– NYRA, which on Friday announced a 2007 net loss of over $34 million – $27.2 million of that before expenses related to NYRA’s bankruptcy – plans to return to profitability by 2009 via a reduction of expenses inherent in the new franchise agreement, and a series of initiatives intended to enhance revenue streams.

I met with NYRA President/CEO Charles Hayward at his invitation in his office at the Big A last week, where he produced financial statements that showed the trends which have caused NYRA to go from profitable, in 2000 for the final time, to an organization which has suffered steadily increasing losses. The main problem on the revenue side is the migration of betting handle from on track to off. Over the years, NYRA retained a net of 9.3% of on track bets; a figure which is now 9.9% after NYRA agreed to a 1 point increase, from 14% to 15%, in WPS bets in exchange for being granted the right to starts its rewards program last year. However, on off track wagers, NYRA has retained a variety of far lower percentages, including, most significantly, 2.7% on bets placed on NYRA races at downstate OTB’s; and far lower, just 1.41% from Capital OTB.

"If someone goes to Central Avenue in Albany and makes a bet on Saratoga," Hayward said, "NYRA gets around 1 1/2 cents, as opposed to 10 cents on track. We have to do around seven times the handle through Capital OTB to make the equivalent of an on-track dollar."

So, while net revenues from the various off-track sources has remained flat to slightly better overall since 2002, gross commissions and breakage from on-track betting has declined from $95.4 million in 2002, to $78.8 in 2007. Combine the resulting lower revenue with the expected increases in operating expenses, including, as always, ballooning health care and pension costs (NYRA stopped funding its pension in 2006, and now offers instead a 401K with a 3% company contribution and a matching program), and NYRA’s losses widened to its worst ever last year.

Despite those well-publicized defecits, Hayward disputed the perception that NYRA had stopped making payments to the state. "When people say that NYRA doesn’t make payments to the state, it’s just not true. It’s not what it used to be, but frankly, in most jurisdictions, such as New Jersey, they’ve gotten rid of the pari-mutuel tax. We make payments to the pari-mutuel tax, the breeders, a regulatory fee which just started in 2003 – it was originally 1, it’s now 1 1/2%. There’s a local admissions tax which is a big deal in Saratoga; any outstanding tickets revert to the state as of April 1 of the following year. In other jurisdictions, that money goes to fund jockeys insurance."

But while the new financials may seem hopeless at first glance, Hayward explained that the figure includes a $9.3 million reserve for the back taxes claim by the IRS; the one which was originally $1.6 billion. "We haven’t yet settled," Hayward added. "We think it’s going to be lower than that." Whatsmore, other major expense items are slated to go away once the franchise agreement is finalized. Interest on the CIF (Capital Improvement Fund) totaled $4.5 million in 2007. This fund was established in 1983, and NYRA was required by statute to turn over any of its then ample profit to it. It could then borrow from the CIF for capital improvements. NYRA’s CIF debt, which now totals around $80 million, is relieved by the franchise legislation. But Hayward argued that this debt should have been erased long ago. "In 1993, we were forced by the Cuomo Administrtion to sell the land here at Aqueduct which is now Home Depot. We got about $50 million. We transferred that money to the state. But instead of the state reducing the CIF [which stood at around $50 million at the time] they instead took it as a one-time franchise fee. So NYRA has continued to pay interest on the CIF. That goes away with the new agreement. People call that part of the quote-unquote, bailout, but that’s a crock, because even the IRS takes the position that when we sold the land, it should have zero’d out the $50 million and we shouldn’t have any CIF debt."

Most significantly to the income statement, NYRA will no longer pay property taxes going forward; Hayward said that with the exception of having fallen behind on some payments to Nassau and Suffolk, taxes have been paid as due since late 2006. These assessments totaled over $17 million in 2007, which is well over 10% of NYRA’s net revenue of $148.8 million. "No business in America spends 10% of its sales on real estate taxes," Hayward said, asserting that 0.6% would be a typical payment. But the taxes will now be assumed by the state under a program in which, in such cases where the state owns certain land (such as parks and prisons and, now, racetracks), it stands in as the taxpayer, making payments to the local communities. The state can appeal the property assessments like any other taxpayer.

So, going forward to 2008 and beyond, if you eliminate the one-time $9.3 million IRS payment, the $17 million in real estate taxes, the CIF interest payment of $4.5 million, then the loss of $27.2 million before one-time reorganization costs suddenly becomes a profit of $3-$4 million. Add in an anticipated reduction in depreciation expenses from $7 million to $4 million due to assets being transferred to the state, and the paper profit would be even more.

