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Fiscal Trends for 2017

Now that the new normal has been established, what changes are on tap for next year?

Fiscal Trends for 2017

As we start thinking about what 2017 will offer, we can look back on 2016 and see some clear trends marking the road to the future.

Indeed, it might be safe to say that 2016 has been a year when changes that began earlier have culminated into a new normal for the casino industry.

Here is some of what we see and will be ruminating about as we try to project into 2017 and beyond:

• REITs. The innovation begun by Penn National when it spun off its real estate into Gaming & Leisure Properties as a new publicly traded company is now mainstream.

Joining GLPI is MGM Resorts’ spinoff of publicly traded MGM Growth Properties. The next REIT will be what is now Caesars Entertainment Operating Company when it emerges from bankruptcy reorganization, probably early next year.

There might not be more new gaming REITs created, but there will be growing activity as more companies explore the potential of selling their properties to REITs or joining forces with them as in the deal done by Pinnacle and GLPI.

For the REITs themselves, the time will come when they branch out beyond casinos, perhaps into non-gaming resorts or other entertainment industry real estate.

• Deleveraging Debt and Improving Margins. Reducing debt, at least as a multiple of EBITDA, has become standard.

And much of the improvement in balance sheets and profitability has come through cost containment, or outright cost cutting.

Examples include MGM Resorts’ much-touted Profit Growth Plan to increase EBITDA by $400 million a year, Boyd steadily chipping away at its debt, Las Vegas Sands increasing EBITDA margins in a tough Macau environment, or Eldorado balancing its appetite for growth through acquisitions with the need to keep debt-to-EBITDA in line.

This emphasis on cost controls once was a response to declining revenues caused by recession. Now, growth of cash flow through efficiencies is more like the reality for a maturing industry.

• Dividends. In another sign of a maturing industry, dividend payments continue to grow.

The emergence of REITs is one way that casinos are paying dividends. MGM might not pay a dividend directly, nor does Penn National. But MGM Growth Properties and Gaming & Leisure Properties are ways for investors in the casino operators to earn dividends, assuming they hold onto their REIT shares.

Elsewhere, Wynn Resorts has continued to pay its dividend even in the face of Macau revenue declines and its need for cash to finance Macau and Massachusetts expansions. And Las Vegas Sands is keeping to its promise to not only pay regular dividends, but to increase them.

It would not be surprising to see other companies initiate dividends over the next year or two.

• Selective Growth. As we near the latest—and maybe last—round of casino growth in the U.S., casino companies have no choice but to grow selectively.

There is always the possibility of new jurisdictions, such as Texas or Georgia opening, but the odds are slim.

Perhaps the biggest U.S. growth opportunities are those now under construction, such as MGM Springfield and Wynn Boston Harbor in Massachusetts.

• International Growth. The most exciting opportunities for significant growth would come if major international markets open.

As of this writing, it appeared that the Japanese Diet would vote on whether to legalize casinos. Brazil legalizing would open a huge market. There is some thought that if Japan legalizes, South Korea will follow by liberalizing its casino regulations.

However, until those markets open, the international pickings are slim, at least for the big American companies.

Las Vegas Sands, Wynn and MGM Resorts need big integrated resorts and fair and reliable governments to make big investments. That leaves countries like the Philippines and Russia to draw smaller, second- and third-tier companies like Hong Kong-listed NagaCorp and Summit Ascent in Russia.

Merger And Acquisition. As growth opportunities diminish, either in number or in ability to move the needle, mergers occur.

We’ve already seen this on the supplier side of the gaming industry and among online companies, primarily in the U.K.

On the casino side, a couple of companies make growth through acquisition a central part of their strategy. This has long been true for Boyd, and has become true of Eldorado since it became a public company less than two years ago.

And the emergence of REITs is a kind of play on M&A.

But we have not seen a big deal yet among major land-based casino operators. However, that day might be coming.

When Caesars restructures, it could sell or acquire properties. Penn National and Boyd have family-centric ownership that could one day want to change direction. Las Vegas Sands and Wynn Resorts have visionary founder-CEOs still going strong, but also not getting any younger.

Nor can big international mergers be discounted. Genting might find buying its way into Las Vegas the best route to grow there. Crown in Australia could be an attractive target. If the Philippines gets its act together and looks like a promising market, some of those investors might want to cash out.

 

New Ways To Play. It seems that every year casinos are considering the addition of ways to play beyond tables and slot machines: skill gaming, social gaming, daily fantasy sports, eSports. And the future might hold more innovation, such as virtual reality. Then there is online gaming.

These new ways to play are still evolving and might, or might not, become big new revenue sources.

But one of the best new revenue sources might be an old one—sports betting.

If sports betting is legalized throughout the U.S., it will open a new revenue stream for casinos. And perhaps as, or more, important, make them stronger entertainment centers.

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