Executive Summary / Key Takeaways

• Canterbury Park Holding Corporation ($CPHC) is strategically transforming from a traditional racetrack and card casino operator into a diversified entertainment and real estate company, leveraging its significant land holdings.
• While core gaming segments (Casino, Pari-mutuel) faced revenue declines in Q1 2025 due to increased competition and external factors, the Company's "Other" revenue segment saw growth driven by large-scale events.
• The Canterbury Commons real estate development project is progressing, with significant leasing achieved in apartment joint ventures and new commercial spaces opening or under construction, supported by a substantial TIF receivable ($19.24M as of March 31, 2025).
• CPHC maintains a strong balance sheet with ample liquidity ($15.74M cash/restricted cash, $0 debt on credit line) to fund ongoing operations and planned capital expenditures, which are expected to decline in 2025/2026 after completing major projects.
• The investment thesis hinges on the successful execution of the real estate development to unlock asset value and diversify revenue streams, alongside potential regulatory tailwinds like legalized sports betting in Minnesota, while managing competitive pressures in core gaming.

The Racetrack's Evolution: From Pari-Mutuel to Mixed-Use Destination

Canterbury Park Holding Corporation, rooted in its Minnesota Racetrack operations since the mid-1990s, has long been a fixture in regional entertainment, offering seasonal live horse racing, year-round simulcast wagering, and a card casino. This foundational business, complemented by food and beverage services and various events, established CPHC's initial market position. However, recognizing the potential of its extensive land holdings and facing the inherent seasonality and competitive dynamics of the racing and gaming industries, CPHC embarked on a significant strategic pivot: the transformation of underutilized land surrounding the Racetrack into a vibrant mixed-use development known as Canterbury Commons.

This strategic evolution is central to the investment narrative. It represents a move to diversify revenue streams, unlock embedded asset value, and create a more resilient business model less solely dependent on traditional gaming and racing. The Company's history of operating a large-scale entertainment venue provides a unique foundation and land base for this ambitious real estate undertaking.

Within its core operations, CPHC relies on standard industry technology, including totalizator systems for pari-mutuel wagering and general IT infrastructure for casino and business management. While functional, the company appears to lack proprietary or technologically differentiated systems that provide a unique competitive edge in core gaming or racing operations. This contrasts with larger, more diversified competitors who are investing heavily in advanced digital platforms, faster transaction speeds, and integrated online offerings to enhance efficiency and customer experience. CPHC's strategic response, therefore, leans on leveraging its physical assets, regulatory exclusivity in Minnesota horse racing, and the creation of a unique destination through real estate development and expanded event offerings, rather than technological leadership in core operational systems.

Canterbury Commons: Building the Future on Land Assets

The Canterbury Commons development is the most compelling aspect of CPHC's long-term strategy. Utilizing approximately 140 acres of previously underutilized land, the Company is pursuing mixed-use development through direct involvement and, significantly, through joint ventures with experienced real estate partners like Doran Companies and Greystone Construction.

A key enabler of this development is the Tax Increment Financing (TIF) District agreement with the City of Shakopee. Under this agreement, CPHC is obligated to construct specific infrastructure improvements within the district, with the City agreeing to reimburse the Company for eligible costs up to a maximum of $17.59 million (as amended). As of March 31, 2025, CPHC has recorded a TIF receivable of approximately $19.24 million, representing $15.69 million of principal and $3.55 million of interest. Management believes this receivable is fully collectible based on projected future tax revenues from the completed development projects, although the ultimate reimbursement is not guaranteed and depends on the success of the development in generating tax revenue. The Company expects to spend the remaining $1.91 million in TIF-eligible improvements over the next six months.

