COMPREHENSIVE GAMING INDUSTRY ANALYSIS: STATE OF LOUISIANA Prepared for State of Louisiana, Louisiana Department of Economic Development April 2, 2019 Executive Summary The State of Louisiana, through the Louisiana Department of Economic Development, formally engaged1 Spectrum Gaming Group (“Spectrum,” “we” or “our”) to undertake a “comprehensive gaming industry analysis” regarding all forms of State-regulated gambling2 in Louisiana. The following summarizes our findings and recommendations. A. Analysis of Revenue by Gaming Sector In the big picture, the performance of all forms of legalized gambling in Louisiana except the Lottery has been in decline since 2008. The performance of each sector over that period: Casino-racino (gross gaming revenue, all sectors combined): - 1.5 percent Video poker (gross gaming revenue): - 3.6 percent Charitable gaming (contributions): - 36.0 percent Lottery (sales): + 31.4 percent Pari-mutuel (purses): - 14.7 percent Casino gaming is the dominant sector of Louisiana’s State-regulated gambling industry. The performance in total and by sector is shown in the following chart. Louisiana casino gross gaming revenue by sector, 2004-2018 $3,000 $2,500 $294 $317 $282 $289 $419 $367 $366 $198 $340 $337 $338 $351 $347 $339 $2,000 $300 $1,500 $1,888 $1,888 $1,928 $1,928 $1,927 $1,927 $1,938 $1,938 $1,764 $1,764 $1,804 $1,804 $1,836 $1,836 $1,782 $1,782 $1,714 $1,714 $1,673 $1,673 $1,654 $1,654 $1,648 $1,648 $1,633 $1,633 $1,567 $1,567 $1,000 $1,567 $1,567 $500 Gross Gross gaming revenue (M) $409 $402 $402 $390 $387 $387 $384 $380 $233 $366 $353 $353 $350 $345 $315 $- 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Racinos Riverboat Land-Based Source: Louisiana Gaming Control Board During the 2017-2025 period, the 20 State-regulated casinos (riverboat, land-based and racetrack slots combined) are projected to create or support an annual average of: 1 Spectrum began project work in January 2019. 2 Per the RFP issued by LED, this study specifically excludes Native American casinos, which are not regulated by the State of Louisiana and whose performance data are not publicly reported. Comprehensive Gaming Industry Analysis: State of Louisiana ii 47,647 total jobs (direct, indirect, induced) $2.8 billion of personal income $3.8 billion of value added An additional 1.3 jobs for every one of their workers The largest contributor to these totals is the riverboat sector, with 75 percent of the employment and value-added impacts. Beginning in 2020, we assumed certain changes to the Louisiana gaming environment to illustrate the economic impacts of what Spectrum believes would be realistic additional capital investments totaling $1.28 billion in the industry. They include: The development of a $350 million expansion at Harrah’s New Orleans that includes a second hotel (which the company is, in fact, considering); Two riverboat casinos would move on land, one in 2020 and one in 2021; One riverboat would relocate to the Northshore of Lake Pontchartrain and one would relocate to the Northeast market area, with construction beginning in 2022; these two boats are assumed to be open in 2023; and We further assume that changes in the tax structure encourage additional investment in Louisiana operations, growing revenue at enhanced properties. These changes induce increases in employment and revenues and, consequently, taxes and fees. Additionally, the changes envisioned would require both construction spending and purchases of new furniture, fixtures and equipment (“FF&E”) which total $950 million and $330 million from 2020 through 2025, respectively. The changes in the gaming environment result in this scenario diverging from the baseline in 2020. Over the period of divergence (2020-2025) the future scenario creates or supports an annual average: 8,964 more jobs $1.3 billion more business revenues $579 million more personal income Additional net new economic activity of $830 million The 2014 opening of Golden Nugget has made Lake Charles the top-performing casino market in Louisiana, while the Shreveport-Bossier City market has been hurt by the tribal casinos in Oklahoma. The following chart segments the casino industry performance by market. Comprehensive Gaming Industry Analysis: State of Louisiana iii Louisiana casino gross gaming revenue by market, 2004-2018 $3,000 $113 $161 $160 $142 $135 $127 $125 $2,500 $142 $116 $144 $146 $150 $147 $136 $98 $651 $642 $662 $839 $2,000 $880 $898 $930 $618 $684 $668 $652 $643 $694 $497 $455 $1,500 $843 $852 $828 $738 $707 $827 $739 $749 $712 $757 $681 $726 $816 $676 $835 $1,000 $230 $243 $218 $274 $192 $280 $191 $196 $285 $309 $288 $280 $273 $199 $187 $500 $723 Gross Gross gaming revenue (M) $673 $665 $650 $631 $628 $615 $597 $580 $573 $560 $557 $550 $550 $525 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ALL New Orleans Baton Rouge