The Status of the Gaming Industry: a Recap of 2008

Transcription

1 The Status of the Gaming Industry: a Recap of 2008 Shannon Okada, Associate Director, HVS Gaming Services HVS Las Vegas HVS LAS VEGAS 8170 W. Sahara Avenue, Suite 201 Las Vegas, NV United States of America +1 (702) OFFICE MAIN TELEPHONE January 2009 New York San Francisco Boulder Denver Atlanta Miami Dallas Las Vegas Chicago Washington, D.C. Weston, CT Boston Mt. Lakes, NJ Mexico City Vancouver Toronto London Moscow Madrid Athens Dubai Mumbai New Delhi Singapore Hong Kong Beijing Shanghai São Paulo Buenos Aires

2 The Status of the Gaming Industry: A Recap of 2008 Shannon Okada, Associate Director HVS Gaming Services Las Vegas The effects of the challenging economic conditions in 2008 on major gaming markets, as well as other significant events and developments impacting these markets, are briefly summarized in this article. Gaming-related tourism is highly dependent upon consumer confidence and spending and any previously held notion that the gaming industry is recession-proof was dispelled in In recent years, gaming developments in destination markets have focused on offering additional amenities in order to drive gaming demand and have changed the overall revenue mixture to a more balanced distribution between gaming, hotel, retail, and entertainment. As a result, operators in destination gaming markets have become more susceptible to downturns in the economy and declining consumer consumption. Challenging economic conditions, including the turmoil in the credit markets, have also resulted in a scaled-back development pipeline. Atlantic City, New Jersey Atlantic City s gambling proceeds fell 7.6% from $4.9 billion in 2007 to $4.5 billion in This is the second year in a row that the city s gaming revenues have declined. In 2007, Atlantic City s gaming revenue was down 5.7% from the previous year. While the decline in revenue in 2007 was attributed to increased competition from Pennsylvania and New York and the implementation of a partial smoking ban, 1 the economic downturn, in addition to these factors, contributed to the decline in Harrah s Resort Atlantic City was the only Atlantic City property to increase gaming revenues year-over-year in Several expansion projects in Atlantic City that had been begun prior to the downturn in the economy were completed in Construction of Harrah s Resort Atlantic City s 961-room Waterfront Tower was completed in March The 44-story Waterfront Tower is the tallest building in Atlantic City and the second tallest building in New Jersey, and increased the hotel s capacity by nearly 60%, allowing the property to increase gaming revenues in The 800-room Water Club at the Borgata Hotel Casino & Spa, a boutique hotel-within-a hotel, also opened in June The Water Club, which includes a two-story spa, food 1 In 2007, the Atlantic City Council approved a partial smoking ban on 75% of casinos floors. and beverage, retail, and residences, completes a two-phase, $600 million expansion of Borgata and brings the total investment in the resort destination to approximately $1.7 billion. In August 2008, Trump Taj Mahal began opening rooms in its new 782-room Chairman Tower. The Chairman Tower is expected to be completely open by early The New Jersey Casino Control Commission reports that the number of occupied rooms at Atlantic City casino-resorts through the first three quarters of 2008 increased roundly 4.2%, from approximately 3,700,000 in 2007 to 3,850,000 in 2008, as a result of the number of available hotel rooms. Overall, occupancy declined from 93.4% during this period to 90.6%. Despite the addition of the high-quality rooms, average daily rate for the market declined from $ during the first nine months of 2007 to $97.93 during the same period in Revel Entertainment s planned $2 billion project at the north end of the Boardwalk broke ground in early However, the company has been affected by the tightened credit market since the entire project has not yet been funded. In addition, a plane crash in the summer of 2008 claimed the lives of several Revel and Tishman Construction executives. The opening of the Revel project is expected to be in 2012, absent any further unforeseen delays caused by financing or otherwise. Pinnacle Entertainment s plans to construct a major facility along Atlantic City s famed Boardwalk are on indefinite hold due to credit market conditions and an evolving competitive environment. Atlantic City requested proposals for one or more casinos to be built on Bader Field, a recently decommissioned municipal airport that straddles two of the three major feeder routes into Atlantic City; the proposals are due in During April 2008, Atlantic City s City Council unanimously approved an amendment to the Atlantic City ordinance that would ban smoking entirely on all casino gaming floors and casino simulcasting areas, but allow smoking in separately exhausted, non-gaming, smoking lounges. The amendment to the ordinance became effective on October 15, However, Atlantic City s City Council voted to

