Churchill Downs Betting On Convergence Of Historic Horseracing, Electronic Table Games

April 26, 2024
Executives with Churchill Downs are optimistic that they are closing in on the development of historic horseracing-powered electronic table games, but stopped short of announcing a launch date for the new product.

Executives with Churchill Downs are optimistic that they are closing in on the development of historic horseracing-powered electronic table games, but stopped short of announcing a launch date for the new product.

Churchill Downs Incorporated has become the U.S.' biggest operator of historic horseracing (HHR) machines, which offer games that look and feel like casino slot games but are actually determined by the outcome of past horse races.

Since August, Churchill Downs subsidiary Exacta Systems has been working with Interblock on an electronic version of roulette that would be based on Exacta’s HHR platform and replicate a table-game experience. Churchill Downs acquired Exacta in December 2022 for $250m.

“We’ve worked really hard but remember before a product like that reaches fruition, it goes through testing, the regulatory process, and it goes through iterations,” CEO Bill Carstanjen told analysts on Thursday (April 25) during a first-quarter earnings call.

Carstanjen said Churchill executives are engaged with developing the product and “it is coming along according to our plans.”

“I don’t want to give you a time and date for when you’ll see that for the first time because that’s not entirely within our control,” he said. “I just want to illustrate that it is a focus of ours and we have good expectations … on what we could have there.”

Asked how a new HHR-powered table game with multiple positions would be affected by state restrictions on the maximum number of HHR games that can be offered in each facility, Carstanjen said it depends on the state and whether there are any machine limits.

“Kentucky doesn’t have a limit; Virginia does,” Carstanjen said. “It is 5,000 machines. An HHR table game is exactly that an HHR machine and it will be subject to any caps there are under the law.”

Besides Kentucky and Virginia, HHR is legal and regulated in Alabama, Arkansas, Kansas, New Hampshire, and Wyoming, according to Vixio GamblingCompliance’s U.S. Regulatory Review: Historical Horseracing.

HHR is also still operating in Louisiana despite a district court judge’s ruling in February that found the state constitution requires local voter approval for the machines. Businesses had previously relied on a state law passed in 2021 authorizing HHR machines.

Churchill Downs owns one of 14 HHR licenses in New Hampshire but acts as a third-party provider to nine of the ten HHR facilities that are operational.

In reporting record first-quarter net revenue of $590.0m, up 6 percent from the same period last year, as well as record adjusted earnings of $242.5m up 9 percent from last year, the company noted the continued success of its HHR operations.

In its earnings report released after the markets closed Wednesday, Churchill Downs reported a $33.1m revenue increase in its live and historical racing segment driven by an $18.3m increase in its Kentucky HHR properties and a $13.5m increase from its Virginia properties.

“Our disciplined approach to HHR investments … has led to excellent returns on capital for both our HHR properties and our acquisition of related technology,” Carstanjen said. “We remain focused on expanding further in each of our key markets.”

In Kentucky, a seventh HHR facility near Owensboro is scheduled to open in the first quarter of 2025 at a cost of about $100m. Churchill Downs is permitted to develop one more venue under state law within 60 miles of its Oak Grove racetrack license.

Carstanjen said that, in Virginia, his company's goal is to utilize all ten of its potential licenses and deploy all 5,000 HHR machines currently permitted under state law. Churchill Downs expects to open the $460m Rose Gaming Resort with 1,650 machines in Dumfries, Virginia, some 30 miles south of Washington, D.C., in September.

“With its completion, we will have approximately 4,450 HHR operational across the commonwealth of Virginia,” he said. “We have a number of additional HHR development opportunities we are exploring and anticipate we will have deployed in 2025 the remaining 500 machines.”

Dan Politzer, an analyst with Wells Fargo, asked Carstanjen about the regulatory environment in Virginia, including new legislation to potentially regulate skill-game machines in convenience locations, as well as authorize a fifth land-based casino-resort in the city of Petersburg near Richmond.

The Petersburg City Council on Wednesday approved Baltimore-based Cordish Companies as the developer of a casino in the city. Cordish has unveiled plans for a mixed-use casino and entertainment development that could cost $1.4bn.

“We expected an additional [casino] license to happen in Petersburg,” Carstanjen said.

Carstanjen did not provide specifics on his expectations for the skill-games bill that was recently returned to Republican Governor Glenn Youngkin by the legislature without any of his amendments having been accepted by lawmakers.

Youngkin and state lawmakers have agreed to a special session beginning May 13 to work out their differences on the state budget, which could lead to a compromise on Senate Bill 212 to regulate and tax skill games. 

In a research note, Barry Jonas, an analyst with Truist Securities, said he believes a veto by Youngkin of the original bill as approved by the legislature is the more likely outcome, barring some compromise.

If the skill-games bill fails, a state-wide ban on skill-game machines will remain in effect, and the issue will not be on the agenda again until lawmakers return to Richmond for a 30-day session in January 2025.

“With respect to additional things that can happen within a jurisdiction, including Virginia, we roll with these punches,” Carstanjen said.

“We participate in the regulatory and legislative process,” he added. “We feel very comfortable with the business we have in Virginia and will look to address any regulatory or legislative opportunities we see or any risks that we see.”

In August, Carstanjen told analysts that “grey games are essentially slot machines,” and that venues across the state would benefit from the ban that was subsequently upheld by the Virginia Supreme Court.

“Certainly, across the different jurisdictions that we participate in, it is fairly common to see legislation that you like or don’t like in any given session,” Carstanjen said Thursday. 

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