Wednesday, March 5, 2014

NYRA's 2013 Financials: A Glass Half Empty?

A year ago, I thought that NYRA's 2012 financials, reflecting the first full year of slot-machine revenue, signaled at least the possibility of better days to come. Last night, ahead of today's regular quarterly Board of Directors meeting, NYRA released its unaudited financials for 2013. While the 2013 figures show the largest profit in many years, there's much in the data to elicit, as Tom Durkin memorably said in the stretch run of the 1994 Breeders Cup Classic, cause for concern.

First, the big picture. NYRA's gross revenue for 2013 was $377 million, up almost 4% from 2012, and net income, after all expenses, was $42.8 million, compared to $25.6 million back in 2012. That's an increase in profits of almost 68%, apparently not bad for a company that's in what's supposed to be a declining industry. And, for the first time in living memory, NYRA has a positive figure on its balance sheet for shareholers' equity. In other words, its assets finally exceed its liabilities.

But a little closer look at the figures tells a more complicated story. The increase in gross revenue was due entirely to bigger payments from the Resorts World Casino slot machines; all other sources of income for NYRA declined from 2012 to 2013. NYRA's operating loss (i.e., before counting the slots revenue) actually increased from $5.6 million in 2012 to $12.3 million in 2013. Those figures suggest that NYRA Board Chair David Skorton and new CEO Chris Kay may be shouting into the wind when they talk about turning NYRA around so that it earns a profit without relying on its statutorily-mandated share of casino revenues. That $42.8 million profit, which included the NYRA share of the casino income, would have been a $12.3 million loss without it. That's a lot of money to make up from increased admission charges and more food sales at the track, especially in the face of the long-term national trend of declining attendance. I'm not saying it can't be done, but to expect that much of a turnaround in the next 12 months, which is all the time NYRA has before it's supposed to present its privatization plan to the Governor, requires a set of extremely rose-colored glasses.

Like many, I'm not sure why Skorton and Kay continue to press for a break-even operation without any reliance on the slot machines. Back during NYRA's bankruptcy litigation in the last decade, NYRA and the state struck a deal under which NYRA gave up its claims to the land the race tracks stand on, in return for a share of the casino money. That deal was embodied in state legislation, so it's not as if the state is "giving" NYRA something. The two sides made the kind of deal that's made all the time in litigation, with the state agreeing to the casino payments in return for NYRA's giving up its  legal claim. That was a bargained-for exchange, not a subsidy. True, Governor Cuomo, who has yet to set foot in a NYRA track, appears to dislike racing so much that he might want to renege on the deal and grab the slots money to help balance his  budget (instead, say, of getting the same amount of revenue through an almost unnoticeable tax on the state's all-too-numerous billionaires). But one would have thought that those charged with directing the racing industry would have the interests of their stakeholders -- the bettors, horsemen, backstretch workers and breeders, who pay for and put on the show -- in the forefront of their thoughts.

To the best of my knowledge, no race track makes money without some sort of income stream from other types of gambling. Certainly not Churchill Downs, Inc., which these days is more a casino and online betting platform than a racing entity. There's the new reality, and it's a delusion to think otherwise.

Overall, NYRA took in some $110 million from its share of casino revenue. Half of that went to fund purses for horsemen, and the other half to NYRA, divided between operating and capital accounts. Much of the proposed capital expenditure, discussed below, will be funded by those dollars. Foregoing them means that we will be hearing more and more comments like those at today's NYRA Board meeting from Gotham winner Samraat's owner Len Riggio, who said Aqueduct's state of disrepair was so bad that he didn't really enjoy being there. If you don't enjoy being at the track when you win a major Kentcky Derby prep, then something's wrong with the track.

Now for the details:

NYRA ran six fewer days of racing in 2013 compared to the previous year, a combined effect of going to a four-day week for part of the winter and of additional weather-related cancellations. That's a 2.4% decrease in race days, although there was a smaller decrease in total races, only 1.4%, due to the proliferation of 10- and 11-race cards at Saratoga. Live attendance at the track -- a focus of CEO Kay's "enhancing the guest experience" policy -- declined even more in percentage terms, from 1,784,000 to 1,658,000. Probably about half that decline resulted from the lack of a Triple Crown on the line for Belmont States day in June, but the other half is a real loss in attendance -- an average of 250 missing bodies at each operating track, every racing day of the year. That's not a good sign for a NYRA management focused on making the race track an attractive destination. It's particularly troubling that attendance at Saratoga continued to decline, as it has for the past decade, despite the best weather of any Saratoga meet recently.

