Another day, another Hollywood Casino.
When Penn National Gaming opened its 11th Hollywood-branded casino last month at the Kansas Speedway, much more was happening than just the good idea of using a casino to boost the fortunes of a NASCAR track. In fact, the project, a 50/50 venture between Penn and Kansas Speedway Development Corporation, benefits both sides.
Those benefits come from a masterful design of a casino at Turn Two of the Kansas Speedway, overlooking the track to merge the casino and racing experiences. Beyond that, the Hollywood Casino at Kansas Speedway is a microcosm of the strategy that has led to Penn’s remarkable growth over the past decade.
Founded with the opening of its Penn National Race Course outside Harrisburg, Pennsylvania in 1972, the company remained a successful but relatively small racetrack operator until two fortuitous acquisitions beginning in 2003 with the purchase of Hollywood Casino Corp. and its three properties in Baton Rouge, Louisiana; Tunica, Mississippi; and Aurora, Illinois. In 2005, the size of the company was doubled again when the acquisition of Argosy Gaming Company instantly made Penn the third-largest publicly held gaming company in the U.S.
But it has been Penn’s growth strategy since then that has allowed the company to maintain its strength, and to continue to grow despite the national economic slump.
Peter Carlino, who has been the operator’s CEO since 1996, implemented a strategy to grow the company’s geographic presence in all directions, using the powerful state lobbies of its traditional racing business to spread a racino model that preserves racetracks, creates local jobs and pours revenues into cash-strapped state coffers.
“Peter deserves a lot of the credit for having the vision to understand and take advantage of the connection that racing now has with casino gaming,” says Tim Wilmott, the company’s president and chief operating officer, “and using the political clout of the horse racing community in states to enable commercial casinos to exist in conjunction with the racetracks. That was really what got the company started.”
Wilmott, who joined Penn in 2008 after a long career with Harrah’s Entertainment (now Caesars Entertainment), has overseen the addition of five new casino properties that will have opened by the end of this year, bringing the total casinos under Penn’s operation to 21—and its total gaming and racetrack operations to 27. In some cases, the company has been instrumental in creating a new gaming industry in a previously underserved market; in others, it has seized opportunity in growing markets.
“What I tried to do when I got to Penn was develop a platform for the growth of the business,” Wilmott says, “because I knew we could be much bigger than we were in February 2008 when I joined the company. That said, I wanted to maintain the autonomy of our businesses, making sure our local managers stayed close to our customers, stayed close to their employees, and were able to manage their businesses at optimum levels.
“I’ve tried to create some structure here at corporate, but not to get too big, to allow our businesses to have the tools and capabilities to market more effectively, to have better operations in food and beverage, and better vehicles for them to make decisions on how to improve the experience for our customers on the casino floor.”
It’s a formula that obviously works. Despite operating in the middle of a recession, the company’s batting average with new projects has been stunning. Take Perryville, Maryland. In a state with an onerous 67 percent gaming revenue tax, Penn zeroed in on the small, very strategically located community along Interstate 95, invested just $94 million, and waited for customers from the three states along the interstate to stop in. And they have.
“We’ll get a 20 percent cash-on-cash return in Perryville,” says Carlino. “We built that with the idea that a facility would come to Anne Arundel (where Cordish’s Maryland Live! will open this summer) and elsewhere in the state, and that our so-called monopoly would be short-lived. And with that high tax, we were very, very cautious with our all-in spend there.”
“We were very disciplined,” adds Wilmott, “in making sure we spent the amount of capital to get a good return, given that high tax rate.” Even though other properties opening will affect Perryville, Wilmott says he expects at least “a good, two-year run” for that investment.
Other new Hollywood Casinos have had higher “all-in spends,” but each dollar has its purpose in each of Penn’s new projects. “It’s not about being the biggest,” says Wilmott, “but it’s really about providing as much shareholder value as we possibly can. And we’ve had a very good record of that over the years.”
Carlino adds that a key to Penn’s success has been a relentless focus on moving forward.
