Is Pinnacle a Good Bet?

Good news, bad news for Pinnacle this weekend. On Friday, Pinnacle announced that they have an opening date of March 4, several weeks earlier than planned.   However, in the company’s most recent earnings press release, Pinnacle Entertainment (NYSE:PNK) announced a $242 million net loss in the fourth quarter, a 5.4 percent decline in revenues versus the same quarter last year, and the company announced that the vacant 19-acre Atlantic City Boardwalk casino site would be put on the market for sale. They also said they may look at selling other assets and will be looking into additional cost-saving measures.

Pinnacle also has some leadership opportunities to address. The company is still actively pursuing candidates to replace their former CEO, Dan Lee. I wonder what this means for Kim Townsend. Back in October, Pinnacle tapped her to be the general manager of Lumiere Place, but then in November announced she would be staying in Atlantic City to focus on that property. Will she move to another Pinnacle property? The company has announced plans to add a casino to their resort in Lake Charles, La., and to build a casino in Baton Rouge, La. Might either of these properties be a home for Townsend?

What does all this mean for shareholders? On the one hand, Pinnacle seems to be undergoing some very big changes. There are some additions in the form of new properties, new jobs and new leadership. They are also going to be shedding some properties (Atlantic City and possibly the President Casino). On the other hand, the properties they’ll be left with could be some of their most productive assets, which might make the stock more valuable. All of this comes against the backdrop of an ailing economy, which many (including Pinnacle) blame for some of the industry’s performance. It will remain to be seen whether these cuts are enough to maintain long-term viability and shareholder value.

St. Louis Mayor’s Casino Defends President Casino

Mayor Francis Slay of St. Louis, penned several earnest and well-argued letters to members of the Missouri Gaming Commission on behalf of the City of St. Louis, opposing the recommendation to close the President Casino and revoke Pinnacle Entertainment’s (NYSE:PNK) gaming license.  While some points are stronger than others, Mayor Slay does present several good reasons why the Commission may want to reconsider this decision.

One of his most interesting arguments come from the seemingly suddenness of the decision.  As he points out, “the Gaming Commission staff has not directly communicated with the the home dock city about this recommendation.”  Why wouldn’t the Commission at least contact the Mayor’s office, if only out of courtesy?  Mayor Slay also brings up a very valid concern regarding the impact of removing $2 million from the City’s budget.   Surely, this cut would be a concern and impact the City.  Why not address it first before contemplating closing the casino?  As he points out in his letter, this process is “the kind of action that makes taxpayers mad at government.”

Slay also calls into question the same concern I voiced in an earlier blog: is Pinnacle being treated fairly?  The Mayor pointed out that Pinnacle has offered up plans and alternatives to remedy the President Casino’s declining revenues, but all have been shot down.  As the Mayor says, “it would be like your local government rejecting a legitimate building permit to repair your house, then condemning your house because you didn’t repair it.”

I question the strength of some of the arguments, though.  While closing the casino would cost St. Louis more than 240 jobs in an economy where unemployment is a major concern, any new casino that opens up would certainly employ at least that many people.  Those 240 jobs might not be lost, but just be relocated elsewhere in Missouri.  Indeed, the new casino could even be located in St. Louis and the City would get those jobs back.  Similarly, the argument regarding cutting $2 million from the St. Louis budget could be offset if the state revenues increase by more than $2 million.   Mayor Slay is right to defend those jobs and tax dollars – as Mayor of St. Louis, it’s his job.  But the Gaming Commission could argue that it’s looking out for the whole state of Missouri, not just St. Louis.

I wonder if the City, the Commission and Pinnacle could all work together to come up with a plan that would satisfy everyone.

Did Missouri Gaming Commission Deal Bad Hand to Pinnacle, President?

Several news sources have now reported that the Missouri Gaming Commission has filed documents with the Securities and Exchange Commission (SEC) announcing the intent to revoke Pinnacle Entertainment’s (NYSE:PNK) gaming license for the President Casino.   According to Executive Director Gene McNary of the Missouri Gaming Commission, the commission staff will recommend that the casino’s license be revoked, with operations to discontinue as of July 1.   This meeting is scheduled for Wednesday, January 27, 2010.  Pinnacle Entertainment’s legal counsel has stated that the company will “pursue all legal remedies to protect our license,” and has already asked a state appeals court to postpone Wednesday’s proceeding (a request which has already been denied).  The process to revoke the license is relatively simple and brief, so the decision may already be a fait accomplis.  Or to put it in gamblers’ terms, the President Casino may be drawing dead.

