by Emily Sze
March 2012

The East Coast’s Mid-Atlantic States are poised for gaming growth. New casinos have recently opened or are scheduled to open in Maryland, Pennsylvania, and New Jersey. The rise of regional competition has deeply impacted mature gaming markets, spurring new legislation and capital investment in these mature markets. Most notably, in the last two years Table Games have been added in West Virginia, Delaware, and Pennsylvania. Deficit-running states look to gaming as a revenue generator, with hopes it will balance their budgets. Each state is seeking that their constituents, or constituent’s money, will stay in state and be taxed instate; thus the race to provide various attractive and competitive casinos. Several states are considering adding more gaming facilities, with projects under construction, pending expansion, or pending approvals or financing.

NASCENT AND DEVELOPING MARKETS
In the last decade, gaming has expanded significantly in the Mid-Atlantic States, with many states in the Eastern United States that lack gaming enacting legislation or paving the way for new casinos. The success of Pennsylvania, which is predicted to outpace Atlantic City to become the United States’ third-largest gaming market, is a goal many other states envy. These developing markets continue to steal market share from mature markets, in particular Atlantic City, Delaware, and Connecticut. This article examines recent developments in the Mid-Atlantic gaming market.

Maryland:
A nascent market, Maryland’s VLT (video lottery terminal) gaming market is ramping-up after opening its first casino in late 2010. Slots are legal, but live table games are not. Of five available gaming licenses, two casinos are open, one is under construction, and two licenses are pending approval. Maryland is a VLT market, and the majority of the gaming revenue is retained by the state, similar to a gaming tax; in Maryland, the revenue retained by the state is 67%.

• In Cecil County, Penn National’s Hollywood Casino opened in September 2010 with 1,500 VLTs. The Perryville, Maryland property was the first Maryland gaming facility to open is roughly halfway between Philadelphia and Baltimore.

• In Worcester County, an independently owned Casino at Ocean Downs opened with 750 VLTs in January 2011. The property is located on Maryland’s eastern shore, in a seaside resort market.

• In Anne Arundel County, the Maryland Live! is under construction and anticipated to open in mid 2012. Maryland Live! is located next to the popular Arundel Mills Mall; the property’s complement of 4,750 VLTs is anticipated to be the state’s largest gaming facility. Maryland Live! is less than an hour’s drive from Washington, D.C.

• In the city of Baltimore, one qualified bid for the location-specific gaming license was received from Caesars Entertainment. The Harrah’s Baltimore would be a 3,750 slot gaming facility proximate to the Baltimore Raven’s M&T Bank Stadium, hopefully to open in 2013. Harrah’s Baltimore would be roughly an hour’s drive from Washington, D.C.

• In Alleghany County, two qualified bids were received for the Rocky Gap Resort site. The Rocky Gap Resort and Golf Course is located in the northeastern corner of the state, proximate to West Virginia. The Landow Partners proposed a 500-slot facility; the Evitts Resorts LLC, proposed an 852- slot facility.

The opening of Maryland Live’s gaming facilities will surely impact the Washington, D.C. market. Prior to Maryland’s legislation, the Washington D.C. market which has no legalized gambling, had to travel to Hollywood Casino at Charles Town Races in West Virginia, approximately an hour and a half’s drive. With such an attractive and affluent gaming market mostly un-penetrated, Maryland’s casinos are poised for growth.

New York:
New York City finally has its own casino: the Resorts World Casino at the Aqueduct in Queens, New York. While New York State has had gaming since 2004, the majority of the racinos, with the exception of Yonkers, was some distance from New York City which is the state’s most attractive market. Prior to the opening of Resorts World in Queens, New York, the closest racino was the Empire State Casino in Yonkers. VLTs are permitted, but commercial live table games are not legal. Recent developments indicate the popular governor, Andrew Cuomo, is pushing for expanded gaming throughout New York, with these developments:

• In New York’s January 2012 State of the State address, Governor Cuomo pushed for a comprehensive state gaming approach, paving the way for live table games, and commercial gaming facilities in choice locations including New York City, the Catskills, Albany, and Buffalo.

• In October 2011, the reportedly $880 million Resorts World Casino at the Aqueduct racetrack in Queens, New York opened its first phase. Additionally, in New York’s 2012 State of the State address, Governor Cuomo pushed for a massive convention center next to the property, paving way for a potential gaming expansion. The proposed Convention Center is expected to cost approximately $4 billion and would be the largest convention center in the United States. According to New York Lottery gaming statistics, the Aqueduct casino achieved a high WPUPD since its opening; for the 65 days open, it achieved a win per unit per day (WPUPD) of $444.

