Sunday, September 21, 2014

Is Atlantic City Doomed to Fail?

               The new season of HBO’s hit prohibition era show Boardwalk Empire has just begun its last season. The show portrays Atlantic City under the control of Political boss turned gangster Enoch “Nucky” Thompson.  As I was watching the show showing Atlantic City at its height my mind turned to the modern day plight of Nucky’s old town.
               It is no secret that Atlantic City is dying; its once booming casinos and boardwalk have decayed to the point of almost no return. This year has been especially tough as the once thriving resort town suffers through the closing of a quarter of its casinos and the downgrading of debts to junk status. The question now becomes whether or not the old Domain of Nucky Johnson (the real life political boss of Atlantic on whom the fictional character Nucky Thompson is based on) could be revitalized and survive into the next decade.
               Atlantic City has always been a playground, throughout the 20’s the beach resort and boardwalk attracted tourists all over the North East and beyond but by the late 70’s the city had fallen on hard times so legalized casino gambling was adopted in 1978 and new life was given to the town. From 1978 to 2006 the gambling industry in A.C (Atlantic City) flourished even surpassing Las Vegas for a brief point in the 80’s and early 90’s. In 2006 annual gambling revenue in A.C reached a peak of $5.2 billion, since then though revenues have been falling in 2013 gambling revenues were at $2.86 billion. What is causing Atlantic City’s decline and could the town be resurrected?
               Well the answer to those questions lies in the finances of Atlantic City’s suffering 12 casinos, of which three, the brand new Revel, Trump Plaza (owned by the now bankrupt Trump Entertainment Resorts) and the Showboat Hotel & Casino (owned by Caesar’s Palace), are closing their doors. Not to mention since the recent bankruptcy of Trump Entertainment those 3 casinos might be joined by another Trump casino, the Taj Mahal which will close its doors in November if labor negotiations fail.
               Clearly the closings and bankruptcies do not paint a pretty picture but just to make you understand just how much Atlantic City depends on its casinos here are some not so fun facts about A.C. Of its 44,000 person population 30-32,000 people work in or for business related to the gambling industry (that is 75% of the population). 65% of the city revenue comes from casino property tax and with the closing of the three casinos the city will lose $30 million annually in lost tax revenue which is equivalent to 15% of the city budget. Oh I almost forgot another not so fun fact, with the three casinos closing 6-8,000 people will find themselves without a job.
               Dealing with the loss of 15% of your city revenue is clearly a terrible thing that requires drastic action, what do you think Atlantic City’s Mayor, Dan Guardian, is proposing to raise more revenue? The esteemed Mayor has proposed raising property taxes 29% on homeowners. Just to let you know how absurd that really is, Atlantic City has an unemployment rate of 13% (double that of the nations) and with the casinos bleeding cash it likely that number will rise, the mayor is saying that the town should tax these very people more in order for the town to stay afloat. Obviously the unemployed and the soon to be unemployed have little to give the town in terms of taxes.
               Atlantic City needs a new plan if it wants to survive. New Jersey Governor Chris Christie has said that his administration has a 5 year plan for the city, which includes building a new convention center. For the short term that might be a decent idea since it will provide construction jobs and additional tax revenue, it is certainly better than the Mayor’s plan for raising property taxes. But this is only a short term solution, the new convention center will need to attract people to the city and not just a few a lot of people if it wants to generate even a fraction of the business the casinos used to.
With the casinos going out of business left and right it is hard to see if Atlantic City could resurrect itself, but hold on their Atlantic City’s casinos might not be totally doomed. Although that is what Christie said 2 years ago when the Revel Hotel & Casino was opened. The 1,600 room Revel was called a game changer when it was first opened in 2012; it was widely believed that with an opening of a hotel and casino as grand as the Revel was it meant that surely Atlantic City was recovering and that it would regain its lost glory. Well it turns out that those so called promises of recovery were merely false promises, the Revel proved to be a disaster. Hurt by increased competition in Pennsylvania, Maryland and Delaware the hotel & casino lost $185 million in 2013 and declared bankruptcy twice in as many years. Now the owners of the Revel have slated that the once so promising resort will close its doors for good, an act which will cost 3,000 people there jobs.
