Author: Casino Connection Staff

Pennsylvania’s 2017 Gaming Expansion Act authorized up to 10 Category-4 (satellite) slot operations, or “mini-casinos,” in the Keystone State.

Since then, only four of the licenses have been snapped up, with diminishing returns for the state in each round of bidding. To wit:

• First, regional juggernaut Penn National paid $50.1 million for a license in York County.
• Then Stadium Casino (aka the Cordish Co.), which is now building a casino in Philadelphia’s Stadium District, paid $40.1 million for a location 40 miles east of Pittsburgh.
• Airy paid $21.2 million for a location in New Castle, between Pittsburgh and Youngstown, Ohio, but its financing fell apart and the license was rescinded.
• A fourth bid was submitted by Greenwood Gaming and Entertainment Inc., operator of Parx Casino, which coughed up just $8.111 million to construct a satellite casino in Cumberland County. That project is in limbo because of geological issues at the site, and Parx is scoping out possible new locations.
• Finally, last June, Penn National won a second license for a Hollywood-branded mini-casino in Morgantown, which bisects both Berks and Lancaster counties, paying just $7.5 million.

Subsequent rounds of bidding aroused no interest, and the auctions were supposedly shut down forever. On September 2, however, lawmakers will return to the well once more, hawking a fifth license in hopes of generating cash for Covid-starved state coffers.

According to a new report from Atlantic City-based consultancy GGH Morowitz, all current Pennsylvania casino operators and licensees are eligible to participate, subject to certain limits.

Some things remain the same: the minimum bid is $7.5 million for up to 750 slot machines, and winning bidders may pay $2.5 million to offer up to 30 table games at opening, with the option to add 10 more after a year.

And some things have changed. “The winning Cat-4 bidder may offer sports betting on-site at the new location or through online/mobile channels inside the state,” states the report by Cory Morowitz and William Allsup, “provided they purchase a $10 million sports betting license.”

Amid the upheaval caused by the virus—which shut down construction on the origina mini-casinos—“the gaming industry is adapting and looking forward,” the report states. “Whether it’s the white-hot online gaming and sports wagering markets or the few remaining greenfield markets that exist, the industry is looking to deploy capital.”

Looking Back, Looking Ahead

In January 2018, when the Pennsylvania Cat 4 licenses were first put out for bid, GGH Morowitz identified 15 desirable sub-markets ripe for the bidding, based on proximity to population density, a right-sized investment, promotional strategies and branding. That initial report was prescient, and predicted that Cat-4 bid amounts “would decline with each succeeding bid as marginal returns declined.”

Originally, GGH Morowitz concluded, “Cat-4 casinos could cannibalize existing markets, but would ultimately grow the total PA gaming market over time.” Each potential location would require careful analysis, and be “considered from the lens of a defensive acquisition or a strategic growth acquisition.”

“All of these conclusions remain valid,” the firm now states.

But given the recent lack of interest, will investors show up for the third round of bidding next month?

Could be. The Morowitz report points to four markets that are “still viable as potential Cat-4 locations,” located “mostly in the center of the state (Altoona, State College & Williamsport),” along with “the highest value location,” the New Castle/northern Pittsburgh market.

“Despite its competitive dynamics,” Morowitz writes, Newcastle is prime “simply due to its concentration of nearby population relative to the other markets.”

The other markets benefit from “significantly less competition, and all have relatively similar population and income characteristics,” the report states.

“One positive for the three smaller markets is that they have the potential to draw patronage from other smaller, underserved markets, as there are no casinos near the geographic center of the state” (prospective casino sites can’t be located within 40 miles of another casino location).

Will Covid Affect Values?

With the economy hammered by the coronavirus, along with a high state tax rate, plenty of existing competition, a steep cost of entry and the current state of the capital markets, “any Cat 4 bid will be constrained and the license fee will likely skew towards the minimum,” Morowitz writes.

Among the risks, of course, is “the continuing unknown impact of Covid,” and concerns that a second viral wave could again shut down the gaming industry. Add to that the “continued overhang of the prospect of VGTs at retail establishments in PA, something that has been bandied about for some time.

“As a benchmark, VGTs in Illinois, while growing the overall market, ultimately cannibalized casinos by 17 percent to 20 percent. Typically, this uncertainty is managed through a higher cost of capital or discount rate applied to cash flows associated with an opportunity.”

All these speed bumps notwithstanding, the report states, “The new availability of a New Castle location, reasonable demographics of other locations, and optionality to enter with a smaller right-sized offering, while keeping potential expansion into other forms of gaming available for future consideration, would seem to outweigh the risks associated with a bid in the current environment, Covid aside.”