“We’re obviously pleased with what we’ve been able to accomplish over the years,” he says, “but if you exist as we do in the public world, nobody cares what you did last week, last month or even last year. Our shareholders are only interested in what we’re going to do tomorrow. And that is our complete and absolute focus.”
Expanding With Care
Penn National has succeeded by picking its projects carefully, keeping construction costs down and maximizing the value of the Hollywood theme. Although the company inherited the theme, it has used the movieland vibe with great success in new properties and in revamps of existing racinos.
One of the first revamps was at the company’s flagship Penn National Race Course, a decision made when Pennsylvania approved casinos in 2004. “When gaming came to Pennsylvania, we made the decision to tear down the old racetrack and start from scratch to build a fully integrated gaming/racing facility,” recalls Carlino. “We introduced the Hollywood concept, which is much more than a name; it is a whole lot of visual excitement we’ve been able to create and develop further as we’ve rolled out more and more facilities.”
Since then, the company’s Argosy Casino in Lawrenceburg, Indiana, Charles Town Races in West Virginia and Empress Joliet have been among the properties converted to the movieland theme.
“We’re very happy with Hollywood,” says Carlino, “and as opportunities open up and certainly as new facilities open, Hollywood is the vehicle that we’ll use.”
With Hollywood, Penn has created popular, high-earning facilities without breaking the bank in terms of capital. It’s one reason the company has one of the healthiest balance sheets in the industry. “As a point of pride, I don’t think anyone in the United States extracts more value and more excitement from an invested dollar than we do,” Carlino says. “You can do a lot of stuff if you want to spend a billion bucks. But if you’re trying to create the highest possible return for your shareholders, quite candidly, no one does it as well as we do.”
Carlino points to the Kansas Speedway as the latest example of how this formula works to perfection. With 100,000 square feet of gaming space, five restaurants (some overlooking the speedway) and the classic Hollywood theme—enhanced by elegant chandeliers, art deco columns and video walls that project classic movie trailers and images from Hollywood’s golden age—the first new casino in 15 years in Kansas City is already drawing rave reviews.
For Penn, the next frontiers lay in Ohio, where two Hollywood Casinos will open this year; and Maryland, where the company has lobbied hard to amend the gaming law to allow for slots at its Rosecroft Raceway, which Penn bought last year. In each market, Penn has worked to change aspects of the law to improve operating conditions, working to duplicate the success of the state law Carlino says should be the model for new jurisdictions—Pennsylvania.
Carlino says Penn has made the case to the governor and lawmakers in new markets such as Ohio and Maryland that their gaming laws should follow the lead of the company’s home market.
“If you look at Pennsylvania—and God bless (former governor) Ed Rendell and the members of the legislature who led that effort—we have what has to be the best gaming/racing bill in the entire United States,” Carlino says. “And as you have seen, in the short space of three years, Pennsylvania casinos have moved to No. 1, producing more revenue for the state than any other (casino market) in America.
“The tax rate is not low—but it’s not unbearable. It’s not Maryland, frankly, where they just were overzealous.”
Carlino says the tax rate in Pennsylvania was actually discussed with the operators before it was implemented.
“I remember the then-speaker of the House saying to me, look, we’d like to get as much from you guys as we can,” recalls Carlino, “but we recognize that beyond a certain point, the more we tax you, the less we’re going to get. I remember saying, ‘You know, I’ve never heard that come from a politician—the actual recognition that if you tax something more, you get less.’”
Carlino says the Pennsylvania law “hit a perfect balance” on the tax level, and also on a geographic level. “They spread these facilities intelligently around the state,” he says. “They’re not overly stepping on each other’s toes; people have distinct markets, or it’s a large market where you can spread it through several companies. And, I think it should be the template for what happens elsewhere in the United States.”
Victory in Ohio
While Ohio may not follow the Pennsylvania template completely, the new jurisdiction, where Penn will have casinos in Toledo and Columbus, carries the stamp of Penn National’s efforts perhaps more than any other new jurisdiction.
