In Las Vegas and Atlantic City, CMBS Hasn’t Always Had a Winning Hand

CRE Finance World, Summer 2013

In Las Vegas and Atlantic City, CMBS Hasn’t Always Had a Winning Hand Jason Lami A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 47 fter staying away from the Atlantic City casino/hotel market since 1998, the CMBS house in 2007 placed its bets on several Boardwalk properties. However, since these securitizations, Atlantic City gaming revenue (which already was trending lower in 2007), has fallen by about 40%. And just recently, online gambling in New Jersey was legalized. Standard & Poor’s Ratings Services believes this will introduce additional competition, potentially reducing the gaming revenue received from the Boardwalk’s bricks-and-mortar casino visitors even further. As gaming revenues fell, casino property values receded from high-tide levels. The Resorts Atlantic City casino/hotel operations (securitized in 2007 and liquidated), realized a loss severity rate of over 100%. In the March 2013 trustee remittance report, The Pier at Caesars reported a value of $11.0 million, compared with $187.5 million at issuance. The master servicer made a nonrecoverable determination, and interest shortfalls have climbed up to the A-1A class. In 2007, the casino/hotel operation of Planet Hollywood was securitized, then in 2008, Las Vegas’s gaming revenue began to decline, continuing through 2009. It started to stabilize in 2010, and has been trending higher ever since. Based on its most recent reported appraisal, however Planet Hollywood’s value has declined by 37% since securitization. While we expect to see further securitizations along the Strip, Boardwalk securitizations are less certain. In both markets, however, revenue sources for debt repayment likely will come from the retail component of the casino/hotel, rather than its casino operating business. The Trends Behind CMBS Gaming Securitizations In 1998, CMBS stuck its toe into the salty waters along the Atlantic City Boardwalk with the securitization of the Showboat Hotel and Casino. It didn’t return to the major gaming markets until 2003, when it ventured west to the desert of the Las Vegas Strip. Both of these years had one thing in common: high CMBS volume. In 1998, CMBS issuance hit a multi-year high of $74 billion, which it did not reach again until 2003, when it closed in on $78 billion (see Chart 1). CMBS issuance then began a steady climb, as did lending activity on gaming properties. The CMBS market continued to lend on the Strip from 2004 to 2006 but stayed away from the Boardwalk. During this time, CMBS financed $2 billion of principal balance on the retail component of several major Strip casino/hotel properties. Then in 2007, the largest issuance year so far, the CMBS house parlayed its winnings by placing three bets directly on the casino/ hotel operations of both Strip and Boardwalk properties. More money was wagered on the Boardwalk with the Atlantic City Hilton, Resorts International, and Pier at Caesars (retail component) being securitized, while on the Strip, it was Planet Hollywood. Chart 1 U.S. CMBS Issuance Source: Commercial Mortgage Alert It appears, however, that the wrong color on the roulette wheel may have been chosen. Although visitor volume and gaming revenue declined in both gaming markets in 2008 and 2009, Las Vegas’s gaming metrics turned the corner in 2010 and have steadily improved since then, while the Boardwalk continues to trend lower. Reflecting the Boardwalk’s economic problems, on Feb. 19, 2013, the Revel casino/hotel announced that it would be seeking chapter 11 bankruptcy protection. And a week later, New Jersey legalized online gambling. A Rating Analyst Standard & Poor’s Ratings Services Larry Kay Director Standard & Poor’s Ratings Services Barbara Hoeltz Senior Director Standard & Poor’s Ratings Services


CRE Finance World, Summer 2013
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