Were this forty years ago, news of a casino operator winning a bid for developing a property inside or near a major metro area would be enough to send its stock skyrocketing beyond any rational measure of its real world potential. This is precisely what happened when the sector exploded after New Jersey legalized casinos in 1976. First out of the box in 1978 was Resorts International, whose stock almost disproved Warren Buffett’s nostrum that trees don’t grow to the skies.
Early in its first operating year, 1978, Resorts shares traded at $18. By September, its Class A stock jumped $23 on a Tuesday reaching $190 a share, with another $17 point gain the next day. Resorts Class B was up $54 in a single day to $266 against expected earnings of $15 a share noted by its Chairman. But Mr. Market, clearly out of his respective mind had a whisper number floating around of $30 a share EPS.
There was a rationale to be sure. Resorts was the only game in town, warned some analysts, literally the only legal game in the US outside the state of Nevada at that time. It also lay within reasonable driving distance from two of the nation’s biggest markets: New York, a two- and a half hour drive south, and Philadelphia, a one hour plus drive east. Combined population at the time for both metro areas was 23m, with two concentric rings stretching to Southern New England and the Atlantic Seaboard down to metro Washington DC.
Shares of other operators in the sector also blew out estimates under the widely accepted mantra that 50m people lived within a tank-full of gas from Atlantic City. And it didn’t take a 5 hour plane trip to get there.
But there was a set of mandates built into the NJ law that contained ambitious social agenda goals. The phrase that “casinos were a unique tool of urban renewal” being the fig leaf rationalization that sold the legislators, came back to haunt the town in dozens of ways in later years. So the core idea of using a casino development to transform a marginal or out and out dead urban area somehow got lost in the shuffle of the gold rush mentality that ensued. What happened over time was that clearly some progress had been made to provide jobs for the unemployed of the town, some progress in creating better housing and various projects that did remove some urban blight. But much of it remains a job undone.
As one who began his gaming career in those early days it became clear that a far better option would have been to build from scratch on vacant land and not struggle with renovations of dowager hotels from AC’s golden age sixty years before. Even those built from the ground up could not withstand the competitive pressures of a maturing industry close to AC borders. After 2006, compounded by the recession every chicken came home to roost competitively.
As AC’s edge was diminished by legalizations in its key feeder markets north, south and west, the most basic of all imperatives of the casino business applied: There is a direct relationship between casino success and distance from a property and its largest potential customer pool. The closer you are the more likely the success-that is, if the farther way properties fall outside endurable driving distance.
The echoes of all these elements in new casino legalizations have seeped into this latest move by Chicagoans to bring a long awaited casino to their city. The statements accompanying the announcement that Bally Corporation (NYSE:BALY) just made resonates the exact lyrics and music we heard about Atlantic City over forty years ago. Only given the quantum leaps the industry has taken since then, growing to literally 1,000 casinos in 40 states, we caution Chicago enthusiasts and possible investors, to take heed of the old adage about the Bourbons of France, “those who forget history are condemned to repeat it…” first uttered by philosopher George Santayana and late modified as above by Winston Churchill.
Above: A rendering of the proposed Bally’s property in the West Loop section of Chicago proper.
Forgotten too was the explosive enthusiasm among industry observers and analysts when Harrahs (Before merging with Caesars) announced it had won the gaming license for New Orleans. The stock spiked big time. Wasn’t its location supposedly made in heaven? In the heart of a big metro population, in a city famed for its ebullient celebrations, great food, long tradition of riverboat gambling in the 19th century?
How was this not a slam dunk? So in 1995, Harrahs, itching to get started, opened a temporary casino downtown with local partners in a partnership deal with locals to be called Harrahs Jazz. The deal contained a social agenda as well. Management predicted an easy $33m a month in casino win. Once open, the facility only did $15m a month.
Seven months later, the partnership filed for bankruptcy-a red faced Harrahs management took a $130m bath. The reasons? There were many, among them, the usual ills that plague cities until this day. After a long lesson learned, Harrahs New Orleans under the Caesars flag in a better located property has become one of the most successful destination properties in the CZR portfolio. And now, here we go again, listening to the same rhetoric echoing from the past coming through the mouths of Chicago enthusiasts. In time, a Bally property might well make it over the top. In the meantime, management and city officials are best advised to keep their promises to themselves.
The Bally Plan: Location, Location, Location?
The winning Bally bid is to locate the property in the West Loop section of Chicago. It is a mixed commercial and residential part of the city which has neither made the lists of the most crime ridden sections of the town, nor the safest. Best said, in a city with one of the nation’s worst crime rates, the location can be considered essentially neutral. Congestion and parking are another problem here.
The location is home to many good entertainment and dining options beamed at millennials and is of course, cheek by jowl to the heart of Chicago’s loop. But the problem is that while AC, held northeast sway nearly 40 years due to its location, Bally Chicago will debut with casinos in these long established areas of the metro area.
Minutes driving time:
Des Plaines: 29m from downtown.
Elgin: 51 min. from downtown.
Aurora: 51 min. from downtown.
Rock Island: 2.47 hrs. from downtown
Joliet: 53 min. from downtown.
If you factor in heavy traffic flows which already choke around the West Loop according to residents, there would appear to be no tangible location plus for the Bally property based on dramatically shorter driving time. In this business you need to always think of the customer first-everyone has a slot machine these days and a nice buffet. And anyone can roll out the dollars to book A-List entertainment names.
