Atlantic City Real Estate Seeing Better Days
by Ian Lazarus
Over the past year five casino assets in Atlantic City are looking for buyers, raising concerns that the East Coast gambling enclave could be starved for new investment at a moment when competition from elsewhere is rising.
The for-sale signs covered a diverse group, from the city's oldest casino Resorts to a 50% stake in its newest The Borgata, as well as a vacant lot on Illinois Ave.. Morgan Stanley finally sold the 1,100-room Revel, a partly finished hotel-casino, and reported a $932 million loss on the $1.2 billion investment. The project is expected to open in late summer of 2012.
"It is perilous," said Harvey Perkins, an Atlantic City-based casino consultant at Spectrum Gaming Group. "Saying Atlantic City is a buyers market is almost an oxymoronic statement because it assumes there are going to be buyers."
Atlantic City By: Michael Ein
Prices have dropped sharply. Trump Entertainment Resorts, emerged from bankruptcy, and sold its aging Trump Marina to Landry's Entertainment for $38 million. A deal in 2008 to sell the property to Coastal Development LLC for $316 million fell through, even after the price was lowered to $270 million last year. The company received an offer on the property in July 2009 for $75 million.
Atlantic City has gone through previous stretches with little investor enthusiasm, and local proponents expect the market to rebound as it has in the past. However, many industry watchers worry that new investors aren't likely to appear until the city's depressed gambling revenues rebound, and that's a vicious circle.
A few years ago, Atlantic City appeared poised to lure a flood of new investment from companies that wanted to create a smaller-scale version of Las Vegas. By building clusters of high-end hotels, shops and restaurants, they hoped to transform the place into a sophisticated resort destination that wasn't dependent on day-tripping gamblers.
Only a portion of those investments took shape before the credit markets seized up.
Many expect gambling revenue to fall further this summer when Pennsylvania casinos, which so far have had just slot machines, add table games.
Even investors who previously had been interested in Atlantic City are now skeptical.
"We continue to believe that Atlantic City is over supplied," said Tim Wilmott, chief operating officer of Penn National Gaming, which operates numerous regional casinos. He added: "There needs to be some pruning of the operations there to get it down to the level that is more commensurate for the size of the market. You still have a lot of further competition coming into that regional space."
Atlantic City's first casino, Resorts, which has the hands and signatures of celebrities embedded in concrete outside its Boardwalk entrance, was taken over by mortgage holders last year. Dennis Gomes recently bought the casino and currently manages the property, and intends to invest an additional $25 million in the property, according to a person familiar with the situation. The casino reported an $18 million loss before interest, depreciation, amortization and taxes last year.
A stake in the Borgata is also on the block. MGM Mirage last March struck a deal with New Jersey regulators to sell its 50% stake in the Borgata, Atlantic City's newest and most successful casino.
Casino consultant Bill Lerner of Union Gaming Group, estimates MGM Mirage would draw $160 million to $360 million, while other analysts have estimated as high as $500 million. Boyd Gaming, which owns the other half of the Borgata, has the right to match any offer.
The fifth property is raw land. Earlier last year Pinnacle Entertainment, Inc. put 19 acres of land for sale that once housed the Sands casino. In 2006 the company spent $275 million buying the casino, Atlantic City's smallest at the time. It imploded it a year later -the first casino torn down in the East Coast gambling capital. The plan was to build a multi-billion dollar casino on the site. But in 2009 it was projected a $357 million loss on the approximately $400 million it spent on the site. As of February, Pinnacle's interim chief executive at the time, John Giovenco, said there hadn't been much interest so far.
The hotel-casinos in question account for around 26% of the hotel rooms that are attached to casinos in Atlantic City, leaving out the unfinished Revel and the torn-down Sands.
Atlantic City operators say they have made improvements, and some longtime observers believe the market's fundamentals are still strong. In 2008, Spectrum, the gaming consultancy, wrote a report that pointed to a gambling tax rate of 9%, among the lowest in the country, and opportunity to grow the non-gambling market, such as higher-end restaurants, entertainment and shopping. It also noted risks such as rising competition from surrounding states, poor image and revenue declines.
Boosters hope that longtime plans to grow the regional convention business will pay off some day. Until recently, operators hadn't been willing to give up blocks of rooms that would otherwise go to more lucrative gamblers. Some also support a plan to allow new casinos to be attached to smaller hotels, which they hope will spur more investment. Some opponents argue that it would make it tougher for existing operators by dispersing gambling dollars.
"The same factors are largely in place today that were there three to four years ago," said Spectrum Managing Director Michael Pollock. "It's just a question of what was viewed as half full is now viewed as half empty."
Optimism has come back with the state plan to take over the Atlantic City Tourism District and the merging of the Casino Control Commision with the Department of Gaming Enforcement. Other New Jersey state bill have paved the way to have the Casino Reinvestment Development Authority help develop the tourism district with millions of dollars from casino gross profits. "For the first time in thirty something years the funds are going to stay in Atlantic City." Gov. Christie said at the press conference after the signing of the bills back on February 1st.
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Ian Lazarus
The Lazarus Team
The Landis Co., Realtors
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