Deconstructing a British Hack Job – Part 1

The British press is notorious for its efforts to tear apart good things. But usually The Times of London is considered a reputable operation. That makes the three article hack job just published about Las Vegas all the more disappointing.

I can only conclude that they’re using a 3rd rate stringer to “cover” the Western US, as the kind of mistakes and bias evident in these articles are generally drilled out journalists while they’re still in school.

Let’s start our deconstruction with this one:

In this article, a guy named Tom Bawden performs some “analysis” and tries to support a thesis that Las Vegas is a “busted flush”. As anyone who has played poker will know, a busted flush is completely worthless.

How does he argue this?

Harrah’s, the world’s largest gaming group, with eight casinos on The Strip, including Caesars Palace, reported a first-quarter loss of $187.8 million (£96.5 million) after what Gary Loveman, its chief executive, described as a “lousy” March.

Well, let’s see. According to Harrah’s own release, posted at Harrah’s Entertainment Reports 2008 First-Quarter Results,

  • Revenues are down only 2.1% from first quarter 2007
  • First quarter 2008 included $211.3 million in pretax charges for the early extinguishment of debt and $142.6 million in non-recurring pretax merger and integration costs.

In other words, Harrah’s had $353 MILLION dollars of ONE-TIME costs stemming from their big leveraged-buy out. If you subtract this $353 million, then you get a positive cash flow of 165 million.

Harrahs generated, in the first quarter, 444 MILLION dollars of cash, aka EBITDA.

Other one time factors that contributed to the weaker quarter include:

    • “…a drop in the number of hotel rooms available at Caesars
      Palace due to reconstruction of the Forum Tower and at Harrah’s Las Vegas and the
      Rio due to room-remediation projects led to lower first-quarter results in the Las Vegas
      Region. The company expects the affected Caesars, Harrah’s and Rio rooms to return
      to service over the next few months.

If you can’t rent out a bunch of your rooms, you’re going to take an earnings hit.

Bawden goes on to say:

The Tropicana resort filed for bankruptcy protection this month because it could not sustain its debt payments.

This is hardly debateable. But what does it mean? The Tropicana was forced into bankruptcy for two reasons: The company overpaid for the Aztar assets in 2006/2007, and the unions managed, in what was quite a coup for their destructive capabilities, to get the Atlantic City license pulled for the Tropicana hotel there. The Tropicana hotel is being auctioned off, and the Tropicana company isn’t going to go anywhere. They may or may not stay independent as a company.

In other words, the Tropicana bankruptcy is a result of politics and corporate decisions, and has little or nothing to do with the overall Las Vegas economy.

Bawden continues:

Since November, shares in Las Vegas Sands, the owner of the Venetian and Palazzo resorts, have fallen by 38 per cent, while MGM Mirage, which controls Bellagio, Mirage and eight other Strip casinos, has dropped by 42 per cent.

Journalism is at its worst when it provides data without context. Let’s take Las Vegas Sands.

Sands is trading 10% higher than it was 2 years ago:


So why then is Sands trading down from its 140 peak in 2007? Most likely because it got overbought due to excitement over the Palazzo opening and the action in Macau. Should a stock that’s trading 10% higher than in 2006 be used to support an argument that the Las Vegas economy is tanking? No.

Then he goes on to make what’s probably the stupidest statement of the lot:

But there are still $36 billion of new hotel, gambling and housing resorts being built, including an entire quarter-mile stretch at the centre of The Strip. …If recent developments are anything to go by, the chances are that a good portion of the new corporate construction will run into difficulties and some will be scrapped.

What an idiot. There isn’t a single example in recorded history of a casino that was under construction being scrapped. The reason is that by the time the casino is visibly under construction, a tremendous amount of money has been invested into it. If the developer gets into trouble, as is the case with Bruce Eichner at Cosmpolitan, the developer may well get scrapped themselves, but someone will come in after the project has been written down to a reasonable cost basis, and finish the job. That’s why Deutche Bank proceeded full speed on the Cosmpolitan after Eichner defaulted.

He ends with:

There is also no doubt that the next few years will be tough for the housing market with foreclosures in Las Vegas not expected to ease up until 2011 or 2012.

Well, Frothing Developer is devoted to providing evidence why the next years will NOT be tough. Will there be foreclosures in 2011 and 2012? Sure. Is that important if demand is high and supply (inventory) is low? Not really.


4 Responses to Deconstructing a British Hack Job – Part 1

  1. Nice writing style. I will come back to read more posts from you.

    Susan Kishner

  2. Kevin says:

    GREAT POST! I put one just like it on my blog recently. What kills me most about pieces like his is that many people will not know enough to dig deeper and ask the right questions. I guess this is why so few people make money in investments – especially real estate investments. Thanks for pointing this stuff out.

    Kevin at

  3. […] continued poking around the internet, and found this gentleman’s excellent two-part “deconstruction” of the Times’s article. Here’s the best part: That’s a […]

  4. […] Frothing Highlights – The Best From May Deconstructing a British Hack Job – London Times Part 1 […]

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