Urban One loses; Station thinks big; NFL gets into the slot biz

Richmond voters narrowly chose to cut off their nose to spite their face, voting 51.5% against the Urban One casino proposal. Since casinos were approved by at least 65% in four other Virginia cities in 2020, the resounding question is “Why?” True, an endorsement of Urban One by unpopular gubernatorial candidate Terry McAuliffe (D) probably didn’t help. His victorious opponent, casino investor Glenn Youngkin (R) kept mum on the issue. Although adversaries of Urban One were outspent 10-1, they had the benefit of a wall of NIMBY sentiment at their backs. They were also accused of stoking racial animus and with Urban One polling poorly in predominantly white areas that strategy, if deliberate, may have worked. As of this morning, the casino industry—at least in the private sector—remains an all-white-ownership province.

So what did the Richmond electorate kiss off? $565 million in direct investment, a $25.5 million upfront payment to the city and $50 million a year in taxes, just for starters. It’s a loss for Richmond Mayor Levar Stoney, who was heavily pro-Urban One, while would-be owner Alfred Liggins must console himself with his stake in MGM National Harbor. If this is how Richmond treats its own, how would carpetbaggers like Tilman Fertitta have fared?

In other electoral news, New Jersey Gov. Phil Murphy‘s fate hangs in the balance, a six-point lead having been frittered away. If Murphy loses, it’s bad news for opponents of smoking in Atlantic City casinos, who had only recently brought the governor around to their side. Garden State voters smacked down a proposed expansion of sports betting to include collegiate events. Linn County in Iowa is back in the game, after constituents voted to allow “excursion gambling boats or gambling structure activities to continue.” This gives a new lease on a life to the Cedar Rapids Development Group‘s proposed casino, although regulators have rebuffed it in 2014 and 2017. Given the recent robustness of the Hawkeye State’s gaming economy the third time may be the charm. Finally, voters in Nashua, New Hampshire approved a sports book for their fair city, so that’s a win for DraftKings.

Not only will Texas Station, Fiesta Henderson and Fiesta Rancho remain closed indefinitely, they probably won’t ever reopen. That’s one of the takeaways from yesterday’s investor call. The three casinos accounted for 10% of the company’s cash flow (and it costs only $2.5 million a quarter to keep them dark) and now those customers have migrated to other Station properties, according to company, which makes one wonder if they have any future at all. Already Station is looking past them to six new casinos in unspecified locations, monetizing the company’s famous bank of real estate.

Explained Vice Chairman Lorenzo Fertitta, “We like the idea of doubling the size of our current operating platform here in Las Vegas by developing those properties. We always have that option down the road (if it makes sense).” Since he wasn’t giving away any details, we can only speculate at where and when Station might pull the trigger. Could the Fertittas be making lemonade out of lemons, having failed to move vacant real estate in the last couple of years? Not every parcel comes without drawbacks. Some of it isn’t zoned for gaming (Losee Road), some is in a bad part of town (the Castaways site) and some is hard by already successful casinos (Cactus Lane, a stone’s throw from mammoth South Point). We’ll just have to wait and see.

To offset the cost of development, Station will take the “heart of each of the properties,” per CEO Frank Fertitta III, and vend the remainder, as it is doing at Durango Station (above). The latter is experiencing some significant cost-creep, as the $600 million budget has grown to $750 million. Company execs are comfortable with that number, since the casino will be surrounded by 350,000 underserved residents and passed by 166,000 drivers per day. They estimate that it will generate a higher-than-average ROI, in part because they expect 2X as many players per gaming position as at Red Rock Resort or even Green Valley Ranch. “We’re extremely excited about this project,” said CFO Steve Cootey, who foresees completion sometime between autumn 2023 and the early months of 2024.

Station shares dipped on Wall Street because the company missed the consensus cash-flow expectation by 5%. Some of this was prompted by the 25% increase in the Durango Station budget (the Fertittas are historically poor at cost control, although they have imposed maximum-price contracts on many Durango contractors) but, noted JP Morgan analyst Joseph Greff, “importantly, revenues were slightly ahead” ($415 million for 3Q21). He added, “The LV Locals market remains healthy, with a strong demand-supply dynamic and rational promotional environment controlled by a finite number of operators,” and liked the competitive dynamics facing Durango Station as well as the positive demographic changes (more high-value customers moving in from other states) in the Las Vegas area. The new casino, he added, would be essentially self-funded even at the higher cost, particularly with proceeds from the Palms sale. Even though he discounted the prospect of land-bank sales, Greff raised his price target four bucks to $59/share.

