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Expand and Deliver
With nearly $2 billion in expansions and new development planned, under way or complete, Atlantic City casino companies are showing they are finally ready to invest in the market's long-term future  

By Andy Holtmann

In January, Atlantic City casino operators were holding their breath, anxiously awaiting revenue figures from December 2001 to tell them if the city's casino industry would have to report its first annual loss in over a decade. After all, other casino markets had experienced significant declines in the wake of Sept. 11 and the nation's recent economic turmoil.

But when the results came in, even the most bullish operators had to blink twice. The city's 12 casinos reported an 18.2 percent jump in gaming win for the month to $349 million, just enough for a 0.9 percent increase in annual revenue and a sure sign that the city was still on a hot streak.

"If this were a prize fight, it would be kind of like the underdog coming off the ropes and pulling off an upset in the 12th round," Credit Suisse First Boston gaming analyst John Leupp told the Press of Atlantic City at the time.

But while continuing the streak made Atlantic City casino executives proud, the earnings picture was important for another reason. It justified the nearly $2 billion worth of expansion projects and new investments operators have announced, begun or completed in the last two years.

"There's a major demand for hotel rooms and other amenities in Atlantic City," says Harrah's Atlantic City General Manager David Jonas. "There's a lot of demand that looks like it has not been met over the years, and that bodes well for some of these new expansions that are on the horizon now."

Harrah's, which opened its 25-story, 452-room Bayview Tower in May, joins several other Atlantic City properties that are or will be undergoing significant renovations. 

Among them:

Resorts Atlantic City's planned 400-room, $125 million hotel tower; the Tropicana's $250 million, 200,000-square-foot Quarter-a mix of upscale retail, dining and entertainment, a 502-room hotel tower and a 2,400-space parking garage; The Showboat's planned $100 million, 500-room expansion; and Park Place Entertainment's proposed $100 million renovation of the Shops at Ocean One. 

Not to mention the $1 billion Borgato hotel-casino, a joint venture between Boyd Gaming and MGM Mirage set to open in the summer of 2003 that many observers are calling the pinnacle of Atlantic City's redevelopment. 

MGM Mirage has discussed building its own $1 billion-plus hotel-casino in the city. Meanwhile, Trump Hotels and Casino Resorts, which owns the Trump Marina, Taj Mahal and Trump Plaza hotel-casinos, is hoping to refinance nearly $1.9 billion in debt in order to free up cash for reinvestment in its properties.

"We feel strongly about the Atlantic City market and that when we open in 2003, we'll be doing so at a time of continued growth here," says Borgata CEO Robert Boughner. "Since the day of our groundbreaking in 2000, there's been over $800 million worth of projects that have been announced, started or completed. That's a significant level of investment. How many cities in the U.S. have $800 million in projects started or ready to come out of the ground? That doesn't even include the Borgata, or any plans our partner, MGM Mirage, has for a wholly owned casino at Renaissance Pointe [the company's name for a parcel of land it owns on the city's H-tract]."

For casino companies facing stagnant growth in Las Vegas and other markets, Atlantic City has been a beacon of light that offers opportunity. 

"Great things are happening in Atlantic City and we are bullish about the future of this market," says Harrah's Entertainment CEO Phil Satre.

Had the redevelopment in Atlantic City been sporadic or spread out in small upgrades to existing properties over time, operators admit they may have been less enthusiastic about the city's prospects. The excitement stirring around the addition of the Borgata-the first new property in the market in over a decade-is what has led to a rash of new capital investments by other operators. It has also given operators a new goal: creating a market that will appeal to a wider variety of casino customers, and growing it beyond the average day-trip customer market that only a few years ago seemed to be Atlantic City's destiny.

Revenues and Reinvestment

In the months following December's surprising revenues, Atlantic City's 12 casinos have continued to forge a path of success. In January, the market's casino win jumped 6.2 percent over the previous year's January to $328.8 million. During the month, Resorts reported a 21.5 percent increase to $20.5 million, based partly on a 19.8 percent table game hold.

In February, casino win jumped 3.6 percent to $345.5 million. In March it jumped 7.5 percent to $389 million. For the first quarter of 2002, the market experienced a 5 percent growth in revenues to $1.1 billion.

"It's definitely proven to be a growth market," says Deutsche Banc gaming analyst Andrew Zarnett. "It's also a market that happens to be constrained by supply today. There is clearly very strong demand. Many of the properties in the market are operating near or at capacity."

That, operators say, is the reason for the seemingly sudden wave of expansions.

