Sky City may JV with hotel developers, investors in $807m expansion, Morrison says

SkyCity Entertainment Group [NZX: SKC], New Zealand's only listed casino company, would consider partnering with developers or hotel investors to part fund some $807 million of spending on its expansion in Auckland and Adelaide, chief executive Nigel Morrison says.

The Auckland-based company flagged the option of using co-investors while outlining development plans for the next six years that include a 300-bed, five-star hotel and adjacent retail precinct in Auckland at about $500 million, and the continued transformation of its Adelaide facilities to include a six-star hotel at a cost of $300 million.

Morrison said Sky City's balance sheet is "relatively modestly geared" and the company has some $330 million undrawn of a total $990 million of bank facilities to call on as well as cash flows from the business. Net debt was $659 million at balance date, while average borrowing costs fell to 6.92 percent in 2014 from 6.97 percent a year earlier.

It is also holding some 73.5 million of its capital notes as Treasury stock, amounting to about half the notes on issue, and could sell non-core assets such as its $35 million Federal Street car park. The notes were last quoted on the NZX debt market at $1.012 per $1 face value, meaning there's about $74 million of them in the market.

"There's lots of options. It's viable for us to invest ourselves and develop and operate but it is more important that the developments are completed" in a timely manner, Morrison told BusinessDesk. "There's some big developers who would come in and build it and take a stake in it, or a hotel investor."

Bringing in a partner to develop and own the new hotel on Hobson Street, which could then be leased to Sky City, could free up $130 million to $140 million, he said. Another option would be strata carparks, which could amount to between $30 million and $40 million. A joint venture of the new Adelaide hotel was also a possibility.

Such arrangements would be something of a novelty for Sky City, which typically owns its facilities. Exceptions are the land under its Queenstown casino and the freehold of its Adelaide casino site, which it rents from the state government.

The casino and hotel group is mid-way through what Morrison calls its "transformational projects" including a remake of Adelaide that has left "not a square inch" of the property untouched. Disruptions during renovations at Adelaide Casino contributed to an 18 percent drop in earnings before interest, tax, depreciation and amortisation at the complex, excluding international gaming rooms that were unaffected.

The company today posted a 23 percent drop in full-year profit, which it attributed to the impact of the strong kiwi dollar, Adelaide redevelopment costs and an adjustment to the theoretical win rate for its international business, which takes in the high rollers.

International business rebounded in the second half for a $6.5 billion in turnover in the full year.

The company lifted its maximum table differential, or the biggest hand that can be played to $250,000 from $200,000, narrowing the gap with rival casinos in Sydney and Melbourne with $500,000 hand limits. That initially lifted the volatility of returns from high-roller tables as the company built up volumes, Morrison said.

The shares rose 1.7 percent to $3.61 on the NZX and have shed about 12 percent in the past 12 months, while the NZX 50 Index gained by a similar amount.

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(BusinessDesk)