Delaware Gaming Market Overview Report by Lisa Mason

Delaware gaming market overview Challenges ahead

October 2009

Table of contents

Executive summary ....................................................................................................................................... 1 Our approach ................................................................................................................................................ 2 Market overview ............................................................................................................................................ 3 Delaware market demand ............................................................................................................................. 7 Impact of table games and sports betting ................................................................................................... 14 Delaware market outlook ............................................................................................................................ 15

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Executive summary

The Delaware market The Delaware market is currently served by three casinos which feature more than 8,000 slot machines. Recently the state of Delaware approved table games and sports wagering for its casino locations. The state is currently undertaking a review of required table game regulations and finalizing tax structure prior to bringing final legislation approving the implementation. After a strong period of growth, the performance of the Delaware casinos has been declining since 2007. This decline was in part due to the recent expansion in casino offerings in Pennsylvania, as well as increased promotional activity by the Casinos in Atlantic City. The level of competition will also be intensifying due to the fact that the State of Maryland recently approved the development casinos in the state and the increasing probability of table games being added to Pennsylvania casinos. This increased competition is of concern as Delaware casinos have a high reliance on out-of-state gamers or customers.

Potential market demand Due to the population size of the state of Delaware, there is not enough potential demand from inside the state to maintain the current level of performance of the three casinos. The difference between the existing performance levels of the casinos and the potential gaming demand from in-state customers or gamers is approximately $170 million or about 40% less than their current performance. This gap is very significant and underscores the reliance Delaware has on out-of-state customers and, thus, the significant exposure Delaware has to increased competition in its neighboring states. Recent performance of the Delaware casinos has started to show the impact of increased competition as the total revenue and revenue per machine has been declining since 2007. With the addition of casinos in the state of Maryland, the potential gaming demand for the state of Delaware casinos is significantly reduced. Though the development of table games in the state of Delaware will provide a competitive advantage to Delaware state casinos over its slot-only competition in Maryland (assuming Pennsylvania adds table games1) this advantage is limited. This is due to the fact that slot players and slot revenue vastly outweighs table game players and table game revenue at casinos. Additionally, the competitive advantage that table games will bring to Delaware casinos can be easily removed by states permitting table games at its casino sites.

Conclusions The increased out-of-state competition will continue to erode the performance of Delaware state casinos, as the competing casinos will re-capture its local customer base at the expense of Delaware. This increased market pressure and the relatively small domestic customer base will lead to continued decline in the performance of the existing casinos in the state. Adding new casino sites in the state will only further cannibalize a decreasing market and add significant pressure to the financial health of the existing casinos.

The Philadelphia Inquirer, September 12, 2009, â&#x20AC;&#x153;Odds are Improving for PA Table Games

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Our approach

Purpose of the report Deloitte was engaged to undertake an analysis of the market capacity for the three Delaware State Casinos, in light of the very significant market changes both within the state of Delaware and in its bordering states. Deloitte was also asked if the state of Delaware had excess gaming capacity to add additional casino sites.

Approach Deloitte engaged an independent gaming market analyst to undertake a study of the gaming demand in the state of Delaware and in the bordering states of Pennsylvania, Maryland and New Jersey, as well as a limited review of West Virginia. This study was completed by Meczka Marketing Research Consulting Inc. (“MMRC”), a firm with significant experience in casino and gaming analysis in North America. MMRC th issued their report to Deloitte on September 30 , 2009. Deloitte reviewed the findings in the market study and overlaid additional market analysis and observations to develop an outlook for the gaming market for the State of Delaware. MMRC undertook to determine the gaming demand for each of the three existing Delaware Casinos, this was accomplished by looking at the underlying gaming propensity for the population in the Casino’s catchment or market areas. These market areas were analyzed under a number of differing scenarios (including a 9-mile “exclusive” radius, 30-minute drive time and 60-minute drive time). For this study both Deloitte and MMRC used publically available data to compile our findings.

Market overview

Delaware Delaware is the second smallest state in geographic size in the United States and the fifth smallest state in terms of population size. The estimated adult population size of Delaware is 635,700. The state’s population has a higher average household income than the average for the United States ($54,610 vs. National Average of $41,994).