I’m concerned about the potential conflict of interest in this conflict.  McNary cited a “decline in performance” as justification for the decision.   And to be fair, his statement is correct.   Revenues at The President Casino have declined steadily since 2005, with a significant drop in 2008.   So the Commission has a valid point in wanting the license to go to a property that produce more tax revenue for the state.  But does the Commission bring in more revenue by revoking the license and putting it up for bid rather than letting Pinnacle keep and renew the license at another location?  Why take the license away a year early (Pinnacle Entertainment bought the license as part of its acquisition of the President Casino in 2006, and that license is supposed to be good through 2011) and force Pinnacle to bid for it against other suitors?  Could the fact that the Commission knows there are several other parties interested in the license influence their decision to revoke and resell the existing license?

Why not give Pinnacle a chance to earn that revenue?    Pinnacle has already expressed interest in using the license for another casino in the hotly contested North County area - one of three speculated locations for a new casino.  Pinnacle also has a proven record of success, with Lumière Place Casino earning some of the highest revenues in the St. Louis gaming market, even in a down economy.  Pinnacle has employed more than 1000 people at Lumière and is currently hiring more than 1000  more employees for the new River City Casino, due to open in March.  Pinnacle offers a compelling record of success.  Why would the Commission not give them another chance to do more of the same?

From an investment standpoint, it seems much more risky to give the license to another entity, which may or may not have the same record of success in the St. Louis market.   Does the potential, one-time revenue boost from reselling the license offset this risk?  Does it make sense to trust a company that has 2 successful operations in the St Louis are to try for a third?  In the long run, what’s the best option for the people of Missouri?

Several sources last week have confirmed that Kim Townsend, chief executive officer of Pinnacle Entertainment Inc.’s (NYSE: PNK) Atlantic City casino project (currently on hold), will not be coming to St. Louis to take over Lumiere Place. No reasons were given and Pinnacle has been relatively quiet on the issue, although one article alluded to ties between Townsend and Pinnacle’s former chairman, Dan Lee, who resigned in November after allegedly threatening a local councilman regarding a zoning change in North County that could potentially allow another casino to build there.

My questions are: 1) who is going to run the Lumiere Place casino? Todd George, vice president and general manager at Lumiere Place was named vice president and general manager of the new River City Casino (scheduled to open in March). At the time, Townsend was expected to take over at Lumiere, presumably so that George could focus on River City. Based on revenues, Lumiere is a top (possibly the most successful) casino in the St. Louis area. So will George have the capacity to maintain Lumiere’s leading position while launching the area’s newest casino? Will he be able to replicate his success from Lumiere to River City? Or will the need to divide his attention cause both properties to suffer?

Question 2: How will this management decision affect shareholder confidence? Lee resigned in November, leaving Pinnacle’s board without a chairman. Townsend is no longer coming to help out at Lumiere. The President casino is headed for troublesome times in summer of 2010 (when the Coast Guard inspection of the Admiral Riverboat, home to the President casino, is due). Are these items causes for concern?

With so much attention on Pinnacle’s St. Louis properties, these casinos and the Pinnacle corporation have a fantastic opportunity. There’s no such thing as bad publicity, right? So the real question is what will Pinnacle do with all this attention?

Congrats, River City, but what about the President?

Pinnacle Entertainment, Inc. (NYSE: PNK) announced today that they’ve moved up their anticipated opening date to early March, as opposed to Spring 2010. It’s refreshing to hear another St. Louis project opening up ahead of schedule. It’s good for the parent company and the state for the same reason: revenues start coming in sooner.

