Here’s a quiz:
Which regional casino operator—Boyd Gaming, Eldorado Resorts, Golden Entertainment, Penn National Gaming, Pinnacle Entertainment—made the following points in their second quarter investor conference call and earnings release?
• Business volumes increased broadly among the portfolio of properties.
• Growth is accelerating.
• Margins improved.
• Customers are spending more and appear more confident and financially healthy.
• We are investing capital to upgrade our properties, and it is resulting in improved profitability.
• We are improving the balance sheet.
• We will pursue acquisitions.
If you answered, “all of the above,” you are correct.
Clearly, we are in an era of prosperity for regional casino companies. Just as clearly, operators have found the same formula to success in their mature and maturing markets: focus on profitable customers, avoid trying to buy business by spending loosely on marketing, upgrading facilities, and adding to non-gaming amenities.
Obviously, not every property in every company is in a Goldilocks era. There’s softness in the oil patch. Weather can still have significant short-term effects, especially in riverboat country.
One of the most interesting observations from the conference calls is that CEOs and CFOs, having made acquisitions, including transformational ones for Eldorado and Golden, are eager for more.
Some of them need to integrate their most recent purchases and get their debt-to-EBITDA ratios down to around 4.5 times, but all appear confident they will do that. Others are ready now.
When they talk about acquisitions, they talk about purchases big enough to make a difference. And, as they have grown, those so-called needle movers need to be larger, which seemingly would mean there are fewer targets.
But there apparently are targets aplenty that meet their criteria.
Eldorado CFO Tom Reeg said he has not seen as many opportunities in his decade at the company. Likewise, Pinnacle CFO Carlos Ruisanchez said the number of targets is the most he’s seen in several years.
Penn National CFO William Fair said there are “a number of processes going on out there…we’ve been looking at a number of things in Canada.”
This hunger for acquisitions is not surprising. It’s what happens in a maturing industry. That and dividends and share repurchases, both of which are now more common among casino companies than a few years ago. The latest example being Boyd initiating a regular dividend.
In addition to the regional casino operators, there are other sources for consolidation.
Caesars Entertainment expects to complete its reorganization with a REIT spin off and far lower debt by early October.
CEO Mark Frissora has publicly sounded the trumpet of a more aggressive, growth-oriented company coming out of reorganization. Evidence of that was the recent creation of a new position staffed by Michael Daily as senior vice president of Strategy and M&A.
Then there are the REITs—Gaming & Leisure Properties, MGM Growth Properties, and the still unnamed Caesars REIT. The REITs live to acquire real estate so they are always on the hunt. And, though they have been spun off from parent casino operators, they are obligated to act independently. Thus, GLPI, born of Penn National, bought Meadows racino in Pennsylvania and leased it to Pinnacle. And Pinnacle has said it could acquire properties on its own or in conjunction with a REIT, whichever would make sense in any deal.
For investors, there are several ways to play this consolidation: own a target, if one can be identified, or own an acquirer, especially now that buyers have their formula down and deals do add to earnings. Or, own a REIT and collect a dividend yielding 6.8 percent.
