Union Gaming Analytics Operator Update

The UGA Index for the period ending Aug. 31, 2013, was up 5.1 percent sequentially to 252.4 from 241.8 on July 31, 2013. As an illustrative example, if an investor bought $100,000 of the index on July 31, the investment would hypothetically be worth $105,116 on Aug. 31. Note, however, that the UGA Index has been compiled for illustrative purposes only and is not being offered as an investment vehicle by Union Gaming Analytics or any affiliated entities.

In comparing the UGA Index with broader markets, the Dow Jones Industrial Average was down 4.4 percent sequentially and the S&P 500 was down 4.4 percent sequentially.

Note: Our index no longer includes Ameristar Casinos. In mid-August, Pinnacle Entertainment (PNK) announced that it had completed its acquisition of the company.

Top index performers include the following:

Galaxy Entertainment was up 15.5 percent sequentially and contributed 26 points to the index. In the month, Galaxy reported strong 2Q13 results led by increased growth in its mass-market segment.
Pinnacle Entertainment was up 11.4 percent sequentially and contributed 0.1 points to the index. The company closed on its seemingly accretive acquisition of Ameristar Casinos during the month.
Caesars Entertainment was up 33.7 percent sequentially and contributed 0.3 points to the index. During the month, Caesars announced that it had entered into an agreement to sell its 175-acre Caesars Golf Macau for $438 million. The stock trades largely on balance sheet issues and optionality to online gaming.
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Underperformers include the following:

Boyd Gaming was down 8.9 percent sequentially and contributed 0.1 points to the index. Early in the month, BYD raised additional equity capital (sold 16.5 million shares at $12/share).
Isle of Capri was down 6 percent sequentially and contributed zero points to the index. The company’s new property, Lady Luck Casino at Nemacolin (which opened July 1), underperformed initial expectations. We think this is related to entrance fee confusion, as the nature of its license (Category 3) in Pennsylvania requires guests, who are not resort guests, to pay to enter the casino.
Genting Singapore was down 0.8 percent sequentially and contributed 6.3 points to the index. The company reported 2Q13 results in the month. The results were impacted by “bad luck” (lower-than-expected win rate).
The month of August featured earnings from a few operators in the early part of the month. Across the regional landscape, gaming revenue in July was similar to June, which was the worst month of the year since February. It isn’t clear why regional revenue trends have underperformed in recent months. In our view, it could be the continued impact of the payroll tax—an impact that had been muted in prior months by delayed tax returns. On the legislative front, it was a pretty quiet month as many state legislative sessions remain on summer break. In Ohio, a key issue is the state looking to shutdown Internet cafés.

MGM and MPEL 2Q13 Earnings
MGM’s 2Q13 results were above consensus expectations on both the topline and EBITDA. The strong results were driven by strength on the Las Vegas Strip and Macau. The company’s regional assets mirrored the tepid trends we have observed recently. MPEL 2Q13 results were also above expectations. The company’s gaming segments posted growth that outpaced the market.

Macau August Gaming Revenues
In August, gross gaming revenue (GGR) grew 17.6 percent, to MOP30.7billion ($3.8billion) against a +5.5 percent comp. On a year-to-date basis, Macau GGR is now up 16.2 percent.The weather comp was essentially neutral, as there was a Signal 8 typhoon in both August of 2013 and 2012.

M&A Activity
Pinnacle Entertainment (PNK) completed its acquisition of Ameristar Casinos. Pinnacle acquired all of the outstanding common shares of Ameristar for $26.50 per share in cash, for a total EV of $2.8 billion, including debt of $1.9 billion and cash on hand of $116 million as of Sept. 30, 2012. In addition, Pinnacle Entertainment entered into a definitive agreement to sell the Lumiere Place Casino, Hotel Lumiere, the Four Seasons Hotel St. Louis and the related excess land parcels to Tropicana Entertainment (private). For reference, to alleviate FTC’s concerns, PNK has agreed to divest Lumiere Casino and the Four Seasons Hotel in St. Louis, as well as Ameristar’s Lake Charles project in Louisiana.

Regional Gaming Revenue Trends
In July, (July results are reported in August), regional state gaming revenue largely showed negative growth (IA -5.1 percent, IN -7.4 percent, MO -6.3 percent, AC -3.6 percent, IL -7.4 percent, MS -6.0 percent). Overall, July results were similar to June. Recall that June was the worst month of the year since February in most regional gaming markets.

Las Vegas Strip gaming win was down 14.4 percent to $511.4 million, against a challenging comp (+27.5 percent). On a positive note, we again saw growth off the Las Vegas Strip in the Las Vegas locals (+1.8 percent) and downtown (+4.5 percent) markets.

Legislative Developments
In Iowa, a local casino referendum in Greene County passed by a large margin. The passage of the referendum was just a small step in the right direction for a casino. Iowa would still need to issue an additional gaming license. In addition, Linn County passed a successful referendum to host a casino earlier this year, and it will also be vying for a license, if one is approved. In Florida, some Internet cafés are reopening, and, to circumvent an earlier ban, they are now offering prizes of minimal value, such as cookware. An earlier ban sought to remove cash or gift cards as prizes. In Ohio, a group is looking to gather enough signatures to get a referendum on the fall ballot to repeal the upcoming Internet café ban.

What to Look for in Next Month’s Index
In next month’s September index, the earnings calendar is relatively light.The only company that is expected to report is Isle of Capri. As we head into fall, we will see if regional trends begin to show any improvement. On the Las Vegas Strip, we are seeing increased airlift capacity coming into the market in the next few months, which should benefit the market.

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