Brian R. Gordon, CPA

Gaming Industry: Performance Review

Over the last few years, a number of new casino resorts have opened throughout the eastern United States, namely in New York, Maryland and New Jersey. The opening of the Hard Rock Hotel & Casino and the Ocean Resort Casino in Atlantic City are two of the latest additions to the expanding East Coast gaming market. Additional developments remain in the pipeline, most notably the $2.5 billion Encore Boston Harbor in Everett, Mass., currently under construction and expected to open in 2019. The openings of these properties will have long-term implications for the gaming industry. The positioning and the amenities included in these properties could revitalize previously declining markets, as well as cannibalize or substantially expand existing gaming markets.

New York Casino Expansions

The largest northeastern expansion in recent years has been the growth of commercial casinos in upstate New York. Beginning in late 2016, commercial casinos began to open in the region in order to compete with a variety of established racinos and tribal casinos. Some of these properties include del Lago Casino and Resort, Rivers Casino Schenectady, Tioga Downs and Resorts World Catskills. Three of these casinos opened between December 2016 and February 2017, while the newest, Resorts World Catskills, opened in February 2018. These casino openings have grown New York’s commercial gaming revenue by 14.6 percent over the past year, with the state’s commercial gaming properties generating $2.5 billion in revenue over the same period. These new properties have not cannibalized the region’s racinos, which are only permitted to operate video lottery terminals. On a trailing 12-month basis, revenue for New York’s racinos has grown 2.6 percent to $2.05 billion.

Two of the casinos, Rivers Schenectady and Tioga Downs, have performed well by posting consistent, modest growth in trailing 12-month revenue. Del Lago Casino and Resort, on the other hand, has not performed as well, reporting declining or flat trailing 12-month revenues. Resorts World Catskills’ revenue is still normalizing after recently opening its doors, therefore it is premature to assess its gaming performance at this time. It is important to note that casinos in upstate New York are fairly spread out geographically, leaving racinos as primary competitors in the market, on top of existing tribal casinos in the area and casinos in neighboring states.

Impact of MGM National Harbor

MGM National Harbor has had a substantially positive impact on the state’s gaming market after opening in December 2016. Trailing 12-month gaming revenue in the state of Maryland has grown 18.2 percent on a year-over-year basis, growing from $1.4 billion to $1.7 billion. MGM National Harbor has been a tax revenue boon for the state and has expanded the statewide gaming market. Since MGM National Harbor’s opening, Maryland’s gaming revenue from casinos excluding MGM have posted declines on a trailing 12-month basis for each of the past 15 months. To further illustrate MGM National Harbor’s impact, its statewide market share has increased since its opening and accounts for roughly 40 percent of gaming revenue.

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Optimism Around Atlantic City

Opportunities to purchase previously closed properties at price points below replacement cost, coupled with recently legalized sports betting nationwide, have renewed optimism around Atlantic City as a destination gaming market. Two of the newest properties, the Ocean Resort Casino and the Hard Rock Hotel & Casino, both opened on the same day in late June 2018. The property openings come as Atlantic City’s gaming revenues have continued to post steep declines. Gaming revenue on a trailing 12-month basis has declined for all but one month over the past two years, and gross gaming revenues on a trailing 12-month basis declined 4.0 percent from $2.4 billion to $2.3 billion. Gaming revenue numbers since the openings of the two new casinos have not been publicly released.

The Hard Rock Hotel & Casino in Atlantic City, formerly the Trump Taj Mahal, opened after $500 million of renovations were completed, which included a 7,000-seat arena, 2,100 slot machines, 120 table games and 20 restaurants. The property had been closed for nearly two years prior due to the renovation and a labor strike by workers. The Ocean Resort Casino, formerly the Revel, also had a troubled history, as the building changed hands three times before being sold for $200 million in January 2018. The latest sale price was less than 10 percent of the reported development cost.

MGM Growth Continues in 2018

Positive net revenue growth for MGM Resorts International (MGM) continued into the second quarter of 2018. MGM generated net revenue of approximately $2.9 billion in the quarter, increasing 7.8 percent from the second quarter of 2017. Revenue growth was driven largely by the casino segment, which grew by 13.6 percent compared to a year ago. Net revenue domestically increased by 2.7 percent from the prior year, rising from $2.10 billion to $2.16 billion.

During the second quarter of 2018, adjusted property earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by 4.7 percent over the prior year to $625.7 million at the company’s domestic resorts. EBITDA margins also declined from 31.2 percent to 28.9 percent on a year-over-year basis for the company’s domestic resorts during the quarter. Domestic properties with strong EBITDA margins in the second quarter included Bellagio (36.6 percent), New York-New York (36.0 percent) and MGM Grand Detroit (34.0 percent).

