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Analysts see East Coast gaming at tipping point

26 November 2012

Barring action on a pending lawsuit, Maryland could soon have six Las Vegas-style casinos, including a $400 million gambling hall in downtown Baltimore and an $800 million resort south of Capitol Hill on the Potomac River.

Pennsylvania gaming regulators are investigating six separate offers to build a $500 million to $700 million hotel-casino in downtown Philadelphia.

Massachusetts authorities are weighing casino proposals for Boston and Springfield.

Lawmakers in Toronto and New York City may open their markets for casino development.

There isn't an end in sight.

Two gaming analysts believe there should be. In separate research reports, they said the populous Northeast and Atlantic Coast regions are close to reaching a casino saturation point.

Deutsche Bank gaming analyst Andrew Zarnett told investors that revenue and cash flow from older casinos will decline as new resorts open.

In the past five months, Zarnett said, the number of slot machines has grown rapidly along the Atlantic Coast. In the past five years, states such as Delaware, Pennsylvania, New York and Maryland opened their borders to casino development.

"The ramp-up of supply has been vigorous," Zarnett wrote in his research report. "In some cases, this new supply has impacted existing properties located in their states. More often, this new supply has cannibalized casinos in neighboring states."

Moody's Investors Service gaming analyst Keith Foley warned that gaming expansion measures that passed in Maryland and Rhode Island this month will increase the gaming supply, but not necessarily add more gamblers.

Foley said casino proliferation "will only further deluge a regional market that is already saturated and forced to reach out ever farther to attract the same number of customers."

For the 12 months that ended Sept. 30, Zarnett calculated the Atlantic Coast casino market generated gaming revenues of $8.3 billion, a nearly 8 percent increase over the preceding 12 months.

However, when factoring out revenues from casinos that opened in the past 12 months - Maryland Live!, Revel in Atlantic City, Resorts World New York and the Valley Forge Casino in eastern Pennsylvania - gaming revenues declined 3.4 percent for existing operators.

The biggest target has been on Atlantic City. Between 2006 and 2011, gaming revenues have fallen 38 percent, from $5.3 billion to $3.3 billion, as the market fended off competition from neighboring states.

The largest Atlantic City casino operator, Caesars Entertainment Corp., which runs four of the city's 12 resorts, continues to challenge its own market. Caesars is bidding on the Boston casino and is the planned developer of Baltimore's new casino.

If everything is built as planned, Zarnett said he believes the Northeast and Atlantic Coast market will increase its number of slot machines and gaming tables by almost 18 percent over the next five years.

Philadelphia's planned casino presents the latest challenge to Atlantic City.

Among the six bidders are Penn National Gaming, Wynn Resorts Ltd. and Cordish Cos. The casino could have as many as 5,000 slot machines and 250 table games, putting the facility in direct competition with Philadelphia's SugarHouse Casino and two Pennsylvania racetrack casinos, including a facility operated by Caesars in suburban Chester.

Zarnett credited new casinos that have opened over the past few years with carving out successful markets and generating a strong return on investment despite operating in states with high tax rates, such as Pennsylvania.

"But as is often the case, they have taken share from markets that long ago were thought to be monopolies," Zarnett said.

Maryland is a case in point.

Penn National thought it had an exclusive hold on the suburban Maryland customer with its Hollywood Casino at Charles Town Races across the border in West Virginia.

But the casino lost market share in June when Maryland Live! opened in nearby Anne Arundel with 3,200 slot machines. The casino has since expanded to 4,750 slot machines in September and is planning to add table games.

Add in the plans by MGM Resorts International to build the much-debated project in Prince George's County, which is even closer to Charles Town, and Caesars' Baltimore casino, and it's no wonder Penn will try to make up for lost revenues by going after the Philadelphia license.

Foley said more casinos will place added pressure on existing operators both in the Northeast and the U.S. gaming sector as a whole. Still, an increase in casinos could translate into higher overall gaming-related revenues.

But there is a catch.

"Without a marked improvement in the U.S. economy that is accompanied by an increased willingness of consumers to spend more money on gaming," Foley said, "these revenues are not expected to result in a material improvement in overall sector profits."