Star Entertainment punts on finding property partner to polish Sydney casino gem

The Star is also in talks with the NSW government to build two new hotel towers at the Pyrmont site, one of which would be a Ritz-Carlton hotel.

Star Entertainment is following the lead of its asset-light counterparts in the US with plans to sell and lease back a minority stake in its $2.3bn Pyrmont site in Sydney’s Darling Harbour including gaming floors, three luxury hotels and a swag of high-priced restaurants and retail.

“We see the potential to unlock value from our property assets via a sale and leaseback or similar transaction,” Star Entertainment Group chief financial officer Harry Theodore has told The Australian in an exclusive interview.

“Transactions of this nature have become prevalent in the US casino market including some large deals this year in Las Vegas,” he says.

“It demonstrates a strong appetite from property investors for prop co transactions,” Theodore says, referring to the structures that separate real estate from the operating companies.

“The Star has initiated a formal process to explore those same opportunities.”

The Star hired investment bank Credit Suisse several months ago to handle the sale and leaseback of a 49 per cent stake. The deal would initially be struck at a 25 to 30-year term with several options in place.

Under the plan, The Star will continually invest capital in the Pyrmont infrastructure, which includes 620 hotel rooms spread across three properties plus at least six signature restaurants as well as outdoor dining.

The leaseback of famed casinos such as Bellagio in Las Vegas has become prevalent in the US, taking the form of a transfer of the property into a trust and leasing it back under a triple net leaseback structure allowing the tenants to occupy the property as well as investing in it.

It is understood that Star would use the sale funds to pay down debt and invest in other growth projects as well as continue to expand its Pyrmont property.

The Star and Foundation Theatres last week unveiled a first look at a 1550 seat Broadway-style theatre and 1000-seat comedy and live entertainment theatres that would be part of a redevelopment of the Event Centre and run alongside The Lyric Theatre.

The casino also is in talks with the NSW government to build two new hotel towers at the Pyrmont site, one of which would be a Ritz-Carlton hotel. It also is negotiating for another 1000 gaming machines.

Pre-Covid, The Star was returning earnings before interest, taxes, depreciation and amortisation of $350m annually, and the initial rent is expected to be set at around 30 to 40 per cent of that number, around $120m to $130m to the new owner.

The market is backing the strategy, with Star’s shares recovering, and investment analysts see a real estate deal as a potential catalyst for a re-rating. This could give Star greater leverage if it comes back with a refreshed merger play for James Packer’s Crown Resorts.

The Star hired investment bank Credit Suisse several months ago to handle the sale and leaseback of a 49 per cent stake. The deal would initially be struck at a 25 to 30-year term with several options in place.

Star delivered a better than expected result in August, with gaming revenues resilient when casinos were open and electronic gaming machines were above pre-Covid levels. The company also flagged the sale of the Treasury buildings in Brisbane, for about $250m, at its results.

“We estimate the sale and leaseback of the Sydney casino could generate $1.25 a share of incremental value assuming a 5 per cent cap rate, a premium to US REITs given the market position of Australian casinos,” E&P Financial Group analysts Sacha Krien and James Fuller wrote in a note. “Star was noncommittal about the use of proceeds from asset sales but remains open to exploring value-enhancing opportunities with Crown, which could take a number of forms depending on the outcome of current inquiries.

“We have increased the REIT scenario in our blended valuation to $5.45 using a 5 per cent cap rate for the Sydney casino only.”

Macquarie Securities analysts David Fabris and Gabrielle Emerick noted that a formal process was under way for the sale and leaseback on a minority stakeholding in the Sydney property, where the vendor would retain an interest of more than 50 per cent.

“Flipping The Star Sydney into an OpCo/PropCo could realise $1.8- $2.6bn in value and be worth 95c–$1.40 per share, with high sensitivity to the rent charge and cap-rate,” they wrote.

The Star put its merger proposal with Crown on ice in July because of uncertainty about the royal commissions the now Steve McCann-run target faces. But The Star’s management, led by Matt Bekier, has remained open to exploring opportunities with Crown.

“We see the next catalyst to this being the outcome from the Crown Melbourne royal commission in mid-October,” the Macquarie analysts said.

However, the big competition for any Crown play would come from US private equity giant Blackstone, which is also alive to the value of casino property, after striking a series of deals in recent weeks leaving it in command of billions of dollars’ worth of casino real estate in the US.

Blackstone already owns 10 per cent of Crown but the target rebuffed its sweetened bid of $12.35 a share in May, saying it undervalued the company and created regulatory risk given Blackstone was yet to acquire casino licences.

But the real estate could hold the key to a takeover if US prices are any guide, and it could be even sharper in Australia as there is less competition.

Blackstone last week agreed to sell the Cosmopolitan casino and hotel on the Las Vegas Strip for $US5.65bn ($7.78bn), marking its most profitable of a single asset.

Blackstone picked up the property for about $US1.8bn seven years ago and splashed $US500m on upgrades, including renovating the nearly 3000 guestrooms, building luxury suites and adding new restaurants and bars.

Notably, the deal separated ownership of the property from the hotel and casino operations, which are being sold to MGM Resorts International for $US1.625bn.

A partnership that includes a Blackstone real estate investment trust is acquiring the property for about $US4bn.

That deal marked the latest in a flurry of real estate sales on the Las Vegas Strip, as casino operators look to raise cash for growing operations such as sports betting and entertainment.

In August, real estate owner Vici Properties agreed to buy MGM Growth Properties in a deal that valued the casino real estate owner at $US17.2bn.

A July deal in which MGM Resorts took ownership of the huge CityCenter property on the Las Vegas Strip, and sold the real estate of CityCenter’s Aria and Vdara hotels for $US3.89bn in cash to Blackstone, has also been finalised.

The transactions point to the possibility that Blackstone eventually could look to a similar split if it gains control of Crown, although this year it insisted this was not on the cards.

After hopes sparked by Crown’s plans to spin off a REIT and The Star’s own merger proposal being pitched as releasing $2bn by carving off the real estate of the country’s best casinos, the time may have come for casino real estate to rise in Australia.