Las Vegas Sands: Unlocking Value Could Be a REIT Idea

NEW YORK ( TheStreet) -- On Dec. 18 Las Vegas Sands (LVS) will be just another domino in a long-line of companies paying a special dividend this year. Sands and other cash rich companies are lining up to take advantage of the current tax rates and likely higher rates on dividend income that could kick in automatically on Jan. 1 (with the expiration of the Bush tax cuts).

Triggered by large casino profits, as well as interests in mall and hotel income, Las Vegas Sands plans to reward shareholders by paying out a $2.75 a share special dividend, in addition to the annual dividend of $1.40 a share. That combined dividend payout amounts to an annual dividend yield in excess of 6%.

Las Vegas Sands is a newcomer to paying dividends as the company squeezed out a token last year and the yield hovers around 2% today -- excluding the special dividend.

Maybe there is more to this? Perhaps there could be a compelling opportunity for investors to benefit for Las Vegas Sands and its repeatable income model?

Las Vegas Sand: A Wide-Moat Gamer

Las Vegas Sands, a Fortune 500 company, is the preeminent operator and developer of integrated casino resorts. 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.

As with many companies, the history of LVS begins with the vision of its founding chairman and CEO Sheldon G. Adelson (his bank account will soar by another $1.2 billion with the payout of the special dividend.)

The secret of LVS and Adelson's success was his focused hotel efforts and specifically on courting the convention and tradeshow industry. At the time, when other hotels were focusing on gambling, his approach was unorthodox, even mocked.

Adelson was also among the first to foresee the financial potential of Asia. Before his American competitors, he located his company nearer to the Asian market. Las Vegas Sands opened the Sands Macao in 2004. Macao, the former Portuguese colony turned over to China in late 1999, is the only place on mainland China where casino gambling is legal.

LVS gets the majority of profits and cash flow from its properties in Asia, especially Macau, the only place where millions of Chinese gamblers legally place bets on games of chance. No new casinos will open in Macao for at least two or three years -- a wide moat gamer!

Unlocking the Value of LVS

Las Vegas Sands is trading at $43.65 per share -- around a 50% discount to net asset value. Should the legendary gaming brand convert to a REIT?

Clearly, many other companies are aiming their sites on REIT-dom. Who wouldn't? With REIT multiples two times the size LVS.

LVS is known for its exceptional gaming and lodging brand, but the company's value proposition is centered on three integrated business models: malls, lodging and gaming. Collectively, the three platforms provide tremendous value, and individually, the pieces appear to be worth more than the whole (or $43.65 per share of LVS).

Jonathan Litt, Founder and CEO of hedge fund Land and Buildings (and investor in LVS) explains, "Las Vegas Sands integrated resort developments would be ideally suited and financed through the separate mall, lodging and casino companies as each entity will have the most cheapest cost of capital for their respective property types as investors interested in each individually would bid the shares to the private market value or beyond."

Las Vegas Sands: Malls

Malls: LVS Mall REIT would be the highest quality, most productive public portfolio of mall assets in the world with sales of approximately $1,600 per square foot (double that of its peer group) and revenue growing at 15% annually. LVS malls enjoy a list of some of the most enviable retailers including HERMES, CANALI, BOSS, De Beers, kate spade, Dior, GUCCI, Lacoste, Tumi, Cartier, Calvin Klein, Louis Vuitton, Coach, Burberry, and Bvlgari.

$11 Mall Value per Share: Private and public market comps support that these assets should be valued at 4% to 4.5% cap rates; using the current share price, the implied cap rate is 10% to 50% discount. Sands Mall REIT would have no leverage post spin-out, which would allow for substantially accretive external development and acquisition activities.

Las Vegas Sands: Lodging

Lodging: LVS Lodging REIT would have the highest occupancy public portfolio in the hotel industry at approximately 90% to 15% growth -- and located in markets with demand growth far outpacing supply.

LVS Lodging has stronger growth prospects given rapid growth of gaming revenues, higher occupancy (90%), higher margins and less cyclical characteristics. LVS will be the leading owner of 4 star and 5 star hotels with 40% of the Macao room supply by 2013.

$25 lodging value per share: Given strong 15% growth prospects of Singapore/Macao, limited supply, less cyclicality and the substantial discount to replacement cost, these assets should be valued at EBITDA multiples of 14 times to 16 times based in private and public market comps, yet trade at a 40% discount.

Las Vegas Sands: Gaming

Gaming: LVS Gaming would be the most profitable casino company in the world with internal and external growth likely to exceed 20% per year.

$48 Gaming Value per Share: Implied value at approximately twice 2013 EBITDA ($8 per share), after adjusting for the fair value of the malls and lodging, is severely penalizing what will likely be a 20% plus growth company that has traded on average since 2004 IPO at 18x forward EBITDA.

Winning Hand: Three-of-a-Kind

Las Vegas Sands should pursue a REIT spin-off strategy that will, in turn, provide maximum value (around $85 per share) for the spin-out of all (and integrated) businesses. Accordingly, investors will be able to tap into the Chinese growth engine and decide how to gain exposure to all or part of the Sands' differentiated high-quality real estate platforms.

As summarized by Land and Building's Founder and CEO, Jonathan Litt: "Having three public companies each focused on its own business, malls, hotels and casino will create the most value for shareholders as each company will be able to drive growth well beyond that of the individual assets they could otherwise sell."

Furthermore Litt explains, "Las Vegas Sands will generate over $3 billion in free cash flow annually likely growing 15% or more a year. This ordinary dividend combined with the special dividend puts the yield in excess of 8%. Like Wynn we suspect the special dividend will be recurring driving further return for investors."

LVS Lodging REIT and LVS Mall REIT would be Singapore-listed REITs owning the mall assets in Macao and Singapore, while the lodging REIT would own the hotels in Macao, Singapore and Las Vegas.

The Singapore REIT market is the most active and mature in Asia, comps have good valuations in the mall and lodging space and the Sing government would likely be favorable toward a transaction relating to Marina Bay Sands, Las Vegas Sands Singapore Asset if they got the listing on Two REITs with market caps totaling over $30 billion.

LVS would spin out to existing shareholders shares in the mall and lodging company and those shareholders would then have the option to buy more or sell. Ideally, the management team of LVS would not sell any shares in these entities.

Both the mall and lodging REITs would be the fastest growing in their respective property space, the largest, and likely the most sought after by institutional investors that are dedicated to real estate or want a way to participate in the growth of the Asian consumer.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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