3 postpone the full smoking ban for at least one year on October 27, 2008 due to, among other things, the weakened economy and increased competition in adjoining states. The postponement of the full smoking ban went into effect on November 16, Trump Entertainment Resorts (seller) and Coastal Development LLC (buyer) reported in October 2008 that the purchase price of the Trump Marina in Atlantic City had been renegotiated from $316 million set in May 2008 to $270 million, which is the result of the decline in Atlantic City gaming revenues and income levels and indicative of the recent downward pressure on sales prices of casino-resorts generally. Based on the trailing 12 months ending third quarter 2008, the Trump Marina sale represents an EBITDA multiple of 10.6 and capitalization rate of 9.5%. Las Vegas, Nevada Las Vegas experienced significant declines in gaming revenue in at least four months in 2008 compared to 2007: May (16.4%), July (15.0%), October (24.3%), and November (15.2%). 2 In October and November 2008, monthly gaming revenues fell below those achieved during the same months in It is estimated that the annual gaming revenue for Clark County in 2008 will be comparable to 2005 gaming revenues, in the mid-$9 billion range. The decline in gaming revenue for Clark County of 9.0% in the first 11 months of 2008 compared to 2007 is high due not only to the economic climate but also in light of the recent multiple years of strong growth. The 5.4% decline in Clark County gaming win per visitor in the year-to-date period through November 2008 indicates that the visitors that are coming are not gambling as much. Las Vegas has a long history of consistent growth. Las Vegas had been experiencing year-over-year increases in the total number of visitors since 2002, growing to roundly 39.2 million visitors in The only annual decline in visitation in the 1990 to 2007 period (2.3%) was a result of the terrorist attacks in The number of visitors to Las Vegas on a monthly basis during the first half of 2008 was relatively comparable to that in 2006 and However, the number of visitors began to decline as gas prices reached record heights during the summer and as the economic downturn worsened through the year. The number of visitors during the months of September, October, and November 2008 were 10.1%, 10.2%, and 9.8% lower, respectively, than during the same months in The number of visitors during these three months was less than during the same three months in Year-to-date 2 December 2008 results have not yet been released by the Nevada Gaming Control Board as of the date of this article. Page 2 data through November 2008 indicates that there were nearly 1.4 million fewer visitors than during the same period in 2007, a decline of 3.8%. Overall average daily room rates declined 9.5%, from $ to $121.01, in the year-to-date period ending in November 2008 compared to the prior year as operators began implementing strategies to compete for overnight guests to support gaming and other amenities. High-end operators, including Wynn Resorts and Las Vegas Sands Corp., dramatically reduced room rates. Additionally, the number of convention attendees for 2008 through November was down 5.0% and the number of conventions/meetings held was down 5.2%, according to the Las Vegas Convention and Visitors Authority, and further downward pressure on average daily rates was caused by hotels replacing a decline in convention business with more leisure and casino customers taking advantage of low room rates and other specials, since convention customers also typically pay more lucrative room rates. It is evident that occupancy and average daily rate for Las Vegas properties have declined in 2008 due to economic conditions. However, since casinoresort operators are motivated to sustain occupancy because of the need to generate demand for the casino and other ancillary facilities, average daily rates have been affected more than occupancy levels. Major developments in the Las Vegas market in 2008 include the opening of Wynn Las Vegas Encore in December 2008; the ongoing construction of CityCenter, the Fontainebleau Casino-Resort, and the Cosmopolitan; and the Hard Rock Hotel and Casino expansion, which all represent increases in gaming inventory, transient lodging supply, and/or function space, as well as factors contributing to the evolution of the Las Vegas area market. Aliante Station opened in North Las Vegas in November 2008 and the M Resort, located in Henderson, is expected to open in March Developers have recognized the potential for oversupply in the Las Vegas market and, combined with the tightening credit requirements, softening interest in residential properties, and declining gaming and hotel demand as a result of the current credit crisis, several projects have been postponed or cancelled. Projects that were postponed in 2008 include Boyd Gaming s Echelon project, the Plaza Las Vegas, the 665-room Octavius Tower at Caesar s Palace, and the Harmon at CityCenter. Projects that were cancelled in 2008 include the Crown Las Vegas, a joint venture between MGM Mirage and Kerzner International Holdings Limited at the southwest corner of Sahara Avenue and Las Vegas Boulevard, and the St. Regis Residences, which was being developed by Las Vegas Sands.

