SugarHouse has growing pains

SugarHouse is celebrating its first birthday this weekend, with live bands and fireworks planned over the Delaware riverfront. Yet, as it marks the milestone, Philadelphia's only casino continues to struggle against its area rivals.

Though SugarHouse has no competition in the city and a vast population to draw from, first-year gross revenue was $212.2 million, less than half what market leader Parx generated and 40 percent less than at Harrah's Chester Casino & Racetrack.

That's a far cry from what owner HSP Gaming L.P. projected in late 2006. Back then, the company - controlled by Chicago billionaire Neil Bluhm and chief executive Greg Carlin - estimated that SugarHouse would open with 3,000 slot machines and generate $320.3 million in revenue in its first year, the most conservative projection among five applicants for two Philadelphia gaming licenses. (Licensing for the proposed Foxwoods casino is still tied up in court.)

SugarHouse's financial health is important far beyond its walls. Less revenue means less money for the city, the commonwealth, and, by extension, the School District of Philadelphia.

After Year One, the casino generated $53.2 million for the state from a 55 percent tax on slot-machine revenue, about $6.3 million for the city through a local-share assessment tax, and $7.8 million for the state Economic Development and Tourism Fund, which helps fund the expansion of the Convention Center, according to the state Gaming Control Board.

And a fourth area gambling hall, Valley Forge Casino, is set for a spring opening, which could make things still more challenging for SugarHouse.

Even regulars like Manuel Hilliard said the Delaware Avenue casino needs to offer more. He fits SugarHouse's key demographic group: He lives within 20 miles and is a repeat customer during the week.

"They actually need to expand," Hilliard, 52, an assistant cook from West Philadelphia, said as he worked a penny slot machine Thursday. "It's very crowded on weekends, and there are not enough machines."

Some observers say the situation highlights the struggle urban casinos have against their suburban counterparts. SugarHouse is hampered by its small size, lack of amenities, and urban location, gaming analysts say, as well as the fact that it opened nearly four years after Parx in Bensalem and Harrah's in Chester.

The two suburban casinos had a loyal clientele by the time SugarHouse came on the scene, and both have had multiple expansions, adding poker rooms, restaurants, and more slot machines and table games.

Next summer, assuming the necessary approvals come through, SugarHouse hopes to begin its first expansion, with completion expected by late 2013.

"SugarHouse is still going through its critical ramp-up period, with no assurance that the casino will meet its longer-term financial targets," Moody's lead analyst, Keith Foley, wrote this year when the $360 million casino refinanced its loan. "SugarHouse also faces a significant amount of competition in its primary market."

Most of that comes from the I-95 corridor: Parx is 15 miles to the north, Harrah's Chester Casino 15 miles to the south. Parx has 3,500 slot machines and 172 table games; Harrah's Chester has 2,900 slots and 121 tables.

After 12 months on Penn's Landing, SugarHouse's results have been mixed: Table games have been a huge hit, slots less so. (Pennsylvania taxes table-games revenue at 16 percent vs. 55 percent on slots revenue.) The casino ranked eighth in the state for gross gambling revenue, significantly below Parx (first, $474.5 million) and Harrah's Chester (third, $348.5 million).

For table games, SugarHouse ranked as high as No. 3 in June among Pennsylvania's 10 casinos, though it had the fewest tables. It has since increased them to 53 from 43 by reconfiguring the casino floor and taking out tables from its only sit-down restaurant.

Though the statewide average for win per table per day was $2,300 last month, it was nearly double that at SugarHouse, $4,300. The popularity of poker, blackjack, and other table games was evident Thursday afternoon, when nearly every table was packed. Lines are common on weekends.

"The business has performed wonderfully," said SugarHouse general manager Wendy Hamilton. "Listen, we're a small casino, but we've been the top casino in win per table in the state and win per slot machine" - average $305 per machine per day.

But gross slots revenue, from which the state derives most of its gaming-tax dollars, was not as good. For each of the last three months, SugarHouse placed ninth with 1,600 slots, for an average of $3 million a week. It finished just ahead of Mount Airy Casino Resort in the Poconos, which was last all three months.

"We did underestimate the strength of the table business and slightly overestimated slot revenues," gaming analyst John Kempf of RBC Capital Markets L.L.C. said of SugarHouse. "Because of its inner-city location, the property is likely attracting a younger customer that prefers tables to slots."

Critics say the casino overpromised when it applied for its gaming license in 2006.

"By doing the numbers, the city is suffering 10 times as much as it gets in benefits," said Kaytee Riek, director of Casino-Free Philadelphia, a group that opposes what it calls predatory gambling. "It's not surprising that SugarHouse would make millions of dollars from poor and middle-class residential Philadelphians. That's their entire business model."

Penn Treaty Special Services District has a different opinion. At a first-birthday bash Friday, SugarHouse presented the district with a $500,000 check, part of a community-benefits agreement it signed with neighborhood groups.

"It's been a good story here," district chairman Joe Rafter said after stepping off the stage with the giant mock check from Hamilton. "We're helping a lot of people in the community."

Rafter said money from the casino, now up to $1.18 million, buys books and computers for schools and libraries and funds programs for seniors and veterans.

To gain more traction in a crowded market, SugarHouse needs "to start over," said Maureen Bonnie, 55, of South Philadelphia, who gambles at all three local casinos.

"It just doesn't feel like a casino in here," Bonnie said while playing blackjack Thursday on SugarHouse's 51,000-square-foot gambling floor. "They need more restaurants, dealers that know what they're doing, and more table games."

Under a modified expansion unveiled Tuesday before the city Planning Commission, the casino plans to add 600 to 800 slot machines, 35 to 40 table games, four restaurants, and a poker room, and increase its workforce from 1,000 to 1,500. But by the time the expansion would be completed in late 2013, SugarHouse's competitors will be bigger, too.

Parx plans to introduce another completed expansion in the spring, and Harrah's Chester is to reveal details of its next one in late fall. Sands Casino Resort in Bethlehem has already opened a 300-room hotel this year and will soon open a retail mall and events venue. In Atlantic City, the $2.5 billion Revel Casino is to open in mid-May.

SugarHouse's sister venture, the $780 million Rivers Casino - also owned by Bluhm and situated on the waterfront in downtown Pittsburgh - opened a $2 million banquet hall last week, adding to its stable of nine restaurants and bars, an outdoor amphitheater, 3,000 slot machines, and 107 table games.

Jacob Oberman, Las Vegas-based director of gaming research and analysis at CB Richard Ellis, said Pittsburgh's gambling scenario was the reverse of Philadelphia's, with two-year-old Rivers outperforming Meadows Racetrack and Casino in suburban North Strabane Township.

The big difference: Less in-your-face competition.

"Rivers doesn't have immediate competition to the north," Oberman said. "SugarHouse faces competition from both directions, from Parx to the north and Harrah's Chester to the south."