Consumers: Will part of your decision to visit the Bally property be: How likely will I be to become a victim of street crime? Without question Bally and the city will respond with stepped up security measures-but will that penetrate the gambler’s mind when he or she can get in the car, drive under an hour and feel perfectly safe at the destination.
Count on the existing properties to get real aggressive in marketing thus raising the price of gaining market share to a very high bar and by extension, being a drag on earnings for a long time as a Chicago Bally’s finds its way to its customer base. It will be a long, hard scrabble climb to build a database that is responsive to its offers on a regular basis.
The winning location in our view is not therefore a winner. It is clear that the location choice was influenced to a degree, as it was in AC, by a built in social agenda. That’s a discussion for another forum. Suffice it to say, history suggests that not all the time, but too many times, the road to hell is paved with good intentions. Delivering on social agenda promises is a far tougher contract than the lip service we appear to be getting from Chicago. Our sources tell us there remains widespread opposition from local West Loop residents to the project. One expression of the fears-justified or not-is the news that area residents have just retained a private security company to augment patrols of city police. The Mayor cried foul. Welcome to the world of social agenda casinos.
The Scale: It’s A Sensible Starting Point On Paper
Between January and April 30 of this year, all Illinois casinos generated $423m in GGR, of which about $200m came out of the Chicago greater metro area. Considering the quarantines and lockdowns due to the pandemic over the past two years and the uncertainties to come, we can’t label the casino business in the metro area accurately as to best case to worse case potential for the Bally property.
Undoubtedly, Bally numbers crunchers have done their homework shuffling lots of data sets. Their number comes to $800m as a targeted revenue for the property. That comes to about $2m a day average casino win. Rivers casino, the state’s biggest earner, clocked an average of $284 per day slot win for pre-pandemic 2019.
Bear in mind the classic error of many industry observers is to rate productivity of slots on win per day times the number of machines on the floor. That is convenient, but not necessarily accurate. More accurate projections are difficult. What you want to measure is average win per machine per occupied time at machines by customers. Today’s slot tracking systems can easily provide this but would-be developers always point to simple win per day projections to legislators who rarely understand the distinctions long term.
Stipulating that in this pandemic age, all estimates are just that, the Rivers property in nearby Des Plaines has in endgame a $87m expansion that will materially increase casino win potential there. Overall the entire state could reach $1.8b in total gaming revenue including online, racing, etc. by 2026 when the Bally property is expected to debut. An $800m target seems highly ambitious to us. Yet it is common for bidding developers to exaggerate revenue projections as part of their bag of tricks. Even the likes of MGM (MGM) and Wynn (WYNN) global giants had overestimated the market share they predicted for some of their new regional properties.
Despite this, we think that Bally’s projected scale of 500 rooms, 3,400 slots, 170 table games, 10 dining outlets and a 3,000 seat entertainment facility is a PR starting point that will be a good place to probably pivot down as reality begins to bite. We think the starting point here assumes a blowout debut fueled by curiosity visits common to new properties. It could last the better part of six months before it cools down. Retaining customers is where the rubber hits the road after the initial lookie-loo business disappears.
Entering an already crowded market in a decent but not particularly plus location, poses a considerable challenge for Bally management. It may sound enticing to say, well, look, we’re sitting a shiny new property right smack in the middle of a 9.4m metro population base of Chicago is a no lose deal. How can’t it be a winner?
The answer will be found in the extent to which the new property can take market share from the existing casinos. And that answer will come from both Bally management and the city in terms of traffic solutions, security, marketing skills, and operational success day to day. All this could be in place and still, the casino game is always played on the same chessboard: where are you located?, how did you move the pieces against your opponent?, what are the distractions to your strategy?
At writing, Bally Corporation trades at $28.40. It operates 14 casinos in 10 states, has a foothold in sports betting in 18 and is guiding $2.4b in revenue for this year with adjusted EBITDA of $560-$580m.
Its market cap sits at $1.52b
Its long term debt is $3.49b with a current ratio of 1.00 suggesting it has enough liquidity at least a year going forward to meet its debt obligations. Its cash position is $206m, a bit on the thin side here. But the company is owned by a hedge fund which attempted to take it private but failed to get the support. I suspect they will be around for another shot here because I see the company as transaction prone.
They should be able to finance the Chicago project under current best assumptions about the cost of money going forward. More importantly, will be the performance of its existing portfolio between now and the projected date of a Chicago property four years from now.
We find it hard to make a BUY case for BALY built off its winning bid for the Chicago casino project. And we think investors are best advised not to jump into the stock on that what if basis.
The company did turn from a ($0.30) loss y/y 1Q’21 to $0.03 in 1Q’22 which is a positive for certain. We see the ramp north from here to an analyst consensus of ~ $0.29 as being in the realm of possibility assuming the continuing easing of pandemic disruption. BALY’s book value of $30.85 is above its stock price which some investors may see as a plus here.
BALY will now face needed approvals by the Chicago city council and beyond that the state gaming board. Loaded as it is with a heavy social agenda I believe it will pass muster-unless local residents get revved up and prepare to fight.
Overall the casino sector, still battered by pandemic jitters and just emerging into the early post-pandemic era, has many undervalued stocks with superior potential which are better bets than BALY at this time.