• Paving the way for a casino in Long Island, the Shinnecock Indian Nation has selected a site but still faces legal and political hurdles, including signing a gaming compact.

The opening of the long-awaited Resorts World Casino at Aqueduct could potentially be the first phase in the Big Apple’s foray into gaming; legislation may pave the way for table games and new resorts in this attractive and high-grossing market.

Pennsylvania:
Pennsylvania’s commercial gaming revenue has continued to grow since slots facilities were introduced in 2006, and live table games were implemented in July 2010. Of the 14 licenses authorized by Pennsylvania, 10 casinos are currently operational. Four gaming licenses in Pennsylvania are not yet active:

• The under-construction Valley Forge Casino Resort is anticipated to open in spring 2012 with 600 slots (and 50 tables if approved), but is restricted to only resort-guests gambling. Patrons may gamble if they stay one night or spend at least $10 at the resort’s other amenities, including food and beverage outlets.

• The Nemacolin Resort received a gaming license in mid-2011; but the decision was appealed by another gaming applicant. Due to the appeal, construction cannot begin. If and when developed, the Lady Luck Casino is anticipated to be managed by Isle of Capri, Inc. and to feature 600 slots (and potentially 50 table games if approved).

• A gaming license was originally intended for the Valley View Downs near Pittsburgh and the Ohio border; American Harness Tracks purchased the property in mid-2011, and is pursuing a casino gaming license.

• The revocation of Foxwoods Philadelphia’s casino license in late 2010 has added uncertainty to Pennsylvania’s gaming industry; the original investors have appealed the decision, which is now tied up in court.

• In late 2011, Sugarhouse in Philadelphia received city approvals for an expansion, but is still seeking regulatory approvals from the Pennsylvania Gaming Control Board. The expansion is planned to increase the casino square footage from 50,000 square feet to 90,000 square feet, add a poker room, a parking garage, and two or three food and beverage outlets. Construction is tentatively planned to start in summer 2012, with completion by fall 2013.

In particular, Pennsylvania’s gaming revenue continues to grow with the state’s table games in its infancy and several gaming licenses yet to be fulfilled. It is anticipated, that if Pennsylvania’s gaming industry continues to grow at its current pace, gaming revenues will outpace those of Atlantic City which is currently the United State’s second largest gaming market.

MATURE MARKETS
As developing Mid-Atlantic gaming markets grow, they are stealing market share from more mature gaming markets. The impact of declining gaming revenue is notable in Atlantic City, Delaware, and Connecticut. These mature markets are seeking to reverse declines with new development, in particular Atlantic City, the nation’s second oldest (and currently second largest) gaming market. New Jersey Governor Christie has continued to push for a reform of Atlantic City which would follow a more Vegas-style model, enacting legislation allowing for new casino-hotels less than 500 rooms, as well as other projects to encourage development. Delaware and West Virginia have added table games in the last decade, and for now, table games is limited to New Jersey, Delaware, West Virginia and Pennsylvania commercial gaming markets.

New Jersey:
In Atlantic City, various developments are occurring in a mature gaming market that was left for dead. These new projects are anticipated to help stem the decline in Atlantic City’s gaming revenue, as well as spark new visitation and increased gaming revenue. These projects include:

• The Revel, a reportedly $2.4 billion casino-hotel, is slated to open in mid-2012; the project was stalled for years when Morgan Stanley, the original investor stopped the project and wrote down a $1.2 billion loss. The project was restarted with financing from a consortium of investors and a variety of state incentives including a $261 million tax credit. The property is anticipated to have a phased opening, initially opening approximately 1,100 rooms in 2012; there are potential plans for a second hotel tower.

• The Hard Rock International is planning a $465 million casino-hotel, which is anticipated to have 200 to 850 rooms, a casino, nightclubs, a spa, a pool and a parking garage. The project is in early development and is planned to be built in phases. Reportedly, Hard Rock is seeking to begin construction prior to July 2012 and open the property in 2014. The project would not have been possible except for the passage of new law which permits casino-hotels with less than 500 rooms.

• In Atlantic City, the Golden Nugget brand has been reincarnated. The Trump Marina was purchased by Landry’s Restaurants Inc., for $38 million; the sale closed in May 2011. The Landry’s Group is in the midst of a reportedly $100 to $150 million makeover.