Penn was intimately involved in the development of the Ohio gaming law, beginning with its lobbying efforts in 2008 that contributed to what was the fourth defeat of gaming proposals in the state legislature—a proposal backed by gaming veteran and poker pro Lyle Berman that would have created a single casino for the entire state, located outside of Cincinnati. “We got a look at the polling on that effort,” recalls Wilmott, “and at that time, the economy was beginning to turn downward. We saw some polling near the end of 2008 that showed attitudes of the voters of Ohio toward gaming were changing.”
At the same time voters were warming to the idea of gaming, Wilmott says the state’s lawmakers were waking up to the idea that the state was losing revenue through its reluctance to legalize gaming. “At the time, Ohio was surrounded by states offering gaming,” he says. “We verified that there was over $1 billion annually being bet by Ohioans in Michigan, Indiana, Pennsylvania and West Virginia.”
In 2009, Penn forged a powerful partnership with Dan Gilbert, owner of the NBA’s Cleveland Cavaliers, to implement a petition drive for a ballot question to legalize large casinos in Ohio’s four largest cities—Cleveland, Cincinnati, Columbus and Toledo. “We knew from our polling that we needed to carry those four cities to win the statewide election,” says Wilmott, “and in November 2009, we were fortunate to win that ballot question by around 200,000 votes.”
Carlino says the economy played a big part in the victory. “We ran a referendum (campaign) very skillfully, which made the right appeal to voters,” he says, “that this really is about jobs, and it’s the right time.” Adds Wilmott, “The economy was really hurting badly in parts of Ohio—unemployment rates in places like Toledo were around 15 percent. The promise of jobs, the promise of keeping revenue within the state, of creating a new source of revenue for the 88 counties—plus the level of investment we offered—finally got the voters to agree with us.”
After the referendum passed, Gilbert was awarded the right to build in his hometown of Cleveland, and Penn ceded Cincinnati as well to Gilbert’s Rock Gaming, which is building casinos in those cities with partner Caesars Entertainment. (Carlino points out that Penn already operates in the Columbus area, with its Hollywood Casino riverboat complex in Lawrenceburg.) Penn would soon break ground for Hollywood Casino Toledo and Hollywood Casino Columbus.
However, there would be one more glitch in the creation of the Ohio gaming industry. Former Governor Ted Strickland had supported the efforts of Penn and Rock Gaming in 2009, and in fact may have assisted in bringing Ohioans closer to accepting casinos when he issued an executive order that year to place VLTs at Ohio’s seven racetracks. Strickland had supported the idea of a reasonable tax rate, and Ohio’s 33 percent revenue tax beat even Pennsylvania, which has an effective rate of around 47 percent. Current Governor John Kasich, who defeated Strickland in the 2010 elections, had other ideas. Early last year, he announced he felt the new casinos weren’t turning enough of their money over to the state, and proposed the state take a portion of all wagers, an unprecedented move.
Penn and Rock quickly began negotiations with the governor, and Rock even ceased all construction plans. By mid-June, they had reached a new deal. Penn agreed to pay the state another $110 million, over 10 years, on top of the one-time $50 million licensing fee it had already paid, and to pay Ohio’s Commercial Activity Tax of 26 cents on every $100 of profit.
Penn never interrupted its Ohio construction plans, although groundbreaking on the Columbus facility was delayed until the second quarter because the company had changed its location at the behest of city officials—a change that had to go back to the voters in May 2010 in a second constitutional referendum. Hollywood Columbus will now be on a 122-acre site that was the former Delphi Auto Parts plant in Columbus’ western suburbs. Penn had to clean up the site.
As a result, Hollywood Casino Toledo will be the first to open, sometime in the second quarter of this year. The $300 million casino will have a 125,000-square-foot gaming floor with 2,000 slots, 60 table games and 20 poker tables, with four restaurants.
Hollywood Casino Columbus, with a budget of around $400 million including the cleanup costs, will open by the fourth quarter at the latest, and maybe even by late summer. The casino will be larger than Toledo, with 180,000 square feet of gaming space, 400 slots and 100 table games at opening. It also will offer 25 poker tables.
The décor of both casinos will follow Penn’s winning formula of 1930s art deco replete with movieland images.