The joint ventures are bringing the development to life. The Doran Canterbury I and II joint ventures have completed phases I (321 units) and II (300 units) of upscale apartment complexes. As of the latest update, Phase II is 95% leased, while Phase I has reached 22% occupancy following necessary repairs and certification in February 2025. The Omry at Canterbury, a senior housing complex, is 80% leased. The Canterbury DBSV joint venture is focused on a multi-use development on a 13-acre parcel, and Trackside Investments is developing a restaurant and entertainment venue expected to open in June 2025. Commercial spaces are also expanding, with new restaurants, fitness centers, and a 28,000-square-foot office building (half leased) under construction. CPHC contributes land to these ventures and accounts for them under the equity method, which has resulted in significant losses ($1.57 million in Q1 2025) primarily due to depreciation and debt service costs as Doran Canterbury II became fully operational in Q2 2024. The Company also has indemnity obligations totaling up to $8.50 million related to debt financing for the Doran Canterbury I and II ventures.

This real estate strategy is designed to create a destination, driving traffic and potentially cross-selling opportunities with the Racetrack and Casino, while also generating new revenue streams and asset value independent of gaming performance. Completion of infrastructure and ongoing development will unlock additional land (50 acres total available for future projects), providing further growth potential.

Core Operations: Facing Competitive Pressures

While the long-term focus is on development, the core racing and casino operations remain the primary source of current revenue and cash flow. However, the first quarter of 2025 showed significant headwinds in these segments. Total net revenues decreased by 6.8% to $13.14 million compared to $14.10 million in Q1 2024.

The Casino segment, CPHC's largest revenue source, experienced an 8.6% decline in revenue to $9.19 million. Management attributed this primarily to increased competition, resulting in a decrease in wagering activity ("drop") and a lower average collection rate in table games. This highlights the heightened competitive pressures in the regional gaming market. Partially offsetting this was an increase in other poker and table games revenue, boosted by progressive jackpot revenue and an increased maximum rake per hand instituted in May 2024.

Pari-mutuel revenue also decreased by 8.2% to $1.08 million, mainly due to lower simulcast revenues stemming from fewer race days at other tracks nationally. Food and beverage revenue declined by 5.9% to $1.62 million, largely correlated with the decrease in casino visitation.

These revenue pressures, combined with increased operating expenses, impacted profitability. Total operating expenses rose by 1.3% to $12.49 million. Key drivers included higher salaries and benefits (due to annual wage increases and state minimum wage hikes), increased depreciation and amortization (related to placing barn relocation assets into service), higher advertising and marketing costs (investments in new Casino promotions), and increased real estate taxes. Purse expense decreased, tied to the lower gaming and pari-mutuel revenues.

The combined effect of lower revenues and higher costs led to a significant decrease in Income from Operations, falling from $1.76 million in Q1 2024 to $649,671 in Q1 2025. Adjusted EBITDA, a key measure excluding real estate development impacts and non-cash items, decreased by 39.6% to $1.94 million, with the Adjusted EBITDA margin narrowing substantially from 22.8% to 14.8%. This underscores the current operational challenges in the core business segments.

Financial Stability and Capital Allocation

Despite the Q1 operational dip, CPHC maintains a solid financial position. As of March 31, 2025, the Company held $10.60 million in cash and cash equivalents and $5.14 million in restricted cash, totaling $15.74 million. Its revolving credit line, amended in January 2024 to $5.00 million and extended to January 31, 2027, had a $0.00 outstanding balance, and the Company was in compliance with financial covenants. This low debt level provides significant financial flexibility.

Cash flow from operations saw a notable increase in Q1 2025, providing $3.37 million compared to $1.62 million in Q1 2024. This was primarily influenced by changes in working capital, including a significant increase in payable to horsepersons due to the timing of the live racing season, partially offset by changes in accounts receivable and payable related to the redevelopment plan.

