The Gaming Industry Weekly Report - Gaming USA Corp 1-800-990-1902

Usually at this point we breathe a sigh of relief figuring we had the pause that refreshes and now we can actually move higher as the industry seems quite sound. Unfortunately, we see storm clouds on the horizon and we have moved from being concerned about the level gaming stocks were trading at and not concerned about fundamentals to being a big concerned about what could impact fundamentals or at least perception.

We have discussed quite a few things that has been impacting gaming in recent weeks including ignorant politicians, competition, crazy regulators, confusion about Hold, and an arrogant and vicious media. All these things have an impact on why we have become so concerned however up until now, these were all things that would not have made much of a difference to us if gaming stocks had not had the successful first quarter that they did. A few things happened this past week that made us see the possibility of a severe storm approaching us.

Let’s start in Macau. The opening of Sands Cotai Central has had us a bit on edge because we feel there are expectations that it will result in an even higher shift of business to Cotai from the Peninsula, but there still are expectations that the market will grow enough that the rising tide will lift all boats, but some lifted more than others. The April gross gaming revenue results show little positive impact from the opening but Hold issues haven been speculated on.

Our concern is that the Cotai Central opening will not increase visitation like Galaxy Macau did. If you recall, when Galaxy Macau opened, we suggested looking more at the visitation growth, rather than gaming revenue because Galaxy Macau was supposed to start the Mass Market growth. It wound up that Galaxy Macau became a very expensive VIP joint but it did the trick in that visitation rose 10%. Other properties seemed to benefit more from the mass market growth than Galaxy, at least initially.

With LVS not commenting much on the opening, investors are left to just view the statistics and the April gaming revenue NOT setting a record and NOT being the top performing month YTD is a bit of a red flag. Even more of a concern to us is that the May Day visitation numbers did not increase. Macau Business reported the number of visitor arrivals to Macau during the Labour Day holiday, April 29 - May 1, were actually down 0.81 to 351,000. This is not supposed to happen with a new casino opening. Overall, Macau authorities recorded over 1.1 million border crossings during the Labour Day holiday, including tourists and residents. We should remind everyone that this is a view of the market on a whole. Our views on individual companies is that operators like WYNN and LVS will make money no matter what and others could juice revenue numbers with low margin business that doesn’t make any sense. That is why we are focusing on visitation, not revenue.

Turning to Las Vegas, our wonderful US government continues to be reactive instead of proactive and instead of thinking before they act, they are about to hurt the only industry that is creating jobs again. In recent weeks there have been numerous reports about how the hospitality industry is hiring and creating new jobs in the hundreds of thousands. If that is true, why in the world would lawmakers start forcing government workers to stop holding meetings?

Once again Las Vegas is being penalized because government workers seem to be clueless about who they work for. We didn’t see all trips to Columbia banned because the Secret Service wanted to party with hookers or Hillary Clinton decided to show her party girl side? Why then is Las Vegas being punished because the General Services Administration went a bit overboard on an event at M Resort in Las Vegas in 2010 and hired a meeting planner to do the work? A Washington Post story has sparked a criminal investigation as Location Solvers was paid a $12,601 commission by M Resort, something considered standard practice. Location Solvers claims the commission was part of the regular price of the bill while the Washington Post claims it was added on to the food and beverage catering bill, prompting a Justice Dept. investigation for possible criminal prosecutions.

At this point neither the lack of an increase in visitation for May Day or the government screwing Las Vegas again is a serious issue as both areas have enough business to go around. The problem is both are happening at inopportune moments as Macau is absorbing the opening of Cotai Central, Wynn Cotai was just approved to start construction, Galaxy Macau is beginning a doubling in size, Macao Studio City is expected to restart construction and SJM and MGM are still trying to get approval to build. Over in Las Vegas, CZR closed O’Sheas, is shutting down Imperial Palace and spending $550 million on Linq including a big Ferris Wheel. Sam Nazarian’s sbe Entertainment and Stockbridge supposedly secured $300 million to redevelop the Sahara. The hospitality business does the best when there is no threat of new supply. We have been cautious, and we believe the Street has sold off regional casino stocks, because of upcoming competition. New supply plus a possible hiccup in business conditions makes us quite nervous.

