CHDN owns property in six states, the majority of which are candidates for online gambling

Churchill Downs Galloping Toward Online Gambling in Pennsylvania, New Jersey

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It’s Q3 earnings season, a time of year dense with financial reports and monotone investor calls held at odd hours. Penn National Gaming, MGM and Kindred Group are among those we’ve heard so far, with US expansion a focal point for each.

The same can be said of the Churchill Downs, Inc. (CHDN) report, which covered an especially long list of news. Having already spread into five states beyond its old Kentucky home, CHDN is dotting the map with big ambitions.

Top- and bottom-line numbers for Churchill

Churchill Downs’ Thursday presentation followed the release of some favorable numbers a day prior. Here are the Q3 vitals and their comparisons to the same period last year:

  • Net revenue: $221.3 million (+12%)
  • Net income: $56.3 million (up from $16.7 million)
  • Adjusted net income: $21.9 million (up from $13.6 million)
  • Adjusted EBITDA: $62.1 million, (+7%)

Gains in net income are pronounced under some favorable real-estate moves, with several million attributable to reduced tax obligations. The $5 million termination fee related to Lady Luck Vicksburg and sundry expenses actually drove operating income down a touch.

Other notable happenings for CHDN during the reporting quarter included:

  • Fully acquired Ocean Downs casino and racetrack in Maryland
  • Liquidated equity in Saratoga Casino Holdings
  • Opened BetAmerica sportsbooks at two Mississippi casinos
  • Opened Derby City Gaming in Kentucky

“We had a strong quarter,” CEO Bill Carstanjen summarized flatly for investors. Company stock prices rose by double digits on Thursday before cooling off to eight percent at close.

Here is the full CHDN Q3 report in text and the replay of the presentation.

CHDN to acquire Rivers Casino Des Plaines

Perhaps the biggest news of the quarter landed just a day before the earnings report.

On Tuesday, Churchill Downs entered into a definitive agreement to acquire majority ownership of Rivers Casino Des Plaines, in Illinois. Rivers is one of several Rush Street Gaming properties, though the joint venture involves just the one. Illinois online casinos aren’t a reality yet, but it’s another state that could be in the picture in a few years.

“We are thrilled to partner with Neil Bluhm and Rush Street Gaming,” Carstanjen said during the call, “and regard this is an important strategic acquisition for our company.” CHDN’s final ownership percentage will depend on the decisions of some minority shareholders.

Carstanjen cited the following benefits from acquiring the Des Plaines property:

  • Best-in-class regional casino with significant future upside
  • Opportunity for full participation in online gambling and sports betting in Illinois, if authorized
  • Ownership of an asset that is well-positioned to resist threats from future gaming expansion in the state
  • An “excellent competitive position” in a market that CHDN has “always valued”

The company does have an existing presence in the sixth-most-populous US state. CHDN owns and operates Arlington Park Raceway, an 80-year-old thoroughbred track in the Chicago suburbs.

According to Carstanjen, the opportunity to acquire a second Illinois property provides a rare temptation:

“Generally, we’ve been reluctant to engage aggressively in pursing regional casino acquisitions thus far in 2018, because multiples are high comparatively. However, this asset is one of the few we especially valued for the reasons I just noted, and because Neil Bluhm and his organization would be our partner. We deeply respect his organization’s business and political acumen …”

CHDN well-positioned in Pennsylvania

Illinois does not have online gambling or sports betting, though both issues seem to be moving forward in the legislature. Churchill Downs is, however, active in a number of other states with expanded gambling, plus another one on the cusp.

Pennsylvania is the one on the cusp, having moved to the front of the conversation as launch approaches. Once its transactions with Eldorado Resorts are final, CHDN will operate both Presque Isle Downs and Lady Luck Nemacolin. Expect closure early next year, followed by a quick turnaround into the expanded market.

In preparation to enter the industry, CHDN formed a partnership with SBTech that covers all forms of online gambling. Eldorado recently secured the approvals for Presque Isle Downs to operate online slots and online table games on the buyers’ behalf.

Carstanjen confirmed that CHDN is not interested in PA online poker, but it will be fully invested in PA sports betting.

The latter will be the focus, building off the existing TwinSpires horse betting product and team. Expect CHDN to launch a PA online casino and sports betting product in the first quarter of 2019, provided the transactions close smoothly.

Presque Isle Downs will have a retail sportsbook on property, as well.

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Poised for growth elsewhere, too

The company is also working to enter the online gambling industry in neighboring New Jersey.

Under a partnership with Golden Nugget, CHDN will soon launch both an NJ online casino and an NJ sports betting platform, possibly even before the end of the year. SBTech will supply the platform there, too, and both are working through the licensure process.

There’s also Mississippi, where Churchill operates a pair of casinos — Harlow’s and Riverwalk. Both have sportsbooks inside of them now, and Carstanjen says the structure of the state’s industry makes for a good trial run.

“Given wagering is limited solely to the physical location, we viewed Mississippi as an excellent opportunity to test our technology and build our team’s expertise before the stakes are raised with more economically significant sports and online market opportunities.”

The company is also eying up another big investment close to home, proposing a $150 million standardbred and historical horse racing venue in Oak Grove, Kentucky. It would add another 1,500 historical machines to the 900 the company already operates at Derby City.

Another tidbit: As part of the transactions with Saratoga Casino Holdings, CHDN has earned exclusive rights to operate the company’s online gambling and sports betting products in New York and Colorado, in the event they become legal.

All told, CHDN has a physical presence in six states, the majority of which are candidates for online gambling. That’s no accident, as Carstanjen explained:

“Our portfolio reflects our strategy of acquisitions and green-field investments in gaming properties we believe will offer stable, predictable cash flows in diverse markets. We also like states that we believe may ultimately grant access to online casino gaming to their brick-and-mortar casino license holders, should it become legal in the relevant jurisdiction.”

Photo: Julian Herbert / Getty Images Sport

- Eric is a reporter and writer covering regulated US gambling, sports betting, and DFS. He comes from a poker background, formerly on staff at PokerNews and the World Poker Tour.
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