National closures due to the coronavirus are devastating the economy and industries worldwide, and the gaming industry is in the eye of the storm. Casino operators are burning through cash with no income streams flowing to replenish the tanks. And tough decisions are being made.
Penn National Gaming announced that unpaid furloughs would begin April 1, affecting approximately 26,000 employees companywide. The temporary layoffs are in response to “the uncertainty about the duration of the pandemic, and with no meaningful revenue for the foreseeable future,” according to Friday’s press release.
Jay Snowden, the president and chief executive officer of Penn National, said:
“With all of our 41 properties in 19 states temporarily shuttered, like many others in the gaming and hospitality sector, we are making difficult decisions to help preserve our liquidity and ensure a brighter future for our company’s team members, customers, shareholders and other key stakeholders.”
The PA-based gaming company also announced a planned sale of two of their real estate assets to Penn’s “principal landlord,” Gaming & Leisure Properties (GLPI). The deal will see Penn’s Tropicana Las Vegas property and the projected mini-casino in Morgantown, PA, change ownership to GLPI.
In exchange, Penn gets $337.5 million in rent credits, which will lessen the company’s financial obligations during this time of economic hardship. Penn will also have a future option to take over operations of Hollywood Casino in Perryville, MD, a property currently owned by GLPI.
Penn National makes moves to increase liquidity
The Tropicana deal appears to be a leaseback agreement, wherein Penn will continue to run daily operations while paying rent to GLPI. Snowden said of the transaction:
“We greatly appreciate the cooperation, creativity and partnership shown by GLPI during this challenging time. While this transaction will help to relieve liquidity pressure in terms of rent obligations, we are committed to taking further steps to reduce our ongoing operating expenses in order to ensure we have a healthy business to return to when we are able to reopen our doors.”
Just when those doors will reopen is anyone’s guess. The costs of keeping them closed are astronomical.
A recent Macquarie Research report cited by the Las Vegas Review-Journal estimated Penn is burning $6.4 million a day since the shutdowns that occurred on or before March 17. Macquarie Securities gaming analyst Chad Beynon pointed out:
“The casino shutdown domestically coupled with high debt loads is pushing investors to ask, how long can these balance sheets last in this current environment?”
According to the report, the estimate for how long before Penn would run of cash was 5.2 months. In that context, Penn Gaming’s recent moves to cut expenses aren’t surprising.
Some gaming companies hit harder than others
The gaming industry continues to be among the hardest hit by coronavirus-related closures and economic fallout. Penn National was perhaps hit even harder than most.
By March 17, Penn National had closed all 34 casino properties across the country, including its PA casinos, The Meadows, outside of Pittsburgh, and Hollywood Casino at Penn National Race Course near Harrisburg.
Last week, the Philadelphia Business Journal reported that Penn was drawing on $430 million in credit as a sort of “lifeline” to help them weather the storm. The rest of Penn’s $700 million in revolving credit was to be used to preserve “financial flexibility.”
Also last week, construction stopped on Penn’s two mini-casinos in Morgantown and York, both of which were projected to open by year’s end. Penn National’s stock also plummeted, along with most of the gaming industry.
After closing at $23.91 per share on March 6, Penn was down 64% to $8.54 on March 16. It rebounded to around $15 but once again took a tumble today when it closed at $11.77.
Economic impacts just keep coming for casino employees
According to the American Gaming Association (AGA), the gambling industry supports 1.8 million jobs. A two-month shutdown of the entire Pennsylvania industry would lead to $1.06 billion in lost economic activity, the AGA projected.
In this context, casino operators are faced with difficult decisions as their doors remain closed with no clear end in sight. For many casino employees nationwide, that has meant unpaid time off for an undetermined amount of time.
“This decision was extremely difficult to make for all of us at Penn,” Snowden wrote in a letter to Penn company employees. He continued:
“Penn National is a family, and we deeply regret the hardship this will place on you and your loved ones. We are extremely motivated and focused on reopening our properties as soon as it is safe and legal to do so. To try to help ease some of the burden, we’re maintaining your medical benefits through June 30, for those team members who are currently enrolled in our health plans.”
Casino employees who are out of work due to coronavirus-caused closures may be eligible for unemployment benefits. Information for requesting those benefits is available at the Pennsylvania Department of Labor & Industry website.
The long road to recovery is still ahead
Regarding the survival and resilience of gaming companies, most will likely bounce back eventually, possibly with some help. Jefferies gaming analyst David Katz explained that banks would likely be willing to work with gaming companies during this economic downturn, according to the Las Vegas Review-Journal.
“Gaming is a little bit different than a lot of other businesses,” he said. “It’s harder for a bank … to take over the building, take over the operations (if they run out of cash).”
He also points out that states want casino businesses to succeed for the good of the economy. That success will also be critical for the hundreds of thousands of gaming employees currently out of work without pay.