• The Borgata is reportedly investing $50 million in a public space and guestrooms refurbishment. Reportedly, their Water Club Tower, i.e. roughly half the rooms inventory, sometimes remains closed midweek seasonally.

• The Resorts’ Casino is in the midst of a softgoods rooms refurbishment in its Ocean Tower. The property was reportedly purchased for $31.5 million by Dennis Gomes and real estate investor Morris Bailey in December 2010.

• The remaining small-scale and staged casino license is in a request for proposal process, with a deadline of April 30, 2012. The previous RFP process had revealed three applicants; (including the Hard Rock). The other two applicants, ACE Gaming LLC and California Avenue Ventures LLC notified the NJ Casino Control Commission that they would not proceed with the pilot program in mid-2011.

• Bader Field, a former airfield and potential casino-hotel development site, is used sporadically as a large concert venue. A proposal was received from Win-Win OND for an $848 million family entertainment complex featuring an indoor water park, condos, restaurants and a casino; the proposal is contingent upon specific incentives. The financing, approvals, and deadlines for this project is unclear.

• In the wake of Christie’s Atlantic City shake-up, various bills are floating through the legislature and may pave the way for growth in Atlantic City or outside of it. Potential legislation includes bills which pave the way for sports betting (assuming a federal law is modified), paving the way for Internet Gaming (assuming a federal law is modified), and gaming projects outside of Atlantic City. These processes all face significant legal and political hurdles.

Time will tell if competing regional casinos will match Atlantic City’s mix of gaming and non-gaming amenities, but it is clear that Atlantic City will continue to face formidable and increasing competition that will make it challenging to reverse the decline in gaming revenues. However, there is hope on the horizon; December 2011’s gaming revenues were up 4.2% compared to the same period last year.

Delaware:
Table games at Delaware casinos opened in mid-2010, adding to the regional competition in the Mid-Atlantic and Northeastern states. Delaware has three gaming facilities: Delaware Park, Dover Downs, and Harrington Raceway. These three facilities have added table games in an effort to compete with other regional facilities, in particular Pennsylvania properties, which have gained market share.

West Virginia:
Table games in West Virginia were fully implemented in 2010, further adding to regional competition in the Mid-Atlantic and Northeastern states. West Virginia supports five casino locations, offering VLTs, and table gaming.

CONCLUSION AND OUTLOOK
In HVS’ gaming valuation and consulting work, we have seen the impact of increasing regional gaming competition across the United States. The rise of regional competition, with the largest recent growth spurt in Pennsylvania, has adversely impacted markets in Atlantic City, Delaware, Connecticut, and West Virginia. We anticipate the nationalization of gaming will continue in the foreseeable future, so that the majority of states and populations centers will enjoy gaming in various forms, i.e. Slots or VLTs, and table games, within the coming decades. From a state point of view, gaming tax revenue is hard to pass up in these fiscally challenged times; in addition, gaming increasingly is more commonly accepted as a form of alternative entertainment.
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About Emily Sze
Emily Sze is a senior associate with HVS’s Las Vegas office, specializing in the gaming and hospitality industries. She joined HVS in 2009 after working as a senior financial analyst for Las Vegas Sands at the Venetian/Palazzo Resort Casino in Las Vegas, NV; a gaming analyst for Harrah’s Entertainment, at Harrah’s Chester in Chester, PA; and as a slot manager’s associate for Harrah’s Entertainment, at Bally’s Atlantic City in Atlantic City, NJ. She earned a Bachelor of Science in Hotel Administration at Cornell University, Ithaca, NY.

Emily has completed assignments in the following gaming markets:

• Atlantic City, NJ
• Maryland
• Council Bluffs, Iowa
• Native American Gaming – California
• Las Vegas, Nevada
• Bahamas

About HVS
HVS is the world’s leading consulting and valuation services organization focused on hotel, restaurant, shared ownership, gaming, and mixed-use real estate. Established in 1980, the company performs more than 2,000 assignments per year for virtually every major industry participant. HVS principals are regarded as the leading professionals in their respective regions of the globe. Through a worldwide network of 30 offices staffed by 400 seasoned industry professionals, HVS provides an unparalleled range of complementary services for the hospitality industry, including financing, marketing and sales solutions for shared ownership real estate. For further information on all of our services, please visit www.hvs.com.