Mirage Sale Benefits Caesars, Wynn, Says Analyst

Posted on: December 14, 2021, 09:04h. 

Last updated on: December 14, 2021, 09:58h.

On Monday, MGM Resorts International (NYSE:MGM) announced the sale of the Mirage operating rights to Hard Rock International for $1.075 billion. There are potential benefits in that deal for rival gaming companies.

Mirage sale
Wynn and Encore on the Las Vegas Strip. An analyst says the price fetched in the Mirage sale makes these assets and Caesars’ properties more valuable. (Image: Las Vegas Review-Journal)

That price tag was surprisingly high, and underscores the desirability of Las Vegas Strip assets, even when real estate isn’t included. In a note to clients today, CBRE Equity Research analyst John DeCree says the Mirage transaction supports the firm’s bullish outlook for Strip operators and landlords, including Caesars Entertainment (NASDAQ:CZR), VICI Properties (NYSE:VICI) and Wynn Resorts (NASDAQ:WYNN).

VICI makes the list because by way of its $17.2 billion takeover of MGM Growth Properties (NYSE:MGP). It announced in August that it’s becoming the owner of the Mirage real estate.

The landlord is entering into a new lease arrangement with Hard Rock with a base term of 25 years and three 10-year renewal options. The initial rental obligation for the new operator is $90 million per year — what MGM is currently paying — and VICI has the option to participate in the $1.5 billion redevelopment of the venue.

The new master lease pact also includes “escalation of two percent per annum (with an escalation of the greater of two percent and Consumer Price Index (CPI), capped at three percent, beginning in lease year 11) and minimum capital expenditure requirements of one percent of annual net revenue,” said VICI in a statement.

Caesars Practical Beneficiary in Mirage Sale

With MGM fetching 17x Mirage’s 2019 earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) of $154 million, Caesars is a winner, too. That’s because, barring a surprise, it’s likely the next operator to sell a Strip venue.

With the Mirage setting a new bar for Las Vegas OpCo valuation, we can’t help but get excited about the prospects for CZR, which is planning to sell one of its Las Vegas resorts in early 2022,” said DeCree in the client note.

Caesars hasn’t publicly confirmed which of its Sin City venues it will sell. Nor has it mentioned if the transaction will be sale-leaseback or an outright divestment. But there’s ample speculation to that effect, with much of it centering around Paris and Planet Hollywood.

When the company formerly known as Eldorado Resorts announced plans to acquire “old Caesars” in June 2019, it struck a deal with VICI. That pact gave the real estate company rights of first refusal for sales or sale-leaseback deals on one of the following gaming venues: Flamingo Las Vegas, Bally’s Las Vegas, Paris Las Vegas, and Planet Hollywood Resort & Casino.

A second transaction would include the remainders from that group and The LINQ Hotel & Casino. To date, Caesars executives note they are targeting the divestment of one Las Vegas asset.

Where Wynn Fits In

For its part, Wynn hasn’t publicly mentioned that it’s looking to monetize its prime Strip real estate. But DeCree adds the operator “is sitting on what is arguably the most valuable casino resort in Las Vegas, if not the country.”

As the analyst noted last week, executive changes at Wynn, coupled with a possible desire to reduce its dependence on Macau, could prompt the company to become a player in industry consolidation.

An effective avenue to raise cash for acquisitions would be to sell the property assets of Wynn and Encore Las Vegas, which would likely command north of $5 billion. The company, however, hasn’t said it’s evaluating such a transaction.