Commonwealth of Virginia, Expanded Legalized Gaming Report Richmond, VA Prepared for: JLARC – Joint Legislative Audit and Review Commission July 2019 Prepared by: The Innovation Group 400 North Peters Street Suite 206 New Orleans, LA 70130 504.523.0888 www.theinnovationgroup.com Table of Contents INTRODUCTION......................................................................................................................... 1 COMPETITIVE ENVIRONMENT ............................................................................................ 3 EXISTING ..................................................................................................................................... 3 Maryland ................................................................................................................................. 3 West Virginia .......................................................................................................................... 8 Delaware ............................................................................................................................... 10 Pennsylvania ......................................................................................................................... 13 North Carolina ...................................................................................................................... 14 PROPOSED .................................................................................................................................. 14 GAMING MARKET ANALYSIS ............................................................................................. 16 METHODOLOGY ......................................................................................................................... 16 MARKET CARVE-OUT ................................................................................................................ 19 MODEL CALIBRATION ................................................................................................................ 22 FORECAST SCENARIOS ............................................................................................................... 23 SCENARIO 1: HHR BENCHMARK FORECAST .............................................................................. 24 SCENARIO 2: BASELINE CASINO FORECAST ............................................................................... 26 SCENARIO 2A: HYPOTHETICAL NORTH CAROLINA AND TENNESSEE IMPACT ............................. 29 SCENARIO 3: CASINO FORECAST WITH NOVA .......................................................................... 30 SUMMARY NGR RESULTS AND TAX SENSITIVITY ANALYSIS .................................................... 33 SOURCE OF REVENUE ANALYSIS: IN-STATE VS. OUT-OF-STATE ................................................ 36 RETURN-ON-INVESTMENT (ROI) ANALYSIS .............................................................................. 39 Methodology ......................................................................................................................... 39 Summary Results ................................................................................................................... 42 Employment Illustration........................................................................................................ 46 HHR IMPACT SUMMARY ........................................................................................................... 46 HISTORICAL HORSE RACING TRENDS............................................................................ 48 ARKANSAS ................................................................................................................................. 48 KENTUCKY................................................................................................................................. 51 WYOMING .................................................................................................................................. 56 SUMMARY .................................................................................................................................. 57 VIRGINIA HORSE RACING ANALYSIS .............................................................................. 58 VIRGINIA HORSE RACING BACKGROUND ................................................................................... 58 VIRGINIA TRENDS ...................................................................................................................... 59 NATIONAL TRENDS .................................................................................................................... 64 Handle ................................................................................................................................... 64 Purses .................................................................................................................................... 65 Breeding ................................................................................................................................ 67 REGIONAL TRENDS .................................................................................................................... 68 HHR AND CASINO IMPACT ANALYSIS ....................................................................................... 74 The Innovation Group Project #025-19 July 2019 Page i IGAMING .................................................................................................................................... 77 U.S. IGAMING LANDSCAPE ........................................................................................................ 77 Delaware ............................................................................................................................... 78 Nevada .................................................................................................................................. 78 New Jersey ............................................................................................................................ 79 Pennsylvania ......................................................................................................................... 79 West Virginia ........................................................................................................................ 79 METHODOLOGY ......................................................................................................................... 80 Assumptions .......................................................................................................................... 80 Calibrating a Model to Actual New Jersey Revenues ........................................................... 80 Virginia iGaming GGR Projections...................................................................................... 80 SPORTS BETTING .................................................................................................................... 83 ASSUMPTIONS ............................................................................................................................ 83 OPERATING PARADIGMS ............................................................................................................ 83 U.S. SPORTS BETTING LANDSCAPE ............................................................................................ 86 Nevada .................................................................................................................................. 87 Delaware ............................................................................................................................... 87 New Jersey ............................................................................................................................ 87 Mississippi............................................................................................................................. 87 West Virginia ........................................................................................................................ 87 Pennsylvania ......................................................................................................................... 87 Rhode Island ......................................................................................................................... 88 New Mexico ........................................................................................................................... 88 New York ............................................................................................................................... 88 States Close to Legal Sports Betting ..................................................................................... 88 RESEARCH AND MODELING ....................................................................................................... 88 WORLDWIDE MARKETS AND COMPARATIVE PERFORMANCE ..................................................... 89 Revenue Comparables .......................................................................................................... 90 THE INNOVATION GROUP’S SPORTS WAGERING SURVEY .......................................................... 93 Methodology / Setup ............................................................................................................. 93 Demographics ....................................................................................................................... 93 Wager Propensity and Frequency .......................................................................................