Easy 1Q15 comparables coupled with anticipated economic improvement are masking secular challenges facing regional U.S. casinos and allowing for a largely flat projection in 2015, according to Fitch Ratings.
We expect tailwinds will be offset by new competition in Louisiana, Ohio, Massachusetts, and Maryland in addition to negative drivers that include: saturation across regional markets; stagnant wages among the lower tier players; reprioritization of disposable income; proliferation of alternative forms of gaming including online/social gaming video lottery terminals and instant lottery tickets; potentially lower propensity to gamble among younger generations; and lower readiness for retirement by baby boomers.
Fitch expects regional markets exempt from new competition will grow in 1Q15 in the mid-to-single digit range and are likely to be flat to slightly down for the remainder of the year. (Revenue declined 6% in 1Q14 in the bigger regional markets with no significant new openings or closures.)
We are encouraged by the fact that improved 4Q14 growth in regional gaming revenues has also been accompanied by an accelerated improvement in consumer sentiment, underscored by the University of Michigan Index, which was up 17% in 4Q14 on a year-over-year basis. However, we note the last time there was a similar spike in consumer sentiment (summer 2013), gaming revenues embarked upon a 1.5-year slump. Over the longer term, Fitch expects regional gaming revenue to decrease by about 1% annually.
We believe regional operators are generally well positioned to weather prolonged low single-digit declines with healthy balance sheets and liquidity as well as disciplined cost controls. Expected growth during the first part of 2015 and a lack of meaningful new competition until late 2016 will likely provide additional cushion for regional operators.
Additionally, the bigger regional companies are in various stages of executing REIT spin-offs, which involve splitting into operating and property companies. However, operating companies could be ill positioned to withstand longer term declines given their larger fixed costs which include but are not limited to lease payments and maintenance capex.
Additional information can be found in Fitch Ratings' Gaming, Lodging and Leisure (GLL) electronic newsletter including brief sector comments, recent/upcoming events, and links/summaries to rating actions and detailed reports. Links to GLL-related reports/comments from other Fitch groups including Leveraged Finance, Credit Market Research, REITs, Public Finance, and Structured Finance can be found there.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