The good news is any new construction in Las Vegas, Macau or even a place like Massachusetts is years from completion in some cases years from even starting up. To us that spells long term bullishness which means, in the event that once again we have spotted something that others will publicize in the near future and it results in declines in stock prices, it could mean the next opportunity. In the meantime, we hope all of you at least cashed in some profits on our cautious view of gaming stocks going into earnings.

We may have missed our chance at adding Ameristar Casinos back into the Model Portfolio. When we removed them at $24.50 on the news of their purchase of Dan Lee’s Mojito Pointe project and the initial positive response, we told you we had all intentions of adding them back when the Street came around to our way of thinking. In recent weeks we continued to point to ASCA as one of the regional casino stocks being knocked down for the wrong reasons. When the stock fell back to the $17 range, we should have added it back, especially since most of our concerns that caused us to remove them have been addressed. We had three major concerns with the Mojito Pointe purchase. Two of them surrounded building Ameristar Lake Charles and their Massachusetts project at the same time. We felt there would be concerns about ASCA’s balance sheet and whether they could handle two projects in development from an operational and financial standpoint. Those concerns are gone as ASCA reiterated plans for a 2014 opening of Ameristar Lake Charles and the Massachusetts Gaming Commission has fumbled the ball so we see little chance of licenses even being granted until the end of 2013 or early 2014. That means construction would probably not get underway on casinos there until mid 2014 or even 2015. The third concern, that ASCA would now be subject to the Texas Two-Step plunge whenever someone suggests gaming legalization in the Lone Star State is still valid. In fact Pinnacle Entertainment made that worse with their announcement they were buying a 75.5% equity stake in the entity that owns Retama Park Racetrack in downtown San Antonio, Texas for $22.8 million. We do not believe that PNK’s purchase of River Downs will make back the money they will see leave the Southern Ohio market when Horseshoe Cincinnati opens and we certainly do not think owning 75% of Retama Park Racetrack will offset what is sure to be a nasty decline in PNK stock if Texas legalizes casinos.

We are not convinced Texas will legalize, actually we pray that they don’t. If you recall, Texas is the only state left in the list of feeder markets we gave over 10 years ago that would result in the downfall of the domestic gaming industry if casinos were opened there. In the case of ASCA, we now believe that the share price may not be ready for $24.50 but certainly should not be at $17, especially after their sterling earnings report. We are not expecting regional markets to report a very strong April so we may get our opportunity to move ASCA back into the Portfolio somewhere near our original intention.

Things are about to heat up in Florida as the Supreme Court upheld the lower court decision on allowing Hialeah Racetrack to offer slot machines. With that decision comes the interpretation that slots are allowed anywhere in Florida, not just Broward and Miami-Dade Counties. If that is true, the Seminoles no longer have to pay the state the exclusivity percentage each year. In the near term, this means the existing Florida racinos will have a new competitor as John Brunetti can complete the renovations at Hialeah and install slots. We don’t know if this hurts or helps those who are obsessed with opening 3 multi-billion dollar casino resorts in South Florida but it certainly does mean Florida has the potential to have casinos across the state, not just in the South. A new group called “New Jobs and Revenue for Florida” is pushing to get a casino question on the 2014 ballot. We don’t know if this is a good idea or a bad one.

An Ohio Senate committee decided to muck up House Bill 386 by adding government sanctioned card rooms in the name of charity in each of Ohio’s 88 counties. While saying it will benefit charities is supposed to smooth things over, this is Ohio, a state where Ohio Roundtable looks for every chance to launch a lawsuit to make things tougher for the gaming industry and a state where the Governor already rung out more cash and fees from the operators than was expected. The last thing they would need is to take a gaming amendment bill which would make into law changes that were decided on many months ago and add something that will not only be competition for the upcoming casinos and racinos but would result in another lawsuit.