4 MGM Mirage announced a deal in December 2008 to sell Treasure Island for $775 million to former New Frontier owner Phil Ruffin. The transaction, which requires approval of Nevada gaming regulators, is expected to close by the end of June and improves MGM-Mirage s liquidity position. In December 2008, Archon filed a Form 8-K with the SEC wherein it disclosed that it has entered into an option agreement to sell 27 acres on the Las Vegas Strip (the former Wet & Wild water park site located south of the Sahara and north of Fontainebleau) to Las Vegas Towers, LLC. The option agreement filed with the 8-K indicates a sales price of $618 million or approximately $22.9 million per acre. It should noted that this sales price is higher than an option agreement previously entered into between Archon and LTVI LLC in mid-2006 for the sale of the site for approximately $16.7 million per acre, which was not exercised and terminated in June Macau SAR, People s Republic of China Macau SAR games of fortune revenue 3 increased 31.2% in 2008 compared to 2007, from roundly $10.3 billion to $13.5 billion. However, the comparison is somewhat skewed by major resort openings in 2007, including the Grand Lisboa (February 2007), Crown Macau (May 2007), Venetian Macao (August 2007), and MGM Grand (December 2007). It should be noted that games of fortune revenues for each quarter in 2008, beginning in the second quarter, were lower than in the previous quarter; the games of fortune revenues in second quarter 2008 were 3.1% less than in the first quarter of 2008, the revenues in third quarter were 10.0% less than in the second quarter, and the fourth quarter revenues were 7.5% less than in the third quarter. Games of fortune revenue growth (decline) year-over-year in the Macau SAR for the months of September, October, and November 2008 was (0.8%), (3.8%), and 2.6%, respectively. According to reports from Deutsche Bank, gaming revenues for the Macau SAR in December 2008 declined 6%, versus a 34% year-over-year increase in December Beijing had begun restricting visas to the Macau SAR for residents of Mainland China even before the world financial meltdown; the frequency of visits that mainland passport holders are allowed to the Macau SAR was reduced several times throughout the year to once every three months from once every two weeks prior to June 1, Industry analysts have speculated that the government wanted to cool the overheated growth that the market was experiencing, control gambling-related problems in 3 Games of fortune revenues do not include revenue from racing and lottery and was approximately 99.0% of gaming revenue in the Macau SAR in Mainland China, and/or prevent so much cash being taken out of the country by the foreign gaming operators. Overall visitation to the Macau SAR market increased 13.4% in the first 11 months of 2008, from 24.4 million to 27.6 million, compared to the same period in This is a notable moderation in growth compared to the 26.6% increase in the number of visitors from 19.8 million in the year-to-date period through November 2006 relative to the same yearto-date period in Additionally, the number of hotel guests increased approximately 13.6% in the year-to-date period through November 2008 compared to the same period in the prior year, from roundly 5.2 million to 5.9 million. While the true reason(s) for the limitations on individual travel to Macau by Mainland Chinese residents by the Central Government is not public knowledge, the visa restrictions implemented in 2008, combined with the worldwide economic downturn, resulted in slower gaming revenue growth and development of the region. Reports from various sources also indicate that junkets have been cutting lending and patrons who have been gambling on credit have delayed or defaulted on repayments to the junket agents who bankroll their gambling sessions, which also causes erosion of revenues to operators. In light of the global credit environment, Las Vegas Sands Corp. suspended development on Sites Five and Six on Cotai and focused its efforts on maximizing cash flow and returns on invested capital from its existing properties in the Macau SAR: the Venetian Macao and the Four Seasons Macao on Cotai, and the Sands Macao on the peninsula. On the flip side, Phases I and II of Melco-Crown s City of Dreams project, also located on Cotai, is fully funded and construction is expected to be completed in Phase I of the City of Dreams will include the Hard Rock Hotel and Crown Towers Hotel. Phase II, expected to be completed in the third quarter of 2009, will feature the two Grand Hyatt towers. New York Seven of the eight New York video lottery terminal (VLT) racetrack casinos (racinos) defied the industry trend with higher gaming revenues in 2008 compared to Gaming revenue at these racinos grew, in part, in 2008 because of the convenience factor. Essentially, the racinos compete within its immediate market area and customers of the facility choose to patronize the subject property primarily due to its relatively convenient location. Gamblers who would otherwise travel to destination gaming resorts, due to economic factors, are limiting their expenses by gaming at local facilities. For example, Empire City at Yonkers Raceway, at least in the beginning of 2008, Page 3

