Carson Valley Casino Market

I analyzed Nevada Gaming Control Board (NGCB) gaming abstract data between FY2013 and FY2017 for casino operators with gaming revenue greater than $1M to develop insight into the Carson valley casino market financial model. I reviewed market level financial statements and data points published by the NGCB. I also developed my own calculations as follows:

NGCB Data

Balance Sheet

Combined Income Statement

Casino Department Income Statement

Rooms Department Income Statement

Food Department Income Statement

Beverage Department Income Statement

Other Income Department Income Statement

Number of Employees by Year

Hotel Room Availability and Occupancy

Operating and Financial Ratios

My Calculations

Sources and uses of cash flow

Debt (leverage) metrics

EBITDA and free cash flow

Total labor costs as percentage of revenue

Slot volume and win trends by day and month

Overview of The Market

The market is primarily a gaming market as gaming revenue has comprised approximately 65% to total revenue for several years with the majority of gaming revenue being slot revenue (approximately 94% of total gaming revenue between January 2014 and April 2018). Within the slot department, approximately 70% of market level volume is generated by multi denominational games. Remaining revenue in FY2017 consists of room  (7.1%), food (15%), beverage (6.5%) and other revenue (6.3%). I characterize the market as a "market share market" due to the fact that overall market level revenue growth has been flat since FY2009 with the number of properties and hotel rooms being relatively stable for several years.

Profitability

For FY2017, total revenue less, cost of sales (13.1%), departmental expenses (44%) and G&A (35.4%) equaled pretax income of 7.5%. Departmental costs and margins were relatively stable between FY2013 and FY2016 resulting in pretax income of 4.8%, 2.4%, 3.8% and 5.6% indicating that operators operate in a low margin environment. The market generated positive EBITDA between FY2013 and FY2017 at a range of 10% to 13% .

Departmental profits are primarily generated by the casino department and essentially the slot department. Casino department profits dominate overall profitability as the casino department contributed between 91% to 95% of total property departmental income between FY2014 and FY2017. The biggest operating cost is labor cost as total departmental and G&A labor costs ranged between 21% to 22% and 9% to 10% of total revenues between FY2014 and FY2017.

Cash Flows

Carson Valley casinos generated cash flow from operations between FY 2014 and FY2017, invested in land & improvements, buildings, furniture & equipment, leasehold improvements and CIP while borrowing, as long term debt increased in FY2017 and FY2015 and decreased in FY2016 and FY2014. The market also generated free cash flow in each of FY2014 - FY2017, defined as net income plus depreciation before maintenance and general cap ex.

Balance Sheet

The balance sheet shrunk between 2007 to 2011 and remained relatively stable through FY2016 ($103.2m) before expanding to $114.2m in FY2017 primarily due to an investment in fixed assets. Working capital has been positive between FY2013 and FY2017 at a working capital ratio of 1.8 to 2.0 while cash has comprised approximately 16% to 20% of total assets. Debt to total capital has ranged between 47% to 60% between FY2013 and FY2017 while net debt to EBITDA has ranged between 1.7 x to 2.4x between FY2013 and FY2017. Interest coverage is 7.8x for FY2017 and has ranged from 5.3x to 7.1x between FY2013 and FY2016. Debt primarily consists of mortgage debt, debentures & bonds and notes.

Returns on Capital

Carson Valley casinos generated positive ROIC (8.5%, 10.3%, 14% and 17%), ROA (6.7%, 8.4%, 10.8%, and 13%) and ROE between FY2014 and FY2017. My DuPont ROE calculation (defined as net income divided by revenue x revenue to total assets x total assets to equity = ROE) indicates that between FY2014 and FY 2017 the majority of ROE is attributed to leverage based on total assets to equity levels (3x to 4x between FY2014 and FY 2017) as pretax operating margins were narrow (2.4% to 7.5% between FY 2014 and FY2017) and asset turnover declined (1.56x, 1.51x, 1.45x and 1.34x between FY2014 to FY2017).

Room Statistics

Occupancy in the market has run between 50% and 55% between FY2014 and FY2017 with trough to peak occupancy running between 32% and 72% between winter and summer periods. REVPAR has averaged $43, $38, $35 and $33 for FY2017, FY2016, FY2015 and FY2014 while the room supply has remained stable. Average slot, food and beverage revenue per room has remained stable between FY2014 and FY2017.

Recent Trends and Conclusion

Slot volume has increased since mid calendar 2017 through the latest NGCB data point, May 2018 resulting in an upward Y/Y trend in WPU creating the possibility of incremental top line revenue, flow through and margin expansion. See Figures 1 and 2 below. I will wait and see what is reported in the FY2018 NGCB abstract results. The results discussed here are based on aggregate numbers for 15 licensees with average assets of $7.5M and average revenue of $10.2M for FY2017.  Individual operators will perform better and worse than the averages and have stronger and weaker balance sheets, due to differences in business strategy, asset mix, management ability, property history and legacy issues, among other factors that affect casino financial models and results. The market has generated cash flow, pretax income, EDITDA and returns on capital despite flat top line revenue for several years. The market is expected to remain competitive and in a "market share mode." See below for FY2017 financial model data.

For a view of select data and charts that accompany this article see:

https://www.slideshare.net/GreggCarlson1/carson-valley-casino-market-financial-model-104134223?qid=7dc68030-c7ae-4a01-858f-fea9cbb3f521&v=&b=&from_search=1

Gregg Carlson