Over at Deutsche Bank, analyst Carlo Santarelli called the results “somewhat mixed” but “when coupled with strong buyback activity [$86 million] and high free cash flow conversion, [they] should be well received.” He noticed the “modestly negative impact on visitation in the back half of the quarter” of Nevada‘s mask mandate, a requirement at which Station executives openly chafed, blaming it for soft business in the quarter, particularly meeting business (as well as Baby Boomers), which they expect to recover in 2022-3. Not only is management entertaining the idea of a REIT spinoff of its casinos, it is experimenting with cashless gaming floors at Red Rock and Green Valley. Concluded Santarelli, “We continue to think, in the current environment, the [Station] portfolio remains underappreciated … with growth on the horizon via Durango.” He bumped his price target from $56 to $60.

Truist Securities‘ Barry Jonas led off with the observation that Station’s same-store cash flow was at record levels—but still fell short of Wall Street’s hopes. He blamed “seasonality” and the mask mandate. Also, Station basically zeroed out its Native American management segment, at least until the litigious North Fork project is green-lit. The company “believes the mask mandate has caused more of an adverse reaction by the older demographic, though the higher-end segment has continued to outperform. We think the NV mask mandate may have impacted total revenues by ~5%, which also likely hit flow through and drove a ~5% miss instead of a commensurate beat. Any impacts should reverse once restrictions are lifted,” perhaps as soon as Nov. 15. Caesars Entertainment also reported earnings but that will have to wait until tomorrow, as we have dwelt rather long on Station.

The NFL has gone through the looking glass. For decades it was the sworn enemy of gambling. Today, it inked a pact with Aristocrat Gaming for “an exclusive global license to build land-based NFL-themed slot machines as well as a non-exclusive license for virtual sports games, marking the first deal of its kind for the NFL.” You read that right: NFL slot machines. “The world of casino gaming is transforming,” rationalized league veep Rachel Hoagland, citing Aristocrat’s “commitment to responsible gaming. Today’s slot machines offer engaging experiences akin to popular video game consoles that our fans adore, and we believe with Aristocrat’s vision, we can bring that exciting gaming experience to fans on the casino floor looking to show their love of football.” We’ll stick to sports betting, if only because the house doesn’t always win. Or does it?

Jottings: Just when things were looking up for the Las Vegas Raiders, wideout Henry Ruggs III killed a young woman in a horrific two-car incident. Ruggs, charged with a DUI, was released by the Raiders immediately. As Ruggs’ line of jerseys reads, “Speed kills.” Indeed it does … Hard Rock Cincinnati is upping its game with the addition of a $70 million hotel. In addition to 300 rooms it will have a spa and luxury suites. Said Hard Rock International COO Jon Lucas, “People can regionally come here, enjoy a show, gamble a little bit, eat some dinner. And then they don’t have to drive back home. They can spend the night.” … Buffets aren’t coming back to either Harrah’s Gulf Coast or Scarlet Pearl Casino, due to cost concerns. That makes six Gulf Coast casinos with buffets and six without. Explained Scarlet Pearl CEO LuAnn Pappas, “We lost a lot of money operating a buffet because for the most part, you gave the buffet away. And we learned we didn’t need to do that in order to attract customers and retain them.” … Resorts World Las Vegas is dreaming big, specifically to the tune of a 262-passenger Dreamliner Boeing 787-8. The transoceanic jet is “for non-stop routes from Las Vegas to Asia, Europe, and Latin America,” particularly with an eye to capturing convention business. Resorts World LV simultaneously busted out a 35% hotel room discount for Nevada residents, among other locals-oriented deals … Spokane Tribe Casino in Washington State opened a new casino floor this week. There are 20,000 more feet of gambling space (mostly smoke-free) and a sports books. The sports book hasn’t debuted yet, lacking an operator, but craps tables will be coming later this month. The casino expansion is part of a much bigger, $400 million push to economically diversify the tribe.

Quote of the Day: “The state of Florida has created an 800-pound gorilla who can spend indiscriminately to prevent any competition whatsoever from coming into the marketplace.”—Las Vegas Sands lobbyist Nick Iarossi, fuming at the political and financial clout of the Seminole Tribe.