"The business we've been shutting out is that Saturday night tourist who has a lot of cash, but who is going to New York, Baltimore and Philadelphia for their entertainment," Jonas says. "They want to come to Atlantic City, but we've never had the product offering for them."

Lack of hotel rooms to keep customers for longer stays has been the market's major downfall. Harrah's recent addition of 450 rooms has signaled the start of operators' desire to address the problem. With 500 more rooms planned for the Showboat, 400 rooms at Resorts, 500 rooms at the Tropicana and 2,000 rooms at the Borgata, operators feel confident that the market will open up to more than just the day-trip gaming customer.

Taking a page from Las Vegas' success, Atlantic City casinos are warming up to offering more amenities to attract new customers. The Tropicana's expansion is largely focused on amenities, as The Quarter is expected to bring a host of upscale restaurants and shops similar to those in Las Vegas. 

The Borgata will also feature an array of retail shops, as well as an upscale European spa, lounges and live entertainment facilities, all geared toward collecting the nongaming dollar.
"It's this broad inclusion of gaming and nongaming amenities together under one roof that's all new to this marketplace," says Boughner. "We're the first facility to be constructed here in 13 years and we believe what we will provide will offer a great level of comfort and credibility for the overnight visitor."

Caesars' planned renovation of the Shops on Ocean One Pier with partner Gordon Group Holdings is also geared toward bringing in new upscale restaurants and dining. The Showboat recently completed its $5 million Pelican Club for VIP gamblers and renovated its buffet.

There is nearly 200,000 square feet of new retail and entertainment space planned near the Sands Hotel & Casino, and the property is currently converting the Madison House Hotel into a 135-unit all-suite extension of its property.

In most of the expansion projects, additional gaming space is also being added, allowing properties to update their slot floors with new product. The Sands, having suffered declines in gaming win due to poor luck on table games, recently dumped over half of its tables in favor of adding more slot machines.

"When you look at the population within 150 miles of Atlantic City, then you look at the number of slots that Atlantic City has, and the metric of people per slot, Atlantic City has 700 people per slot machine," Zarnett says. "Kansas City has 362 per slot. Tunica has 175. The only market that has more people per slot is Chicagoland, with over 1,000. That shows the demand, and how it outpaces supply." 

"You would hope to reduce costs that you don't need and enhance revenue opportunities," new Sands President Herbert Wolfe told the Press of Atlantic City of the decision to add more slots in lieu of table games. "In the end it should be a lot more profitable."

The city's casinos have also cut expenses in other areas, most notably their marketing departments. Jonas says that after Sept. 11, properties began to rethink how money was being spent to attract customers.

"I think a lot of operators realized that some of these marketing costs were not driving incremental trips," Jonas says. "It wasn't driving profit. It became an expense that equaled giving money to the people that were coming anyway."

The new customer-the customer that has never been to Atlantic City-is what operators say they want.

What's the Rush?

Many outside observers point to the possibility of expanded gambling opportunities in nearby states like New York and Pennsylvania as another reason for the sudden investment in Atlantic City. New York Gov. George Pataki has pushed for full-scale casino gaming in his state, with the most significant projects slated for the Catskills area. Pennsylvania legislators, meanwhile, have mulled the addition of racinos, some near the Philadelphia market-traditionally one of Atlantic City's key feeder markets.

"There's no doubt that expansion in New York or Pennsylvania will have a negative impact on Atlantic City," Zarnett says. "But the issue is how close are these places to legalized gaming? That's a difficult issue to determine because there are a lot of legal disputes, and from my experience, legal disputes tend to run for a while."

Atlantic City casino operators admit that the potential for increased competition is one reason for the quick turn-around on expansion projects, but they don't seem overly concerned.

"Those things are still on the drawing board [in New York and Pennsylvania]," says Park Place COO Wallace Barr. "They're not things that we're preparing for anymore than we could have prepared for them 10 years ago when Foxwoods-and more recently Mohegan Sun-opened up in Connecticut."

Jonas also believes that the reality of legalized gambling in nearby states is still a long way off. He says the best way for Atlantic City's casinos to prepare is to reinvest in their own properties and become a significant player for East Coast gamblers.

"There's not a sense of panic, but of course we never seem to panic around here," he says. "We just spent over $200 million here in Atlantic City, so I wouldn't say we're concerned in any way, shape or form that Atlantic City is going to disappear if the Catskills get gaming."