The one thing that raised my eyebrow in their press release today was the absence of the President Casino.  In th release, John Giovenco, Pinnacle’s interim chief executive officer, said that, “… Along with Lumiere Place, its sister property in downtown St. Louis, River City represents a major investment in the future of the St. Louis area.”  I’m curious why the quote didn’t also mention Pinnacle’s President Casino.  Is it because the other two are new and required large amounts of capital to build?  Is Pinnacle trying to distance itself from the ailing President Casino, which faces certain challenges of its own?  Is Pinnacle underscoring its dedication to St. Louis and its record of investing in St. Louis in the hopes of facilitating the efforts to keep and/or move the President’s coveted 13th license?

Putting the Smoking Genie Back in the Illinois Bottle

The early bird gets the worm, but it’s the second mouse who gets the cheese. That’s because the first one got killed by the trap and the second one learned from the mistakes of the first. While first-mover advantage is good in many situations, being first is not without risk.

In Illinois, one of the first states to pass a smoking ban that eliminated smoking in casinos, the smoking ban taught legislators in other states the financial impact of such a decision. Recent reports from the Illinois Gaming Board and Missouri Gaming Commission have reported, yet again, that revenue in Illinois casinos are down more than revenues in Missouri casinos.  This data is in keeping with the results published by Federal Reserve Bank of St. Louis in their study of the impact of smoking bans on casino revenues.

Clearly, other states have learned this lesson from Illinois’ misfortune, and have avoided the same fate. St Louis passed a smoking ban last month, but exempted casinos. Michigan just passed a smoking ban this month, which also exempted casinos. It would seem that states are watching Illinois as a bellwether and benefiting from the state’s proactive smoking stance.  States that have followed suit with Illinois, such as Oregon, have also seen significant losses of casino revenue and their associated tax revenue.  While the smoking bans have certainly had a positive health impact in states that have effected such bans, clearly the available data suggests that smoking bans have had an unintended consequence of further damaging an already unhealthy economy (lost revenue, fewer jobs, smaller tax base, etc).

Can Illinois now learn from its own actions?  And if Illinois has learned its lesson, how can lawmakers put the genie back in the bottle?  Surely a full repeal of the smoking ban is not in the cards.  But is it possible to grant an exemption to the law after the fact?  Alternatively, is it possible to offer smoking licenses, as has been suggested before, to undo the damage the smoking ban has already done and possibly increase state revenues (which could be directed towards healthcare concerns)?

1000 New Jobs at River City Casino in St Louis

The River City Casino, operated by Pinnacle Entertainment and scheduled to open in April 2010, has opened a new employment center to help find candidates for 1000 new jobs. More than a thousand people lined up at the casino’s employment office (at 8643 South Broadway) yesterday. This looks like a point in favor of the casino industry, and evidence of the jobs they can create as well as the interest from job seekers for those jobs.

According to various reports, the new casino is hiring all kinds of position from kitchen workers and card dealers to top level managers. The employment office is open Monday through Fridays from 9am to 6 pm and is basically a computer center where prospective workers can log on to fill out online applications. Staff is available to help people fill out the applications on site too. However, there were lengthy wait times for a computer on Thursday (over an hour) so it might make more sense to fill out these applications from home (at www.workatrivercity.com), since it’s all the same system.

Environmentalists for Casinos?

Maybe the solution to the controversy surrounding the possibility of a new casino near the Columbia Riverbottom conservation area is as simple as lifting the restrictions on where casinos can be built.  What if Missouri changed its gaming laws so that casinos didn’t need to be located on or near a river?  Such a change might benefit lots of Missourians.

First, consider the environmentalists.  Many people are concerned about bringing any kind of industry (casino or otherwise) into nature preservation areas.  Some contend that the Harrah’s and Ameristar Casinos are already eyesores in the midst of otherwise pristine nature areas.  A casino near the Great Confluence wildlife area would surely garner the ire of environmentalists.  Some environmentalist groups have been reported to be gearing up for a fight at this location near the Chain of Rocks bridge.  Maybe they should aim their weapons not at casinos, but at legislature that requires casinos to build on waterfront property.

If casinos didn’t have to build on the river, I wonder if they would choose to build elsewhere.  With so many factories recently closed down, I suspect real estate might be cheaper at a closed factory than along a riverfront.  Plus, if a casino had the freedom to locate anywhere, maybe they would choose to locate somewhere that’s not so close to another casino (e.g. Pinnacle’s Lumiere Place and President Casino).

