MGM Resorts International is considering selling MGM Springfield but retaining control of the casino’s daily operations. The plan resembles the $4.25 billion sale and leaseback of the Bellagio Hotel & Casino on the Las Vegas strip, announced on October 15.
In a conference call with investors on October 30, MGM Chairman and CEO Jim Murren said a similar real estate sale for the iconic MGM Grand in Las Vegas would likely post by year’s end. The Springfield, Massachusetts property along with Las Vegas’ Aria and Vdara are being contemplated using the same blueprint as Bellagio, he said.
Murren plans to use the proceeds from the sales to reduce debt and invest in new growth opportunities, including a potential $10 billion casino in Japan and sports betting in the U.S.
In a statement to The Republican, MGM said it was “proud of our work in our Springfield community and is committed to building on our shared accomplishments. This partnership has resulted in thousands of jobs and millions of dollars of revenue in the area, and we look forward to expanding our engagement in the commonwealth. Previous financial transactions made by MGM focus exclusively on the transfer of real estate and have no bearing on the property’s management or operations.”
Springfield Mayor Domenic J. Sarno told MassLive.com the city has a strong host community agreement with MGM. “Part of this mandates the city and the Massachusetts Gaming Commission (MGC) must approve any and all adjustments to said agreement,” he said.
MGM Resorts International and Blackstone Real Estate Income Trust formed a 95 percent/5 percent BREIT-led joint venture to acquire the real estate assets of the Bellagio in a sale-leaseback transaction. As part of that deal, MGM Resorts signed a long-term agreement to lease the Bellagio from the joint venture and continue to manage, operate and be responsible for all aspects of the property on a day-to-day basis.
MGM Springfield opened in the city’s south end in August of last year at a cost of nearly $1 billion. The casino has not performed as well as initially expected. The venue has brought in less than two-thirds of the $418 million in gross gaming revenue (GGR) MGM executives told the state the casino would see during its first year. Through this past August, the resort has generated GGR of $273.8 million.
During the years of debate over whether to allow casinos in Massachusetts, proponents invariably said the state was losing out on a revenue jackpot enjoyed by Connecticut and other states where gambling was legal.
The hoped-for windfall promised as a selling point from the three operations has yet to materialize. And expectations are morphing into a more prosaic reality, according to the Boston Globe.
Three months after it opened to much fanfare, Encore Boston Harbor is on pace to come in more than $100 million less than anticipated in first-year gambling revenues. And although the slots-only Plainridge Park casino is taking in more money per machine than the other two casinos, business in Plainville has also dropped off in recent months.
The disappointing trends have some wondering whether the industry didn’t fully understand how tough it would be to attract gamblers in a regional market that has become increasingly competitive.
It’s too early to say legalized gambling is a bust in Massachusetts. The MGC notes that the state has collected about $460 million in gaming revenue since Plainridge opened in 2015. While less than what was hoped for, it’s still a hefty take. The state gets 25 percent of gaming profits from Encore and MGM and 49 percent from Plainridge.
“At the end of the day, it doesn’t really matter whether casinos’ tax revenue overestimates are honest projections or driven by political gimmicks,” said Lucy Dadayan, a senior researcher at the Urban Institute, a Washington, D.C., think tank. “What matters is that casino tax revenues are behind the projections and not meeting the promises.”
The early shortfalls contrast sharply with the upbeat sales pitches casino companies made when they were seeking public support and regulatory approval. Les Bernal, national director of the group Stop Predatory Gambling, said the overly optimistic public relations campaigns were carefully calculated. “They deliberately oversell how much revenue they’re going to bring into the state,” Bernal told the Globe, “because there’s no merit to the business.”
Industry observers say there’s time to turn things around, especially at Wynn Resorts’ $2.6 billion Encore casino in Everett, which is still ramping up following its June debut.
“Going into these multibillion dollar openings, the expectations are high without necessarily a realistic sense of how long it takes to develop these businesses,” said Harry Curtis, a managing director who follows gaming and hospitality stocks at the financial firm Instinet.
Curtis said it can take a year and a half to realistically assess the overall success of a new casino. Also, he said, factors such as the performance of Encore’s hotel and restaurants must be part of the equation.
Many in the industry also believe that the introduction of sports betting—should Massachusetts choose to legalize it—could help. Though in-house sportsbooks are not a major revenue driver for casinos, they can get people in the door to eat, drink, watch sporting events, and perhaps gamble on other games.
Massachusetts isn’t the first state where casino revenues have fallen short of predictions. It’s a tough industry, especially in the Northeast, where the market is growing ever more crowded. Upstate New York, in particular, has recorded a string of disappointing casino results in recent years. Revenue projections typically are based on market studies of the demographics around a proposed casino, with particular attention given to economic factors such as disposable income.
Clyde W. Barrow, a professor at University of Texas Rio Grande Valley who has followed the Northeast’s gambling market, said such models can be useful. But they’ve also been confounded in recent years both by the increasing competition in the region and by an apparent drop in the propensity of people to spend money on gambling after the Great Recession.
Another major reason the projections can be wrong, Barrow said, is that casino operators have a significant incentive to cast their prospects in the sunniest possible light. Wynn Resorts, for instance, had to persuade the Massachusetts Gaming Commission to choose its proposal over one from the operators of Mohegan Sun.
Encore has brought in $166.8 million since it opened June 23, which puts it on pace to come in below the $800 million in first-year gross gaming revenue predicted in 2014. The gambling commission sought to counter this tendency to inflate the numbers by doing an independent assessment of the companies’ estimates. It predicted MGM Springfield could take in $500 million in gross gaming revenue by its third year and Encore could reap between $705 million and $825 million by its third year.
There is still time to meet those goals—Encore is not far off track to hit the low end of the projection—but Barrow believes regulators should have been more skeptical.
“The commission just got dazzled by the bells and whistles that Wynn and MGM dangled in front of them,” he said.
The gambling commission said the casinos should be judged on more than gaming revenue. Together, the three operators spent close to $3.6 billion to build their facilities. And the industry has created thousands of new jobs. About 4,800 people work at Encore, and MGM said it employs about 2,300. But that number is hundreds lower than when it opened.
“Gaming as an economic development tool is a long-term play,” Elaine Driscoll, spokeswoman for the commission, said in a statement. “It is a dynamic industry that is accustomed to market and regulatory changes and gaming expansions. It will take time to truly assess the economic outcomes of the commonwealth’s decision to authorize expanded gaming.”
In a statement, MGM Springfield president Michael Mathis said the company is still developing its business here. “We recognize in this early ramp-up period that results will continue to vary month to month as our operation, programming, and customer base stabilizes,” he said.
MGM also emphasized its other businesses, such as retail, dining, and entertainment events. Officials from Wynn and Plainville declined to discuss their financial results.
