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After years of rumored courtships, Caesars Entertainment is finally selling its aging Rio All-Suite Hotel & Casino in Las Vegas.
New York-based Imperial Companies is the buyer, falling in line with speculations that materialized this past spring. Imperial describes itself as “a vertically integrated real estate investment, development and management platform.”
Following the sale, Caesars will retain the data for customers enrolled in its Caesars Rewards programs via the Rio. It also keeps ownership of the World Series of Poker (WSOP), which has become a huge draw since moving from its original downtown home at Binion’s Horseshoe in 2005.
The brand stays with Caesars, but the annual summer poker event will likely relocate again in the coming years.
Caesars Rewards is a unified loyalty program that allows guests to collect and spend points at dozens of Caesars-owned properties, including the nationwide Harrah’s chain. The program and its associated data are a core part of Caesars’ empire, not just a component of the Rio’s independent business.
The summer series at the Rio has likewise become part of the WSOP’s identity, but the brand has grown to be more than just an annual festival.
Caesars supports the summer series with a regulated WSOP online poker site, plus live events across WSOP Circuit and WSOP International stops abroad. None of those sub-brands are part of the transaction.
Neither Caesars nor the WSOP are leaving the Rio immediately either.
Under the terms of the deal, Caesars will rent the property back from its new owner for a minimum of two years. Imperial holds the option for a third year, which requires a $7 million payment to activate.
That does, however, indicate that Caesars intends to fully divorce itself from the Rio within that window. If the sale was designed to free up liquid capital while retaining operations, it likely would have reserved the option for itself rather than leaving that decision to Imperial.
Indeed, the whole point of the deal seems to be to decouple the physical property — the buildings and the real estate — from the Rio’s intangible assets. The two have come to be less than the sum of their parts to some extent, and each may be more valuable on its own.
Splitting things up makes sense given the nature of the two companies too.
Caesars Entertainment is, as the name implies, an entertainment company with a business that orbits around shows, dining, and nightlife as much as gambling. It owns dozens of properties around the country, but its portfolio is focused. If a casino is no longer seen as a destination for recreational travelers, it’s no longer valuable to the company’s underlying business.
Conversely, Imperial is a vertically-integrated real estate company which owns a far larger portfolio of property. And its business lives and dies by the value of those properties themselves. The group is known for buying undervalued investments, improving them, and flipping them for a profit.
In that regard, the Rio is an ideal fixer-upper.
The two-to-three year term for Caesars’ continued operations suggests that Imperial has a relatively short timeline on its plans for the Rio — whatever those might be.
The off-Strip casino might be less than 30 years old, but it has been mostly neglected under Caesars ownership. While spending hundreds of millions upgrading its other Las Vegas properties in recent years, the company hasn’t done anything beyond basic maintenance to the Rio since 2007.
The property’s condition is reflected in the purchase price.
When Caesars bought the Rio in 1998, it paid $880 million. Accounting for inflation, that’s almost $1.4 billion in 2019 dollars. Imperial is paying just $516.3 million, meaning the property has lost over 60% of its value in the past 20 years.
The state of general disrepair is apparent to anyone who’s played the WSOP or otherwise visited the Rio recently.
In addition to being visibly dingy and rundown, the building has serious issues with its infrastructure. There was a significant power failure during the 2018 WSOP for instance, and an outbreak of Legionnaires’ disease in 2017 which likely stemmed from poorly-maintained plumbing.
Caesars stock (CZR) dipped slightly after the deal became public, presumably in response to the sale price.
Investors may be getting things wrong in that regard, however, as this deal has the promise to be a mutually beneficial. Caesars didn’t purchase the Rio as an investment, and it has served its purpose for more than two decades.
The company extracted good value from the real estate — in the form of direct profits, customer acquisition, and growth of the WSOP brand — and it’s acceptable to shed it at a loss if it’s no longer useful. And besides, it will take most of its most-valuable assets with it when it leaves.
Imperial will now invest additional money to add value back into the property and convert it for a new purpose. That might involve some sort of mixed-use endeavor with a residences to mesh with Imperial’s broader business model.
Gaming analyst Barry Jonas told the Las Vegas Review-Journal that he expects “a focus on non-gaming amenities, a potential residential component, and perhaps partnerships with hotel and hospitality brands.” Once the conversion is complete, Imperial may even try to flip the property itself.
The two business plans are starkly different, and one is not necessarily better than the other.
The new Rio (or whatever replaces it) will no doubt be very different, and the WSOP will eventually move to a newer — probably shinier — home. For now, though, Vegas-goers and Series attendees shouldn’t get too excited. A move of this magnitude requires a transition period that could span the next few years.
Staff already 100% confirmed that the Rio will host the 2020 WSOP, and that should extend through 2021 while Caesars rents the property from Imperial. That means it probably won’t move until 2022 at the earliest, and possibly 2023. Where it might go is a topic of speculation for another day.
As for the Rio’s facelift, it’s not clear how much work Imperial intends to do while Caesars is still an occupant. If anything, things could get worse before they get better. Major renovations can bring major inconveniences, and Imperial may want to get the worst of them out of the way before it takes over operations on its own.
Expect to see plenty of dust and scaffolding over the next couple years, and parts of the property may even be temporarily closed off during renovations. The revamped Rio likely won’t realize the full benefits of all that work until Caesars and the WSOP have already departed.