The company also is moving its two Ohio racetracks—they are currently in Toledo and Columbus—to Dayton and Youngstown, both areas Wilmott says are underserved as far as gaming. There is a constitutional challenge to the former governor’s move—a lawsuit filed by the anti-gaming group Ohio Roundtable—but Wilmott feels the racetrack plan will survive the challenge because there is ample precedent for the state lottery running VLTs. “I think eventually, you’re going to see all seven racetracks have slot machines,” he says.
The relatively light tax rate in Ohio, of course, is contrasted by some of Penn’s other jurisdictions, most notably Illinois, where the company is working to fight rather than to create expansion legislation. Illinois lawmakers sent Governor Pat Quinn a huge expansion package that would add several new riverboat casinos, a casino in the city of Chicago, racetrack slots and slots at O’Hare and Midway airports.
Wilmott calls it a “flawed piece of legislation” that would seriously hurt the existing operators—none less than Penn, which operates casinos in Alton, Aurora and Joliet. “The only reason for the legislation to include all of this was to get enough votes in the House and Senate, which it barely passed,” says Wilmott. “Not a lot of thought goes into this type of legislation, unfortunately. It’s all about getting the votes to get it passed.”
If even the Chicago casino goes through—it would be owned and regulated by the city of Chicago under rules different than existing licensees—it would hurt Penn’s Hollywood casinos in Joliet and Aurora, and Wilmott says if a good part of the legislation passes, it would lead to downsizing and loss of jobs. “I think Governor Quinn has recognized that, and they’re trying to see if they can work a compromise that won’t be as damaging to the existing licensees,” he says.
For Carlino, the expansion bill is only the latest affront to good business in Illinois—the first was the bill that established what is the highest gaming tax rate in the country for the casinos making the most money, which Penn challenged all the way to the U.S. Supreme Court before the high court declined the case.
“Under any concept of equal protection, that was an abysmal piece of legislation, it cost us dearly, and it has made doing business in that state utterly outrageous,” Carlino says. “Doing business in Illinois is like doing business in Zimbabwe. They have raped and pillaged every company that has done business in that state. They have cost our shareholders at least half a billion dollars of value by basically stealing our revenues.”
Penn National has had a different set of challenges in its other high-tax market, Maryland. Wilmott’s “good, two-year run” with a comparative monopoly in Perryville will end with the opening of the Cordish casino in Anne Arundel County this summer, most likely followed a year later by a Harrah’s casino in Baltimore.
Penn has sought to hedge its bets in Maryland with another facility. At first, the company’s executives thought it was going to be the Anne Arundel casino, which went to Cordish after the owner of the county’s Laurel Park racetrack, Maryland Jockey Club, a Penn National partner, failed to submit a license fee with its application.
Penn National bought a half-interest in the Maryland Jockey Club in hopes that it could ultimately bring slots to Laurel Park. The company helped to put a challenge to the zoning law for the Cordish casino up to a public vote in the 2010 election, joining with a citizen group that objected to its proximity to the Arundel Mills Mall. After that effort failed, Penn turned its interest to another potential Maryland win—Rosecroft Raceway.
Located in Prince George’s County near Washington, D.C., Rosecroft was left out of the original Maryland slot sweepstakes by the 2008 gaming law, which designated five approved locations. Prince George’s County was not one of them.
Penn announced plans to buy Rosecroft in January 2011, after it had been closed for six months. Regulators approved the purchase in July, and the track reopened with daily simulcasts in August. By October, a new live harness racing season had begun.
But the addition of slots is a deal-breaker for Penn. All of last year, as the company prepared the shuttered track to reopen, it intensified lobbying efforts in Annapolis to add Prince George’s to the list of approved slot locations. “We are making the argument that the only way, long-term, Rosecroft can remain viable is if we attach casino gaming to it,” says Wilmott. “Because if you look at racetracks across the United States, with very few exceptions, they’re losing money.”
Carlino agrees that Rosecroft, or just about any other racetrack, needs slots to survive. “Let’s face it—we’re not minting more racing customers,” he says. “Those days are gone. And the reason is, our customers have died. D-I-E-D, died! I defy anyone who thinks differently to tell me how many young people above 18 say, ‘I’m going out to the track on Friday night.’ It just doesn’t happen anymore.”