But Hayward emphasized two points. For one thing, despite the looming improvements, NYRA’s short-term cash situation remains bleak. In fact, with the remainder of the $20 million alloted to NYRA by the state for operations in 2007 running low, NYRA will, as early as this week, be tapping an additional $9 million "dry appropriation;" this money will be repaid from the proceeds of the hoped-for sale of the land parcels NYRA is permitted to sell as part of the franchise agreement (as will the $9.3 million IRS payment). That will be the last state money available to NYRA until the $30 million in bridge-to-VLT money it is to receive by virtue of the settlement comes through. That, however, won’t happen until the documents underlying what was agreed to in the legislature are finalized and signed, and a settlement is reached on an agreement by which NYRA would drop two lawsuits, including the one filed against the Pataki Administration for its stalling on the MGM racino. April 11 is the latest target date for that to happen; but in the meantime, NYRA will still have to make a quarterly real estate payment and will continue to accrue interest payments on the CIF debt.

Secondly, Hayward presented in detail the new initiatives which will, it is his hope, increase revenue an enhance the racing business model independent of VLT’s, without fundamental changes in the structure of the OTBs, and with acceptance of the fact that bettors will not be returning to the tracks en masse. "They’re not coming back," he said, citing the enormous conveniences of in-home wagering.

So, let’s take a look at what NYRA has in mind to help the bottom line:

– Live video streaming on NYRA’s internet wagering site. "When internet wagering was enacted, our view was that it was implicit in the legislation that we would not only be able to have internet wagering, but we could stream the video. Logical. The State Racing and Wagering Board however takes the position that video streaming into the computer is consistent with sending the signal into the home on cable TV, which requires the approval of the OTB’s."

"We were nine months ahead of the OTB’s [on internet wagering]; it’s been five months since we submitted our plan to the racing and wagering board, and to this day, we still can’t stream video." Noting that NYCOTB, Capital, and Nassau OTB’s now have internet wagering (only the latter has yet to apply for streaming), Hayward expressed hope that an agreement will be reached in which everyone can stream. Internet wagering is a particularly crucial area for NYRA, as it’s the only form of off-track betting from which NYRA gets its ontrack handle percentage of 9.9% as opposed to the lower rates from OTB and simulcasting. "Every other account wagering site – Youbet, TVG – has video streaming capability; we did that as part of our account wagering deals. So our own racing and wagering board is not allowing us to compete effectively in the marketplace."

NYRA is also having trouble competing with OTB in the account wagering area, and has a lot of catching up to do in this critical area. "Last year, OTB did $211 million on phone wagers; while NYRA did $28 on phone, and $10 on the internet," Hayward explained. When telephone wagering was first rolled out, OTB had no minimum balance requirements, and offered the first way to beat the odious surcharge. However, NYRA was mandated to require a $450 minimum balance. "The result was that the first year, OTB opened about 20,000 accounts; NYRA opened 1200." In addition, NYRA limited the betting choices to the three tracks that were being simulcast at the track, made the accounts difficult to fund, and accepted no wagers on NYRA dark days.

"So it really was a combination of the legislature giving OTB a running start, and NYRA’s own inability to recognize what the account wagering business was all about. And frankly, that didn’t change until 2006, when we pretty much went to full card simulcasting for thoroughbreds – there are some issues why we can’t take harness. We now take dark day simulcasting over the phone and internet. And we just finally got approval from the racing and wagering board to do an immediate funding, because right now, it’s arcane, you have to send in a check." NYC OTB was permitted to roll out its funding program several months ago. "The state racing and wagering board works in odd ways." Hayward didn’t make a specific projection as to how much NYRA could grow its internet wagering, but there’s obviously a lot of upside once it has the proper tools.

– Increase simulcast rates. NYRA has already made an aggressive move with respect to account wagering sites. Hayward said that, having gotten out of its exclusive deal with TVG (an arrangement he called "stupid"), NYRA has been able to double its pricing to most account wagering companies, from 4% to 8%; and "nobody blinked." "HRTV and Churchill were thrilled, because they had been excluded. We do around $200 million on account wagering; take that times an additional 4% – that’s $8 million, four for NYRA and four for the purses."

