Infrastructure improvements and challenges for the Mississippi Gulf Coast gaming marketplace
Like many gaming markets across the United States, it appears the Mississippi Gulf Coast has had a hard time shaking off the lingering effects of the Great Recession.
Statistics released by the Mississippi Department of Revenue show that the 11 casinos operating along the Mississippi coast generated a combined $1.08 billion in gross gaming revenue for 2014, an increase of 1.9 percent over the 1.06 billion the properties produced in 2013. While this news is positive, it continues a five year pattern of flat growth for the Gulf Coast, which appears to have plateaued as a $1.1 billion gross gaming revenue market, still well below the $1.3 billion the region generated during its peak in 2007.
That said, it appears 2015 is stacking up to be a better than average year for Gulf Coast gaming operators. For the first two months of this year, Mississippi coast casinos have generated $182.5 million in combined gaming revenues, a healthy 6.85 percent jump over the $170.8 million reported by casinos over the same time period last year.
The past two years have also seen a flurry of both gaming and much needed amenity development in the Mississippi Gulf Coast counties. True, one casino has closed—the much maligned Margaritaville Casino & Restaurant in Biloxi—but Golden Nugget entered the market, purchasing and renovating the Isle Resort casino in Biloxi. The Hard Rock Hotel & Casino Biloxi, purchased by Twin River Worldwide Holdings in 2013, opened a new 154-room hotel tower last year, added a nightclub and three new restaurants and recently finished a renovation to its pool area. A number of other properties in the region have either undergone or are undergoing refurbishments and renovations and a new casino resort—the Scarlet Pearl in the coast community of D’Iberville—is scheduled to open later this year and another—Rotate Black’s Hemingway Resort Casino—is in the process of securing financing.
On the non-gaming front, the finishing touches are being put on MGM Park, a new baseball stadium across the street from Beau Rivage that will be the home to the Biloxi Shuckers minor league baseball team. The new team and facility should provide a mid-week local traffic boost to coast casinos. The Mississippi Gaming Commission also recently passed Rule 1.5, which requires developers of new casino projects to include an amenity that will increase tourism to the area and/or to demonstrate how the project will otherwise grow the market.
So for the first time in a long time, Gulf Coast gaming fortunes appear on the uptick. But is this truly the case? That was the gist of a discussion Casino Journal had with the four equity analysts participating in a roundtable gaming industry discussion at the upcoming Southern Gaming Summit, which will take place this month at the Mississippi Coast Coliseum & Convention Center in Biloxi. These analysts are Alex Bumazhny, CFA, director—gaming, lodging and leisure corporate ratings for FitchRatings; Frank Fantini, editor and publisher, Fantini’s Gaming Report; Christopher E. Jones, senior gaming analyst for Union Gaming Research; and Srihari Rajagopalan, credit trading desk analyst, gaming and leisure for UBS Securities. While all agreed the Mississippi Gulf Coast promises to be a steady market going forward, they also recognized a need for continued non-gaming development to drive more customers into the region. Here are some excerpts from the discussion:
Current state of the Mississippi Gulf Coast gaming marketplace:
Bumazhny: Revenue growth in the Gulf Coast region has been pretty lackluster since the economic recovery began around 2010. We attribute the lack of robust growth to gaming saturation across regional markets, weak discretionary spending capacity among lower-tier players and, in our view, longer-term secular pressures such as the rise of alternative forms of entertainment and gaming. However, Gulf Cost casinos have fared better relative to some other mature markets including the ones in the northern part of Mississippi. The relative strength could be attributed to Biloxi’s status as a destination market for the larger southeast region, which remains largely underpenetrated. It also reflects recent capital investments such as the conversion of Isle’s casino into a Golden Nugget.
Fantini: It’s growing. You can see it every month in the revenue figures, which through February of this year are up by a pretty healthy margin. My impression is that the Gulf Coast will see its market grow modestly so long as there are no radical economic changes.
Rajagopalan: The way we have looked at it, the market as a whole has been flat to slightly up. Specifically looking at the Gulf Coast versus the rest of the southern market, the Gulf Coast has increased substantially over the last year. I think a big part of this has derived from the focus on amenities over time, and I think we have seen that more than a handful of operators have spent money and reinvested in their properties, and that has driven most of that growth.
Positive market factors for 2015:
Jones: I think the Biloxi market will profit from the smoking ban in New Orleans. It could be a huge benefit for Mississippi casino operators since it is a higher grade of customer that is going to the New Orleans market, and you could make the argument this type of customer is more likely to head to Beau Rivage instead of the western Louisiana casinos.
Bumazhny: The Gulf Coast market is in pretty good shape competitively as is. It benefits from a low gaming tax, relatively new properties some of which were rebuilt after Katrina, yearlong good weather, an airport with direct flights to key feeder markets and a fair amount non-gaming amenities. The market is also a key gaming destination for underpenetrated states with little chance of legalizing commercial gaming such as Georgia and the Carolinas.
