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CRE Finance World, Summer 2013

We believe that legalized online gambling in New Jersey could help to regain some of the gambling revenue lost to Pennsylvania, and New York. However, it is our view that legalized online gambling will introduce additional competition, which could potentially reduce the gaming revenue received from the Boardwalk’s bricks and mortar casino visitors. For any future Boardwalk casino securitizations, it will be interesting to see whether a casino’s online gaming revenue will be pledged to service the debt, in addition to the bricks and mortar gaming revenue. Visitor Volume Drives Gaming Economics Visitor volume is one of the single largest determinants of how well a gaming market might perform. Visitors drive hotel occupancy, average daily rates (ADRs), and gaming revenue (see Table 1). After a strong 2006 and 2007, visitor levels in both Las Vegas and Atlantic City began to trend lower. Following the two down years of 2008 and 2009, Las Vegas visitor volume began to turn around and, increased 2.7% to 37.3 million visitors in 2010 compared with 36.4 million in 2009. In both 2011 and 2012, Las Vegas visitor volume continued to grow modestly, increasing about 6% when comparing the year-to-date totals though November of both years. (For Chart 2, the Las Vegas year-to-date November 2012 and 2011 figures were annualized.) Las Vegas gaming revenue, though still lower than it was in 2007, is recovering. For the trailing 12 months through November 2012, gaming revenue was $6.14 billion compared with $6.05 billion for the same period in 2011, an increase of 1.5%. Expected improvement in group booking levels and limited room supply scheduled to come on-line in the foreseeable future should help keep Las Vegas’s occupancy levels and room rates strong. Table 1 Gaming Metrics * Year to date through November ¶ Trailing 12 months through November § Year to date through September CRE Finance World Summer 2013 48 Atlantic City, however, has not yet turned around. After reaching 34.5 million in 2006, its annual number of visitors has slowly and steadily declined. For full-year 2012, there were about 23.8 million visitors, which is about 30% fewer than in 2006. Atlantic City’s gaming revenue — also in its sixth consecutive year of decline — has dropped more substantially than visitor volume. Gaming revenue fell to $3.30 billion in 2011 and then to $3.06 billion in 2012 from $5.17 billion in 2006, about a 40% overall drop. And although Hurricane Sandy largely spared Atlantic City casinos, competition from casinos in Pennsylvania, New York, and Connecticut remains fierce. This will likely keep the pressure on Atlantic City’s performance. The biggest competitive challenge for Atlantic City is the 11 casinos in Pennsylvania, including four in the Philadelphia area. In 2011, the licensed casino operators in Pennsylvania produced more than $3.5 billion in gaming revenues, exceeding that of Atlantic City. CMBS Doubles-Down on Gaming Properties CMBS loan originations on the Strip were most active from 2003–2005, as the retail component of five major hotel/casino properties were financed. Of these, four have already paid off at full proceeds, with the fifth about two years away from maturity. In 2006, with the Las Vegas market still strong but starting to exhibit signs of frothiness, CMBS doubled-down on the Desert Passage retail component of the Aladdin Hotel. This securitization occurred approximately one year after the prepayment of the Desert Passage securitized loan. The amount of securitized debt was more than double the previous securitization’s amount. Appraisals supported the increased debt levels, which valued the property at $1,103 per square foot from $571 at the previous securitization (see Table 2). The increased valuation may have been in anticipation of the changes scheduled for the property in 2007, as well as a precursor of things to come. The Aladdin hotel, which was plagued by poor design and high operating expenses, was sold in bankruptcy in June 2003 to the partnership of Planet Hollywood and Starwood Hotels and Resorts Worldwide. In April 2007, it re-opened as Planet Hollywood Resort and Casino. Its retail component, Shops of Desert Passage, was also struggling financially. In May 2007, the owner removed the retail area’s Moroccan/Egyptian décor, which became unpopular after the Sept. 11, 2001, terrorist attacks, and rebranded itself as Miracle Miles. In Las Vegas and Atlantic City, CMBS Hasn’t Always Had a Winning Hand


CRE Finance World, Summer 2013
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