Atlantic City casinos in danger if gaming expands

(PRESS RELEASE) -- Expansion of gaming outside Atlantic City could lead to as many as four additional casino closures, though expansion efforts face an uphill battle, according to Fitch Ratings.

Properties most susceptible to cannibalization include Trump Taj Mahal Casino Resort, Resorts Casino Hotel and Golden Nugget - Atlantic City. Fitch estimates a roughly 25% decline in Atlantic City's gross gaming revenue (GGR) would wipe out the operating profit before management fees of Golden Nugget, the most profitable of the three. This assumes proportional revenue loss among the existing casinos and that income falls by $1 for every $2 of revenue loss.

Declines of 10% and 20% in GGR would put Taj Mahal and Resorts at risk, respectively, under the same assumptions. Bally's - Atlantic City could also face an uncertain future, as Caesars ultimately closed the Showboat in September 2014 amid Atlantic City weakening and despite the property still being marginally profitable.

Casinos in Northern New Jersey still face a long and uncertain future before the November referendum to legalize gaming outside of Atlantic City. Public opposition for gaming expansion has been lessening, but is still meaningful at around 50%, according to the last Fairleigh Dickinson poll in January 2016. This was down from around 56% in June 2015.

Even if the referendum does pass, Fitch believes it will be at least four years until a casino could realistically open. This aggressive timeline assumes one year to pass the necessary regulatory legislation, a one-year bidding process, and a two-year construction phase, but the timeline could be even longer. For example, Wynn Boston Harbor and MGM Springfield are expected to open almost five years after their proposals were selected and nearly eight years after Massachusetts legalized casinos. Both projects have faced either legal or construction hurdles that slowed their development process.

Even though casinos outside of Atlantic City would be a major negative for the market, certain concessions do exist. The current proposal gives Atlantic City operators priority in the application process and includes a revenue share provision with Atlantic City. The incremental revenues could help the city offset any declines in the Payment-In-Lieu-of-Taxes (PILOT) Atlantic City casinos pay to the city as the PILOT amount begins to decline if GGR falls below $2.2 billion. In addition, the surviving properties could benefit from the closures and see performance improve, similar to what occurred after four casinos closed in Atlantic City during 2014.

A tax rate has yet to be set for any new casinos, a material unknown given the $1 billion minimal required capital investment per property. Previous legislative proposals called for tax rates in excess of 60%, which would put the projects on similar footing to nearby competition in Pennsylvania and New York (effective tax rates of 45% and 65%, respectively). Atlantic City casinos have an effective tax rate of only 9.25%, which may provide the surviving casinos additional margin cushion to promote more aggressively.