Threat of gaming expansion in neighboring jurisdictions:
Rajagopalan: I think it is unlikely any casino legalization initiatives pass in Florida or Texas this year. Historically, all we have seen is repeal after repeal in these states. Electronic gaming devices in Arkansas have had an impact on casinos in northern Mississippi, I think that will continue.
Fantini: Biloxi gets a fair amount of its business from Florida, and if you had a big, destination type resort in South Florida that would be one less argument for building destination-type resorts in Biloxi. Meanwhile, is Texas ever going to legalize gaming? We are in April of 2015 and I think the legislature goes home pretty soon and they will not meet again for two more years. I don’t know if Texas is highly motivated to legalize casinos.
I think the real threat to Biloxi from the east would be if the Poarch Creek Indians were able to somehow fulfill their plan of having Interstate 10 corridor casinos in North Florida and then getting a gaming compact in Alabama that will allow them to build really attractive casinos. That would be the greatest threat, more so than destination resorts in Miami.
Bumazhny: Legalization in Florida would be a threat as a fair amount of visitations (about 15 percent) comes from Florida; however, any expansion of gaming would likely be limited to the southern part of the state, which is already penetrated by the Seminole Tribe of Florida and racetrack casinos. Probability of an expansion in Texas is very low in our opinion as prior efforts have failed by a wide margin and the state contributes relatively little to visitation. A more near-term threat is the potential of expansion… in Lake Charles, La., where Golden Nugget recently opened.
Other threats to the Gulf Coast marketplace:
Jones: I think one of the more ominous things on the horizon is lower oil prices. I think there have been some pretty big numbers thrown out there about the number of people that are going to be unemployed by virtue of declining oil and gas prices. I think without a doubt this is the number one concern we have as we enter the summer period.
Rajagopalan: I think the biggest threat for this market as a whole is going to be the significant impact we are already seeing from the oil industry and its employment data. We have yet to see noticeable change, but a whole bunch of companies plan to announce employee cuts. Generally these things get announced and the lag effect can be anywhere from six to 12 months. So we won’t see an economic impact at the moment, but we might see it down the way.
Rajagopalan: I think there is need for more hotel rooms. We do see a link—although occupancy does not show you that it is spiking up significantly. But I think the profile with southern gaming customer overall shows they are willing to take that overnight visit versus just coming in for a day.
Jones: Absolutely more non-gaming draws are needed; you need more hotel rooms and all that goes along with that to get people to engage with this marketplace. The problem is… operators do not have the confidence to build non-gaming attractions because they have no confidence that the Mississippi government can refrain from adding more gaming licenses. Operators are not going to spend $200 million on amenity infrastructure if they fear someone else is going to come in and build a new casino right across the street.
Fantini: I think for a long, long time, we have had the idea that Las Vegas is the one and only gaming destination in the U.S. But what we have seen increasingly is that those non-gaming amenities are become important in regional markets too. Today, regional casinos are transforming themselves into entertainment centers; and I think that Biloxi, of all the regional markets, has the greatest potential to be that regional magnet, for people who want a vacation, who want to get away, who want to have dinner and see a show. People now want to do more than just gamble. Biloxi has got weather, it has got the beach. Geographically, it is in a really good location. In reality it could be… a really good alternative to New Orleans. But from a public policy perspective, I am not sure the people living on the Gulf Coast want to become this type of gaming destination marketplace, and you need that local support to make this happen.
New casino development along the Gulf Coast:
Rajagopalan: There is a fine balance on whether new casino supply coming into the market is going to be additive and creative to the rest of the market or whether it is going to be cannibalistic. The Scarlet Pearl is set to open later this year and I think it will be additive instead of cannibalistic. It is not going in front of an existing casino and should grow the market modestly.
Fantini: The Gulf Coast is kind of an in-between market. You can build a $150 million casino down there, but that is not going to grow the market—it will just slice it up some more, giving everyone a smaller piece of the pie. To really change it, someone will have to come in a build a dramatic magnet facility. But to do that would cost billions of dollars and it doesn’t pencil out when you look at the dynamics of that market today.
Jones: At this point, I think the state has to say no to more casino developments. If you want to build a new casino, you have to buy out one of the existing operators. This will give higher value to the existing licenses.
Gulf Coast market forecast:
Bumazhny: We are more optimistic on the Gulf Coast market relative to other mature gaming markets. As the U.S. economy picks up steam, we think the Gulf Coast will benefit and may see some improvement; but the improvements will be curbed by the general secular headwinds we see in regional gaming. Net net, we expect largely muted growth going forward.
Fantini: I think it is steady as she goes. I don’t see a whole lot of change.
Rajagopalan: I think the Gulf Coast gaming market will continue to have its place within the other gaming markets. Operators have shown willingness to reinvest in properties which is a good sign. Longer term, the state of the oil and gas industry in going to matter, and I think there will be some sort of job cuts which will translate to a negative economic impact on the region.
Jones: I think Mississippi is due for a bigger lift in its economy, which will help the casino business. The oil and gas industry continues to be the specter, however.