ALL Bossier/Shreveport Lake Charles Other Markets Source: Louisiana Gaming Control Board Louisiana’s video poker industry as a whole is in decline since its high point in 2009. While the truckstop and OTB segments have generally held steady, the performance at bars and restaurants has decreased. Smoking bans, more gaming options, and shifting population are causes of declines. Louisiana video poker revenue by venue type, 2009-2018 $700 $2.3 $40.4 $2.1 $1.7 $1.5 $1.3 $1.3 $600 $40.3 $42.1 $134.6 $42.3 $42.0 $44.8 $116.3 $108.2 $500 $95.5 $91.3 $89.7 $61.3 $49.5 $45.2 $38.5 $37.8 $37.3 $400 $300 $435 $406 $413 $402 $404 $411 Gross Gross gaming revenue (M) $200 2009 2011 2013 2015 2017 2018 Truckstops Restaurants Bars OTBs Hotels Source: Louisiana Gaming Control Board Charitable gaming contributions to participating organizations, and the number of those organizations benefiting, are in decline. Reasons for this decline include the limited appeal of charitable gaming to younger players, smoking bans, and declining population in some areas where charitable operations exist. Comprehensive Gaming Industry Analysis: State of Louisiana iv Louisiana charitable organizations and contributions, 2007-2018 700 $30 600 500 $25 400 $20 300 200 $15 Contributions (M) No. Organizationsof 100 0 $10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Organizations Contributions in Millions Source: Office of Charitable Gaming Louisiana Lottery sales have continued to grow over time and, as discussed in Chapter IV of this report, have significant upside if the minimum transfer requirement to the State is relaxed. Louisiana lottery sales, 2004-2018 $600 Instant Lotto ON LINE Pick 3 ON LINE Easy5 ON LINE Powerball ON LINE Cash Quest ONLINE Pick 4 ON LINE Mega Millions ON LINE Raffles $500 $400 $300 Sales Sales (M) $200 $100 $- 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Louisiana Lottery Despite the overall decline of the pari-mutuel industry nationwide and in Louisiana, supplements from racetrack slots have enabled the performance of Louisiana’s thoroughbred-racing industry to compare favorably with non-racetrack-slot states and with national trends, except in average purse size. B. Future Threats that May Impact Louisiana Gaming Some threats to Louisiana’s gaming industry are societal and others are specific to the industry or the state itself, or both. Casino operators are concerned about generational change, specifically that their current base of mostly older players will not be replaced by younger players. An analysis of Louisiana demographic trends for the 2020-2030 period shows a drop in the population ages 55-64. The Millennial generation (at the widest range, those born between 1976-2004) has less interest in slots and table games and is more attracted to casinos for the non-gaming entertainment, food and beverage. One survey shows that only Comprehensive Gaming Industry Analysis: State of Louisiana v half as many Millennials as Baby Boomers say gambling is an important consideration in planning a night out – the biggest disparity among 28 potential entertainment activities. Meanwhile, technology is spawning new ways to gamble, including internet gaming, sports betting (including mobile and in-game wagers), and skill-based gaming. This could lead to a diversification of gaming verticals in which the total gambling budgets of consumers are divided among more choices. This could be an opportunity for casinos or it could be a threat, depending on the State’s public policy on these emerging forms of gaming and the industry’s acceptance of them. The casino industry continues to consolidate. While consolidation offers greater efficiencies for multi-property, multi-state operators, it also requires such operators to evaluate which properties should receive the most reinvestment dollars. By definition, operators have a responsibility to invest where the potential returns are greatest. This means that Louisiana casinos compete for capital against their sister properties, and Louisiana casinos are not necessarily well positioned to compete in that arena, particularly under current rules. Of note, Louisiana operators Boyd Gaming, Caesars Entertainment, Churchill Downs, Eldorado Resorts, Landry’s, and Penn National also operate properties in Mississippi, which has a lower gaming-tax rate and does not tax free play. The Mississippi casinos benefit from a significantly lower gaming tax rate than in Louisiana; after fees and taxes, a Mississippi casino in Bay St. Louis pays an effective gaming tax of 11.6 percent vs. 26 percent for a representative casino in Louisiana. The net tax advantage means that a multi-property owner making investment decisions has incentive to improve the Mississippi casino over the Louisiana casino, and is similarly incented to market the Mississippi casino to Louisiana residents.