Delaware casinos Currently there are three gaming locations in the state of Delaware with more than 8,000 slot machines (approved slot machine capacity is 12,000). Description

Gaming Attributes

Other Attributes

183,000 square foot casino with 2,963 machines Delaware Park

The race track is the only thoroughbred track in the state and offers live racing from April to November

Dover Downs Hotel and Casino

Harrington Raceway and Casino

165,000 square foot casino with over 3,000 machines The track offers harness racing from October to April 140,000 square foot gaming space with over 2,000 machines The track offers harness racing from October to April

The location has an 18 hole golf course, as well as six dining options

The property has a four diamond hotel with 500 rooms and a spa. The property also offers seven restaurants. The property is also home to the Dover International Speedway, which hosts five NASCAR races

The property offers five restaurants

Delaware casino performance The three casinos in Delaware have seen declines in both total “win” (the amount the casino wins from its visitors) and win per unit. For the 12 months ending in June 2009, the three properties have experienced a total decrease of almost $44 million or 7.1%. Win

Prior Year

Decrease

Units

YOY % change

Daily Win per Unit

YOY% change

Delaware Park

$ 243,906,147

$ 271,875,400

($ 27,969,253)

(10.3%)

3,126

0.1%

$215

(8.7%)

Dover Downs

$ 212,225,560

$ 222,126,500

($ 9,900,940)

(4.5%)

3,072

14.3%

$190

(14.8%)

Harrington

$120,587,193

$ 126,677,500

($ 6,090,307)

(4.8%)

2,055

24.1%

$161

(21.8%)

Total

$576,718,900

$620,679,400

($ 43,960,500)

(7.1%)

8,266

10.5%

$192

(14.3%)

(Information in tables from public information sources – Delaware Lottery Commission)

Customer base – reliance on out-of-state gamblers Delaware’s three casinos have a high reliance on out-of-state gamblers. In Dover Downs Gaming & Entertainment Inc.’s annual report, they have indicated that approximately 70% of its club membership base is from out of state. In proprietary information Delaware Park shows an even higher rate of out-ofstate gamblers. The importance of out-of-state gamblers to the state’s casinos is also evidenced in tourism research undertaken by the State.2 In the last visitor profile study undertaken by the state (2007 Visitor Profile) gambling was noted as the fourth most popular activity for leisure visitors to the state. Twenty percent of visitors noted gambling as a key activity for their visit, this was higher than enjoying the beaches of Delaware (16%), but behind Dining (36%), Shopping (30%) and Entertainment (27%). The percentage of people visiting the state for gambling was substantially higher than the national average of 8% of travelers citing gambling as a key activity for leisure travel. The study also noted that the top three markets for all leisure trips in 2007 were Philadelphia (32.9%), Baltimore (13%) and Washington, DC (12.5%). In the 2006 Visitor Profile study3 gambling was the fourth highest activity, however the participation level was slightly higher at 22%.

Competitive landscape The key existing competitors to the Delaware market are in Pennsylvania and New Jersey, namely Atlantic City. In addition, the state of Maryland will be adding new gaming competition to the marketplace. West Virginia contributes some secondary competitive pressure to the Delaware’s casinos.

Pennsylvania competition Pennsylvania competition is currently Harrah’s Chester Casino and Racetrack, Philadelphia Park Casino, Sands Casino Resort, as well as the Hollywood Casino at Penn National Race Course. In March 2008 ground was broken on a new 200,000 square foot casino at Philadelphia Park, the new casino is scheduled to open in December of this year. In addition to these four casinos there is potential for two additional casinos to be developed in the Philadelphia area, namely the Sugar House Casino and a Foxwoods Casino. The two casinos within a 50-mile radius of the Delaware market are Harrah’s Chester (approximately 20 miles northeast from closest Delaware casino) and Philadelphia Park (47 miles). These two casinos have total win of more than $800 million and have over 5,700 slot machines combined currently. This number is expected to increase with the new Philadelphia Park. The other two eastern Pennsylvania casinos are the Sands Casino (77 miles) which opened in May 2009 and Hollywood Casino (82 miles) which opened in 2008. For the 12 months ending in June 2009 total win for Hollywood Casino was $250 million and for the two-month period ending June 2009, the Sands Bethlehem casino had a total win of $30 million. These two casinos have added over 5,200 machines to the marketplace.

