The Las Vegas of China

Why we think Macau is the best gaming environment.

The gaming industry in Macau offers interesting opportunities to investors. Combining a restricted casino and hotel supply with a huge demand for gaming in China, Macau is now the world’s top casino market, with more than five times the revenues of Las Vegas. In a lot of ways it’s actually a better business environment than Las Vegas for gaming and entertainment companies.

Formerly a Portuguese colony and located just across the Pearl River estuary from Hong Kong, Macau is a tiny peninsula attached to mainland China. It is one of two Special Administrative Regions for the People’s Republic of China, the other being Hong Kong.  The Chinese government legalized gaming in Macau in 2002 and has issued a limited number of licenses to operate casinos. Right next door to Macau reside more than 1.35 billion people in China. The resulting mismatch between supply and demand has created the kind of oligopoly we find to be a compelling opportunity.

The average visitor to Macau arrives from Hong Kong or mainland China, and loses approximately $1,100 per day, or roughly 30 times as much as the typical visitor to Las Vegas, who loses $36 per day.  In the fourth quarter of 2013, VIP gamblers at the Wynn Macau resort alone wagered $34.4 billion; annualized, this comes to $137 billion.  For comparison, the 2013-2014 budget for the state of California was $98.4 billion. In other words, last year, VIP gamblers in one Macau facility the size of a supermarket gambled 1.4 times the annual budget of the 12th largest economy in the world.

The limitation on supply is driven both by physical constraints (Macau is 11.4 square miles) and the limited number of gaming concessions issued by the Chinese government.  The return on assets (unlevered) to U.S. companies with casinos in Macau – Wynn Resorts, MGM Resorts and Las Vegas Sands –has historically been in the mid-20 percent range or higher.   By comparison, unlevered returns on commercial real estate in the US have typically ranged from 5%-9%, depending on the sector and location.  Unlevered returns on new development of casinos in Las Vegas have typically ranged from  9%-13%, so on an apples-to-apples basis, the companies in Macau have developed assets about twice as profitable as in the U.S.  This advantage is a function of exceptional demand drivers meeting limited supply.

Over time, we believe it is not likely that this advantage will go away.  About 13 percent of the U.S. population is represented in visits to Las Vegas and anyone that wants to go there, can.  Macau’s visitation is only about 1.2 percent of the Chinese population and China’s government is allowing more of their population to visit.  The Chinese are also pouring money into the area’s infrastructure, including new high speed rail, inter-city rail, border gate expansion and a 31-mile, $10.7 billion bridge linking Hong Kong to Macau. These expenditures will likely make Macau even more tourist-friendly to the world’s most populous country, and subsequently, bode well for its gaming industry.

Of course, any meaningful slowdown in the pace of growth in China’s economy could reduce the rate of growth in gambling and vacation travel.  Additionally, internal travel policies such as the individual visitation scheme could change and this may affect travel to Macau.


The Internet of Everything

How to make money when your refrigerator orders milk

The U.S. Department of Transportation (DOT) wants cars to talk to nearby cars to aid in safety and maybe target traffic congestion.  As of the end of 2011, according to DOT, there were 253 million registered vehicles in the U.S. – that’s a lot!  My Nike Fuel Band talks to my phone and my laptop and one of my friends has a smart house where basically every piece of information that’s even remotely relevant gets measured, transmitted and stored.  So his refrigerator is complaining to his microwave that the embedded music system never plays Perry Como, because it’s fixated on Katy Perry.

When we look to make investments in real estate stocks we are drawn to companies that possess certain characteristics.  We look for businesses that operate in sectors that have but a few competitors, where the real estate they own is in markets with very high barriers to entry, where the tenants have practical, locational or physical issues that prevent them from moving, and lastly where the tenants or users are experiencing strong secular growth.  Data centers and cell phone tower operators fit the bill for these characteristics and are part of our portfolio.

But in particular, the internet of everything, in our opinion, is a massive secular demand driver for these companies.  The possibilities are nearly endless. Some trivial, like my Nike Fuel Band or my refrigerator telling me I am out of soy milk (don’t even ask) and some really important, like medical devices chatting with one another and updating the health status of the population of a nursing home or hospital.  Wearable computing.  Google Glass for instance, is likely to be as ubiquitous as cell phones are today and the sheer amount of data these items will gather, store, share and access boggles the mind.

While this is in some ways a blinding glimpse of the obvious, we don’t think it’s actually baked in to the numbers.  Each time available bandwidth has increased, previously unimagined applications pop up to absorb that bandwidth.  No one would have predicted five years ago that kids would have Facebook’s mobile app open on a smartphone 14 hours a day running in the background.

You take this to its logical conclusion and huge quantities of what is now inert stuff becomes talking, communicating, bandwidth-eating stuff.   All this stuff stores its stuff in data centers and transmits that stuff to data centers through cell towers and other wireless networks.    Cisco’s expectation for wireless bandwidth is that global mobile traffic will grow 11 fold between 2013 and 2018.  We like this.


White Papers: Interest Rates & REIT Performance

A look at how REIT prices historically performed during periods of rising rates.

How do REIT share prices perform while interest rates are increasing? This is a logical question, as the returns associated with traditional fixed income oriented products, like bonds, are strongly correlated with rate changes. Many looking for income oriented products wonder if REITs behave the same way. After examining seven distinct periods of rising Federal Funds rate, we believe the simple answer is no.

Download the Interest Rates & REIT Performance White Paper