Over in Massachusetts, it would probably be easier if the Gambling Commission makes their decisions based on whether they will have a chance at the Stupid Move of the Week award from the Gaming Industry Weekly Report. This week the winner, hands down, is the Massachusetts Gambling Commission. Despite everything, in this country you are still innocent until proven guilty. That is not so in the gaming industry as Kazuo Okada found out with WYNN. Shouldn’t the gaming regulators be held to the same standards as the industry they regulate? The Commission hired Carl Stanley McGee as interim executive director. The first problem is that McGee formerly worked for Governor Patrick which already brings up issues of a possible conflict of interest. The big problem is McGee was accused of assaulting a 15 year old boy in Florida in 2007 and it was the type of assault that would set off spam filters if we printed it. The case was eventually dropped for lack of evidence. We are quite certain McGee and the boy, who is now a college student, are great people and the fact he was in a steam room in Florida at the same time as McGee in 2007 was all quite innocent. The fact is gaming regulators expect the licensees to be lily white and if they would question a potential licensee about an issue like this, they should not have anyone on the Commission that would have problems being licensed.

If the Commission stops doing things that will delay the licensing of casinos and actually does things to speed them up, it may be a good thing for those who finally win them. The Mashpee Wamanoag Tribe unveiled their plans. The tribe will partner with Genting but will build up the casino in phases over 5 years. When completed the casino, for now, will be located in Taunton, will eventually include a water park, three hotels, high end retail shops and of course, the casino.

We don’t know who did it or why but Canterbury Park actually made a deal that makes sense. We are a bit puzzled why the gaming tribes from Minnesota would agree to this but CPHC dropped their push for VLTs at tracks for this session, smoothing the way for the Minnesota Vikings funding bill to be voted on this Monday. That bill includes the legalization of Video Pulltabs and Bingo machines at fraternal organizations. Instead of fighting a losing battle with the tribes and politicians for VLTs at tracks, CPHC agreed to a deal where they would be allowed to increase the number of poker tables from 50 to 80 and raise the maximum bet on poker to $100. They also get to have real blackjack. In return, Indian casinos in the state get to have simulcast horse racing with a revenue split between the track, tribes and horse racing industry. CPHC is not restricted from trying for VLTs again next year or at any time which really has us wondering why in the world the tribes agreed to this?

On to Atlantic City where reports are out that casinos are following Revel’s lead and decided to not just have walls facing the ocean but to let people see the water. The CRDA is giving more than $9 million to Trump Taj and Resorts. The Taj will get $6.9 million and will include outdoor seating for the casino’s Hard Rock Café and Royal Albert’s Palace Restaurant. We can fully understand taking down the wall and making it glass. After all, one of the best things Atlantic City has is the Boardwalk and Beach. Why would any casino spend money on outdoor seating for restaurants when they would be able to use it for 2 or 3 months a year?

The deadline passed again and nobody bid on the remaining boutique casino license in Atlantic City. Eventually those who actually have the power to change things will realize that you need a few steps to success. First, tell the union heads to go jump in the ocean. Close up the parasite casinos that do nothing but take a few needed dollars out of the casinos that actually can generate visitation. Spend the money to spruce up the remaining casinos. Then consider issuing new licenses.

Missouri lawmakers are considering allowing casinos to offer credit to customers, something that would be overwhelmingly positive. Of course the Moral Mentality groups are up in arms about this predicting destruction of family values. You can max out your credit cards buying shoes online at Zappos but if you get credit at a casino, the world will come to an end. There is no doubt this would be positive for casinos if it passes.

The NY Lottery generated $8.84 billion in sales and nearly $2.9 billion in net win profit for the year ended March 31, 2012. VLTs generated $1.4 billion in net win and $697.1 million in profit and that was with only 5 months of Resorts World, which generated $253.3 million of net win. Why in the world would the state of NY consider allowing commercial casinos considering there is no way the LVS, WYNN and MGM’s of this world are going to put up billions of dollars in investment and pay 60%+ in taxes. If the state would just focus on getting everything straightened out with the tribal casinos and work out a good deal with all of them, allow table games at the racinos in return for major investment it would bring in more money and create less problems than allowing commercial casinos.

President Obama’s strategist and pollster Benenson Group said New York residents do not seem to want commercial casinos. Benenson is a former aide to the current Governor Cuomo’s father when he was Governor of NY. They also advise the Oneida Indian Nation and have been working for President Obama since 2008. Benenson’s poll found 50% would vote for a constitutional amendment allowing commercial casinos and 47% would not. 59% of voters agree that gambling will not fix the state’s problems. Benenson said 60% support at the onset is the number backers should feel comfortable with and it is just not there.

