Boarding a bus with top slot managers, Truist Securities analyst Barry Jonas took a tour of multiple southern California casinos. He came away “amazed at the depth and size of the market, which offers limited visibility to investors given its tribal, private nature.”
Jonas’s itinerary took him to Agua Caliente Casino Resort Spa at Rancho Mirage, Pala Casino Spa Resort, Pechanga Resort Casino, Soboba Casino Resort, Sycuan Casino Resort, and Yaamava’ Resort & Casino (formerly San Manuel). Jonas found all to be “generally busy,” pulling customers from Los Angeles and San Diego.
In addition to fine non-gaming amenities, Jonas stressed that these Native American casinos offer “some of the most impressive slot floors in the country.”
The most recent revenue figures for tribal gaming in SoCal have to be extrapolated from a statewide $11.9 billion in 2021, which represented a 23 percent leapfrog over 2019. California accounts for almost a third of all tribal gambling revenue, which stood at $39 billion nationwide last year.
One hidden asset of tribal gaming, the analyst found, was that tribal fees that go to the Golden State are generally lower than taxes for commercial casinos elsewhere, resulting in superior EBITDA margins for the indigenous casinos. Jonas wrote that “one operator we spoke to noted margins in the low-60% range.
“All tribes acknowledged 2021 was a windfall year unlikely to repeat this year given last year’s wider pent-up demand, stimulus funds, and a lack of alternative entertainment options,” Jonas reported.
Finding labor remains difficult and upward pressure on salaries is abating, but it’s “still challenging” to fill certain types of jobs.
He equated the six tribal resorts with high-end regional properties, with the added advantage of “fresher and more diverse slot floors.” (California casinos have an industry reputation for being first movers on new technology.) Specifically, “Yaamava’s new $760 million expansion gives it the feel of a high-end Las Vegas property (the property is aiming to achieve a rare Forbes five-star rating) with relatively smaller non-gaming footprint, but a larger (~7K slots) and superior slot floor.”
According to ReelMetrics, the highest-earning 10 percent of slots can drive as much as 40 percent of casino revenue. Touring California, “We don’t see this as the case in the tribal properties we visited, generally packed with newer product and fairly busy during our visits.”
Jonas’ tribal interlocutors said they generally refresh as much 25 percent of their slot floor annually, 2.5 times as much as the private-sector casino average. Revenue-participation games can make up as much as 40 percent of a SoCal casino floor, versus five percent or less in commercial gambling.
“Feedback was generally positive on most supplier product offerings, as well as previews for the upcoming G2E show in October. We think this justifies strong replacements, given that the quality of what’s available appears to be a key component to operator capex budgets,” Jonas wrote.
Expected beneficiaries are Aristocrat Technologies, Light & Wonder, and International Game Technology, followed by AGS and Everi (several of whose executives were riding with Jonas). Tribal casinos are diverse in their slot suppliers, with one property noted as having 20 different manufacturers represented on its slot floor.
Added Jonas, by way of a caveat, “While supply chain remains a concern (including bill validators), no operators noted any material impact at present, aside from some delays getting products on the floor.”
On the near-term front, macroeconomic conditions had caused some “recent softness,” particularly when gasoline broke the $5-per-gallon gallon threshold. Lower-end customers were the ones feeling the pain, cutting back on patronage and spend per visit. Midweek days were softest, “with the mid-to-high end and weekends still consistently strong.” While Jonas stated that SoCal casinos would be hard-pressed to match last year’s performance, he believed they would still comfortably exceed 2019’s.
As for the elephant in the room, Proposition 26, which would legalize sports betting on reservations and at horse tracks, tribes expected a “modest” financial lift should the initiative pass — very much an open question at this point. But for them, sports betting is only one aspect of a larger fight to protect their prerogatives: Rival Proposition 27, backed by the private sector, “would allow out of state entrants to engage in sports betting with the risk that this structure could define how igaming could one day be introduced in California, which many see as an inevitability. Prop 26 would keep control in the hands of tribes, with initial retail gaming and the potential for [online sports betting] down the road.”
Two other incentives are involved. One is that Proposition 26 would legalize tribal craps and roulette, potentially keeping more Las Vegas-bound gamblers on the reservation. Also, it would enable tribes to sue California’s myriad card rooms, which Native American interests say are infringing on such tribal provinces as blackjack.
