the equity piece in the $770 million transaction.

Importantly, DLJ also agreed to pay for all of the initial capital expenditures required to expand the Hard Rock property. But Morgans' one-third equity stake in the project allows it to grab one-third of the property's cash flow.

Morgans also will receive a management fee based on that cash flow. If the joint venture decides to expand the property, the company will benefit without having to put in additional funding.

New Twist for Circus Circus

Existing-casino owners, such as MGM Mirage, have a prettier picture than Morgans, since they've owned their assets for some time.

The aging Circus Circus casino, an MGM property that sits on 24 acres of land on the northern part of the Las Vegas Strip, is a prime candidate for such a joint venture structure.

MGM on Thursday announced it had purchased another 34 acres of land adjacent to Circus Circus for $575 million, or $17 million an acre.

MGM now controls a 78-acre site for future development next to Circus Circus. The company said it expects to bring in development partners for the new site.

"MGM may not close Circus Circus, and could renovate and upgrade the facility, and potentially build another separate development on the new land, though timing remains uncertain," Deutsche Bank analyst Bill Lerner wrote in a research note.

Of course, if the company did decide to monetize Circus Circus, pursuing a property-level joint venture could be the right solution.

Selling the property would create a tax bill. And developing the property requires spending money. The same is true for the new land that was purchased. Thus the joint venture option may work best.

By placing older land into joint ventures, MGM can bump up its equity stake, and reap management fees, development fees and capture a piece of the new casino's future profits.

MGM did not return a call seeking comment.

Jefferies & Co. analyst Larry Klatzkin said in a recent research note that MGM President Jim Murren and

Wynn Resorts

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President Ron Kramer both indicated they would not donate any of their Strip land into a joint venture for less than $20 million an acre or sell the land outright for less than $30 million an acre.

Several recent deals point to the record prices being paid for real Las Vegas Strip properties.


( HET) paid $81.8 million an acre for the 4.5 acre Barbary Coast site, and private real estate developers recently purchased the Sahara Hotel and Casino for $22 million an acre.

A $40-million-per-acre

deal for the New Frontier casino appears to be on hold for now, according to recent press reports.

Other Beneficiaries

The joint venture structure would have worked well for

Boyd Gaming's

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ambitious Echelon Place development, which the company is building at the site of the former Stardust in Vegas. Boyd is in fact using joint ventures to build the hotel and retail portions of the project, but wanted to keep full control of the gaming operations, says company spokesman Rob Stillwell.

Wynn Resorts could also pursue the structure with its ambitious Wynn Encore development on the Vegas Strip, but Steve Wynn doesn't like giving up control, industry watchers say.

Harrah's new private equity owners could also reap benefits from pursuing property-level joint ventures. Harrah's and Wynn did not return a call seeking comment.

The exploration of the structure comes at a time when private equity is becoming ever more interested in the gaming sector, as evidenced by the Morgans deal and the buyout of Harrah's by Apollo Management and TPG.

"We've always been very comfortable in investing in gaming. It tends to have asymmetrical returns," says Neal Pomroy, managing director with DLJ Merchant Banking, which partnered with Morgans on the Hard Rock deal. "Volatility on the downside is limited and the upside is fueled by continued secular growth."

In short, gaming is being perceived as an investment that offers steadier yields. As new investors continue to look for ways to enter the space, property-level joint ventures could be the perfect way to satisfy these appetites. The deals will start in Vegas, but may eventually spread to Atlantic City and other casino hotbeds.