Casino Reinvestment and Expansion
The proper Care & Feeding of the Golden Goose
Under the new paradigm of heading downward economic conditions across a diverse array of consumer spending, casinos face a unique challenge in addressing how they both maintain earning while also remaining competitive. These factors are further complicated within the commercial gaming sector with Baccarat increasing tax rates, and within the Indian gaming sector by self charged contributions to tribal general funds, and/or per capita distributions, in addition to a growing trend in state charged fees.
Determining how much to “render on to Caesar, inch while saving the required funds to maintain market share, grow market puncture and improve earning, is a daunting task that must be well planned and executed.
It is in this context and the author’s perspective that includes time and grade hands-on experience in the development and management of these types of investments, that this article pertains ways in which to plan and prioritize a casino reinvestment strategy.
Although it appears to be axiomatic not to cook the goose that lies the golden offspring, it is amazing how little thought is oft times fond of its on-going proper care and feeding. With the advent of a new casino, developers/tribal councils, investors & financiers are rightfully anxious to experience the rewards and there is a tendency not to set aside a sufficient amount of the gains towards asset maintenance & enhancement. Thereby begging the question of just how much of the profits should be allocated to reinvestment, and towards what goals.
Inasmuch as each project has its particular set of circumstances, there are no hard and fast rules. For the most part, many of the major commercial casino operators do not distribute net profits as payouts to their stockholders, but instead reinvest them in improvements to their existing venues while also seeking new locations. Some of these programs are also funded through additional debt instruments and/or fairness stock offerings. The lowered tax rates on corporate payouts will likely shift the emphasis of these financing methods, while still maintaining the core business discretion of on-going reinvestment.
As a group, and prior to the current economic conditions, the freely held companies had a net profit relation (earnings before income taxes & depreciation) that averages 25% of income after deduction of the gross revenue taxes and interest payments. An average of, almost two thirds of the remaining profits are utilized for reinvestment and asset replacement.
Casino operations in low gross gaming tax rate jurisdictions are more readily able to reinvest in their properties, thereby further enhancing revenues that will eventually benefit the tax base. Nj is a good example, as it mandates certain reinvestment allocations, as a revenue stimulant. Other states, such as The state of illinois and Indianapolis with higher effective rates, run the risk of reducing reinvestment that may eventually erode the ability of the casinos to grow market demand penetrations, especially as nearby states are more competitive. Moreover, effective management can generate higher available profit for reinvestment, arising from both efficient operations and favorable borrowing & fairness offerings.
How a casino enterprise decides to set aside its casino profits is a critical aspect in determining its long-term viability, and may be an intrinsic area of the initial development strategy. While short term loan amortization/debt prepayment programs may at first seem desirable so as to quickly come out from under the obligation, they can also sharply reduce the ability to reinvest/expand on a timely basis. This is especially valid for any profit distribution, whether to investors or in the case of Indian gaming projects, distributions to a tribe’s general fund for infrastructure/per capita payments.
Moreover, many lenders make the mistake of requiring excessive debt service supplies and place constraints on reinvestment or further leverage which can seriously limit settled project’s capacity to maintain its competitiveness and/or meet available opportunities.
Whereas we are not advocating that all profits be plowed-back into the operation, we are encouraging the consideration of an allowance program that takes into account the “real” costs of maintaining the asset and exploiting its impact.