5 Table 1 New York Racino VLT Gaming Revenue (2007 and 2008) Racino VLT Revenue ('000s) Weighted No. of Units WPUPD VLT Revenue ('000s) Weighted % % Change No. of Units Change WPUPD % Change Saratoga Gaming and Raceway $129,785 1,592 $223 $134, % 1, % $207 (7.1) % Finger Lakes Gaming and Racetrack 93,214 1, , ,199 (0.1) Fairgrounds Gaming and Raceway 44, , (0.2) Monticello Gaming and Raceway - Mighty M 64,290 1, ,109 (9.6) 1, (9.9) Batavia Downs Gaming 28, , Tioga Downs Gaming 41, , Empire City at Yonkers Raceway 394,326 5, , , Vernon Downs Gaming 32, , (0.8) New York Racino Market Combined Total $828,205 12,653 $179 $947, % 12, % $ % Source: NY State Lottery, HVS Consulting & Valuation benefited significantly from the high price of the gas that was necessary to travel to New Jersey or Connecticut from the New York City area. Gross VLT revenue for New York s racinos in 2007 and 2008 is set forth in Table 1. Recent legislation, effective April 1, 2008, also contributed to the increased success of New York racinos in The primary components of the legislation include an increase in amount retained by the venues (to 32.0% of gaming revenues) and a higher marketing allowance (to 10.0% of the first $100 million and 8.0% thereafter). The new legislation also increased the percentage paid for purses and established a matching capital improvement fund. Given the success of video lottery terminals in New York, the New York Aqueduct Gaming LLC (a partnership between Delaware North, Saratoga Gaming and Raceway, The Peebles Corporation, McKissack & McKissack, and Mason Capital) has signed an agreement with the State of New York to build and run a casino at the Aqueduct Racetrack in Queens. It will be the only legal casino in New York City, with its own subway stop, making it easily accessible for all the residents of the metropilitan area. A $370 million upfront franchise fee will be paid for the exclusive casino deal and a minimum of $250 million will be spent on the 328,000-square-foot VLT gaming and entertainment venue. The first phase of the project is expected to take approximately 14 months to build and will include a parking garage and restaurants. A hotel and 30,000 square feet of retail space are expected to be added following the first phase. Pennsylvania One additional U.S. gaming market that experienced a rise in revenue in 2008 compared to 2007 was Pennsylvania, another non-destination gaming market. Revenues for the Pennsylvania gaming market increased from roundly $1.0 billion in 2007 to $1.6 billion in 2008, a growth rate of 55.6%. The two facilities that were open prior to 2007 (Mohegan Sun at Pocono Downs and Philadelphia Park) both had higher revenues in 2008 compared to Growth in this market was also due to additional gaming inventory, as four of the seven gaming facilities currently in operation in the market were opened in Additionally, Hollywood Casino at Penn National Race Course opened in February of The status of the four remaining stand-alone (Category 2) casinos authorized on December 26, 2006 under Pennsylvania s Race Horse Development and Gaming Act of 2004 by the Pennsylvania Gaming Control is as follows: Sands Bethlehem Gaming, LLC: The Sands Bethlehem Casino is being developed by Las Vegas Sands Corp. and will be located at the former Bethlehem Steel Co. plant in the city of Bethlehem. It will feature approximately 3,000 slot machines and is expected to open in mid Las Vegas Sands Corp. had suspended work on construction of a hotel, conference center, and mall due to the tightening credit market and downturn in the economy in late PITG Gaming, LLC: The approved casino in Pittsburgh is to be located on the North Shore along the Ohio River waterfront in Pittsburgh, west of Heinz Field and the Carnegie Science Center. On August 14, 2008, the Pennsylvania Gaming Control Board approved a request for a change of control and recapitalization of the Pittsburgh casino project that had been sought by Don Barden and PITG Gaming, LLC. Holdings Acquisition Co., L.P., a newly formed company, will now hold the license. The $780 million casino and entertainment project Page 4

