Caesars surprises Wall Street; Rincon defects; Bluhm to NYC?

Since the Roman Empire is not given to pre-announcing earnings (it leaves that to MGM Resorts International), its tribunes must have had some pretty good end-of-year numbers to trot out, which they did this morning. The headline, at least as far as J.P. Morgan analyst Joseph Greff was concerned was that the results were pretty much as expected and Caesars Entertainment is reducing its digital losses. That’s all favorable news for investors, so let’s read on, shall we? The Las Vegas Strip continued to boom but, due to “harsh December weather” (tell us about it), regional revenues were a trifle squishy, negatively impacting cash flow by as much as $15 million. Caesars Sportsbook would have posted positive ROI—were it not for a $30 million bad beat delivered by John “Mattress Mack” McIngvale. Win some, lose some.

Strip revenues for 4Q22 were over $1.1 billion, 8% higher than Wall Street forecast, and occupancy ran at an impressive 95.5%. Regional casinos combined, by contrast, brought in $1.3 billion. Internet gambling underperformed, generating only $60 million compared to the $180 million engendered by online sports betting. Even after factoring in the Mattress Mack debacle, the negative return on investment in the digital sphere was but $5 million.

Caesars considerably outperformed what Deutsche Bank analyst Carlo Santarelli expected, to the tune of $21 million, almost all of that propelled by Las Vegas. Also pleased was Truist Securities savant Barry Jonas, particularly with break-even in sight for digital. Somewhat concerning, amidst all this, was that Caesars really splurged with online promotions ($556 million, according to Jonas), which would be tantamount to giving away the store. More heartening was management’s decision to up an $800 million capex commitment for 2023 to $875 million. (More capex is never a bad thing.) We’ll know even more when the official earnings call is held but can see why Caesars execs were just bursting to get out the good news.

There’s trouble in paradise, otherwise known as California tribal casinos. The Rincon Band of Luiseño Indians revealed, after some journalistic prodding, that it agreed last November with Gov. Gavin Newsom (D) that it would withdraw from the Golden State’s regulation of tribal casinos and heretofore answer only to the National Indian Gaming Commission. According to the San Diego Union Tribune, this is the culmination of a two-decade dispute with various Sacramento administrations. Out of luck are the California Gambling Control Commission, the Bureau of Gambling Control, the office of the Attorney General and the Office of Problem Gambling, all of which benefited from tribal largesse.

“We’re the first to go through the full process and help develop the process where the state has agreed to opt out from regulatory oversight of our gaming operations,” tribal Chairman Bo Mazzetti told the newspaper. “Basically, making it simple, the middleman is being taken out.” As former NIGC vice chairwoman Elizabeth Homer explained, “Compacts are really only supposed to govern the conduct of Class III gaming and are not intended as a mechanism for the state to start pressing its policies onto tribal governments. Does this mean that there is less oversight or is this going to be a more poorly regulated facility because the state isn’t performing that function? I would say, not really. I think there’s going to be robust regulation regardless,” with the onus falling on the federal body to enforce compliance.

California’s government can be said to have brought this upon itself. In 2021, $34 million in distribution fees—which fund oversight of casinos—were collected in excess of what was needed. That’s not all. The state was found to be sitting on $127 million in reserves, which could cover regulatory costs from now through 2026. The tribe also isn’t happy with the way its problem-gambling-treatment programs were being overseen by the Office of Problem Gambling. While Rincon will continue paying $1 million a year into a fund for California’s hard-luck tribes, the cost of regulation will now flow into the NIGC’s coffers.

Tribal-gaming attorney George Forman says the Rincon move doesn’t portend a stampede, although at least 16 tribes have won in court that California has negotiated with them in bad faith. “Tribes cannot simply opt out. These compacts—the more recent ones—are 25-year agreements,” Forman said. Even so, California’s habit of using compacts for regulatory overreach, poking its nose into non-gaming matters, doesn’t bode well for the future. So far only the La Jolla Tribal Council is even hinting that it might follow Rincon’s lead.

Chicago may have rebuffed Neil Bluhm but he’s tipped to be kicking the tires on a New York City casino. No one’s interest is hard-and-fast certified but news reports have the Vornado Realty Trust eyeing a site near Madison Square Garden. The hideous hulk of the Hotel Pennsylvania currently sits there but doesn’t figure in anybody’s plans, as it’s slated for a teardown later this year. The could leave Bluhm and Vornado sitting on a casino plot adjacent to Penn Station—a valuable spigot of potential players. Vornado, for one, conceded that it’s “studying the possibility of applying for a casino license” in the neighborhood but that’s as far as it would go.

Democratic Party rainmaker Bluhm, of course, heads up Rush Street Gaming, which has succeeded in some urban markets and struggled in others. But it adds a solid track record of development to Vornado’s own. (Meanwhile, Hard Rock International is rumored to be warming to New York Mets owner Steve Cohen‘s Flushing casino proposal, thereby slimming Vornado’s odds; both must declare their interest by Feb. 3). Vornado is already heavily invested in the Penn Station area. Reports the anti-casino New York Post, “Vornado is designated to develop five of eight office sites, where some buildings will be demolished and tenants evicted.” A wild card in the Manhattan casino scenario is Larry Silverstein, who recently declared his intention to erect a casino on the island’s “Mercedes-Benz” site. But talk is cheap, especially in the context of multi-billion-dollar developments.