Two years ago construction companies had more casino projects than they could handle. They were in clover, four leafed clover.
A year ago the clover dried up. The bottom dropped out. Several projects are half completed in Las Vegas. Indian gaming projects nationwide have halted in mid-stride. The biggest gaming companies have cut capital budgets as much as 90 percent.
Companies that once turned away clients are scrambling in a market where financing has evaporated. They are looking overseas. They are competing for public works. They seek to become as lean as possible for a protracted dry spell. They are getting creative.
If financing were not almost unavailable, this would be a great time to build. Contractors and subcontractors are hungry. Raw materials are cheaper and easier to obtain.
Tough as times are, some things casinos MUST do. Like maintain hotel rooms.
Getting Creative
Purchasing Management International, L.P. is the leading purchasing agent. Since its founding in 1993 by Bill Langmade, it has sourced, purchased and installed over $1.5 billion in hotel, resort and casino furnishings. PMI works with a designer or architect to install designer-oriented products, including specialty lighting fixtures and millwork.
Langmade calls the market “pretty grim. Many projects are on hold. Some are on a slowdown. Most of our projects with major corporations have stopped.”
The market shrunk 60 percent “overnight.” “There are signs of life-but most companies don’t want to fix up big areas. But they do want customers to stay in the nicest suites as they can.”
A “soft” renovation replaces carpets, bedding and drapes. A complete renovation would be everything, including lighting. “The big hotels constantly upgrade room by room,” Langmade says.
For the countercyclical players, “it is a great time because the cost has gone down so much. But it is difficult to get affordable or in fact any financing,” he says.
Materials are cheaper but often harder to acquire. “The price has dropped, but lead times for fabrics for custom-made goods have increased. The recession has hit China and everyone else. In China 20,000 factories closed. Instead of five companies supplying furniture there might be one.”
That requires more advance planning.
PMI has gotten creative. “You’ve got to get out of your chair, get on a plane and go meet with every client and say, ‘We are still here. We want your business.'”
They cut everywhere-except marketing. “We started this before the downturn. That’s when you need to advertise to get a share of the shrinking pie.
“Most of our clients are budgeting for next year and after. You’ve got to be flexible enough to go away for a few months but be ready when they are ready.
“Our goal is to break even and not lay anyone off. Most gaming companies had serious personnel cutbacks in construction, design and purchasing. They must outsource, so we have opportunities for more work-and we’d better be ready!”
Identifying New Financing
Perini Building Company is the largest builder of hospitality and gaming resorts in the U.S. It is building CityCenter, the largest privately funded project in the country; and the Cosmopolitan Resort & Casino, both in Las Vegas.
Vice President Dick Rizzo says this year will be the company’s very best in its 115-year history, due to its backlog. “Unfortunately to replace that backlog going into 2010 is our challenge now. Most of our work is negotiated and designed two or three years before construction. A good 80 percent is stalled because our clients are having difficulty identifying financing.”
Perini is proactively identifying funding sources. “We have always had contacts with financial resources but that has never been a focus,” says Rizzo. “Now it is. We hired a consultant to make a list of people we have worked with. We interview them to find out their appetite and how interested they are.”
Along with bond and legal associates, Perini is preparing a white paper on the new American Recovery and Reinvestment Act, aka the stimulus legislation, including Build America Bonds (BABS) and Tribal Economic Development Bonds.
“Such funding is good for hotels and convention centers, everything except the casino,” says Rizzo. “BABS are also appropriate for private hotel developers.
“If you have the financing there could not be a better time to build. Prices have significantly declined-at least 10 percent. But someone would have to have money in hand,” says Rizzo.
Subcontractors are more flexible and cost-competitive. “Where the project has been put on hold- after it is taken off hold and we ask the same subcontractor to re-price it to current conditions-99 percent of the time the cost comes down,” says Rizzo.
Equally important are payment terms. “If we can offer an incentive to sharpen their pencil we convince our clients to pay more frequently,” i.e. let subs bill in the middle of the month for labor and for the entire job at the end of the month.
Another way to get money flowing is through public-private partnerships. Perini is working with one private investor on an arena on Indian land.
“That will become more common. It’s one of the few ways to overcome a lack of financing by the tribes,” says Rizzo.
Venturing Overseas
KHS&S Contractors has lost half of its revenue from Las Vegas, where it is based. “We lean towards hospitality, gaming and medical. Those projects tend to be large,” says Senior Vice President John Platon, who, when we interviewed him, had just returned from Singapore.
“We saw what was happening a year ago and ventured overseas,” says Platon. “In Singapore they are well under way with the Sands and Star Cruise Lines is building a casino.”
“The economy in Dubai has made headlines but Abu Dhabi is pretty busy. There’s a light at the end of the tunnel in that Macau is going to be back online.”
Many contractors seek overseas suppliers for lower prices but Platon warns, “You have to qualify people more. Before using somebody we put a quality control manager in their factory.”
KHS&S has become creative. “We purchased a company that developed software to promote forward thinking. It identifies problems before they happen,” says Platon. “You have to come up with a better mousetrap. Right now that is technology-based.”
San Diego-based Roel Construction has customers in Indian gaming, and Boyd Gaming in Las Vegas. According to CEO Wayne Hickey, “Revenue is off considerably. We are making adjustments to overhead and staff. Looking into markets where traditionally Roel has not been.” Those include military, public works and health care.
“We do design-build-something the industry is going for. Design-build can be more economical if the tribe, and the decision makers, define the project well and the design-build team does a good job of providing the needs to match the program.”