Entertainment Properties Trust said they are moving ahead slowly with plans to develop the 1,500 acres they control at the former Concord Resort. They had to extend the expiration date of all their agreements with Empire Resorts again, something that tells us that if a snail and NYNY/EPT had a race, it may be a photo finish. Meanwhile the Stockbridge-Munsee Band of Mohican Indians are back, filing an updated application to have the US Dept. of Interior take 330 acres of land in the Catskills into trust for a casino. Claremont Partners also closed on the purchase of the bankrupt Nevele Grand Hotel and Country Club property, something that is pretty much not worth anything if a casino is not eventually allowed there. The NY State Lottery approved a $27 million expansion at Batavia Downs.

Maryland Live!, the next and biggest casino to open in Maryland, will open its doors on June 6th at 10 PM. The first phase of the $500 million casino will open at the Arundel Mills Mall with 3,200 LV style slots and electronic table games. The facility will open with F&B selections including Bobby’s Burger Palace, Cheesecake Factory, Phillips Seafood, Live Market Buffet, Noodles and the R Bar. Between July and October the facility will open Rams Head Center Stage featuring live entertainment nightly and The Prime Rib steakhouse. Ahead of the opening, Cordish Cos., owners of Maryland Live!, and Aristocrat, provider of the Oasis system, launched Myliveonlinecasino.com, a free website that allows you to sign up for the Live! Rewards players card and link your card to virtual credits on the free online casino. This is the first play for fun online gaming environment to be branded and integrated with an existing gaming property’s casino management system.

Lakes Entertainment announced its Evitts Resort unit was awarded a VLT license for the Rocky Gap Lodge & Golf Resort in Cumberland, Maryland. The license is contingent on certain approvals by the Maryland State Board of Public Works as well as Evitts obtaining construction financing. LACO expects to purchase the existing resort, expanding the parking lot and constructing 50,000 square feet of new space, opening with a minimum of 850 VLTs, a new restaurant and a live entertainment bar.

We discussed in last week’s newsletter how a former Alabama Governor Bob Riley stooge/supporter has decided to try finishing Riley’s work and close down the Poarch Band of Creek Indians’ tribal casinos. Now we have the strangest Attorney General in the world, Luther Strange, writing letters to the NIGC saying the Class II slots at the tribal casinos are illegal. This is one fight that is going to turn violent if they don’t watch it as the tribe will not give in and public opinion supports the casinos.

There has been a lot of industry chatter about the competition between TransAct Technologies and FutureLogic regarding thermal printers. Meanwhile it seems like JCM is making a run at both of them with their PayCheck 4 Thermal Printer. Last week JCM announced they will install their printers on all the slots at the Oxford Casino in Maine and this past week they announced a deal to install the printers on all new devices at the Mardi Gras Casino & Resort in West Virginia.

We have no idea why it took so long but the NYRA may soon be dissolved. Their top two executives, CEO Charles Hayward and senior VP Patrick Kehoe, were put on unpaid administrative leave. We don’t think it is a coincidence that a second story from the NY Times came out with more details on just why so many horses are dying at Aqueduct. It was another black eye for horse racing, right before the Kentucky Derby but it also showed how the NYRA should have been able to spot all this. Meanwhile an investigation was announced into the NYRA amidst new evidence that Hayward lied when he said he did not know anything about stiffing customers and allegedly endorsed intentionally short changing betters over a 15 month period. Hayward is the former head of the Daily Racing Form and supposedly he convinced current DRF publisher Steve Crist to keep the information secret. Kehoe is also general counsel to the NYRA. Unfortunately the ones to blame are NY lawmakers who kept giving bailouts to the NYRA and never put their own people in charge of overseeing the state’s investment.

PA April slot revenue rose 1.3% to $214.1 million. Once you back out the $4 million from the new Valley Forge casino that opened during the month, same store revenue fell 0.6%. Parx led with $33.1 million, up less than 1%, followed by the Rivers and Sands, up 1% and 3.6% respectively. Sugarhouse saw the biggest rise of 7.5% while Harrah’s Chester/Philadelphia and MNTG’s Presque Isle saw the biggest declines of 7.6% and 6.6% respectively.