Atlantic City Atlantic City features 11 casinos which had a total combined slot revenue win of almost $2.9 billion for the year ending June 2009. Every Atlantic City casino except for the Borgata property has seen slot win decreases. The combined decrease in slot win was over $445 million. All of the casinos have reduced slot machines with just under 6% of the total slot machines in the city being removed. The Atlantic City market has been negatively impacted by the increased competition from Pennsylvania. The declining performance of the Atlantic City casinos has put significant pressure on the viability of these 2 3

Delaware 2007 Visitor Profile, Issued in August 2008, D.K. Shifflet & Associates Ltd. Delaware Travel Barometer, 2006 Annual, Travel Industry Association of America

casinos. With as many as six of the 11 Atlantic City casinos being in or being threatened with a bankruptcy proceeding this year it is clear that the market is facing very tough challenges.4

Maryland On November 4, 2008, Marylanders voted on a state constitutional amendment to allow slot machine gaming. There are five proposed slot locations with a possibility of 15,000 slot machines or video lottery terminals (VLTs). The following four sites will have an impact on gaming revenue in Delaware: o

4,750 VLTs at a location in Anne Arundel County within two miles of Route 295 (an area including Laurel Race Course);

3,750 VLTs in Baltimore City, in a nonresidential area within one-half mile of Interstate 95 and Route 295, on city-owned land that is not adjacent to or within one-quarter mile of residential property;

2,500 VLTs at a location in Worcester County within one mile of the intersection of Route 50 and Route 598 (an area including Ocean Downs race course); and

2,500 VLTs at a location in Cecil County within two miles of Interstate 95.

West Virginia West Virginia has four casino sites across the state and does contribute some competitive pressure to the State of Delaware. Though these casinos are outside the normal drive time market analysis (90 minutes or less) from the Delaware state casinos, they do focus their marketing efforts into some of the same markets as the Delaware casinos. The location of most concern to the state of Delaware is the gaming facility in Charles Town which is owned and operated by Penn National gaming. Charles Town features a very large casino with over 5,000 slot machines (total win for the 12 months ending June 2009 was $441 million) as well as dining, entertainment and a recently opened hotel. This casino is just over an hourâ&#x20AC;&#x2122;s drive time of Baltimore and 90 minutes to Washington DC, as such it is a competitor to Delaware casinos in these metropolitan markets.

Overview of market performance The following table outlines as of June 2009, the total win and machines in each market. 2006 %

Win Atlantic City

$ 3,768,794,672

Delaware

601,703,900 14%

Pennsylvania*

Total

$ 4,370,498,572

86%

Machines 41,231

Win

86% $ 3,682,321,159

6,581 14% $ 47,812

0% $

2007 % 80%

Machines 35,615

Win

2008 %

75%

$ 3,325,780,508

72%

Machines 34,123

Win

71%

$ 2,880,360,474

2009 %

632,221,400 14%

7,236 15% $

620,679,400 13%

7,884 16% $

576,718,900 14%

271,603,761

4,825

657,953,994

5,785

706,180,999

$ 4,586,146,320

47,676

10%

$ 4,604,413,902

14%

47,792

12%

Machines

69%

33,466

8,266 16%

17%

$ 4,163,260,373

8,747 50,479

* - Eastern based Casinos

In the broader market Atlantic City has shed both market share and machines. Delawareâ&#x20AC;&#x2122;s market share has remained relatively constant though they have increased their portion of machines in the marketplace.

Total win and win per unit The win per unit per day (WPUPD) is a key industry statistic for looking at the relative profitability of each slot machine. A casino or market that has a high WPUPD would indicate that there is high market demand and that there is potential for adding more gaming capacity. A casino or market with low WPUPD would indicate low demand and is an indicator that there is excess capacity.

Suzette Parmley, The Philadelphia Inquirer, February 19, 2009.