Investing activities used $891,000 in Q1 2025, a decrease from $2.71 million in Q1 2024. This reflects ongoing capital expenditures for the barn relocation and redevelopment plan ($859,000 additions to land, buildings, and equipment) and TIF eligible improvements ($135,000), as well as increases in related party receivables ($166,000) from member loans to joint ventures. The Company's $15 million barn relocation project is nearing completion, with approximately $2.00 million in estimated remaining costs for phase three. Management expects overall capital expenditure to decline year over year in 2025 and 2026 as these major projects conclude.

Financing activities used $430,000, primarily for cash dividends ($0.07 per share declared) and tax payments related to equity awards.

Management believes its current liquidity, operating cash flow, and potential future land sales are sufficient to cover ongoing operations and planned development expenses for at least the next twelve months.

Competitive Positioning and Outlook

CPHC operates in a competitive landscape that includes larger, more diversified gaming and entertainment companies like Churchill Downs (CHDN), Penn National Gaming (PENN), and Boyd Gaming (BYD), as well as indirect competitors such as online betting platforms and other leisure activities.

Compared to these larger rivals, CPHC operates on a smaller scale with a more localized focus. While its TTM financial ratios reflect this difference (e.g., TTM Gross Profit Margin of 53.57% vs. CHDN's 34%, PENN's 33%, BYD's 52%; TTM Operating Margin of 8.78% vs. CHDN's 26%, PENN's 1%, BYD's 24%), CPHC's TTM Debt/Equity ratio is 0.00, significantly lower than CHDN (4.54), PENN (3.93), and BYD (2.49). This low leverage is a key strength.

CPHC's primary competitive advantages stem from its exclusive Minnesota horse racing license, which provides a unique niche, and its integrated real estate development, which leverages its land assets to create a differentiated destination. These factors help it compete against the scale, operational efficiencies, and technological investments of larger players. However, CPHC is vulnerable to increased competition in its card casino segment, as evidenced by the Q1 2025 results, and faces challenges from the national decline in horse racing popularity and the rise of online wagering platforms which offer faster, potentially cheaper betting options.

The outlook for CPHC is tied to the successful execution of its real estate strategy and potential external catalysts. Completion of the barn relocation and TIF projects by mid-2025 will reduce capital intensity. The ongoing leasing and development within Canterbury Commons are expected to drive future value and diversify the revenue base. A significant potential catalyst is the legalization of online sports betting in Minnesota. Management has guaranteed additional purse money for the 2025 live race meet, partly as a bridge, and believes reimbursement is likely if sports wagering legislation passes, which would provide additional purse supplements. This legislative potential represents a material opportunity, though its timing and outcome remain uncertain.

Risks to the Investment Thesis

Investing in CPHC involves several key risks. Increased competition in the Casino segment could continue to pressure revenues and margins. The success of the real estate development is not guaranteed and relies on market demand for residential and commercial space, as well as the performance of joint venture partners. Reimbursement from the TIF district depends on future tax revenues, which could be lower than projected. The Company's indemnity obligations related to joint venture debt expose it to potential liabilities. Changes in state gaming laws, including potential tax increases or the structure of sports betting legalization (if it occurs), could significantly impact profitability. The seasonal nature of live racing and vulnerability to weather remain factors. Furthermore, general economic downturns could reduce discretionary consumer spending on gaming and entertainment, and affect real estate demand.

Conclusion

Canterbury Park is at a pivotal stage, actively transforming its business model to unlock value from its real estate assets and diversify beyond traditional gaming. While the first quarter of 2025 highlighted challenges in its core Casino and Pari-mutuel segments due to competitive pressures and external factors, the progress in the Canterbury Commons development offers a compelling long-term growth narrative. The Company's strong balance sheet provides a solid foundation to navigate current headwinds and fund planned capital projects. The investment thesis rests on the successful execution of the real estate strategy to create a more diversified and valuable enterprise, complemented by the potential upside from legislative changes like sports betting. Investors should closely monitor the progress and financial performance of the real estate joint ventures, the competitive dynamics in the Minnesota gaming market, and developments regarding potential sports betting legislation as key indicators of CPHC's future trajectory.