Friday, May 17, 2013

NYRA's Financials: Turning the Corner

The latest financial results for the New York Racing Association (NYRA) show that, after years of financial travail and uncertainty, the nation’s leading racing circuit has achieved some much-needed financial stability. While nothing in horse racing is certain, that’s very good news for New York horsemen and the thousands of people they employ, for race fans, for the thoroughbred industry as a whole and, not least, for the State of New York.

NYRA’s audited financial report for the year ended December 31, 2012 (full report available here and summarized in the Daily Racing Form here) is the first annual NYRA financial report that includes a full year of “video lottery terminal” (a.k.a. slot machine) revenue, and the first produced under the auspices of the “new NYRA” legislation passed at New York Governor’s Andrew Cuomo’s urging last fall. Under that legislation, NYRA has become, as the notes to the financial statement point out, “a governmental entity engaged only in business-type activities.” As a result, the financials look somewhat different from what one would see for a for-profit corporation like Churchill Downs Inc. (whose most recent annual report is here). Still, the basics are fairly easy to discern.

The big news in the financial report is that, for the first time in many years, NYRA showed a “profit.” In fact, a healthy profit of $25.6 million. In government-accounting-speak, the report describes that as a “change in net position,” but for all practical purposes, it’s a cash profit. Lots of qualifications to that number, discussed below, but still, it’s a huge, and positive, change from prior years.

Two major reasons for the turnaround: first, a full year of VLT revenues. NYRA gets 3% of the Aqueduct casino’s net revenue to use for operating expenses, plus another 4% that goes into a separate fund for capital expenditures and maintenance of its facilities. For 2012, the 3% operating income from VLTs was approximately $20.2 million, while the VLT contribution to capital expense was another $26.9 million. Without the contributions from the VLTs, NYRA would have recorded an overall operating loss of $20.5 million instead of the reported $25.6 million profit. Still, compared to other “racino” tracks, NYRA is significantly less dependent on slot-machine income than the norm.

Second, in contrast to the nationwide trend in betting on thoroughbred racing, which was flat or slightly negative in 2012, NYRA’s handle increased significantly in 2012. All-sources handle on NYRA races was $2.2 billion, up from $1.96 billion in 2011. In addition, bettors at NYRA tracks and on its NYRA Rewards betting network wagered $294 million on races from other tracks, up 7% over the previous year. Overall, total handle reported by NYRA was $2.5 billion, up 12% from the previous year. Some of the increase is undoubtedly due to NYRA’s getting in five extra racing days in 2012, thanks to good weather, but that accounts for only a small part of the increase. Evidently NYRA’s racing product is still attractive to the bettors.

NYRA has also made some progress in increasing the amount of each dollar bet that it keeps for operating purposes and for funding purses. When simulcasting was introduced a couple of decades ago, tracks basically gave away the simulcast signal, often getting back as little as 3% of the amount bet at off-track locations., even though takeout was a total of 20%. For 2012, NYRA reports that it retained an average of 9.86% of total handle. To do that, considering that over 80% of the handle is generated from simulcast sources, shows that NYRA has been appropriately aggressive in dealing with simulcast operators.

Wagering on all US thoroughbred racing was essentially flat in 2012 as compared to 2011, increasing just 1%. In fact, without NYRA, total national handle would have declined. Of the $10.9 billion bet nationally, NYRA, with just 4.6% of the country’s race days, accounted for 20.1% of all betting. Despite the continuing decrease in the US foal crop, now down by nearly a third since its peak in the early years of this decade, there are still too many race days at too many tracks nationwide. The total number of US race days actually increased by 16, to 5,315, in 2012 as compared to the previous year. NYRA may be doing well with its racing product, but many smaller tracks cannot maintain their existing programs. Something has to give, though it may not be NYRA, where field size actually increased slightly in 2012, averaging just over eight horses per race.

The long-delayed advent of VLTs at Aqueduct, coupled with the increased handle, has been a boon for horsemen. Total purses at NYRA in 2012, with a full year of the VLT supplement, were $147.7 million, up 44% over 2011, which had included a couple of months of partial VLT operation. Those numbers make it almost worthwhile for an owner to run in New York. The old rule of thumb had been that the average horse earned about 50% of what it cost to keep the horse in training; with the new VLT-enhanced purses, it’s likely that the average horse can now earn somewhere around 80% of its training cost. That means a lot more horses can break even or turn a profit, and the losses from the rest won’t be as big as they used to be. A huge collective sigh of relief from horse owners.

Returning to the NYRA financials, while NYRA’s operating expenses increased by 18.4%, to $339.2 million, most of that increase reflects the VLT-enhanced increase in purses, which was offset dollar for dollar by VLT revenues. NYRA appeared to do fairly well at controlling its actual non-purse operating expense, holding employee compensation, benefits and retiree expenses essentially flat. The only major expense increase was in “facility operating costs,” which included nearly $3 million in legal costs related to the infamous Pick Six takeout scandal, $1.1 million to the state for incorrect sales tax payments on program sales, and $1.2 million for badly needed new marketing initiatives.

On the capital-expense side, NYRA spent $1.8 million toward a master development plan for Saratoga (a process that’s still ongoing), $734,000 for “patron area improvements” at Aqueduct and another $428,000 for similar front-side work at Belmont, plus $1 million to install wi-fi networks at all three tracks. There was significant spending on the Belmont backstretch, including $1.3 million to install concrete wash pads at the barns, as required by environmental laws, and another $1.2 million for fixing and upgrading the Belmont barns. Still lots more to do, including new dorms for backstretch workers at both Belmont and Saratoga, but it’s a start.

In the wake of its emergence from bankruptcy in 2009, NYRA had borrowed $25 million from casino operator Genting, to help pay operating costs until the VLTs began generating revenue. With a full year of VLT operation in 2012, NYRA was able to pay back $7.9 million of that loan, with the balance expected to be paid in full by mid-2014.

A danger signal in the financial report concerns the state of NYRA’s labor relations. Half of NYRA’s employees are covered by 25 different union collective bargaining agreements, of which 10 had expired as of the end of 2012 and more are expiring in 2013. A strike by, say, the 16 active members of the assistant starters’ union could quickly cripple operations. NYRA has set aside funds for retroactive wage and benefit increases that might need to be paid retroactively under new contracts, but uncertainty still remains.

Similarly, the precarious financial position of various OTB operations in New York State raises concerns. Suffolk OTB owed NYRA some $3 million when the OTB filed its most recent bankruptcy petition, money that NYRA is unlikely ever to see. The sensible solution to New York’s OTB wars would be to bring all the remaining OTB operations under NYRA, but, given the patronage and political forces behind the various regional OTBs, that’s likely to occur around the same time that we have flying-pig races at Belmont.

Still, despite the uncertainties, the 2012 financial report offers a glance at what could be a relatively serene future at NYRA, or at least a future in which the financial building blocks are in place, and the soon-to-come new management may be able to move away from crisis-reaction mode, the general state of things over the past decade, and focus on improving the racing experience for fans and horsemen alike.