Deutsche Bank equity analyst Carlo Santarelli has published a report that splashes some cold reality on regional gaming trends.
By factoring out various data to achieve as close to apples-to-apples comparisons as possible, Santarelli shows that gross gaming revenues in brick-and-mortar properties have generally been flat and have fallen well short of inflation.
Those revenues have grown 6.9 percent over the past decade. Exclude Ohio, which as a late starter weights the results with a youthful growth spurt, and revenues actually declined a fifth of one percent. Inflation during that time totaled 32 percent.
Further, as Santarelli has shown in his previous studies, iCasino is taking its toll on brick-and-mortar properties. Factor out early iCasino states and Ohio, and regional brick-and-mortar revenues rose a more acceptable 4.5 percent.
The picture that Santarelli presents is not new to readers of this space, as we have repeatedly pointed out the nearly languishing state of regional brick-and-mortar gaming.
There is little reason to think that the legacy regional casino business will turn around as iGaming spreads, a growing number of casinos share the pie and as gray gaming proliferates, from sweepstakes sites to so-called skill-based games.
Compounding the problem is that some companies have cut costs to the point of squeezing the fun, or value proposition, out of the customer experience, resulting in diminishing returns. When going to a casino is no longer fun, people will quit going to them. The hard-core gambler just looking to gamble can more conveniently satisfy that desire on his or her cellphone in an increasing number of jurisdictions.
As we’ve also noted, the opportunities for long-term investors in US regional casinos have been companies with steady growth plans like Boyd Gaming and Churchill Downs, and their shareholders have been rewarded with rising stock prices.
In many cases, the answer to this malaise is in the hands of legislators and regulators. They can protect the jobs and tax revenues provided by casinos if they rein in gray gaming, for example.
Until or unless changes in public policy occur, the opportunities for brick-and-mortar equity investors will remain limited to the few companies with sound growth plans and excellent operators able to generate increasing profits from current operations, such as Monarch Casino.
NOW IS THE TIME
One regional casino operator with more than its share of growth opportunities is Full House Reports.
Thanks to the Illinois Supreme Court, this may be the year in which Full House wins or loses investor confidence that it can capitalize on those opportunities.
That is because the court has knocked down a lawsuit challenging the issuance of the Waukegan casino license that Full House holds, thus clearing the way to gain financing to construct a permanent casino where its temporary American Place now operates.
If Full House successfully finances the project and, as part of the process, refinances other debt, it will be all systems go.
The bullish outlook for Full House is that it gets acceptable financing and American Place combines with the relatively new Chamonix resort in Cripple Creek, Colorado, to transform the company. In the simplest calculation, a 15 or 20 percent return on the combined $750 million investment would be transformational for a company otherwise at $30 million to $40 million a year in EBITDA.
Without the financing, however, or without executing on fulfilling the profit potential of the new casinos, Full House will be a debt-laden little company facing uncertain and unpleasant options.
Our bet is on Full House. Chamonix has gotten off to a slow start and critics question whether the luxury resort is overbuilt in a small town miles down twisting mountainous road from its primary market, Colorado Springs.
However, this is Colorado. Residents know how to traverse twisting roads and the state knows how to clear winter snow for motor vehicles. Black Hawk and its canyon road are evidence of that. And the Colorado Springs and southern Denver exurbs are big enough. All one has to do is look at nearby Broadmoor Resort to see that an upscale operation can thrive in the market. Most importantly, gaming revenues at Chamonix are growing by double digits.
So, now it is up to CEO and former Wall Streeter Dan Lee to get the financing needed to make Chamonix and American Place work. If he does, the onus then will be on Full House to execute operationally and fulfill what appears to be considerable potential.