In the opinion of the authors, “there should be demand for this license, and that demand should result in a price that exceeds the bid floor.

“Bottom line, for some, this is a bid worth making and winning.”

For additional information, contact Cory Morowitz at cory@morowitzgaming.com or call (609) 226-9426.

Sources: GGH Morowitz analysis, ESRI data

Ukrainian President Volodymyr Zelensky has followed through on a 2019 campaign pledge to bring legal gaming to the country. Last week, he signed Bill-22885D, which fulfills his promise to expand regulated gaming in the country beyond the lottery.

The bill approved by the Verkhovna Rada overturns an 11-year ban on gaming.

According to SBC News, the Ukraine Gambling Law will form a regulated marketplace for land-based and online casinos, retail and mobile sports betting, slot machine halls, online poker, totalizer contracts and lotteries. Important details must still be finalized, such as a licensing framework and industry tax rates.

Parimatch has confirmed that it will bid for one of the new operating licenses. CEO Sergey Portnov said: “I would firstly like to congratulate President Zelensky for delivering on his pledge to legalize gambling in Ukraine. He has shown that he is a man of his word and we fully support his agenda to liberalize the local economy. Parimatch has long argued that the development of a fair and regulated betting industry will really benefit Ukraine.”

Taxes will likely be decided once the Rada returns from recess in September. In June, Marusyak filed a new tax bill, 2713-D, which would set a 5 percent GGR tax on sportsbooks, 10 percent on online gambling and lotteries and 12.5 percent on slot machines. Bill 2713, jointly submitted by Oleh Marusyak and Marian Zablotskyi, sets the tax rate for all gambling and lotteries at 25 percent of GGR, while Deputy Oleksandr Dubinsky put forward bill 2713-2 which includes a similar proposal.

Meanwhile, Bill 2713-1, from Dmytro Natalukha, proposes a 7.5 percent tax rate on bookmaking, 12.5 percent on online gambling and 22 percent on lotteries.

Bill 2713-3, proposed by Artem Dubnov, would not levy gambling taxes but derive funds collected through license fees and normal business and income taxes.

Parimatch’s Portnov added: “We are fully committed to conquering our home market by delivering a product that can entertain the people of Ukraine. We are also proud that we can now contribute to the country’s economy and help grow its technology industry.

“However, for us to deliver these benefits in the long-term we need a fairer tax system which is currently too punitive and uncompetitive compared to similar international markets. It is vital that this is addressed as soon as possible to ensure the enduring viability of the industry in Ukraine.”

Portnov said a fair tax system would be important in securing the viability of gambling in Ukraine, especially as the country’s tax system was already “too punitive.”

“We are fully committed to conquering our home market by delivering a product that can entertain the people of Ukraine,” Portnov said. “We are also proud that we can now contribute to the country’s economy and help grow its technology industry.

“However, for us to deliver these benefits in the long-term we need a fairer tax system which is currently too punitive and uncompetitive compared to similar international markets. It is vital that this is addressed as soon as possible to ensure the enduring viability of the industry in Ukraine.”

Visitation to Las Vegas in June came in at just over 1 million, a decline of 70.5 percent from the 3.6 million visitors who came in June 2019.

That’s not bad compared with the shutdown months of April, when volume fell 97 percent, and May, when it was down 95.9 percent, and the city drew a total of around 163,000 visitors combined.

Passenger volume at McCarran International Airport was down 76.6 percent for the month.

Figures compiled by the Las Vegas Convention and Visitors Authority indicate the greater Southern Nevada market averaged just 95,396 available hotel and motel rooms during June, down from 149,627 rooms a year ago. The total number has since grown to around 115,000 as more properties reopened.

Total hotel occupancy was 40.9 percent for the month. Weekend occupancy came in at 51.8 percent. Midweek occupancy, absent conventions, was only 36.5 percent.

The average daily room rate was $104.07, a decline of 13.6 percent versus last year. Revenue per available room, a key metric of resort industry profitability, was $42.56, down 61.5 percent.

Through the first six months of the year, Las Vegas visitor volume is down 54 percent to 9.73 million. The flow of passengers through McCarran is down 53.8 percent.

Gaming revenues on the Strip are down a corresponding 47.9 percent. Downtown is off by 45.5 percent.

A study by Pennsylvania’s Allegheny Institute has found that the state lost $424 million in tax revenue while the 12 casinos were shut down between March and June.