However, Hayward explained that now is not the time for NYRA to take on some of the large consortiums of the bricks and mortar establishments – racetracks and Las Vegas casinos. "We have to have some cash in the bank because we’d probably have to go to war with some of these guys, whether it’s Mid-Atlantic, the Southwest Co-op, or TrackNet themselves. We get the highest rate of anybody but still, Las Vegas for example, we get I think 3.75%; we should be getting 4 1/2 to 5. But, in order to achieve those economics, you have to have some cash in the bank to withstand a disruption."

– Expansion of NYRA Rewards Program – NYRA will move aggressively to grow its NYRA Rewards program through active recruitment and an increase in rebate rates. "We signed up 5,000 people at Saratoga last year. We did a bet $100/get $100 promotion, and out of those 5,000, I’d say we got about 800 customers out of it. But we’re going to continue to promote this, and we’re probably going to look at increasing the rewards. We have a lot of room to work, particularly on the exotics which have a 25% takeout rate; those tend to appeal to the bigger players. We’re never going to be as attractive as the rebate shops. But the non-domestic ones don’t have the NYRA signal to start with." Of course, NYRA will need the approval of the racing and wagering board to change the rewards rates. "So that will take awhile." Hayward feels that NYRA can net an additional $2 million from its Rewards program.

– Artificial Surfaces – This is in theory a revenue item because of the idea of sounder horses racing more often, less scratches due to no sloppy tracks, and less cancellations. Of course, in practice, the experiences have differed from track to track, and Hayward said that he felt rather "lucky that we’re broke right now; otherwise we may have made some of the same mistakes as others have." But while acknowledging the problems and the mixed feeling amongst NY trainers (and expressing his own disdain for aberrant synthetic races such last year’s Blue Grass and Pac Classic), Hayward said "I think we’ll be compelled to do something for a number of reasons, and the Belmont training track would be the first to go."

He also discussed the ongoing "serious issue" with the Aqueduct main track, which, he pointed out, will be open for only three weeks this spring (Belmont opens a week early). However, the future of the Big A unfortunately remains uncertain. "There’s an argument – I think a legitimate argument to be made, from both a financial and racing perspective, that at some point, five or seven years down the road, you close this place. And you have a winter racing surface at Belmont and, the mile and a half surface I guess, though personally I hate it. I think it’s terrible for the game; mile and an eighth, mile and a sixteenth races around one turn. You don’t see the horses at the start, and you barely see them at the finish.

"So we’re not at all clear which way we’re going to go. If you did Poly on the Aqueduct main track, then you’d have all the distances during the winter; six and seven, a mile; and a mile and an eighth at two turns. And then you might be able to rip out the inner track and move the turf course there. So instead of having a seven furlong course, it would be a mile, and a little bit more user friendly.

"But I’m not sure which way we’re going to go."

– I.T. / Customer Service – "The fact that the whole IT revolution occurred in the 1990’s and NYRA wasn’t part of it is just criminal," Hayward said. He said that NYRA is hiring a new Chief Information Officer, and will be replacing Teleview with its own camera crew starting the first week in May. Improved technology should result in improved efficiency and cost cutting.

But more significant to Hayward is what he sees as an opportunity to use improved technology to enhance customer service. "If you’re an individual who owns horses, buys Belmont Stakes tickets, who buys Saratoga box seats, we’ve got you in an owners’ database, we might have you in a NYRA Rewards database, Saratoga seats database. But we have no way of looking at you as an aggregate customer. We have a lot of people walking in and out of the place who we have no electronic contact with; no ‘thanks for coming to day and thanks for running; we appreciate that you’re using NYRA Rewards, have lunch on us.’ So, we’re building out that data warehouse capability.

"I think that’s part of the problem of the perception of NYRA as being arrogant. We’re just not using traditional customer service interfaces with people." He spoke of new customer service initiatives, including a recent hosting of 60 NYRA Rewards members, who were broken into groups to provide their input on what they’d like to see, and then treated to lunch in Equestris. "They were really jazzed up."

Hayward also mentioned new efforts at hospitality services, which he said NYRA has never before had. The effort is being led by Gavin Landry, the former president of the Saratoga Convention and Tourism Bureau. "You talk about how lovely the Belmont backyard is, but it’s not fan friendly at all. There’s not much hospitality, not enough windows, not enough TV’s. So we’re working on that." This spring, the clubhouse entrance at Belmont will feature a new hospitality center staffed with friendly employees who will be there to help direct people where they need to go in the cavernous plant. The hospitality effort will also include efforts to attract groups to the track, and follow up with them for feedback afterwards. "If you want to attract new customers, you have to get them to the live track experience."

