A Tale of Two Cities
Viewed from the distance of a highway, Atlantic City’s skyline never exactly inspired awe. But its familiar, shimmering casino logos still managed to trigger the buzzy anticipation of high-stakes risk and an impending, if unlikely, opportunity to bring down the house. Bright lights signaled proximity to Caesars, Bally’s and Tropicana in candy-colored red. Along with the faux exotic font of Taj Mahal, they all augured action. It wasn’t Vegas, but for those in the northeast, it also wasn’t a five-hour plane ride either. If you needed a gambling fix and lived within driving distance, AC felt robust enough to satisfy.
That was then. These days, a nocturnal ride on the Atlantic City Expressway feels a little grim. Sandwiched between the alluring beacons of AC, pockets of darkness hover. Like missing teeth on a once-good-enough mouth, the casinos Revel, Trump Plaza, Showboat and Atlantic Club are now black spaces on the boardwalk. It leaves you wondering what went wrong rather than what might go right. Consider the fact that that Revel, built for $2.4 billion, is being sold off to Brookfield Asset Management for $110 million (assuming Brookfield does not reneg). Or that Showboat has been sold to Richard Stockton College to be used as a satellite campus. Those recently shuttered casinos—triple whammied by the recession, Hurricane Sandy and more competition along the East Coast—killed their lights, blotted the landscape, ceased paying taxes and leave one to mull how the hell a casino can go broke. Maybe the house doesn’t always win, at least not in the long run. Definitely not in Atlantic City.
But it doesn’t have to be that way. As is the case with Atlantic City, Las Vegas also faced fiery trials throughout the recession. Casinos there laid off thousands of workers, unemployment spiked as high as 16 percent, the housing market crashed, major would-be properties ceased construction midway through and countless projects failed to attain liftoff. Nevertheless, Vegas has emerged stronger than ever, with more visitors and more rooms than it had prior to the start of the recession. In this tale of two cities, why did one come out victorious and the other battered?
“Most casinos in Atlantic City did one critical thing very poorly,” says Robert Shore, an analyst with Union Gaming, which tracks the gambling market for investment firms. “They did nothing to reinvent themselves. They had a monopoly on gambling in the northeast and never did anything to differentiate themselves. Now, there are numerous offerings in Philadelphia, Connecticut, Maryland and Delaware. They are very similar to those offered in Atlantic City. Why spend $20 in gas and tolls and travel for an hour to get there?” Plus, he adds, “Having empty casinos along the boardwalk does not make the place any more attractive.”
Lisa Cartmell, president of Atlantic City Alliance, an entity designed to spread good news about casino gaming in New Jersey, has some answers. She blames out-of-whack taxation and a lack of foresight. Contributing $200 million to Atlantic City’s $250 million operating budget, gambling dens there are responsible for keeping the city afloat. Additionally, when the recession hit and cash-strapped states along the East Coast needed money, legislators legalized casino gambling in the region as an easy revenue generator. Suddenly the Atlantic City monopoly was no more. “It’s a downward spiral,” she acknowledges. “People look for more than just slot machines to play. You need to offer more than that to get visitors to come here when it is not Memorial Day to Labor Day.” She refers to the heart of the summer season in AC, when borderline proximity to the Atlantic Ocean turns the gambling town into an alluring destination. “That is when occupancy reaches 95 percent, seven days per week. But casinos with staffs of 1,300 to 1,500 can’t survive when weekdays slow down during the off season.”
Jim Murren, who serves as chairman and CEO of MGM Resorts International, which partners in Borgata (far and away Atlantic City’s best hotel/casino), puts a finer point on it. He blames the casino owners themselves for not keeping up with the important things or with mustering the necessary degrees of commitment. “There was so much merger-and-acquisition activity in Atlantic City, a lot of consolidation, companies going private, Trump as a company going bankrupt twice, hedge-fund guys leveraging buildings to the limit and then sucking out the money,” Murren says, sitting on a sofa in his plush, sprawling, desert-view office at the Bellagio. “There was no money to reinvest and no margin for error if cash flow declined,” continues Murren. “Atlantic City was a transactional market for a long time. Some of the properties there have had five different owners in their lifetimes. How do you maintain continuity? Also, when you have new casinos in Delaware, Maryland and Philadelphia, why would you go to something that looks like it’s 30 years old and in many cases is 30 years old?”
One spot that has had continual success in Atlantic City is the Borgata. Jersey guys lovingly describe it as AC’s Vegas-style casino, and it totally feels that way. Cool restaurants, fresh rooms and a pretty good club all contribute to the impression. But it comes at a price. “We put $25 million a year into the property for maintenance,” says Joe Lupo, a Vegas veteran and the Borgata’s senior vice president of operations. “Then we spent another $600 million on expansion and $50 million more when we redid the rooms. That is more money than what the entire Golden Nugget was built for.”
One upside of the casino closings in Atlantic City is that gamblers, who tend to be loyal to single properties so that they can accumulate comps, are suddenly in freefall if they favored a place that closed. A bit of a dogfight is going on to snag those players. “We’re going after all the new business we can,” says Lupo who has initiated incentives such as free buffets for people who show player cards from defunct casinos and an offer to start them out on the levels they achieved at their previous casinos of choice. “People see our hotel rooms and they recognize real value.” A concern of Lupo’s? “We want to make sure that people see Borgata as an accessible brand. We don’t want them to think it’s too upscale.”