Pennsylvania casinos, which deal with some of the highest gaming revenue taxes in the nation, lost around $968.8 million in potential gaming revenue during the shutdown, which translated into the nearly half billion in tax losses.

The study, performed by Allegheny Institute research assistant Hannah Bowser and Executive Director Frank Gamrat, analyze three categories of gaming revenue sources—slot machines, table games and internet gaming. The iGaming operations, of course, were the sole bright spot, jumping 258.6 percent from $13.9 million in January to $50 million in June, the report said. But it was not enough to counter the loss of brick-and-mortar gaming.

“Though online gaming revenue from slots, table games and poker rose to record-setting highs, the total intake from January through June ($206.6 million) doesn’t even cover a quarter of the estimated losses from slot and table games,” the report authors wrote.

The authors estimate that casinos missed out on $143.5 million in slot revenue in March and another $415 million over the course of April and May. Even with the reopenings in June, they calculate another $140.3 million in lost revenue, for a total of $699 million, which translates into $381.1 million of lost tax revenue.

Table games accounted for a loss of $270 million in revenue and $43.1 million in taxes.

The analysis also examined the costs related to casino workers being out of work while their employers were shut down. Citing data from the Bureau of Labor Statistics, the authors wrote that employment in the amusement, gambling and recreation sector was down 70 percent in April, with many of those workers likely collecting jobless benefits during that time period.

“The total number of individuals employed by all 12 casinos in the commonwealth by the end of the 2018-19 fiscal year stood at 16,717,” Bowser and Gamrat wrote. “Since the lockdown included a complete stoppage of all nonessential functions and only a few managers and maintenance crews were likely deemed essential and kept on the job, it is safe to assume that most of the 16,717 casino employees were furloughed.”

Penn National Gaming CEO Jay Snowden said the massive losses in the second quarter of this year due to Covid-19 shutdowns do not overshadow “encouraging trends” in regional gaming markets, where Penn operates 41 properties in 19 states.

“We continue to make fundamental changes to improve our offerings and efficiencies across our organization,” Snowden said in a statement published by CDC Gaming Reports. “For example, we are working closely with regulators in several jurisdictions to introduce cashless, cardless and contactless technology to our casinos, which we believe will increase safety and provide improved service while delivering additional efficiencies and accountability.”

Snowden also touted Penn’s interactive gaming offerings, citing the Barstool Sports mobile wagering offering, expect to be launched in September in Pennsylvania and more states next year.

In Virginia, Caesars Entertainment has officially launched a Caesars for Danville referendum campaign to educate voters about its proposed $400 million casino resort at Schoolfield. The referendum will be held November 3 and if it passes, Caesars plans to break ground by early 2021 and complete the project in 2023.

The campaign announced a committee of community leaders, who will be the liaisons between the community and the developers, said Caesars campaign advisor Tony Rodio. “That helps give us direction into knowing the community. It helps get our story across. We’re going to use traditional media, a lot of social media, boots on the ground, talking to people. We’ll give people in the community an opportunity to ask questions.”

Rodio said the project will create 900 construction jobs and 1,300 permanent jobs with benefits and average pay between $35,000 and $47,000 annually. The property’s gaming floor will offer 2,000 slots, 75 table games, 16 poker tables and a sportsbook, plus a 500-room hotel, 35,000-square-foot conference center, 2,500-seat live entertainment venue, restaurants and bars. The city of Danville expects to receive $34 million in annual gaming tax revenue.

Caesars Entertainment President and Chief Operating Officer Anthony Carano stated, “Caesars Entertainment has a long history of enriching the communities we serve, whether that be through our commitment to social responsibility or through our proven record of creating exhilarating experiences at our world-class resorts. Our diverse collection of destinations across the U.S. are synonymous with unparalleled service, impressive benefits through our Caesars Rewards loyalty program, superstar entertainment talent and culinary excellence. We will bring these same phenomenal offerings to the people of Danville to enjoy.”

Mayor Alonzo Jones added, “This is a once-in-a-lifetime opportunity for our community and breathes life back into an old industrial site. I hope my fellow residents will join me in voting yes to bring Caesars to Danville.”

Danville is one of five Virginia cities allowed under recently passed legislation to have a casino with the approval of local voters. The others are Richmond, Bristol, Portsmouth and Norfolk.

After several months when it was not getting any money from its Twin River Tiverton Casino Hotel, the city of Tiverton is now getting paid again.

