Casinos Join Hotels on Asset-Light Strategy: What Took Them so Long?

The owners of gaming resorts are taking a page from the hotel operations playbook when it comes to owning — or not owning — real estate. But the motive is a little different.

MGM Resorts revealed plans early this month to sell its CityCenter complex — comprised of the Aria Resort and Casino and Vdara Hotel and Spa — in Las Vegas to Blackstone for nearly $4 billion. The deal, part of MGM’s ongoing asset-light strategy, would keep MGM in charge of operations while Blackstone owns the property just as it acquired other MGM properties in recent years like the MGM Grand, Mandalay Bay, and the Bellagio Hotel & Casino.

MGM executives were talking about going asset-light as far back as 14 years ago but only pulled the trigger in recent years.

Why so long? Unlike hotels, casino companies now appear to want to deploy the money for other revenue streams. One of those revenue streams — online gaming — only just began to show its popularity on scale.

Splitting Differences: Hotel companies often use the capital saved on development to focus on guest experience or other areas typically directly involved in the property.

Casinos are a bit different, as the major gaming companies are still very much invested in the idea of owning real estate.

MGM’s asset-light strategy so far has been targeted to Las Vegas to capitalize on soaring real estate values and use that cash to pump money into higher growth and return opportunities in Asia or, even more importantly, online gaming.

Las Vegas Sands plans to vacate the market altogether in a $6.25 billion sale for Macau and other growth opportunities, and Wynn Resorts — which has not sold any of its Vegas properties — has similarly expanded in the Chinese gaming market. MGM Resorts is zeroed in on Japan.

“We’ve spent the better part of seven years pursuing an integrated resort at scale in Japan,” MGM Resorts CEO William Hornbuckle said at the Skift Hospitality & Marketing Summit last month. “We love the marketplace.”

Caesars Entertainment’s asset-light strategy has been a bit more muted than MGM’s, with the company offloading the Rio All-Suite Hotel & Casino in 2019 for a little more than $516 million but maintaining operations at the nearly 2,600-room off-Strip resort. That move was meant to free up capital to focus on the company’s properties on the Strip, Caesars CEO Tony Rodio said at the time.

The general industry sentiment with hotels is that these companies are best at operations rather than real estate ownership. By focusing on operations and licensing out their various brands, hotel companies also avoid the volatility of the real estate market by going asset-light and can scale into new markets rapidly without worrying about development costs. Marriott and Hilton led the charge here, and Accor and Hyatt followed suit in recent years.

The Virtual Casino Floor: The key destination to park capital from a Las Vegas real estate sale isn’t more physical properties. It’s online gaming — no real estate or construction required. But it’s only been in the last few years when online gaming showed real signs of growth,

The company’s BetMGM online gaming platform is expected to rapidly grow in revenue in coming years, and resources are needed to remain competitive in an increasingly crowded field.

Barry Diller’s IAC/InterActive took a $1 billion, or 12 percent, stake of the company last year with the intention of beefing up its online gaming presence.

BetMGM launched in seven new states over the span of 2020 and is expected to be in 20 markets by the end of this year. MGM expects BetMGM’s revenues to hit $1 billion next year — rapid growth from the $178 million in revenue seen last year. The platform already saw $163 million in revenue over the first quarter of this year.

“Today, we see this space as a three-horse race,” Hornbuckle said on an investor call this year without naming any specific leading competitors like DraftKings or FanDuel. “We are incredibly excited about this trajectory in the sports betting and gaming market.”

But MGM also has competitors with a similar ability to offload gaming mega-resorts to generate capital to invest further into online gaming.

Caesars Entertainment closed earlier this year on its roughly $4 billion acquisition of UK-based gaming platform William Hill, which accelerated its own presence in the sector. Wynn Resorts announced in May plans to take its Wynn Interactive online gaming platform public via a special purpose acquisition company, or SPAC.

The race is on for being the leader in online gaming, and offloading Las Vegas assets to eager investors can help fuel growth.

“There is real money, particularly in iGaming, today,” Hornbuckle said on an investor call last year. “The notion of asset-light moving forward is critical.”

Soho House Sees Major Growth Opportunities in North America

It may have been born in London, but Soho House’s future is centered on the other side of the pond.

The UK and North America each have 11 Soho House locations, with the UK the more mature market. North America is the revenue winner, however, when it comes to revenue.

North American locations account for 41 percent of the brand’s revenue while the UK accounts for 34 percent, according to an investor presentation Skift obtained that was included in parent company Membership Collective Group’s management roadshow. MCG appears ready to grow those numbers.

North America is the most profitable region for Soho House, and numerous cities across the region appear on MCG’s radar in expanding from the current 30-House portfolio to more than 90 in the next 10 years. Following profitability is a good thing: MCG had an $848 million deficit at the beginning of April, according to its prospectus filed with the U.S. Securities and Exchange Commission.

Where To: It’s fairly easy to track where exactly future Soho House properties might appear.

Soho House’s “Cities Without Houses” membership is one for those who live in cities without a physical Soho House but can access one of the clubs whenever they travel to a city where one is located. The company has 5,100 of these members concentrated in 44 markets around the world. MCG plans to use this membership sector as a roadmap in deciding where to build many of their next physical locations.

The presentation outlined many of these markets as likely next growth opportunities for physical Houses, including many in North America like Atlanta, Philadelphia, and Vancouver.

Projects are already in the pipeline in Nashville, Mexico City, Palm Springs, Portland, California’s Lake Arrowhead and Sonoma regions, and Rhinebeck, New York.

Hospitality Shopping Spree: MCG also closed on a $25 million deal with Sydell Group last month to operate The Line and Saguaro hotels in Austin, Los Angeles, Washington, D.C., Scottsdale, and Palm Springs. Additional properties are in development in San Francisco.

Sydell Group was co-founded by American investor Ron Burkle, who is also chairman and director of MCG.

“We believe the transaction will broaden our geographic reach in North America,” MCG noted in its prospectus.

The company declined to be interviewed for an interview following the release of the prospectus.

Another Day, Another Opportunistic Hotel Investor

New York-based investment firm KKR & Co. raised $2.2 billion for a fund targeting European real estate amid easing travel restrictions. Hospitality assets are part of the firm’s target.

“We continue to believe that Europe represents an attractive investing environment for real estate,” Ralph Rosenberg, partner and global head of KKR Real Estate, told Bloomberg.

It’s a hefty number, but it isn’t the only fund in town. Many investment funds were announced and capital earmarked over the last year for bargain hotel opportunities expected from the pandemic.

The crowded field of investors waiting on the sidelines, coupled with operators unwilling to budge on price due to federal stimulus keeping them afloat and the accelerating recovery in the U.S., meant there hasn’t been a major wave of deals.

KKR’s European focus may be to its advantage, given the region’s lagging recovery compared to the U.S. and China. Hotels are struggling more across Europe due to its reliance on long-haul travelers to fill rooms.

But even Europe may be short of deals: Roughly a quarter of the private equity real estate funds raised in the first quarter of this year are aimed at Europe. If there’s a whiff of a bargain to be made, that figure is certain to go even higher.