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% 66%

17%

Delaware – This market has seen decreasing win since 2007 and for the prior 12 months ending June 2009 win was down 7.1% and WPUPD is down 14.3%. Atlantic City – This market has seen decreasing slot win and WPUPD since 2007. For the 12 months ending June 2009, Atlantic City’s WPUPD decreased 7.8%. Eastern Pennsylvania – The two previously existing casinos (Harrah’s Chester and Philadelphia Park) increased machines, and in the case of Philadelphia Park WPUPD also increased, while Chester’s remained flat. The Sands Bethlehem Casino opened in 2009 and the impact of this added capacity is not yet known.

Key observations •

The declining trends in Atlantic City and Delaware began prior to the economic downturn.

•

The declining trends in those two markets parallel the opening of Philadelphia Park (December 2006) and Harrah’s Chester (January 2007).

•

Though total win has been increasing in Pennsylvania, it has not increased at the rate of the units added in the state.

•

The significant decline in total win in Atlantic City has seen a retraction in total slot machines in the city.

Total Win and Win per Unit are declining in Delaware and this could be a very telling sign that the market has reached capacity. These trends started prior to the economic downturn.

Delaware market demand

Potential demand MMRC’s approach to determine potential demand involves the following factors: Market size – This is the number of adults within a geographic area Gaming propensity – This measures the percentage of the adult population within each market segment that is likely to participate in gaming activities Gaming frequency – This relates to the likely number of times gamers will visit a casino Win per visit – This relates to the average amount of money the casino can expect to win from each gamer. There is a difference between potential demand and realizable demand. This is due to the fact that not all potential demand can be realized due to a variety of reasons, including capacity constraints. Capacity constraints occur due to the fact that casino demand is not evenly allocated. It is estimated that 60% of casino business occurs on the weekends. Additionally, evening demand and holiday demands are higher than week day demand. These peak periods in demand can surpass the capacity of the casino and, thus, some potential demand goes unfilled. Other factors that may impact a casino from realizing the full potential demand are efficiency of operations, jurisdictional requirements and quality of devices.

Potential demand is different from realizable demand. There are a number of reasons as to why realizable demand will lag potential. It is not uncommon that potential demand will be 20% greater than the demand actually realized by the casino.

Due to the above, actual demand will be less than potential demand. In some cases realized demand may only be 60% - 80% of potential demand.

Market demand MMRC undertook the market demand study utilizing a number of procedures or views to determine the potential market demand for the current Delaware Casinos, as well as the proposed casinos both in Delaware and Maryland. For the purposes of this report we will focus on a few key market demand analysis.

Importance of location For the slot market the most critical factor for gamers in choosing where to play is the location or convenience of getting to the casino.5 In addition there have been documented examples of “Instate Pride Play”, where gamblers prefer to gamble in their own state to ensure that the benefits of their gambling dollars benefit their home state. One only needs to look at the recent history of Atlantic City, to see the importance of convenience and locality to the gaming consumer. The total win in Atlantic City has decreased as more local gaming options have taken market share away from it.

Source: Glenn Goulet, Intralot S.A. + Gaming Strategies + Insights, LLC

Domestic demand The domestic or in-state only potential demand for the state of Delaware was estimated to be $406 million (for slots only). This demand was based on an estimated instate adult population of 635,688 persons. It is estimated that 35% of these individuals would visit a casino at various levels of frequency. There is not sufficient This level of potential demand is approximately $170 million less than demand within the state the current state win. In other words, the potential demand is 40% of Delaware to support less than the actual achieved results of the existing three casinos. It the three existing casinos should be stressed however that this is potential demand and not at current levels. realizable demand, which as noted before is also less than the actual Additionally there is not potential demand. sufficient realizable demand to support the casinos when you factor Delaware and Maryland Eastern Shore demand in Marylandâ&#x20AC;&#x2122;s eastern The potential demand for this area was determined to be shore. approximately $576 million, which is currently the level of win at the three Delaware casinos. However, as we have noted previously, the actual realizable demand would be less than the estimated potential demand for this market.

Drive time analysis MMRC undertook a number of drive time analyses (30, 45 and 60-minute drive time) from the existing and proposed casino sites. The markets with existing overlap include the Delaware Park and Harrahâ&#x20AC;&#x2122;s Chester market as well as the Baltimore market as such for purposes of the market analysis they are considered one market. There becomes some additional market overlap in the state of Delaware once you widen the market segment to the 45-minute drive time, and there is significant market overlap once you reach the 60-minute drive time range.

