Penn is Making Hay in the Massachusetts Sunshine By Ken Adams July 29, 2015 at 5:58 pm As anyone knows who has been following the Massachusetts gaming story, it is a slow moving and complicated tale. It has been four years, but Massachusetts gaming is successfully out of the gates. On June 24, 2015, Penn National’s Plainridge Park Casino opened in Plainville. It started well; 10,000 people visited on the first day. In the first week, the slots had an average daily win of $586. Plainridge is not a full casino; it is a “slot parlor” – the only one authorized by the enabling legislation. By definition it does not have table games. It does have electronic simulations of table games. Those games have some opponents calling foul, but the gaming commission sees no foul. Penn is having a pretty good year; it reported $700 million in revenue and $16.9 million in earnings in the second quarter, both numbers are up significantly. If the $586 win per day holds up, it will make a solid contribution to Penn’s quarterly earnings report. However, it is almost guaranteed that in time, those numbers will drop. There are just too many issues which will limit the appeal and reduce profitability of the racino. When other casinos open in the state, those electronic table games will struggle to compete with real tables and live dealers. Worse than the game limitation, Plainridge Park has a very hefty tax-burden of 49 percent. It may be doable without competition, but eventually it will restrict Plainridge Park’s ability to respond to competitive pressures. Additionally, it is a non-smoking property; when the casinos in Connecticut and Rhode Island ramp up their marketing campaigns, the smoking policy will be a huge disadvantage. There is another regulatory requirement that will make for a very lopsided playing field with neighboring states. The state’s jackpot tax policy requires a slot machine to be shut down any time a player hits a jackpot of over $600. The machine is to remain offline until the proper forms are completed and the tax on winnings is collected. It is very, very expensive to lose as much as half an hour of playing time for a jackpot as small as $600. The property and the state will lose revenues, but it will also act as incentive for customers to go to casinos in other states. There are indeed some major challenges, but, in the short-term Penn National is in the cat bird’s seat. It will be the only casino in the state for at least three years serving an under-served market. When Plainridge Park opened the casino era in Massachusetts last month, it was considered a first, modest step on the road to a multi billion-dollar industry. As originally envisioned, the next great leap was supposed to come in 2016 with the openings of three grand resort casinos, bringing thousands of jobs and a new stream of state revenue. But today, plans for the resort casinos have stalled. Even the best-case scenario would be for two of them to open no earlier than 2018, while the fate of the third remains in limbo. Sean P. Murphy, Boston Globe, 7-20-15 As the Globe points out, the Massachusetts narrative is filled with delays and disappointments. The enabling legislation authorized three full-casino licenses in Massachusetts. Thus far only two have been awarded and they are not even close to opening, due in part to state and in part to local communities. Besides the extremely lengthy process the state’s gaming commission has imposed, opposition has surfaced at every stage. Currently, Stephen Crosby, chairman of the state gaming commission is being investigated and the city of Boston is suing the Gaming Commission over one of the licenses. The suit and the investigation are both over the license awarded to Steve Wynn for Everett, rather than Suffolk Downs. The suit is said to have cost the commission $1.5 million so far. The costs are not likely to go down as Mayor Martin Walsh seems quite set on getting his way and punishing the chairman of the commission in the process. The city claims Wynn associated with a convicted criminal and the gaming commission was aware of the association. Mayor Walsh thinks Steve Wynn and Steve Crosby are much too friendly. A federal judge is hearing arguments Wednesday in a wire fraud case against three former owners of the waterfront land in Everett that Wynn Resorts wants to develop into a $1.7 billion casino. …The allegation has also been a focus in civil lawsuits by Boston, Revere and Somerville seeking to overturn the state’s decision to award Wynn the lucrative Boston-area gambling license last fall. U.S. Attorney for Massachusetts Carmen Ortiz’s office, in court filings, has dismissed the allegations as “rumor spewed and spun” by Boston that should not be allowed in the case. Philip Marcelo, Associated Press, 7-29-15 The Wynn license was issued ten months ago, but construction has yet to begin. However, the process is finally starting. Wynn put out bid requests for construction of the $1.7 resort. Once the contract is awarded, construction will probably take three years. Conservatively, it will be late 2018 or early 2019 before Wynn Resorts can welcome its first customer. The lawsuit may not have delayed the project, but certainly has not helped. Like Wynn, MGM Springfield is not on a fast track. MGM is building an $800 million dollar project in Springfield. There is no lawsuit, no investigation, but there are delays. The most recent was requested by MGM. The company asked for official permission to postpone opening until 2018. MGM would like to wait for a new highway to open. It has been estimated that the state will have lost a billion dollars by the delays. But everyone has to take some ownership of the this incredibly long process – if either Wynn or MGM open in 2018, it will have been seven years since the process began. The commission, the bidders, the host communities and the very nature of the process all contributed. The commission moved very slowly in the beginning, declaring it wanted to guarantee the integrity of the process and the bidders. All of the bidders and the projects had to be vetted and each needed to find financing. Every city near a proposed project had a say in the process, a project had to receive voter approval and negotiate for with the host community on fees and mitigation costs. And even after long vetting processes, votes, negotiations and commission meetings, local historical commissions, city business licensing and traffic departments all get a say. It was always destined to be a long and convoluted process. But no one seems to be in a hurry in Massachusetts, do they? I interviewed someone once who said, “Sometimes the best deals I made were the ones I did not make.” I would suspect more than one of the losing casino bidders in Massachusetts has since celebrated the loss. The delays cost the state in lost revenues, but they really drive up the cost of the project and of financing. And that brings me to license for the southeastern part of the state, which has not been issued yet. The enabling legislation divided the state into three regions; it permitted one license for each region. The license for southeast region was scheduled to be granted to one of two competitors in March 2016. But one, KG Urban, has withdrawn its proposal for New Bedford. The developer and its partner saw New Bedford as a great opportunity. The city was on board and enthusiastic, but sadly the bankers were not as excited. In fact, according to KG Urban, no one is willing to finance the $650 million project. That leaves just one bidder; Mass Gaming & Entertainment has submitted a $650 million proposal for Brockton. The Massachusetts Gaming Commission is not pleased with the withdrawal. The commission is going to conduct hearings and investigate. It has even said it may not issue a license for that region. The law says three are authorized but does not require all three be awarded. All in all, nothing is not turning out quite the way supporters of casino gaming claimed when pitching casinos to the legislature and the governor in 2011. The intent of the original legislation was to create jobs, encourage capital investment and provide a significant cash flow to the state. However, the economy of Massachusetts is not the same in 2015 as it was in 2011. Both jobs and investment in Massachusetts have grown since then, enough for Boston to turn down the Olympics. And the perception of the potential of casinos in the state has changed as well. Analysts are beginning to question the viability of a southeastern casino and even the long-term profitability of casinos in Boston and Springfield. They are speculating that Massachusetts casino market is going to be saturated the day the new casinos open. But that is a long way down the highway and the highway isn’t even built yet. In the meantime, Penn National is going to be making hay while the sun is shining.