There are also few worries about the competitive challenges existing operators will face with the opening of the Borgata. In fact, many are embracing it.

"This is a very resilient market. We've been here for over 20 years and we've weathered everything from recessions to new properties to Sept. 11. I don't think the Borgata is going to hurt the market at all," Jonas says. "Do I think for the first six months to a year that there will be a little shifting of business? Sure, that will happen, but long-term, in a year or two, it will increase the depth of this market and will create opportunities for everyone."

Other Hurdles

While expansion and new development will ultimately help grow Atlantic City's casino industry, there are a number of questions that remain.

Chief among them is how well the Borgata will actually fare when it opens. Boughner says he expects a significant amount of trial business from existing Atlantic City casino customers. But, like everyone else, he hopes it will be enough to spur completely new business.

"We feel we'll be opening at a time when there's an improving economy, not just in the northeast, but in the country overall," he says. "Hopefully, this will include a number of people who in recent years-or perhaps never-have considered Atlantic City as a viable destination for their away-from-home entertainment dollar."

Though he did not release revenue projections for the Borgata's first year of operation, Boughner did say he expects the property to easily compete with the better Atlantic City properties, and finish in the upper quarter of the city's casino revenue.

Atlantic City casinos are also facing a proposed 6 percent tax on casino comps such as free meals and hotel rooms. The tax, proposed by Gov. James McGreevey as a way to help balance New Jersey's $23.7 billion budget, has been adamantly opposed by casino executives.

"If it is more costly to comp people, if we'll be more hesitant to do that, it could impact the gaming revenues and therefore impact other state gaming taxes [used] for programs such as senior citizens," Harrah's Eastern Division President Timothy Wilmott was recently quoted by the Press of Atlantic City. 

Zarnett says the proposed tax "sends a bad message to the operators and guys who are willing to invest money" in Atlantic City.

McGreevey has shied away from the tax in recent weeks, instead proposing at least $25 million in state funds to renovate the Boardwalk and other Atlantic City infrastructure. He also called for looser, more streamlined casino regulations in an effort to simplify the regulatory process to attract new gaming investors to the city.

McGreevey's sudden commitment to Atlantic City has convinced at least one wary operator. MGM Mirage had placed on hold plans it had to develop its own wholly owned resort because of the pending comp tax, but CEO Terry Lanni said the company would now move forward with those plans.

"Based on the comments that the governor made today, we have decided to move ahead immediately on this second project, one that will cost $1.5 billion," the Press quoted Lanni an hour after the governor's speech. "Our goal and plan is to be in the ground in September of 2003. We're very bullish on Atlantic City."

The comp tax is not yet a dead issue, however, as McGreevey said in late May that negotiations with casinos were "ongoing."
Despite his company's recent turnaround, casino magnate Donald Trump also continues to have problems refinancing his company's debt. A $470 million bond offering was pulled from the table in May due to lack of interest, even after Trump split it into two parts to make it more attractive to investors.

Trump Hotels & Casino Resorts reported a 45.9 percent increase in cash flow for the first quarter and the company's stock hit a 52-week high of $3.25 in May. But investors are still shying away due to a tiff Trump and the company's bondholders had in late 2001, when Trump withheld interest payments in an attempt to force renegotiations of the company's interest rates on debt. Trump claims the company needs the money to reinvest in his three properties, but bondholders appear unwilling to budge.

Some analysts say casino companies' recent investment in Atlantic City could be a phase. Zarnett points out that one of the main reasons for the investment is a lack of new gaming opportunities throughout the nation to invest in.

"If there were some better opportunities, perhaps some operators would be focused on those instead," Zarnett says. "Gaming companies have a lot of money, and there's nothing to do with it right now, so Atlantic City looks like a good choice to invest in right now."

Leupp told the Press after the market's surprising December revenue figures that it was too early to get excited about Atlantic City, referring to it as a "flattish market." 

Jonas says that despite the number of projects being carried out right now, Atlantic City will continue to remain a regional market. "There's not a lot for a guy in Los Angeles to want to come to Atlantic City for," he says.

But while Jonas, Boughner and others feel Atlantic City is a long way off-if ever-from becoming a mini-Las Vegas, they do think they can lay stakes to a larger segment of the northeastern market. The recent wave of expansions and new projects help fuel that attempt. 

Smaller properties without capital to reinvest, however, may suffer during Atlantic City's resurgence. 

"When it's all said and done, those that haven't reinvested in this market are going to be behind," Jonas says. "I would hope that this doesn't become a have and have-not market." 

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