Will SLS Las Vegas Succeed Where Sahara Failed?

by John Mehaffey on February 23, 2013

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    saharaLas Vegas woke up to unexpected news on March 11, 2011.  The 59-year old Sahara property announced that it would close on May 16, 2011.  The property at the corner of Las Vegas Boulevard and Sahara Avenue has sat idle ever since.

    Sahara was a low end Las Vegas Strip property.  Hotel rooms sold for as little as $26 a night.  The casino floor had deteriorated to the point that the property had to offer $1 blackjack to draw players.  The property had found itself on an island at the north end of the Las Vegas Strip with only the Stratosphere within a reasonable walking distance.  Even then, the walk between the Stratosphere and Sahara can be interesting at night.

    Nearly two years later, construction is starting up on the skeleton of what most Las Vegas residents will always call Sahara.  The new name will be SLS Las Vegas.  The same brand is used on a number of boutique hotels across the country that are managed by SBE Entertainment Group.

    This group managed to secure $300 million in loans from traditional investors and $115 million through the EB-5 Immigrant Investor Program.  This program allows residents of other countries to gain easier access to visas by making investments that produce jobs in the U.S.  The $300 million loan carries a reported 13% interest rate.  The $115 million loan appears to be in the 6% range.  If those numbers are correct, it will cost nearly $47 million annually just to service the debt.

    SLS Las Vegas will offer 1,622 rooms, down from the 1,700 rooms that Sahara offered their guests.  If each room was filled every night of the year, then $79 from each room rented would be needed just to service the interest on the debt.

    Hotel revenue is not the only place SLS Las Vegas will earn money.   Most casinos in Las Vegas make their money on the casino floor.

    Single Property Las Vegas Strip Owners Losing Money

    Las Vegas Strip casinos that are not owned by large casino companies all share the same problem.  They do not have a large database of casino players to market.  Cosmopolitan, Riviera and Tropicana all have difficulty drawing gamblers to their hotels for this reason.  The massive mailing lists that Caesars Entertainment and MGM Resorts have at their disposal give them a competitive edge.

    Cosmopolitan is the newest Las Vegas Strip casino.  The property is most comparable to what SLS Las Vegas will be.  Cosmopolitan is located in the center of the Las Vegas Strip, between Bellagio and Aria.  Cosmopolitan lost $97 million in its first year on revenue of $478.6 million.  Over half of the property’s revenue came from food and beverage.  The casino only managed to win $107.4 million during their 2011 fiscal year.

    Cosmopolitan’s hotel offers 2,966 rooms.  That is nearly twice as many rooms as SLS Las Vegas will offer guests.

    Riviera, a 2,075 room hotel, posted a loss of $15.9 million in 2011, the last full year the company reported.  The property’s entire revenue was $81.7 million for the year, including $37.8 million in gaming revenue.

    Tropicana fared worse than Riviera, even with a better location.  In 2012, Tropicana lost $34.2 million on $91.3 million in revenue, including casino revenue of $39.2 million.  Tropicana has 1,658 hotel rooms.

    Comparing Cosmopolitan to SLS

    While Cosmopolitan is the most comparable property to the future SLS Las Vegas, there is one very large difference.  The former Sahara property is not in the center of the Las Vegas Strip.  Guests staying at SLS Las Vegas will not be within walking distance of any casino except for Stratosphere.  There is a Las Vegas Monorail station connected to the property that may help with connectivity.  While that is better than nothing, that access did not seem to help Sahara.

    Cosmopolitan posted gross revenue of $478.6 million in 2011.  Comparing that number to the size of SLS, the property would gross about $263 million.   That is giving SLS quite the benefit of the doubt.

    The Marquee nightclub, believed to be the highest grossing nightclub in the country, produced about 15% of Cosmopolitan’s revenue in 2011.  The hotel is also well positioned as it offers some of the best Las Vegas Strip views that are available, complete with balconies overlooking the Bellagio fountain and other strip scenery.  SLS Las Vegas will offer none of this, nor will it have the walk in traffic that benefits Cosmopolitan.

    According to an SEC filing, Cosmopolitan’s expenses for their first full year were $678 million.  These expenses included:

    • Casino, including promotions – $95.3 million
    • Hotel – $47.8 million
    • Food and beverage – $193.9 million
    • Admin – $142.2 million
    • Corporate – $14.5 million

    Ignoring depreciation, Cosmopolitan had $493.7 million in expenses in their first full year.  It is hard to compare one property to another, but this is probably the best example that there is.  Comparing these numbers to the size of SLS Las Vegas, the former Sahara property would have $271.5 million in expenses based on a multiplier of .55.  Using this number, SLS Las Vegas would be $8 million in the red before ever paying their interest expense.

    These projections are quite optimistic.  That assumes that SLS Las Vegas, islanded at the top end of the Las Vegas Strip, can pull in the same numbers on a percentage basis when comparing hotel room counts.  Cosmopolitan averaged a hotel rate of $237 per night in 2011.  It will be hard to imagine SLS can command the same high hotel rates due to its location.

    Riviera is not a comparable property, but it grossed just $81 million with a larger hotel.  A good estimate for SLS Las Vegas revenue is probably somewhere between Riviera and Cosmopolitan.  This might put annual revenue in the $200 million range.  If that number is correct, then about 24% of the property’s revenue would go towards servicing the debt.  The property would only have $153 million each year to meet its other obligations.  As you can see from Cosmopolitan’s expenses, running a high end casino is not cheap.

    SLS Las Vegas has a poor location, no database of high rollers and about $47 million worth of annual debt expense to overcome before it can be successful.

    Author Notes

    I do not wish for the property to fail.  In fact, I am hoping it succeeds.  I would never want a business willing to take such a risk to fail.  Risks like these helped build Las Vegas and many other cities.  The construction jobs this project will create are very important for the city, as are the permanent positions in the casino and hotel.  I hope that the marketing list created by the other SLS properties will provide SLS Las Vegas with everything it needs to overcome all of the other obstacles the property faces on its road to prosperity.   I wish them the best of luck.

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