The Revel joins the Trump Casinos and the Showboat in the world of sunken Atlantic City casinos but as I have said before the future might not be as bleak as it seems for the A.C casino industry. The Revel although thoroughly bankrupt (the $2.4 billion property had less than $3.7 million in cash left when it declared that it will close its doors) has been put up for auction. At first it might seem as though nobody would want the sunken casino but apparently interested investors think they have spotted opportunity in the form of the closed casinos on Atlantic City’s boardwalk.     
Glenn Struab a Florida real estate developer, has offered a $90 million cash bid for the property, stating that with a large cash infusion he could reopen the property in 2 years. Alex Muruelo, owner of the California bases Muruelo Group (which has tried to break into the Atlantic City casino market before with a bid for the Trump Plaza) has also described an interest in the Revel. Another far more familiar name also seems to desire the Revel, activist investor Carl Icahn.  
You might know him as the man who intimidated Tim Cook and the largest company in the world (Apple) into buying back $100 billion of their own stock, or as the man who has been battling Bill Ackman over Herbalife but perhaps you did not know that Icahn also has his fingers in Atlantic City. Apparently Icahn owns the Tropicana Hotel & Casino, and since the bankruptcy of Trump Entertainment Resorts, the Taj Mahal is about to fall into the hands of the infamous activist investor.
Since the last time Trump Entertainment declared chapter 11 back in 2011 (it has declared bankruptcy 4 times since the company was created) Icahn has been the principle owner of the debt of the beleaguered casino company bearing the name of rival billionaire Donald Trump. He currently owns $285 million in secured debt of Trump Entertainment, giving him an opening to take control of the company and its two casinos.
Icahn has not made it clear whether or not he will close the casinos and funnel there customers to the Tropicana, but he has made it clear that the Trump Plaza will close its doors for certain, whether or not the Taj Mahal (the 5th most profitable casino in A.C generating about $131 million in gambling revenue annually) is yet to be seen. By the way as a side not Donald Trump has little affiliation with Trump Entertainment Resorts he owns less than 5% of the stock and has been trying to strike his name from the company for years.
As for large casino companies with assets on the boardwalk the decline of Atlantic City has been detrimental to their bottom lines. Especially since AC used to be one of the top gambling destinations in the world many companies invested billions into developing resorts there. Caesars Palace owns 3 casinos there, MGM also has a presence as well as Boyd Gaming which owns the most profitable hotel & casino in AC, the Borgata which has a 95% occupancy rate every night.
To understand just how important AC is to these companies all one has to do is look at how much of a percentage of the company’s profits come from its Atlantic City properties. Caesars Palace makes 20% of its revenues from AC and Boyd gets 14% of its profits from the shrinking resort town as well. Clearly Atlantic City is an important asset to the casino companies of the U.S and obviously gambling is in demand so why is Atlantic City and its casino’s going under?
The answer is that the casinos in the area south of the Tri-state (which includes Southern New Jersey, Maryland, Delaware, and Pennsylvania) have been overbuilt. There are simply too many casinos and the supply has outstripped the demand. Atlantic City thrived when it was the only place on the East Coast to go gamble now a day though you could go anywhere and find a casino.
Atlantic City has lost its monopoly and is now going down the drains, the good news is that gamblers are still flocking to AC and to the out of state casinos in Pennsylvania and Maryland which means there is still a large demand. With the closing of the three casinos and the possible closing of a 4th the other casinos in AC might be saved as they eat up the customers from there failed competitors.
Regardless skeptics believe that in 5 years gambling revenues in AC will have dropped to a mere $1.5 billion and that half of the casinos still afloat will go under. Personally I doubt that things will get so bad, I believe that AC’s problems stem from the over saturation of the casino market and that the means to it survival lie in closing as many of its casinos as possible. With that said AC can no longer rely on gambling to sustain it instead the resort town has to invest in a new industry which should be its beaches and boardwalk much like its neighbors to the North in Longbranch and Asbury Park. AC has traditionally neglected its beaches I believe its time for that to change, unfortunately to renovate these things requires cash and AC has none. But it is necessary, Atlantic City is not a lost cause and could be resurrected it just needs new blood and an infusion of money.
As for the companies operating out of Ac I believe investing in them is a terrible idea, in fact investing in any casino company that derives most of its revenue from the continental U.S is a bad idea. There is simply too much competition in the U.S gambling market. Atlantic City is merely a victim, a symptom of this disease. This disease which is called oversaturation, it’s the thing that destroyed the railroads, and the banks it will do the same with gambling. The best time to buy into U.S based gambling companies will be in 5-10 years from now when the majority of them declare bankruptcy and shut their doors.