Average field size at NYRA tracks declined from 8.1 horses per race in 2012 to 7.8 in 2013, largely as a result of out-of-state horsemen staying away when NYRA and New York State introduced new medication rules at the start of the year. Now that the other mid-Atlantic states have joined new York in adopting uniform drug rules, that factor should disappear, but there's an increasing threat to field size nationally, resulting from the sharply lower foal crops of the past few years. As these horses reach racing age, competition among tracks will intensify, to nobody's benefit. The sensible economic solution would be for some of the minor-league tracks to drastically cut back their racing days, but, with no centralized authority in racing, that's not going to happen.

Despite the reductions in race days and in field size, on-track handle at NYRA's three tracks (which includes bets made on the NYRA Rewards platform) decreased by only 1.6%, to $664.2 million. When the reduction in race days is taken into account, average daily handle actually increased by 0.9%. In easier-to-comprehend figures, the average NYRA patron pushed $201 through the windows each day in 2013, a modest rise from $198 in 2012.

Including simulcasting and off-track betting, total NYRA handle in 2013 was $2.5 billion, less than $1 million below the 2012 total. In addition to the aggregate drop in on-track handle, there were also declines in revenue from the remaining OTB operations in New York State and in simulcast revenues from other in-state locations (mostly harness tracks). These were more than offset, though, by significant jumps in out-of-state betting and international wagering, which rose more than 75%. If new NYRA Racing Director Martin Panza is successful in his goal of attracting more foreign horses to Belmont and Saratoga, the international betting market could be a bright spot for NYRA in the future.

In all, three-quarters of NYRA's handle comes from off-track. NYRA's simulcast signal is by far the most popular in the country. NYRA had 5% of all US race days last year, but accounted for 20% of total US thoroughbred handle. (and 14% of purse money). It's not impossible that Chris Kay's efforts to promote on-track attendance will bear fruit, but the numbers suggest that there could be equal, or even greater, gains from emphasizing the televised product. NYRA's current efforts to renegotiate simulcast contracts to secure a larger percentage of the takeout are a good first step in that direction.

One mystery in the financials is what happened to the $12 million tax liability that was discussed at the last regular NYRA Board meeting back in December. The year-end NYRA financials note that the final tax liability for 2013 has not yet been determined (remember, these are unaudited financials), but the balance sheet has no item for potential tax liabilities; rather, there is a credit of $17.4 million in the non-operating expense  Nothing in the footnotes that really explains the shift, but every little bit helps.

The new management team at NYRA has made some significant savings. Payments to outside lawyers and consultants declined sharply in 2013, and pension payments also declined, in part because of a shift to a new way of calculating NYRA's future liabilities. That may or may not hold up in the future, but for now it's a plus. NYRA also seems to have tightened up on fringe benefits, since its salary expense went up by 5.9% while its benefits costs dropped by 1.4%. With all its union contracts expired and in need of renegotiation, it may be tough to replicate that divergence in the coming years.

From the horsemen's point of view, things are looking up. Purse money for the year was $159.1 million, of which $55.2 million, or more than one-third, came from the slot machines.That's an average purse of well over $65,000 per race. At those prices, the old rule of thumb that horse owners earn only about half as much in purses as it costs to keep their horses in training is no longer valid. Now we earn three-quarters of what it costs. Guess we should be thankful for small favors.

The capital projects carried out in 2013 and planned for 2014, largely funded by casino revenue, have already been well documented. At Saratoga, there will be 750 new high-definition TV monitors, and 125 new picnic tables in the backyard; perhaps that will abate some of the death-defying 7 am race for tables when the gates open.At Belmont, work is supposed to finish on new dorms for backstretch workers, about a century overdue, and at Aqueduct the mythical Longshots bar and TV lounge, on the site of the long-shuttered Man O' War Room, is rumored to be opening any day now (well, perhaps any month). Still, despite the delays, it's good to see things actually being done. Barn roof repair has been ongoing, the Environmental Protection Agency has been satisfied with concrete wash pads and a manure facility that dominates the training track infield, and Saratoga continues to be, along with Keeneland, one of the best places in the country to go to the races. Let's hope NYRA can keep those capital projects moving.

Overall, then, NYRA's financials look healthier than they have been in a long time. But the source of that good health is, entirely, the addition of the tracks' share of the Aqueduct casino's slot-machine take. If that goes away, so does the financial health of the entire NYRA enterprise, Would more fans at the track and a better "guest experience" help? Sure. But it won't solve the financial problem. All of us -- fans, bettors, horsemen, those who work for NYRA and on the backstretch, upstate breeders -- we all need the state to keep its word and continue to follow the law that allocates a (small) portion of casino revenue to the racing industry.