6 is expected to initially feature a ±400,000-squarefoot facility with 3,000 slot machines, five dining locations, lounges, unencumbered access to the waterfront, sculptured landscaping, terraced dining, and a 1,000-seat amphitheater. Future plans include the development of additional entertainment and dining venues, a 300-room hotel, and a multipurpose event room to accommodate 2,500 guests. The initial phase of the project is expected to be completed by August HSP Gaming, LP: HSP s SugarHouse Casino is expected to be located along the Delaware River near the Girard Avenue exit of Interstate 95 in Philadelphia and feature 3,000 slot machines. Protests and litigation have delayed the construction of this property. In July 2007, the Pennsylvania Supreme Court upheld the Pennsylvania Gaming Control Board s decision to award the license and, in October 2008, rejected a request from the city to reconsider an August 2008 ruling that gave SugarHouse control of 11 acres of state-owned riparian land along the banks of the Delaware River. Philadelphia Entertainment & Development Partners, LP: Philadelphia Entertainment s Foxwoods Casino Philadelphia was to be located in South Philadelphia along the Delaware River and was to feature 3,000 slot machines. However, this project has also been delayed by legal challenges and may be relocated from the Philadelphia waterfront to the Gallery at Market East, between 10th and 11th Streets on Market Street. The Pennsylvania governor and Philadelphia mayor have publicly supported the relocation of this project. Valley Forge Convention Center Partners, L.P. (Valley Forge Convention Center, Valley Forge, PA) and Bushkill Group, Inc. (Fernwood Hotel & Resort, Bushkill, PA) have submitted applications for the two available slot machine licenses for existing resorts (Category 3). In October 2008, the Gaming Control Board completed two days of licensing suitability hearings for Valley Forge Convention Center Partners, L.P. and Bushkill Group, Inc. The hearings provided the Gaming Control Board with an opportunity to hear directly from representatives for the two applicants and to thoroughly inquire about character, operational and financial suitability, community impact, diversity plans, plans for the prevention of compulsive gaming, and other issues. The Gaming Control Board originally received four applications during 2007 for Category 3 licenses. However, two of the applicants, Vacation Charters, Ltd. (Resort at Split Rock, Lake Harmony, PA) and CE-Palace, LP (Palace Inn, Monroeville, PA), later withdrew. Significant Developments in Other U.S. Gaming Jurisdictions As the gaming industry has evolved both nationally and internationally, it is far beyond the scope of this article to discuss all relevant aspects in all markets. However, readers of this article should be aware of certain issues in particular gaming markets that will potentially have a major impact and/or ramifications on a national level. California California is a major source market for the Nevada gaming industry. Nevada gaming markets, including Las Vegas, Lake Tahoe, Laughlin, and Primm, have all been negatively impacted by the increase in gaming on Native American tribal lands in California. In January and February of 2008, five Southern California Native American tribes received authorization to increase slot inventory by 22,500 units. In January 2008, the federal government gave final approval to a gambling expansion plan that allowed the San Manuel Band of Mission Indians to add 5,500 more slot machines to the 2,000 slots featured in its San Bernardino area casino. Additionally, in February 2008, California voters approved ballot measures upholding gaming compacts that allow four other Southern California Native American tribes the Morongo Band of Mission Indians, the Pechanga Band of Luiseno Indians, the Agua Caliente Band of Chuilla Indians, and the Sycuan Band of the Kumeyaay Nation to add 17,000 slot units to their then-current 8,000-unit gaming inventory. Colorado Colorado casinos became smoke free on January 1, 2008 after Colorado s Clean Indoor Act was extended to casinos. Casinos were not included in Colorado s smoking ban when it was first enacted in On November 4, 2008, Colorado voters approved Amendment 50, which allows residents of Black Hawk, Cripple Creek, and Central City to vote on measures to increase bet limits to $100 (versus $5), extend gaming operations to 24 hours (currently all casinos must close for six hours between 2:00 a.m. and 8:00 a.m.), and permit the installation of roulette and craps games in the casino. It was argued in support of Amendment 50 that the changes were necessary so that revenues lost as a result of the implementation of the smoking ban could be recovered. Connecticut MGM Grand at Foxwoods opened on May 17, 2008, adding approximately 2 million square feet to North America s largest gaming venue. The new hotel has 825 guestrooms and suites, a 4,000-seat theater, approximately 340,000 Page 5