Because the city had relied on casino money and put it into the general fund, it found itself in a sticky situation earlier this spring when the casino closed due to Covid-19 and suddenly the money wasn’t flowing anymore. The casino closed in mid-March and didn’t reopen again for more than three months.

The city council went into panic mode to make drastic cuts to almost all programs to deal with not receiving $1.8 million of the $3.1 million it normally gets annually. Although the town had voted to host the casino under the impression that the state would make up any deficits to casino payments caused by declining profits, it later learned that didn’t apply when the casino was forced to shut down.

However that will never happen again. The council recently voted 5-2 that gaming funds will go into a reserve capital account and won’t be available to be spent until the following year.

Before the council took that vote Council President Patricia Hilton commented, “You have to learn from your mistakes.”

Councilmember Nancy Driggs, who voted against the ordinance, declared, “This ordinance is not ready for prime time,” because she wanted the council to take more time to write it.

School Committee Chairman Jerome Larkin supported the ordinance as “an opportunity for you guys to be fiscally responsible for the town” and compared putting gaming revenue into the operating budget as “counting your chickens before they hatch.”

Each year the town’s voters approve of the budget in a Financial Town Referendum, usually held in September.

Although the casino money is flowing again, it is not nearly as much as the town was being paid this time last year. Last year the casino was open 24/7 but now it is open 10 a.m. to 3 a.m. and fewer patrons are allowed to be inside.

In a normal year the town would receive between $4,000-$6,000 per week, but the payment sent to Tiverton on July 30 was $3,010.

In 2018 voters defeated by 13 votes a charter amendment that would have put all casino revenue toward capital, debt service and infrastructure, something that was recommended at the time by the town administrator.

Meanwhile, Twin River Worldwide Holdings, which although based in Rhode Island has become a national gaming presence over the last two years, reported that July’s results were “strong.”

CEO George Papanier reported August 11 that the company reopened all nine of its properties in five states by June 17. It also got its first profit results from its nearly acquired properties in Mississippi and Kansas City, Missouri that it purchased from Eldorado Resorts for $230 million.

Both properties generated “strong positive cash flow” and were “a great fit for our portfolio,” said the CEO.

Despite the “strong” description, TRWH ended Q2 with $28.9 million in revenue, a 79.8 percent decline over the Q1 numbers. This resulted in a net loss of $23.5 million and loss of $10.7 million in cash flow for the same period.

Papanier concentrated on the positives, singling out the Hard Rock Biloxi in Mississippi and Dover Downs in Delaware for strong cash flow and high market demand.

Twin River’s two Rhode Island properties slowly reopened including an invitation only period with just a few hundred guests allowed at a time. But since June 20, with higher capacity, revenue is expected to be 240 percent higher than June. Both casinos are reporting 60 percent of normal revenue.

Meanwhile, Dover Downs Hotel & Casino, Delaware’s only gaming facility operated by a public company, Twin River, reported a net loss of $2.36 million for the second quarter of 2020, with the Covid-19 shutdown resulting in gaming revenues plunging by some 70 percent.

Delaware’s three racinos were closed from March 16 to June 1 due to the pandemic, reopening with safety restrictions on June 1.

Dover Downs revenues through the first half of the year were almost identical to net income through the same period in 2019, but the casino’s profits are down $3.48 million. Dover Downs went from a gain of $1.33 million last year to a loss of $2.15 million halfway through 2020.

Gaming revenues plummeted from $21 million in the second quarter of 2019 to $6.08 million. However, total revenues for slots and table games for 2020 saw a slight increase through six months compared to 2019—$23.92 million versus $22.48 million.

For weeks, Las Vegas casino operators have been testing thousands of employees for Covid-19 as a matter of policy. However, they are not required to share the results with the public. Not surprisingly, not one had volunteered to do so.

Or that was the case until Strip giant Wynn Resorts acted on its own earlier this month to breach the wall of secrecy and disclose that to date around 300 workers at Wynn Las Vegas, Encore and Encore Boston Harbor have tested positive for the potentially deadly virus.

Industry watchers are now wondering if Wynn’s action will induce other operators to open up.

“This pulls the cover off for everyone else,” said Nehme Abouzeid, president of consulting firm LaunchVegas and a former Wynn executive.

As he told the Las Vegas Review-Journal, “Customers and employees will ask other operators, ‘How come you’re not as forthcoming as Wynn?’”

Some companies, notably Station Casinos and Las Vegas Sands, tested all employees before they returned to work on June 4 and now regularly test some or all of them. LVS says it’s administered nearly 30,000 tests over the last three months. Station has reported more than 12,000. Others, like MGM Resorts International, only test staff who exhibit symptoms of the virus or have been in contact with someone who has it.

