Deutsche Bank analyst Carlo Santarelli called 2024 “a year to forget” for most regional casino operators. Challenges remain for 2025, but with fewer headwinds.
“Unless you were Boyd Gaming, 2024 underperformed considerably versus the major indexes,” Santarelli said in a note to investors. “The last time the group experienced declines in back-to-back years was the 2007/2008 period, thereby adding historical credibility to the notion that the group is poised for an inflection trade in 2025.”
For regional markets, the year is likely to end up flat in terms of gaming revenue, Santarelli said. States like Illinois with new supply and Michigan with easy comps, given the 2023 strikes, offset several states that experienced low-single-digit revenue contraction. “Given limited mergers and acquisitions, declining net revenue and property EBITDAR, and few investible narratives, investors have largely steered clear.”
In all 2024’s quarters, Santarelli felt like each operator discussed a stable regional environment, at the same time as reflecting on net revenue trends down low to mid-single digits and property EBITDAR down mid- to high single digits. While rising operating expenses clearly played a role, competition and disruptions were noted as the disconnect between the results and the commentary.
“The commentary was further clouded by lackluster state-by-state results coming out on a monthly basis, which only added further to the skepticism and doubt around the group,” Santarelli said. “Of late, while the optics haven’t improved materially, stability under the surface has seemingly emerged.”
To see this, Santarelli said it requires looking at calendar-adjusted metrics. On a calendar-adjusted basis, gaming revenue across their proxy subset has been up, albeit modestly, in four of the last five months.
“We aren’t necessarily taking this as a sure sign that fundamentals are poised to change in 2025, but we do believe it adds optimism to the dynamics of what has been a tough slog for regional gaming markets for several years now.”
As Deutsche Bank looks to 2025, “Some challenging geographies remain, though we view the headwinds as less problematic when compared with 2024.”
Santarelli said they see the Bossier-Shreveport, Council Bluffs, and East Chicago markets as facing the most competitive challenges for the regional operators in 2025, with Penn Entertainment and Caesars Entertainment exposed to more headwinds than Boyd. “The key, in our view as we look to 2025, will be the ability for operators to offset the competitive headwinds with reinvestments of their own,” Santarelli said. “Focusing specifically on the operators with investments that should bear fruit in 2025 (opened in 2024 or opening in 2025), we see Caesars likely generating about $70 million of incremental EBITDAR from New Orleans and the permanent facilities in Danville, Virg., and Columbus, Neb., though competitive headwinds are likely to rival these returns. We see a rather benign competitive outlook for Boyd and modest productivity from the Norfolk, Virg., temporary facility later in the calendar year.”
As it relates to Penn, Santarelli said of the four ongoing projects, only Hollywood Joliet is expected to open in calendar 2025, while Deutsche Bank sees the headwinds from competition in Bossier-Shreveport, Council Bluffs, and East Chicago being a net drag.
“Given the late-in-the-calendar-year potential completion of the Durango Casino & Resort project, and no material incremental competition in the Las Vegas locals’ market, we see a fairly uniform environment for Red Rock in 2025.”
The margin bleed continued in 2024; rising, though moderating, operating expenses were burdened by continued net-revenue declines, Santarelli said. Operators appear poised for 2024 to mark their third year of regional drive-to-market margin declines in a row.
“When looking ahead to 2025, the margin dynamics in our view are fairly straightforward,” Santarelli said. “We expect modest expense creep, though again likely more subdued than what was experienced in 2024, and as such the net revenue cadence is likely to guide the margin story. We believe same-store net revenue of about 2% in regional markets is likely to be necessary to keep margins flat, though again, impacts from new competition and development activities, as well as other idiosyncrasies will also play a considerable role. As evidenced by our forecasts, we expect margin contraction to broadly continue in 2025, though moderate in magnitude relative to 2024.”