7 square feet of gaming space, four restaurants, 115,000 square feet of meeting and convention space, and a 21,000-squarefoot G Spa. In December 2008, Foxwoods announced that it would be the first casino in the U.S. to introduce a rollingchip program. Rolling chips, which are widely popular in the Macau SAR gaming market, allow patrons to purchase gaming chips with a set percentage rebate at the time of purchase but cannot be redeemed for cash. Winning bets using the rolling chips are paid with regular chips. Rollingchip program offers players an instant advance rebate and some customers prefer the rebate over traditional complementary amenities provided by casino operators. A portion of Mohegan Sun s second major expansion, Project Horizon, was also completed in Specifically, Casino of the Wind, which added approximately 45,000 square feet of gaming space, including 660 slot machines, 28 table games, and a 42-table themed poker room, as well as approximately 20,000 square feet of new dining and retail amenities, was opened in August However, the Mohegan Sun Tribal Authority announced in September 2008 that construction of the hotel, retail, and parking garage elements of the Earth Expansion component of Project Horizon would be suspended as a result of the ongoing national economic recession and that the feasibility of the suspended elements would be revaluated in approximately 12 months. In addition, construction of a 1,500-space parking garage that was anticipated to be built adjacent to the Earth Expansion was suspended. Maryland In November 2008, voters in Maryland passed a referendum that added a constitutional amendement approving the placement of 15,000 slot machines at five locations throughout the state. The five Maryland counties that may add slots are: Anne Arundel County Baltimore City Allegany County Worcester County Cecil County Despite the amendment to Maryland s constitution, delays caused by zoning disputes at the local level, jockeying among gambling companies and developers, and continued debate over the impact of gambling on the Maryland s social fabric is anticipated. Development of such facilities in the future may impact gaming revenue currently being generated by New Jersey, West Virginia, and Pennsylvania slot facilities from Maryland residents to some degree. Conclusion The risk of further decline in local, national, and worldwide Page 6 economic conditions is greatly concerning gaming operators. Deteriorating revenue and net income levels for gaming properties reflect a cyclical downturn; however, the duration and magnitude of the downturn are uncertain at this time. Significant increases in competition from other gaming markets, both internationally and in the United States, may also have a negative impact upon the future performance of any particular gaming market. Overall, a rebound is expected once the national and world economies recover. The performance of the gaming-tourism market, as with other resort/consumer markets, is expected to improve as a result of cyclical market forces and the inducement caused by the completion of expansions and development of product offerings. The current financial crisis has curtailed lending on major development projects. The investment banking firms are in a state of transition, and it is uncertain what the future source of debt financing for large-scale casino hotel projects will be. Major gaming companies such as MGM-Mirage have resorted to sales of assets to improve liquidity positions due to declining cash flow, while others have scaled back or stopped construction of particular projects completely. One source of cash infusion into the market may be cashrich gaming companies and investment groups seeking bargains during the down market. ABOUT THE AUTHOR SHANNON OKADA is a Vice President with HVS Consulting & Valuation and Associate Director of the HVS Gaming Division. He holds a Masters of Science degree in Hotel Administration from the University of Nevada, Las Vegas, a Masters in Business Administration and Juris Doctor degrees from Pepperdine University, and a Bachelor in Business Administration degree in Marketing and Management from the University of Hawaii. Since 1980, HVS International ( HVS ) the leading global hospitality consulting organization has provided financial and valuation consulting services for over 10,000 hotels throughout the world. Principals and associates of the firm have written textbooks and thousands of articles regarding all aspects of the hospitality industry. Mr. Okada can be contacted at: HVS Consulting & Valuation - Las Vegas 8170 W. Sahara Avenue, Suite 201 Las Vegas, NV United States of America Tel: sokada@hvs.com