Business going down, buildings going up
By JUDY DeHAVEN
Star-Ledger Staff
Atlantic City, NJ, May 27, 2007 — Two years ago, Kevin DeSanctis, then the chief operating officer of the Pennsylvania-based casino operator Penn National, took the stage at Atlantic City's yearly gaming conference and made a prediction that drew snickers from the pro-New Jersey crowd.
DeSanctis said once Philadelphia's slot parlors were open, up to 60 percent of the 2.2 million people living within a 90-minute drive of Atlantic City could opt to gamble in Pennsylvania instead of A.C.
Fast forward to 2007, and DeSanctis' prediction seems to be coming true. Philadelphia's two slot parlors haven't even opened yet, but others in eastern Pennsylvania, along with one in Yonkers, N.Y., have given Atlantic City a pounding. Total A.C. casino revenue fell 4 percent for the first four months of the year, gross operating profits are down nearly 6 percent, and analysts are predicting 2007 will go down as the first year in history that casino revenues decline.
Why, then, is DeSanctis now making a huge bet on Atlantic City -- a $2 billion plan, backed by Wall Street giant Morgan Stanley, to build a casino resort along the Boardwalk? And he's just one of several industry heavyweights angling to enter the market, not quit.
Atlantic City's casino industry is at a crossroads. On the one hand, it faces threats on all sides -- intensifying competition from new or soon-to-open gambling parlors in neighboring states, new smoking restrictions that have turned off many gamblers, and a movement to unionize dealers.
On the other hand, there is billions of dollars of fresh investment in major hotel expansions and at least two new casinos, with two others in the early planning stages. There's a momentum building that some say could spur A.C. to finally become an overnight destination, the kind of resort boosters have hoped for since the first pair of dice was thrown 29 years ago.
Down the Boardwalk from the casino planned by DeSanctis, Pinnacle Entertainment wants to replace the Sands with a $1.5 billion casino. Las Vegas gambling titan Steve Wynn is eyeing a return to A.C. So is former Caesars Entertainment CEO Wally Barr, who, along with former Casino Reinvestment Development Authority Executive Director Curtis Bashaw, bought 11 acres next to the Hilton, which also is considering a $1 billion expansion. And MGM Mirage is once again drawing up plans for a casino to be built next to Borgata, which MGM co-owns with Boyd Gaming.
All this is in addtion to hotel towers currently under construction at three existing casinos; plans by Bashaw to convert two old Atlantic City hotels into what he calls one "hip,groovy" noncasino hotel; and an expansion of the outlet stores at the foot of the Atlantic City Expressway.
But while prospective developers are upbeat, the business climate is anything but. The Tropicana has laid off hundreds of workers since it was acquired by Columbia Sussex last fall. And analysts said pressures on A.C. have curtailed efforts by Donald Trump's casino company to regroup after emerging from Chapter 11 bankruptcy protection two years ago -- forces that may be complicating the company's attempts to sell some or all of its assets, since all of Trump's casinos are in Atlantic City.
And there's another wrinkle: Some say private equity's move into gambling may not be good for the industry.
Many now doubt Harrah's Entertainment, which owns four A.C. casinos, will move ahead with its much-anticipated $1 billion redevelopment of Bally's now that it is being acquired by two top private equity firms, Texas Pacific Group and Apollo Management.
Some believe Trump Resorts could soon fall into the hands of a private equity firm as well. If it did, nine of the city's 11 existing casinos would be controlled by private equity.
"I don't necessarily see leveraged buyouts as a positive for the gaming industry because they leverage up to buy back stock rather than invest in the market," Lehman Bros. analyst Jane Pedreira said.
'AN UNTAPPED MARKET'
Speaking from his office on Atlantic Avenue, DeSanctis, CEO of Revel Entertainment, said if he were asked to give a speech on Atlantic City today, it would be no different than the one he gave two years ago at the East Coast Gaming Congress.
"What I said was very simple: Atlantic City is a tremendous market," DeSanctis said. "And it's an untapped market. However, in order to reach that market you have to create facilities that would make people want to drive to Atlantic City."
DeSanctis said when he gave his speech, there was a feeling among A.C. operators that the Pennsylvania slot parlors would be little more than warehouses with slot machines. He thought they were overlooking the fact that the bulk of their customers play the slots and eat at the bufffets.
Pennsylvania would have all that -- and offer a more convenient option to many gamblers.
"If you're going to sit here and hope that because they're slot parlors you're going to keep your customer, you're going to get hurt," DeSanctis said. "That's what I said. And I would say it today. And, frankly, it's happening."
But customers in Pennsylvania will drive past their local slot parlor if A.C. can offer them something other than gambling, DeSanctis said.
The model, of course, is Las Vegas. Vegas and A.C. have roughly the same number of visitors -- 38.9 million a year for Vegas, 34.5 million for A.C.
But Las Vegas has eight times more hotel rooms than Atlantic City -- 133,000 versus 16,000. And it gets 61 percent of its revenue from nongambling activities -- restaurants, shops and shows. For Atlantic City, the figure is just 11 percent.
Pedreira of Lehman Bros. said the A.C. operators are in a Catch-22: They just need to build more hotels and offer more nongambling activities to grow the market, but they can't justify the expense until they attract more conventioneers. And visitors with expense accounts won't pack A.C. until the resort has more hotel rooms because the casinos now reserve most of the rooms for gamblers.
