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The State of Florida Gaming, Part 2

By Jeff Hwang – Updated Apr 5, 2017 at 5:18PM

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The competitive gap in South Florida is wide.

In Part 1 of this series, we noted the disappointing performance of the fledgling racino industry in Broward County in South Florida. We also discussed how, without a change in the operating conditions -- primarily the prohibitive 53.5% gaming tax rate, the pending upgrade to Class III slots at the Seminole casinos, and the addition of table games at the Seminole casinos -- the Broward County racino operators don't stand a chance of competing with the Seminole casino operations, including the dynamic Seminole Hard Rock property in Hollywood.

As it is, the competitive gap between the Seminoles and the three Broward County pari-mutuels that currently have slots -- Magna Entertainment (NASDAQ:MECA)'s Gulfstream Park, the Mardi Gras (formerly Hollywood Greyhound), and Isle of Capri's (NASDAQ:ISLE) Isle at Pompano Park -- is already wide, and I would be remiss if I told you that the racino operators didn't deserve some (or most) of the blame.

Let's take a look at a few of the problems:

Covered parking
We all know it rains in South Florida. Yet collectively, the four pari-mutuel facilities in Broward County -- including Boyd Gaming's (NYSE:BYD) Dania Jai-Alai, where Boyd has yet to break ground on a new slot facility -- have a total of zero parking garages. In contrast, the Seminole Hard Rock has one good-sized parking garage and one colossal one.

The racino operators can't even begin to match the Seminole Hard Rock in terms of depth and scale, particularly when it comes to non-gaming amenities. Since the Seminoles don't pay taxes, they can re-invest a higher percentage of their gaming revenue into their properties than the commercial operators can; in turn, they also generate a higher return on investment. The result is that the Seminole Hard Rock's large-scale non-gaming amenities represent a premier entertainment destination on their own, whereas the racino operators each have only a few token restaurants. Magna Entertainment does have the right idea, though; it is building The Village at Gulfstream Park, a multi-use project that will add retail and office space to its property, as well as a new parking garage.

Penny slots (or lack thereof)
I believe that one of the main advantages of Class III slots is the ability to have lower-denomination slots, whereas the smallest bet you can make on the Class II machines at the Seminole Hard Rock is a quarter (even on a nickel slot). Now when I say "low-denomination," I'm thinking pennies. And the Isle of Pompano Park doesn't have any.

I find this mind-boggling. Granted, the new Isle is actually a pretty nice facility, and it's certainly a couple of notches above the Isle's low-maintenance casinos in such locales as Boonville and Kansas City, Mo.; Lula, Miss.; and Lake Charles, La. But come on: MGM Mirage's (NYSE:MGM) Bellagio has penny slots; its Beau Rivage in Biloxi, Miss., has them, too. And yet of all the slot joints in the country, the Isle at Pompano Park doesn't have penny slots?

I don't think Isle of Capri has any idea who its customer is. I'll tell you that it is the same customer it has in Boonville -- the small-stakes convenience gambler. The Isle might have a $25 buffet and a high-priced steakhouse, but that does not make it a pure high-end destination resort. The fact is, the Isle is a locals' property in a locals' location. I think what companies such as Station Casinos (NYSE:STN) and Ameristar Casinos (NASDAQ:ASCA) have shown is that you can still cater to the high end while focusing on the mass-market penny-slot players. And of all the casino operators in Broward County, Isle of Capri should know better.

Of all the racino operators, Isle easily has the best location at the north end of the market. In contrast, the other three players (including Boyd) are bunched up toward the south end of the market, just a few miles east of the Seminole Hard Rock, and closest in proximity to the pari-mutuels in Dade County. I think the Isle -- which controls about half of the racino gambling revenue -- will continue to lead by default. However, the Mardi Gras is in for a world of hurt with a poor product and an even worse location. The property isn't on a road where it would be easy to stumble on by accident (compared to the highly visible Gulfstream Park), and it is pinched between Gulfstream, Boyd's Dania Jai-Alai, and the Seminole Hard Rock.

Gulfstream and Mardi Gras both suffer from the fact that they merely inserted slot machines into retrofitted facilities. I think Gulfstream Park is a nice facility overall, but its product is segregated into three separate rooms on two floors (two slot rooms and one poker room), which is a design I had not previously come across anywhere in the United States -- I got carded three times just moving between the three gaming areas. The Mardi Gras, meanwhile, has low ceilings. The result is that both properties are already a bit dated.

Closing thoughts
The Broward County racinos have certain competitive problems that can only be solved by spending money, and they may not get much of a chance to spend it without a change in the tax rate. As it is, Magna Entertainment is already looking to sell off property adjacent to Gulfstream Park, as well as a stake in the casino operation, in order to raise cash to pay down debt. Frankly, I wouldn't want to be Mardi Gras. Boyd Gaming hasn't even really committed to getting its feet wet, given the environment. At this point, Isle of Capri is getting the best of it by virtue of its location, but I don't think the company is doing what it needs to be doing to maximize its opportunity.

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Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool's disclosure policy is a sure thing.

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