However, Carlino says that doesn’t mean racing has to die. In fact, as a business model, racing supported by a casino “makes perfect sense,” he says. In the case of Rosecroft, the lobbying efforts center around not only the economic benefits—slots right in the D.C. market will fund a much-needed county hospital in Prince George’s, for instance—but because horse racing as an industry should be preserved. “Racing supports a lot of jobs, and it is an agricultural industry,” Carlino says. “People forget that. And it is desirable at a time when green space is getting gobbled up for every type of development.”
Last month, Maryland state Senator Douglas J.J. Peters introduced a bill to amend the state constitution to add Prince George’s as a slot location, and to add table games to the mix in Maryland. While it has the support of Senate President Thomas V. Mike Miller Jr., Wilmott says its success is still anyone’s guess. “It’s very difficult to predict,” he says, giving the bill at best a 50/50 chance of passing.
Eye to Expand
While Penn faces challenges in other markets—Mississippi has not yet come close to business levels pre-Katrina, for example—the company’s leaders are always looking for new opportunities.
Still at or near the top of the list is Las Vegas, where the company now owns the M Resort locals casino on the far southern reaches of Las Vegas Boulevard. According to Wilmott, the M—purchased from the Marnell group last June—gives Penn a foothold in the Las Vegas market, and a Las Vegas destination to which the company can drive its regional customers.
“In 2011, we generated about 5,600 room nights to the property, and about $2.5 million in gaming revenue, just from moving our customers to that location,” Wilmott says. “So far, so good—we’ve made a lot of changes at the M; we’re bringing them into the Penn organization, working with them to take cost out of the business, and still trying to figure out the Las Vegas locals business, which is very competitive.”
“We have met and continue to meet with growing success in sending our people to M, simply because the property is so fabulous,” adds Carlino. “So, we’re thrilled with the acquisition.”
However, with the Las Vegas locals business still sagging, Penn National remains open to an opportunity along the more populated portion of the Strip. (Before the M purchase, Penn was out-bid by Carl Icahn on the ill-fated Fontainebleau project. Icahn is more likely to tear down the structure than to operate it.)
“We certainly do want to have a greater presence on the Strip,” says Wilmott, “and we’ve been very public about that. We’ve looked at a lot of properties; nothing’s materialized. We want to make sure it’s the right product in the right location at the right place.”
Adds Carlino, “We are nothing if not patient.”
There are plenty of other potential new locations for Penn’s magic formula. Competition is heating up in Massachusetts, where the casino in the western part of the state is up for grabs. Wilmott says the company is looking at a couple of different sites, and will have plans finalized in the coming weeks for a bid in competition with Ameristar, Mohegan Sun, Hard Rock International, MGM and others. Elsewhere, the company is fully engaged in lobbying efforts in Texas and Florida.
Prospects in Florida dimmed a bit last month when a bill to create commercial resort casinos died in a House committee, but Carlino says Texas is a huge potential market. “Texas will, one day, get gaming,” he says. “Whether it will happen in the short term, I don’t know, but it ought to—Texas needs money like everybody else. They have to finally awaken to the notion that Texans gamble, and hugely so. But they’re gambling elsewhere.”
Penn’s other coming triumphs could come overseas, where the company has been kicking the tires in several Asian markets. What’s next? Carlino says he has no idea. “It’s not the nature of this business to be able to lay out a business plan,” he says. “We’re not Starbucks. You’ve got to pick and choose your opportunities very closely, you’ve got to work hard, and you’ve got to get lucky. I come to the office every day and look at the gaming world—what’s happening, where it’s happening, where the next opportunity is.
“Somebody said to me years ago that a leader doesn’t have to know where he’s going; he’s just got to be ahead of everybody else. So, our goal is to be ahead of everybody in our category of business. Where is uncertain, but I can tell you this: We’re going to be the most prepared, the most focused company, wherever that place is.”
Just another day in Hollywood.