PENN NATIONAL: OVERSTATED PROJECTIONS IN OHIO

PENN NATIONAL DISAPPOINTED IN COLUMBUS CASINO'S REVENUES
By Steve Wartenberg        

July 24, 2013
After three consecutive months of declining revenue, officials of Penn National Gaming publicly announced what was obvious to industry observers: The take at its Hollywood Casino Columbus has been disappointing.

Penn officials expected the $400 million West Side gambling palace that opened in October to dominate the central Ohio market and rake in more than the $16.5 million in revenue it produced in June.

“Clearly the market has not met our expectations,” said Timothy Wilmott, Penn’s president and chief operating officer. “We expected to be the market leader in slot win, and right now, we’re at a 50-50 level with Scioto (Downs).”

In June, Scioto Downs Racetrack & Casino had slot revenue of $11.45 million, while Hollywood’s slot total was $11.23 million. That was the first month that the racino, owned by MTR Gaming, topped the Penn property.

Hollywood Columbus had an additional $5.26 million in revenue from its table games.
MTR Gaming officials did not return calls asking for comment.

Results from Hollywood Casino Toledo have been disappointing as well and contributed to a less-than-stellar second-quarter earnings report from Penn yesterday. Overall, the company, based in Wyomissing, Pa., had $761.4 million in revenue in the quarter and lost $12.2 million, or 16 cents per share. Penn also reduced its revenue outlook for the remainder of the year from $3.14 billion to $2.98 billion.

Penn stock dropped 7.4 percent yesterday, closing at $49.98.

Several factors contributed to the poor quarter, said Peter Carlino, Penn’s chairman and CEO, during a conference call with Wall Street analysts yesterday. They included an overall gambling-industry malaise, extreme weather at some Penn sites and increased competition from new casinos.

[TRANSLATION: The Gambling Idustry has SATURATED THE MARKET.]

And then there’s Ohio.

“The issue has largely been that Ohio has not ramped up as quickly as we had hoped for,” Carlino said.

However, he still believes, “in the end, these two properties (Hollywood Columbus and Toledo) will do everything we think they will do.”

Industry experts were not surprised that Penn officials were disappointed by the poor performance of their two Ohio casinos.

“We already knew from past reports that their revenues have not matched the projections,” said Alan Silver, an Ohio University assistant professor of restaurant, hotel and tourism and a former casino executive.

He cited the slow economic recovery as a reason casino revenue has declined in several states in recent months.

Silver also said the amount of free play awarded by Scioto Downs to slot players has helped it gain ground on Hollywood Columbus.

“People want free play. It brings people in,” Silver said.

Scioto Downs awarded $3.8 million in free play in June, compared with Hollywood Casino’s $2 million.

“We don’t believe that’s sustainable,” Wilmott said of the amount of free play awarded by Scioto Downs, and the $7.2 million in free play awarded at Horseshoe Casino Cincinnati in June.

The Cincinnati figure is more than the June total of the two Hollywood casinos and Horseshoe Casino Cleveland combined.

Carlino called this amount “suicidal.”

Horseshoe Cincinnati opened in March and competes for gamblers, and their money, with Penn’s nearby Hollywood Casino Lawrenceburg in Indiana. Revenue at Hollywood Lawrenceburg sank 37 percent in June — to $20.2 million — from a year earlier.

Penn officials say its two Ohio casinos are profitable.

“Columbus and Toledo will have slightly north of a 20 percent cash-on-cash return in their first year,” said William Clifford, Penn’s senior vice president of finance and chief financial officer.

By that, he meant that each casino earned 20 percent of the cost to build it — or $80 million in the case of Hollywood Columbus — before interest, taxes, depreciation and amortization were deducted.

“We would do projects all day if we can get a 20 percent return in the first year, and we’re confident those metrics will improve over time,” Clifford said.

Penn is expected to open two racinos in Ohio by the end of 2014: Hollywood at Dayton Raceway, and Hollywood at Mahoning Valley Race Course.

Each will cost about $250 million to construct, and Penn officials say they will apply lessons learned from their current Ohio operations.

“We’ll open a little more conservatively with the slot product we’ll put out on the floor and let the market grow and add additional slots,” Wilmott said, adding that each will open with about 1,000 slots.

The success of Scioto Downs, even though it has come at the expense of Hollywood Columbus, has increased Penn’s optimism about the openings of its two racinos.

Racinos generally have fewer amenities than Las Vegas-style casinos such as the Hollywood and Horseshoe casinos in Ohio.

“It says customers are willing to go to a lesser product,” Wilmott said.


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