There is good news and bad news for Northeastern casino operators with the coming of full-service casinos to the New York City area, says a new Fitch Ratings report.
The good news: “License winners will benefit from access to a deep market and geographic diversification.”
The bad news: Winners will face expensive construction budgets and license fees starting at $500 million (more if competitive bidding takes place), while existing operators in the region must contemplate cannibalization of their businesses.
As noted by Fitch, the gaming tax rate – nominally 25 percent for slot revenues and 10 percent from table games – has not been finalized, nor have license imposts, let alone minimum capital-investment requirements. MGM Empire City, in Yonkers, and Resorts World New York, in Queens, may benefit both in terms of lowered license fees and preferential selection, thanks to the amounts they have spent on their facilities already. Any other operator will be starting from scratch.
“The $500-million-minimum upfront license fee dwarfs similar payments, which did not exceed $100 million in nearby states with commercial casinos,” write Fitch analysts, citing Chicago’s $120 million levy as a comparative high-water mark.
Unlike Chicago, however, revenue expectations for New York City are robust, with rival CBRE analysts pegging them at $1.3 billion a year for MGM Empire City and $1.5 billion annually for Resorts World, once Las Vegas-style gambling is added. Currently, only video lottery terminals are permitted, not that it has dampened business. Accordingly, “Fitch expects strong competition among major gaming operators for these licenses, despite such fees making economic returns more challenging.”
Why will it be such a challenge?
Though operators will benefit from the huge market and geographic diversification, “this could be partially offset by the development’s balance-sheet impact.” In addition, this must be set beside bidders’ ongoing investments in Las Vegas, Chicago, Macau, and Singapore, although only Resorts World’s Genting Group and New York aspirant Las Vegas Sands have money committed to the Singaporean market. Fitch advises sternly that “embarking on multiple large-scale developments simultaneously increases execution risk, including whether and when actual cash flows meet expectations.”
While MGM Empire City and Resorts World are known quantities in New York, Fitch believes that their real estate footprint is large enough to allow full-blown resort conversion and MGM has let it be known that a Yonkers hotel is on its to-do list. Not only are both operators deemed sufficiently liquid to shell out $500 million for a license, they would additionally benefit from the new, lower, taxation regime, as they’re currently paying out 60 percent of gross gaming revenue to New York state.
While saying it was not unforeseen, Fitch analysts declared that the biggest bite of cannibalization will come out of Atlantic City, which banked $2.7 billion in gambling revenue in 2019. Boardwalk operators facing New York City competition, if geographically diversified, can withstand the negative-cash-flow impact on their ratings, Fitch opined. They could also pursue one of the three licenses, as several are already doing, or alter their “financial policy,” although Fitch did not clarify whether this meant getting out of Atlantic City altogether.