Hickey doesn’t see much change in the price of materials, although they are easier to get. But he sees labor prices declining.
Roel is also deploying software programs that help one do the work of two. “When there is a lot of work you concentrate on executing it. But when it slows down you look at your systems,” says Hickey.
Don’t Survive-Thrive
Florida-based ROI Gaming & Hospitality is not just surviving, it’s thriving through a program where casino and hospitality customers are handed a turn key hotel business-at a discount.
Their credit must be pristine. They need to be well capitalized and they can’t be heavily leveraged.
ROI founder Tim Rose worked with both Bally and Trump for many years in property development. He started ROI in the 1990s.
In his most recent partnership with the Three Rivers Casino and Hotel in Oregon, he created the turn key hotel development model.
“Five-hundred-million-dollar casino deals are not going to be done anytime soon,” he says. “I knew of plenty of well-capitalized mid-size casinos that didn’t have lodging but were ready to go the next level.”
ROI stands for “return on investment.” “My philosophy is if I focus on my client’s return, I will be taken care of. We can put in an oversized, four-star hotel room at 25-35 percent less than the competition,” he says.
“If the capital market was more open we would be swamped. We spend more time identifying credit-worthy clients. The universe of people who need a hotel is large but the universe of people who could afford one is much smaller.”
ROI works with major lenders to get affordable financing. A typical client has operated two to five years, has 700-1,000 slots, a good EBITA and is a day-trip casino that wants to broaden its market. “We can deliver an oversize four-star room, complete turn key for $100,000 a key.” That’s 30 percent lower than the industry average.
“A hotel’s benefits are well-documented. You get higher-value players. Your geographic region expands. You have hotel revenues and increase food and beverage revenues. EBITA increases 30 to 40 percent. That is our niche.”
Rooms are 400 square feet (industry average is 370 square feet). Furnishings are designed for high turnover. Bathrooms are spacious with an extra vanity.
“You build during a low construction cycle. Now is a good time. Recovery will probably be in 2010. If someone gets into the process today they will open into that recovery.”
Rose and his contractors have been in the business 25 years or more. His preferred architects’ designs are part of the price. They specialize in the medium-size hotel, 100-400 rooms.
“We design it, build it, train the people and put the soap on the counter, so they don’t have to think about it,” he says.
Beyond Hospitality
PENTA Building Group is a general contractor based in Las Vegas with projects in hospitality, gaming, retail, commercial, and institutional. A recent project is Aliante Station.
During 2006-2007 PENTA turned away work in Las Vegas, which was 80 percent of its customer base. “We had talked about diversifying. In hindsight we should have put more time into diversification,” says Vice President Ken Alber.
They saw the train wreck coming last summer. They were in the third phrase of the Hilton timeshare project, ready to start foundation work, when in May of 2008 Hilton said it was going to slow the project until September.
“September came and went. They indefinitely suspended. This happened to other projects. A year ago we thought we had a nice backlog. That quickly evaporated as credit dried up.” Available work shrank and what remained was very competitive.
“We’re competing beyond hospitality,” says Alber. “Many contractors are bidding on government contracts. Some take it with zero fees and negotiate with subs to make them go lower. In the public sector a library was publicized for $50 million. Fifteen contractors bid the job, which then went for $32 million.”
Alber adds, “Companies are reducing general conditions, of which a good portion is staffing. They are staffing jobs leaner than before, which can be a detriment if you are not careful.
“We are getting out there and meeting and forming new relationships. We won’t aggressively pursue a job and cut staff to zero. We would rather pay three or four people to sit around playing cards than do a risky job.”
PENTA is looking at military projects in the Southwest and establishing design-build relationships with architects to collectively sell services.
It seeks out public sector projects where contractors are pre-qualified through alternative methods employing predetermined fees and general conditions. “It avoids the down and dirty bidding process which sometimes results in a bad project,” he says.
“We have had a few layoffs. We are bidding more competitively. Our fees have declined. We are re-evaluating benefits. We have always treated our employees fairly but we are tightening our budgets. We are thinking more regionally and getting our people into the concept that travel beyond Las Vegas may be required.”
The economy has made materials costs more realistic, he says. “Back in ’07 and ’08 structural steel and concrete costs escalated until projects wouldn’t pencil.” That has changed. Prices are falling. Projects can be built for 20 percent less than a year ago.
Reinventing Themselves
Someone who well knows that situation is Jay Allen, executive vice president of sales and engineering at Schuff Steel Southwest.
“We’ve had to reinvent ourselves,” he says. “We started adjusting a couple of years ago. Las Vegas was a big part of our revenue. 2007 was a big year for us. A large part of it was Las Vegas casino hotel work.” Then things slowed down.
Schuff does strategic planning. According to Allen, “Everybody in the company is a salesman, especially in hard times.” Schuff anticipated the slowdown and sought other markets. It opened an office in Chicago, where it has a project. There is another in Pennsylvania. Both were new markets.
“That has softened the blow,” says Allen. So has going after government and military work. There’s no limit to where the company can go, since it has 11 steel plants nationwide and is acquiring others.
It cut unnecessary costs, trimming and centralizing. “During the down period there are a lot of ways to prepare for the next up-tick. We are doing a lot internally to make us more streamlined, more efficient,” says Allen.
Innovation is a company hallmark. It is one of the few steel companies with a research and development budget.
“We are always looking for new things, new patents,” says Allen.
One factor that unites all of these companies is that they are all forward-looking and optimistic about the future-even though the present is a bit dicey.
Tough times weed out the inefficient. What remains will be companies positioned to take advantage of better times, whenever they arrive.