"They can't really sell rooms today to a convention customer because they don't have enough nongaming amenities to make money off of them," Pedreira said. "So they'd be just displacing a gaming customer. So, they would have to build more rooms.
"But that requires a lot of capital investment."
When DeSanctis and other prospective casino developers look for an A.C. prototype, it is Borgata. When it opened in July 2003, its hip lounges and restaurants brought a sense of style to a city long known as a cheesy resort.
Borgata quickly exceeded expectations, breaking records in just about every category. It has attracted a new, younger gambler who is more likely to play the tables than the slots. And it is consistently at the top in revenue and gross operating profits.
Borgata has not stood still. Last summer it opened an expansion, doubling the size of its poker room and introducing A.C. to celebrity chef restaurants. Next year it will open another hotel.
But even Borgata has felt some pain. While casino revenue is up 5 percent through April, slot revenue has fallen 2.4 percent. To get those slot players back, Borgata has jacked up its promotional expenses to nearly $60 million in the first quarter -- more than any other casino, and an increase of 13 percent over last quarter. And it has started a marketing war with its Marina rival Harrah's, which increased its promotional spending 19.5 percent, to $44.1 million.
Marketing wars in Atlantic City are legendary. Time and again, the casinos have thrown "comps" at gamblers to get them in the doors and drive up revenue. But Harvey Perkins, vice president of Spectrum Gaming Group, said this one is different because Borgata and Harrah's do not have bus programs and, therefore, are going after a more profitable gambler. And both are building new hotels that will need to be packed with gamblers.
"In the case of Borgata and Harrah's, battling for the premium customer makes sense," Perkins said. "They are seeing a need, perhaps, for additional, new-customer acquisition at the premium level to start those towers off with high occupancy rates."
Borgata's chief operating officer, Larry Mullin, who has denied he is in a marketing war, downplays the effect of competition from neighboring states.
"Longer-term, we will recover and continue to grow," Mullin said. "We're very confident and very bullish on this market. We believe that the market is healthy."
SHIFTING SANDS
The Sands Casino Hotel may have closed last November, but activity has not stopped.
Its new owner, Las Vegas-based Pinnacle Entertainment, has been busy emptying the casino. This fall, it plans to demolish the legendary casino to make way for a $1.5 billion resort.
But during a recent trip to A.C., Pinnacle Chief Executive Dan Lee said the company is still monitoring the market. He said certain developments could make him rethink his plans for the Sands.
Lee said he is not concerned the state may ban smoking at casinos altogether. (Currently, smoking is allowed on 25 percent of the gambling floor.) And he is not worried by competition from nearby states. He also said he wouldn't be bothered if Pennsylvania were to allow table games in addition to slots, because its 54 percent tax rate would make operating them expensive; New Jersey's tax rate is 8 percent.
But if New Jersey were to allow slots at the Meadowlands Racetrack, Lee said, that could be "a deal-stopper." So could a decision by the state to allow a rival casino company to build a gambling resort on Bader Field, a historic airport that recently shut down.
In a city with few developable plots left for a casino, Bader Field's 130 acres have caught the eye of many operators, including Wynn. But Gov. Jon Corzine has said he does not want to rush into redevelopment of the airstrip. On Friday, Atlantic City Mayor Robert Levy announced the formation of a task force to study the options.
If the state allowed casinos on Bader Field, that would draw "people away from the Boardwalk district, so we end up with crack addicts and the hookers, and you end up with a competitor who doesn't have to deal with that," Lee said. "We'd say, 'You know what? We made a mistake. We'll sell the land at a $50 million loss and move on.' "
So, while Atlantic City is anxiously anticipating billions of dollars of investment, "whether they all get developed is another story," Prudential Securities analyst Joel Simkins said.
BETTING ON A.C.
Casino companies aren't alone in wagering on A.C.
The once-blighted base of the Atlantic City Expressway is now home to outlet shops, eateries and the 40/40 Club, owned by hip-hop mogul Jay-Z. More is on the way.
David Cordish, who developed the area, called "The Walk," with the backing of the Casino Reinvestment Development Authority, recently announced plans to double the size of the district. The CRDA, a powerful state agency, oversees the investment of fees paid by the casinos.
"I have no idea why (the casinos) do not add massive entertainment (and) retail," Cordish said. "The market is clearly there, and we have proven this fact. The sales of our tenants, fashion, food and entertainment are off the charts."
Cordish was the third developer for the site. The others bailed.
"You might say they bet wrong and had the glass-half-empty view," Cordish said. "We see Atlantic City as the glass half full."
Bashaw, the Cape May developer who used to serve as head of CRDA, is another believer.
His group, Cape Advisors, has rounded up investors to buy the Holiday Inn and Howard Johnson hotels. They plan to close them in the fall, give them a $90 million facelift and reopen them next year.
Bashaw has also partnered with Barr, the former Caesars CEO, to buy property for a casino. But because Bashaw is barred from working for an Atlantic City casino for two years after leaving his CRDA post, he declined to discuss plans. The prohibition ends this fall.
Bashaw did say Atlantic City interest is at an all-time high.
"The stars, in my view, are aligned for a rebirth," Bashaw said. "We've got a stable regulatory environment. We have a critical mass of gaming. And now these emerging nongaming activities seem to be doing well.
"This lends itself to a market where, for people who play in real estate, Atlantic City is on their radar screen," he said. "In acquiring things we acquired, we had to go to the capital markets. And they believed the story."
"People are putting their money into the town."
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