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The following are the summaries of the potential demand estimates: 30-minute drive time analysis 2010 Projected Potential Gaming Demand 30 Minute Drive Time Market Potential Demand Delaware Park/Harrah's Chester/Cecil $ 325,599,975 Dover Downs/Harrington Raceway $ 63,672,922 Proposed Ocean City $ 23,049,477 Proposed Baltimore/Anne Arundel $ 840,691,925 2010 Estimated Gaming Demand $ 1,253,014,298 Source: Pcensus & MM/R/C

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45-minute drive time analysis 2010 Projected Potential Gaming Demand 45 Minute Drive Time Market Delaware Park/Harrah's Chester/Proposed Cecil Dover Downs/Harrington Raceway Proposed Ocean City Proposed Baltimore/Anne Arundel 2010 Estimated Gaming Demand Source: Pcensus & MM/R/C

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Potential Demand $ 857,518,378 $ 107,303,870 $ 63,871,096 $ 1,586,816,353 $ 2,615,509,697

60-minute drive time analysis 2010 Projected Potential Gaming Demand 60 Minute Drive Time Market Potential Demand Delaware Park/Harrah's Chester/Cecil County $ 1,967,773,544 Dover Downs/Harrington Raceway $ 198,414,728 Proposed Ocean City $ 133,269,145 Proposed Baltimore/Anne Arundel $ 2,619,790,346 2010 Estimated Gaming Demand $ 4,919,247,764 Source: Pcensus & MM/R/C

Key observations •

The summaries show the location with the largest potential market segment is that of the proposed Baltimore and Anne Arundel sites. This market is currently served by out-of-state casinos such as Delaware’s and Charles Town West Virginia.

•

The current actual win level of the three Delaware casinos plus Harrah’s casino is approximately $950 million. The potential gaming demand estimates (which are higher than the actual demand that could be realized) does not reach the current win levels until you extend the market out to 45 minute drive time.

Polygon market MMRC undertook a polygon analysis for the three existing Delaware casinos as well as Harrah’s Chester and the proposed Maryland locations. Under this analysis, the casinos’ market ranges are stretched until they touch another casino’s market. This effectively looks at the potential demand of each casino based upon proximity.

The following outlines the potential slot gaming demand. 2010 Gaming Demand Polygon Markets Market Potential Demand Dover Downs $ 103,722,870 Harrington Raceway $ 98,616,421 Delaware Park/Harrah's Chester $ 587,425,480 Proposed Baltimore/Anne Arundel $ 1,564,900,002 2010 Estimated Gaming Demand $ 2,354,664,773

Key observations •

Under this analysis the existing casinos potential demand is approximately $790 million. This is significantly lower than the current win at the casinos of approximately $950 million.

•

Delaware will lose a significant amount of its current wagering to the proposed casino operations in the Baltimore area.

Other analysis MMRC also reviewed the adult population to gaming position (or machine). This analysis is another viewpoint on market size. As noted previously overlap in the markets starts to occur at the 45-minute range and is significant at the 60-minute range. Ratio of Adult Population to Positions Casino/ Community Delaware Park/Harrah's Chester Dover Downs/Harrington Baltimore/Anne Arundel Ocean City

Adult Population within 30 Minutes 509,494 99,635 1,353,089 37,098

Total Gaming Positions 5,991 5,127 8,250 2,500

1,999,316

21,868

Total

Ratio of Primary Adult Population to Positions Ratio 85 19 164 15 91

Sources: PCensus, Delaware Lottery Commission, Pennsylvania Gaming Control Board

Casino/ Community Delaware Park/Harrah's Chester/ Cecil County/Philadephia Park Dover Downs/Harrington Baltimore/Anne Arundel Ocean City Total

Adult Population within 60 Minutes

Total Gaming Positions

Ratio

3,079,145

11,403

270

310,447 4,099,411 208,538

5,127 10,750 2,500

61 381 83

7,697,541

29,780

258

Sources: PCensus, Delaware Lottery Commission, Pennsylvania Gaming Control Board

Ratio of Adult Population to Positions Casino/ Community Delaware Park/Harrah's Chester/ Cecil County Dover Downs/Harrington Baltimore/Anne Arundel Ocean City