Internationally, MGM China improved notably on a year-over-year basis in the second quarter of 2018. The company’s international segment net revenue increased by 32.4 percent, growing from $423.9 million to $561.4 million. Much of this growth was due to the opening of the MGM Cotai resort in February 2018, which generated $184.7 million in net revenue during the second quarter of the year. Adjusted EBITDA margins declined from 28.0 percent to 21.4 percent in the second quarter as a result.

Sands Leans on Macao

Las Vegas Sands (LVS) delivered another set of positive results in the second quarter of 2018. Sands’ quarterly net revenue increased 6.2 percent from the prior year to $3.3 billion. While the company’s domestic properties performed well during the second quarter, Macao operations drove the company’s growth. Macao net revenues increased 17.8 percent on a year-over-year basis in the second quarter, growing from $1.8 billion to $2.1 billion. Net revenue in Singapore dropped 15.5 percent to $705.0 million, due to lower rolling chip volume (amount wagered on table play).

Sands’ adjusted EBITDA increased by 1.4 percent on a year-over-year basis during the second quarter of 2018. Adjusted EBITDA growth exclusively came from the company’s Macao operations, where EBITDA increased by 25.0 percent to $750.0 million with a 35.4 percent margin. Other properties reporting notable EBITDA growth included the Sands Cotai Central (increase of 31.3 percent to $176.0 million with a 34.6 percent margin) and the Venetian Macao (growth of 29.3 percent to$331.0 million with a margin of 39.9 percent).

Sands’ U.S. operations lagged the company’s overseas properties in EBITDA and margin, which is to be expected given the margins of Macao casinos. Moreover, the company’s Las Vegas properties (The Venetian and The Palazzo) posted year-over-year EBITDA declines, though still commanded healthy margins. The drop in performance was due to lower-than-expected table play volume, according to casino management. During the second quarter of 2018, EBIT-DA at Sands’ Las Vegas properties decreased to $77.0 million with a margin of 19.2 percent.

Wynn Resorts Continues to Grow

Wynn Resorts (WYNN) again reported solid year-over-year operating revenue growth. Overall operating revenues grew by 9.0 percent to $1.6 billion during the second quarter of 2018. The company’s operating revenues in Las Vegas were effectively flat during the second quarter of 2018, growing by 0.8 percent from $438.0 million to nearly $442.0 million. Revenue sourced to Wynn’s Macau operations grew 12.5 percent from $1.0 billion to $1.2 billion during the same period. Macau operating revenue growth was largely driven by substantial gaming revenue increases at Wynn Palace. On a year-over-year basis, Wynn Palace’s VIP table game revenue increased by 66.3 percent from $252.6 million to $420.2 million.

Additionally, EBITDA for the company’s Macau operations grew by 18.3 percent on a year-over-year basis, increasing from $297.8 million to $352.2 million. EBITDA at Wynn Palace increased by 105.4 percent on a year-over-year basis, reaching $179.3 million compared to $87.4 million a year prior.

Caesars Reports Improve Q2 Results

During the second quarter of 2018, Caesars Entertainment (CZR) experienced significant net revenue growth, rising from $1.0 billion to $2.1 billion. The increase is reported top-line revenue is not sourced to organic gains; rather, it is largely attributable to reporting anomalies sourced to the consolidation of Caesars Entertainment and Caesars Entertainment Operating Company (CEOC), which recently emerged from bankruptcy.

On a same-store (comparable) basis, net revenues grew 2.8 percent from $2.06 billion to $2.12 billion over the year. Same-store adjusted EBITDAR (EBITDA before rent payments – common in REIT arrangements) increased 13.1 percent on a year-over-year basis from $551.0 million to $623.0 million, which Caesars attributed to revenue growth and improved efficiency.

On a same-store basis, the company’s Las Vegas sector experienced a 7.5 percent growth in net revenues, from $923.0 million to $992.0 million, and a 16.4 percent year-over-year increase in adjusted EBITDAR from $329.0 million to $383.0 million.

Trailing 12-month totals. Percent change from prior year.

Trailing 12-month totals. Percent change from prior year.

Source: Las Vegas Convention and Visitors Bureau
Trailing 12-month totals or averages through June 2018.

Brian Gordon is a principal with the Nevada-based advisory services firm, Applied Analysis. Gordon has extensive gaming and leisure experience from an accounting, finance and operational perspective. Contact Brian.