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.
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