Adult Population within 45 Minutes

Total Gaming Positions

Ratio

1,341,833

8,491

158

167,908 2,553,972 102,800

5,127 8,250 2,500

33 310 41

4,166,513

24,368

171

Total

Sources: PCensus, Delaware Lottery Commission, Pennsylvania Gaming Control Board

Key observations •

What is clear from the analysis is that the locations in the southern portion of the state have the lowest ratio of adults to gaming position than any other market. Delaware Park has the highest ratio of adults to gaming positions in Delaware; however, its market has overlap with Pennsylvania based casinos, as well as the proposed Cecil County casino.

•

The Delaware market ratios are significantly lower than that of the proposed Baltimore and Anne Arundel market.

Impact of table games and sports betting

Table games as a competitive advantage The introduction of table games in Delaware will provide a competitive market advantage for its casinos over Delawareâ&#x20AC;&#x2122;s neighboring competitors of Maryland and Pennsylvania (for the time being) as only Atlantic City offers table games in the market currently. However, the degree of impact or advantage that table games will provide must be considered. There have been some studies that show the level of acceptance of slot games is higher for table players than table games are for slot players. In other words there is a greater portion of table game players that will play slots as a second choice. Thus if slots are offered in a convenient local venue table game players will play slots as a second choice at a higher frequency than slot players will play table games. Therefore as neighboring states add slot venues the ability for Delaware casinos to pull table game players becomes more difficult as they will on some occasions substitute slots due to convenience.

Table games impact In Atlantic City table games have traditionally averaged between 25% and 30% of the total casino win, as slot and video terminal players far exceed table game players. Other casinos in smaller markets can see table games represent an even lower percentage of win. Mountaineer added table games and a poker room in 2008 and saw a table win of approximately 20% of its previous slot win. As such the casino business is still substantially a slot-driven business. One must also remember that table games have a higher cost structure associated with it due to the labor costs involved in running and supervising the games. These costs mean that the margins are generally lower than slot machines. One must also consider the impact of gaming substitution. This is where gamblers switch their betting dollars from slot machines to table games. Some of the increase in table game revenue will come from gamblers changing their gaming spend away from slots to the table games. Thus, some of the table game revenue will come at the expense of slot revenue, or in other words not all of the table game revenue will be new incremental casino revenue.

Sports betting Due to recent court rulings limiting the type of product offering for sports betting, the impact of sports betting for casinos in the state will be nominal.

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Delaware market outlook

There is significant cause for concern for the Delaware gaming market, based on the following reasons: •

Delaware casino performance measured by total win and by win-per-unit has been declining. This is a strong indicator that market saturation exists.

•

Delaware casinos have seen competition from casinos in Pennsylvania since they were created in late 2006 and early 2007. Delaware casino performance started to decline in 2007.

•

The current casinos have a very high reliance on out-of-state gamers. The instate demand is significantly below the current operating levels of the three existing Delaware Casinos.

•

With casino development in Maryland approved, the competitive landscape will intensify. This increased competition will reduce the preferential market position Delaware casinos enjoyed with Maryland gamers.

•

Though table games will be a competitive advantage for Delaware casinos, table game revenue is traditionally significantly smaller than slot revenue. As such the ability for table games to offset the loss of slot players from out of state is limited.

Conclusions •

With the development of gaming offerings in Maryland and potential product being added in Pennsylvania slot revenue will continue to decline as key out-of-state gamers will gamble at more convenient casinos options within their markets.

•

The gap between the potential gaming demand with the proposed Maryland sites and existing performance would indicate that Delaware’s casinos will be facing continued decreasing demand. It should be noted that this analysis did not factor in potential new developments in Pennsylvania (the new Philadelphia Park, Foxwoods and the Sugarhouse) which would only make the situation more difficult for Delaware casinos.

•

The addition of more casino sites in the state of Delaware will only cannibalize an already declining market.

•

The addition of table games to Delaware casinos will provide some competitive advantage for the State’s casinos; however, this competitive advantage could be easily neutralized by the introduction of table games in neighboring states. This competitive advantage will not be sufficient to offset the loss in market share from the addition of Maryland casinos.

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