Long-term robust same-store growth in U.S. bricks-and-mortar regional gaming is unlikely, according to global ratings agency, Fitch Ratings. The company attributes this pessimism to longer term structural macroeconomic and secular factors. Notable factors, according to Fitch Ratings include, saturation across regional markets; stagnant wages among the lower tier players; reprioritization of disposable income; proliferation of online/social gaming; potentially lower propensity to gamble among younger generations; and lowered preparedness for retirement by baby boomers.
The U.S. regional gaming supply has largely met demand, with most states now having some form of casino-based gambling. Only a handful of states that have meaningful prospects of legalizing casinos over the next several years (e.g. Kentucky, New Hampshire) remain, with Texas a longer term possibility. Results could be lackluster, even if more states allow casinos, as is the case in Ohio, which Fitch Ratings estimates cannibalized roughly one-third of its revenues from surrounding states.
In New Jersey, the growth of gaming in nearby states is having a negative impact on Atlantic City’s casino industry. Atlantic Club Casino shut down earlier this year, Showboat Atlantic City Hotel & Casino is closing in August and Trump Plaza Hotel and Casino is expected to close in the fall. And, if a buyer is not found in bankruptcy court, Revel Casino Hotel will be closing its doors, according to the casino. Additionally, in December, Fitch Ratings forecast that New Jersey would see between $200 to $300 million in revenue from online gaming, but has recently cut its estimate to $120 to $130 million.
In a note to investors, Fitch says, “Several factors we had expected to drive sequential growth have not materialized, including a ramp-up in players’ awareness of online gaming as a result of operators’ marketing efforts. The number of online gaming accounts increasing 8 percent in June to 378,564 from 351,136 in May, and tripling since December, has not translated into increased revenue. Other factors expected to drive growth include technology improvements, users’ adaption to the available payment methods and the rollout of mobile products.”
Additionally, casino-themed social games are a net negative for the U.S. regional casino operators. Fitch Ratings believes there is overlap between casino and social game players, and spending on social games, along with lotteries and other low-cost, convenient alternatives, eats into the customers’ casino and other recreational budgets. The company is less concerned about online gaming legislation, which it does not expect to pass on the federal level in the near- to medium term.
Baby boomers make up a critical core of the existing gambler base. Low interest rates are dampening seniors’ incomes in the near term. Longer term, the solvency of Social Security funds could be a factor, as some combination of new revenues and lower benefits is required to keep the Social Security funds solvent, according to the Social Security’s trustee reports.
Out of the four main U.S. pure-play regional operators, Isle of Capri Casino, Inc. is most vulnerable to a long-term moderate same-store revenue decline scenario, but Penn National Gaming, Inc. is more vulnerable in more severe scenarios given its fixed-cost structure. Pinnacle Entertainment, Inc. is best positioned due to its strong free cash flow (FCF). Boyd Gaming Corp. also benefits from the FCF at Peninsula Gaming LLC and its net operating losses (NOLs).
Fitch Ratings estimates gaming revenues derived from slots in regional markets will decline to roughly 75% of total revenue by 2030 from the current mix of about 85%. The shift largely reflects the younger generations’ preference for table games. With only a modest new supply coming online, suppliers’ slot sales and operations will likely continue to struggle. The company sees consolidation with lottery and table game suppliers and participation in social gaming as smart hedges against the difficult backdrop for the suppliers’ core products.