Only Golden Entertainment, operator of the Stratosphere and Arizona Charlie’s casinos in Las Vegas and hundreds of gaming taverns across the city and statewide, had gone as far as to provide a ballpark, disclosing on a recent earnings call that it’s seen a positivity rate of less than 2 percent of its nearly 6,000 tests performed.

Wynn’s infection rate corresponded with Golden’s at around 2 percent out of 16,750 tests performed, or “roughly 300” employees, as CEO Matt Maddox said on the company’s second quarter earnings call.

He said the company tested all of its employees before they returned to work and now follows an “algorithm” for monitoring staff and randomly testing 500-600 every couple of weeks.

He added that the company’s in-house contact tracers have determined “99 (percent) of those 300 people were exposed outside of Wynn.”

That doesn’t surprise Brian Labus, an epidemiologist with the University of Nevada, Las Vegas and a member of Governor Steve Sisolak’s medical advisory team. “Just because it’s a Wynn employee that tested positive doesn’t mean it had anything to do with Wynn or put any other co-workers or guests at risk.”

He’s not surprised by the rate of infection either, given the fact that gaming is Nevada’s largest employer.

But as a health expert he said it would be useful to know more, such as where the positive results occurred and how the algorithm identifies who to test.

“All we have is an answer at the very end of it. How they got to that number, we don’t know, so it’s hard to say what it really means.”

Amanda Belarmino, a hospitality professor at UNLV, agreed, but said she was heartened by the revelation that Wynn’s employees likely aren’t catching the virus at work because it could mean the company is identifying asymptomatic employees before they unknowingly spread the virus.

“I think it’s a very good sign in terms of the industry itself as a whole and Wynn properties, in particular, that they’re doing the right thing in terms of preventing the spread of the virus.”

In related news, Nevada regulators are pursuing disciplinary action against Reno’s Grand Sierra Resort for violating provisions of the state’s Covid-19 health and safety guidelines.

A three-count complaint filed by the Gaming Control Board identifies three dates in June and July when agents observed more than 75 guests in total not wearing facial coverings and not being told by employees to do so, as the guidelines require. Agents also observed as many as 50 guests not following social distancing guidelines while queuing for hotel elevators.

The complaint is the sixth leveled by the Control Board against gaming operators for violations of the Covid protocols. They include the Sahara on the Las Vegas Strip, which is owned by the same private company, Los Angeles-based Meruelo Group, that owns the Grand Sierra.

The properties could face fines depending on the outcome of the complaints.

Las Vegas-based Full House Resorts reported its Silver Slipper Casino Hotel in Bay St. Louis, Mississippi posted the best month in its 14 years in June. Although only half of its slots were operational due to Covid-19 regulations, revenue surged by 28 percent, said Chief Executive Officer and President Dan Lee. He added cutting costs in marketing, payroll and other amenities helped improve margins.

“At this point, we’re not only surviving, but thriving. The Covid-19 shutdowns were a good opportunity to take a fresh start, get rid of the sacred cows and reexamine everything. And we did that,” Lee said.

Full House operates five casinos and resorts in Nevada, Indiana, Colorado and Mississippi which produced a total of $14.5 million in revenue in the second quarter—a drop of 65.2 percent compared to 2019 with a net loss of $6.7 million. The venues closed in mid-March due to the pandemic; all had reopened by mid-June.

Lee said the properties are following strict new health and safety protocols. For example, table games remain closed in Colorado and limited in other markets. Restaurants have cut back hours and capacity and no live events are being offered.

In addition, the casinos are operating with about 1,650 slots, slightly more than half their usual number. But, Lee noted, “It was a bit of a wake-up call. We don’t actually need that many slot machines. Slot machines are expensive and the casino actually looks better and feels better if you remove some slot machines.”

Lee said Full Houses’ regional properties have benefited from their significant drive-in customer base and not having to rely on resort amenities like nightclubs or conventions. He said the properties are attracting new customers, including younger players.

Still, there are numerous constraints, Lee noted. For example, buffets—which can cost more than $2 million annually—and 49-cent breakfasts are unlikely to return. Also, Lee said construction has halted on a parking garage at Bronco Billy’s in Colorado.

In addition, Lee said, “We’ll remain cautious on the payroll, on the number of employees, the hours of operations because who knows, things could turn. It’s possible, with the Covid-19 spikes around the country, that we could end up closing again. I think it’s very possible we could end up closing one place.”