Las Vegas Strip Failure Turns Into a Huge Win

Every inch of land on the Las Vegas Strip has become incredibly valuable. Recent sales have placed the value of a single acre at $10 million -- and that's land located on the less popular northern end of the Strip.

The Las Vegas Convention and Visitors Authority (LVCVA) Board of Directors recently approved the sale and licensed use of a 10-acre parcel of land located at Las Vegas Boulevard and Elvis Presley Boulevard for $120 million to CB Investment SpA, a company owned by South American businessman Claudio Fischer. That piece of property once housed the Riviera Hotel.

Land on the north Strip has climbed in value because Resorts World Las Vegas, Fontainebleau, a potential NBA-ready arena, and perhaps a Major League Baseball stadium next to Circus Circus have made that once-underdeveloped area. Move to the south Strip and land becomes even more expensive.

Tillman Fertitta, CEO of Fertitta Entertainment, reportedly will pay $200 million for a 6-acre site, which is currently occupied by a Travelodge motel, retail, and restaurant space. Located between Caesars Entertainment's (CZR) - Get Free Report Planet Hollywood and MGM Resorts International's (MGM) - Get Free Report MGM Grand, the site will be developed into a high-end casino/resort by the Golden Nugget owner.

That's roughly $33 million per acre simply for the chance to build a property on the Las Vegas Strip. And, while these numbers are astounding the growth of Las Vegas as a sports and entertainment destination suggests that prices will keep moving higher.

Basically, Strip assets have become priceless, and selling one when you don't absolutely have to seems like a terrible mistake.

Why Caesars Wanted to Sell a Strip Property

For the past few quarters, Caesars had talked about selling a Strip asset, which could have been multiple properties, but ultimately it turned out that Flamingo was for sale. There were a lot of reasons why the company would want to make the deal including:

• Paying off some of the 15.5 billion in debt it took on when it merged with Eldorado Resorts in 2020
• Reducing the number of rooms Caesars owns, making the rest of its inventory more valuable.
• Saving Caesars the expense of having to redevelop the property.

The problem is that while those all seem like good reasons, they're all very short-sighted. Flamingo sits on one side of the Linq (Harrah's sits on the other) and shares the Linq Promenade with its sister property. If another casino operator bought Flamingo, it would break up a long run of Caesars properties that continues with Flamingo's neighbor on the other side Cromwell.

That's followed by Bally's soon to be renamed Horseshoe, Paris Las Vegas, and Planet Hollywood. Caesars Palace sits on the other side of the Strip across from Flamingo. Basically, it's a huge area that Caesars dominates, offering pretty much every price point and experience Las Vegas visitors could want in an easy-to-walk stretch of the Strip.

The Economy Saves Caesars From Itself

Caesars had a deadline to make the sale and that deadline passed in late summer. The company's CEO Tom Reeg gave some insight as to why the deal failed during his company's second-quarter earnings call.

"For us -- and there's -- there are plenty of interested parties. Obviously, the financing environment is what it is. And if that's going to impact what someone will pay, there is a level where we're not going to chase it. I'm very happy to just clip the free cash flow and come back later," he said.

Basically, rising interest rates made it harder to make a deal and that may have saved Caesars from making a mistake that would have haunted the company. Reeg's comments during the company's third-quarter earnings call made it sound like a sale was not something the company was considering anymore,

I'd also like to touch on the strip asset sale and say that we intend to keep all of our strip assets as we move forward. We ran into a market where the cash flow of the asset continued to increase the ability of buyers to raise financing, made it a very easy decision for us to keep. I know that despite us talking about how this is and was a discretionary process for us, it created an unnecessary overhang in the stock. And I apologize to all of our shareholders for that. That was a self-inflicted error and that was me. So, we will be keeping our Vegas Strip assets as we move forward.

Market conditions killed the sale and that's something Caesars shareholders will be thankful for going forward. Yes, Flamingo needs work (a lot of work) but its location on the Strip and the escalating value of Strip property made selling it a move Caesars would regret because the cost of replacing it would simply be too high.