Why do casinos in Missouri need to be on a river anyway?  Originally, they had to be on riverboats that traveled up and down the rifer.  I presume this restriction was a way to limit the total number of casinos or as a way for casino operators to float between jurisdictions of neighboring states.  But then they were allowed to be docked, so long as they floated (like the President Casino or the Alton Belle).  Then, they just had to be located within a prescribed proximity to a river, so long as the casino’s gaming floor still floated on water.  (Many casino patrons might be surprised to learn that the seat at their slot machine is actually sitting on top of what essentially amounts to an overgrown swimming pool.)

Have these water-based restrictions outlived their usefulness?  Maybe it’s time to revisit this limitation.  The number of casinos is already strictly controlled by law, so releasing the water restriction won’t result in a proliferation of casinos.  Zoning laws and city planners can keep casinos out of residential areas the same way they keep out factories and other industrial businesses.  Owners of empty factories could enjoy revenue from sale or lease of their vacant property.  Environmentalists would have an alternative to offer in stead of sacrificing natural resources.  And casinos could enjoy the freedom to choose location based on business reasons, rather than geologic factors.

Of course, we all know that change does not come without great effort.  Sure, the casino industry is strong (they managed to lift the $500 loss limit last year and garner an exception from the smoking ban this year, right?) but if environmental groups like the Audubon Society and the Sierra Club along with local groups like Missouri Coalition for the Environment and the residents of Spanish Lake who oppose the new proposed casino all joined with St Louis gaming industry – maybe all together they could enact legal change that would make everyone happy.

Reports: Casinos can be Good for Local Property Values, Businesses

Maybe casinos aren’t as bad as some people seem to think. Two reports published within the past few years have documented that casinos actually have a positive impact on property values and businesses. (Both studies cited below with links to the original reports.)

In one study, Casino Revenues and Retail Property Values: The Detroit Case, by Douglas Walker, a professor of economics at Charleston College in South Carolina, data indicates that casinos increase commercial property values within a 5-mile radius. The report says that casinos have the ability to draw in additional consumers who will then patronize restaurants, stores and other businesses in the area. True, today’s casinos often have their own shopping and dining on site, but this report seems to imply that casinos offer a kind of halo effect that spreads to businesses not located on the casino’s property. An interesting approach on “share the wealth.”

The other report I came across The Impact of Casino Gambling on Housing Markets: A Hedonic Approach by Michael Wenz from the Department of Economics at Northeastern Illinois University focused on the impact of casinos on residential property values. This study found a correlation between casinos and a subsequent increase of about 2% in local property values. The paper also notes that the increase in property values depends on the population density of the area, with less dense areas realizing an increase while more densely populated areas (i.e. downtown urban areas) actually see a decrease in property values.

These reports shed an interesting perspective on two controversial casino issues in St. Louis: The President Casino in downtown St. Louis and the proposed casino in the Spanish Lake area. The President Casino, which may be in danger of losing its license, is located in an urban area. One might argue that a casino would be better for the Missouri economy if it were located in a less densely populated area, such as Spanish Lake, a possible location where the population density is about half that of St. Louis (2900 people per sq mi versus 5800 people per sq mi). It provides a possible rationalization to relocate the President Casino up-river (or maybe just its license). Still the residents of the North County area may take little solace in the knowledge that local businesses may prosper and local housing markets may improve if a casino is built in their area, regardless of who builds and operates it.

So NIMBY notwithstanding, maybe a casino is a good thing for the Missouri economy, depending on where it is.

Sources:
Casino Revenues and Retail Property Values: The Detroit Case
Douglas Walker

http://www.springerlink.com/content/k7034476xhk32628/

The Impact of Casino Gambling on Housing Markets: A Hedonic Approach
Michael Wenz

http://ideas.repec.org/a/buc/jgbeco/v1y2007i2p101-120.html

Population Density of Spanish Lake, Missouri: 2,900.4/sq mi
(According to http://en.wikipedia.org/wiki/Spanish_Lake,_Missouri)

Population Density of St. Louis, Missouri: 5724.7/sq mi
(According to http://en.wikipedia.org/wiki/St._Louis,_Missouri)

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