– Sponsorships – This is an area which Hayward labeled "uncharted territory." He spoke of the new ATM deal with Dime Savings Bank – "six figures over five years" – which has brought ubiquitous shiny new light blue machines and signs to the tracks (as well as a promotion for the dime superfectas). The recently announced deal with Shadwell to sponsor the Forego and Travers is a seven figure deal over two years; and NYRA is speaking with Coolmore and seeking to expand the participation of Darley, who has a "small deal" with the Test. Discussions are underway with Nikon for a photo finish deal. "We don’t want to whore the place out. But there are some opportunities that are just logical."

The Belmont presently has no sponsorship because ABC/ESPN got the rights to sell a presenting sponsor as part of its television deal for the race; but they’ve thus far been unable to sell them. Hayward said they’re working on a possible deal to help sell the rights in return for a share of the revenues. Regardless of what happens on that front, he feels that NYRA can increase their sponsorship revenue by $3 or $4 million next year.

– Rebuild the turf courses – "NYRA has a reputation for pulling our races off the turf courses, and that’s a problem for us. [Track superintendent John] Passaro had some involvement in building the turf course at Colonial. They have one huge grass course and rail settings from 0 out to 90 feet. So instead of having two grass courses, I think we’ll have one course with different rail settings. With better grass there’s better drainage, and we won’t be coming off the grass as much." Less off-the-turfers means less scratches, less off-the-turf races and, therefore, more betting revenue.

– Uncoupled Entries – NYRA wrote a letter to the state racing and wagering board last summer requesting a change in the rules so as to allow horses from the same trainer, but different owners, to race uncoupled; initially on a six month trial basis. That would be consistent with virtually every other racing jurisdiction in the country, including Florida, California, and Kentucky (states from which, as Hayward was quick to point out, New York bettors can readily bet from the in-state venues that the board oversees). The letter claims that, in 2005, there were 358 coupled entries that went to the post: "As an additional wagering interest generates approximately $129,000 in handle, this amounts to approximately $46,182,000." Hayward said that this additional handle could yield an additional $2 million for NYRA.

In addition, Hayward contended that the total of additional entries from the rule change could be significantly more just that 358, explaining that, due to the rules that require one half of an entry to scratch from a superfecta race, some trainers avoid entering either half of a different-owner entry altogether so as to avoid having to explain to one owner why his/her horse is scratched and the other horse isn’t. "I would argue that there could be twice as many additional betting entries." Hayward is "hopeful" that this could get done before Saratoga.

So, Hayward here has quantified some $11-12 million of projected revenue increases, which doesn’t include what seems like a big potential in an increase in higher-rate on-track bets via its internet wagering site, and identified other areas with less tangible potential. When you add that to the savings on taxes and interest payments, the picture looks much brighter.

And then there’s that VLT revenue, of which NYRA will, someday, receive 4% to be dedicated to capital improvements, which Hayward estimated could yield $20-25 million annually, and 3% for operations. In addition, as opposed to the old arrangement in which all profits had to be turned over to the CIF, NYRA will be able to retain profits equal to 45 days worth of purses, plus 45 days worth of operating expenses. Additional profit will be paid to the state as franchise payments.

However, NYRA has to get through the estimated 18-24 months before the VLT’s start to roll, and will receive just that $30 million from the franchise agreement to do so. Hayward feels that current credit conditions will preclude NYRA from borrowing against future VLT revenue streams until the time that the first monies start to actually flow. In the meantime, there are some areas of the tracks that can not wait until then for attention, and Hayward identified some capital improvement projects that will proceed: At Belmont, $2-$3 million for the barns and dorms; $2-$3 million for the bathrooms and seats, $1 million for the backyard (where $800,000 of improvements took place over the winter). At Aqueduct: $2 million for seats and bathrooms, and $1-$2 million to completely renovate the back of the second floor clubhouse, where the Man O’War and Kelso rooms are, creating a deluxe simulcasting room with a nice bar that would presumably operate year round; I guess the racing and wagering board would have to approve that too. "I think it could end up out-handling any of the OTBs in the city."

And at Saratoga, $4 million for the seats and bathroom, particularly the women’s room (the Head Chef declined to comment on those facilities), and $2 million for the backstretch.

Mr. Hayward also spoke at length about OTB – its history, his view of its current plight, and what he sees as realistic possibilities in terms of a consolidation of OTB and NYRA that we’ve all long called for. He also gave me some interesting numbers to examine. I’ll discuss OTB in a subsequent post.