Casinos Are Closing but Still Paying Employees. How Long Can the Cash Last? -- Barrons.com
1:11 pm ET March 18, 2020 (Dow Jones) Print
By Evie Liu
Casinos in Las Vegas are closing their doors after Nevada Gov. Steve Sisolak on Tuesday ordered all nonessential businesses statewide to shut down for 30 days.
The order -- Nevada's latest effort to contain the coronavirus spread -- will pose an unprecedented challenge to the state's dominant gambling industry, which includes about 440 licensed casinos that brought in over $12 billion revenue in 2019, according to the Nevada Gaming Control Board.
Casino stocks, already underwater over the past three weeks, took another deep dive following the news. MGM Resorts International (ticker: MGM) tumbled 27% in recent trading, Penn National Gaming (PENN) plunged 36%, Caesars Entertainment (CZR) lost 24%, Wynn Resorts (WYNN) and Las Vegas Sands (LVS) down 10%, Red Rock Resorts (RRR) plunged 41%, Boyd Gaming (BYD) lost 29%, and Eldorado Resorts (ERI) is down 25%.
Several of Las Vegas' largest gambling operations, including properties owned by MGM and Wynn, had already planned to halt operations, as sharply declining foot traffic and the cancellation of conventions and the March Madness NCAA tournament put severe pressure on their business.
Many of the state's casinos and resorts have said they would continue to offer regular pay and health benefits to full-time eligible employees for the next two weeks. Some include part-time hourly workers as well. But there is little detail about what will happen after the initial two weeks. At the same time, significant furloughs and layoffs have been reported at multiple gambling operators since last week, including MGM and Caesars.
Following Sisolak's announcement, Bill Miller, president and CEO of the American Gaming Association, urged the federal government to provide aid to the industry.
"Nevada is the epicenter of the resilient American gaming industry," he wrote in a tweet on Tuesday night, "The federal government must act swiftly to bring relief to our friends, neighbors, and colleagues in Nevada and all across America whose livelihoods have been severely impacted by these hard but necessary actions."
Investors are concerned how long the gambling operators can survive before they run out of cash, should they be forced to remain closed longer than expected.
Nomura Instinet analyst Harry Curtis did the math, aiming to give investors a ballpark estimate in a Wednesday note. A lot of things are assumed, of course, in a quickly moving environment like this.
Since gambling companies can't absorb labor expenses indefinitely, Curtis assumes operators will only have to pay wages through March and the federal government will step in from April to provide assistance to furloughed workers.
He also expects the landlords of casino operators -- property companies such as VICI Properties (VICI) and Gaming & Leisure Properties (GLPI) -- to give their tenants some temporary rent relief until the Covid-19 crisis has passed.
Maintenance, renovation, and capital expenses on new buildings are likely to be deferred, but Curtis noted this "cannot go on indefinitely since property depreciation is real." The operators will also likely postpone dividend payments.
Once the payroll period ends, fixed expenses should account for between 30% to 40% of the casino operators' total operating expenses, Curtis estimates.
Based on such assumptions, Las Vegas Sands appears to be in the best position cash-wise among the nine casino operators Curtis analyzed. His model projects the company can sustain operations for about 760 days with its current available liquidity, which includes cash, cash equivalents, and available capacity of revolving credit lines.
Companies with more exposure to Macau and less to Las Vegas -- such as Las Vegas Sands, Wynn Resorts, and Melco Resorts & Entertainment (MLCO) -- will be able to stay solvent for the longest period, noted Curtis. "It is no revelation that Macau is the most likely casino market to rebound in the near term, possibly putting the stocks in the best position to recover earliest," he wrote. Both Wynn and Melco should be able to remain solvent for at least 500 days, according to Curtis' estimates.
It remains uncertain when the borders between Macau, Hong Kong, and mainland China will reopen, and when Beijing will start issuing visitor permits to those regions again. Since new coronavirus cases in Macau and neighboring Guangdong province haven't been reported for about three weeks, Curtis estimates things should start getting normal in Macau within four to six weeks. That means that while operations in Las Vegas and other markets continue to burn cash, Macau operations should be able to return to cash-positive within two to three months.
Caesars Entertainment and Penn National Gaming, on the other hand, have the least cushion due to their largely U.S.-focused operations. Both companies only have enough liquidity to sustain two to three quarters before cash runs out, according to Curtis' estimates.