Meanwhile, recently elected Mayor Don Guardian finds himself needing to deal with a broken city, busted-out casinos, hunks of eyesore real estate and a shortfall of taxes (particularly since four of his tax-paying casinos have suddenly evaporated, leaving only eight remaining casinos). A cigar-loving optimist in a bowtie, who entered politics by running for mayor of his city, Guardian has a knack for gallows humor. “We’re at the end of another chapter in Atlantic City,” he says, bemoaning its propensity to be a one-shot locale: first with bootlegging during prohibition, then with its convention center in the 1950s and 1960s and finally with gambling. “Today our monopoly is over. There are 30 casinos [on the east coast] competing for business and the weakest ones are dying. Unfortunately, the weakest casinos all happen to be here.” The question is: What’s sustainable? Golden Nugget and Resorts? “Yes,” answers Guardian, “as long as they have deep-pocketed, visionary owners who invest in their properties and are willing to lose money now to make money later. As for the Taj Mahal, [current owner] Carl Icahn can save it if he is willing to put in $100 million to avoid walking away from a $235 million note. The Tropicana and Resorts have both been made into great properties.”
He’s not worried about Borgata and has confidence that Brookfield Asset Management will do just fine with Revel at its fire-sale price. Beyond that, he has serious work cut out for him and takes solace in the fact that Atlantic City generated $2.86 billion in casino winnings last year. Still, Guardian acknowledges of his 14 months in office, it was tough for him to see those casinos shutting down. “But I don’t know any better. Right now, I have nothing but bad days here. I only know bad news.”
Roughly 2,500 miles away, everything in Las Vegas seems to sparkle. Life on the famed, light-saturated Strip is in overdrive. Giant steaks, fancy cocktails, busy nightclubs and impossibly beautiful girls all seem to perfectly complement the gambling in a city that’s managed to transform itself. The difference between Vegas during 2007, the height of the recession, and today is stark. It’s easy to imagine that it all happened by accident or a lucky double down or some kind of divine intervention. But it was more a case of calculated risk, dedication and carefully reading the tea leaves when it really counted.
To see how things really were in the bad old days, Jim Murren flashes back to a dismal afternoon in 2007. CityCenter—an enormous $9.2 billion hotel/casino complex conceived in the halcyon days of 2004, ground-broken in the boom days of 2006 and troubled by 2007—was in jeopardy of being shut down. At the time, Vegas housing prices had collapsed, other casino projects were derailed and CityCenter’s financial partner, deep-pocketed Dubai World, had pulled out and stopped contributing funds. MGM’s bank group had suggested that Murren do the same thing. In short, they meant that he should shut down his wildly ambitious project. Security guards were hired to protect the half-finished CityCenter, protective fencing had been purchased and Murren prepared to hop a jet to Delaware, where CityCenter is incorporated, and file for bankruptcy.
But Murren saw something that the bean counters might have missed. “I believed that if CityCenter filed bankruptcy, there was no next chance for Las Vegas; it would send the world a very specific message about Las Vegas as a whole,” he says, adding that, at the time, Vegas had come to symbolize all that was wrong with the U.S. economy. “For us, it’s right between Bellagio and Monte Carlo [two properties owned by MGM, the largest casino entity in Vegas and the largest employer in all of Nevada]. Unfinished and fenced in, it would have been a blight that deterred people from coming here.”
So Murren took one more shot. He recalls sitting at a glass-topped table in his office, right next to those same large glass windows overlooking the desert. He and his CFO Dan D’Arrigo were in the middle of a critical conference call with lenders. It could have been their last. Bankers were going to vote on whether or not to keep floating money for the project—not only MGM’s money but also enough to cover the shortfall created by Dubai World’s pullout. “All of a sudden,” he remembers, “in the middle of the call, those glass panels started vibrating. It got very loud. I had to put the bankers on hold—not a great thing to do when you’re begging them for money—and see what was going on. I looked up and saw five helicopters circling CityCenter. Word was out. TV stations were getting footage for their news broadcasts. The lead story was going to be CityCenter declaring bankruptcy.”
Of course, though, that did not happen. The bankers came back with a 50.43 percent vote in favor of keeping the cash coming. Soon, impressed by the lenders’ confidence, Dubai World returned to the fold. The project—with three hotels, one casino and a never-to-be-completed condo—neared the finish line within seven months. Before 2007 ended, MGM publicists began touring journalists through the new, so-called “city within the city,” paying particular attention to the luxurious Aria.
Arguably, it initiated a comeback for Las Vegas that still took several years to gain footing. At this point, right now, in early 2015, visitation is record-breaking again and SLS Las Vegas—an offshoot of Sam Nazarian’s trendy hotel in Los Angeles—opened last summer. The Cromwell (owned by a division of Caesars) and Delano (owned by MGM) both represent total, high-style redos of, respectively, Bill’s Gamblin’ Hall and The Hotel. A big, new project from Asian-based Ghenting Group and a small but extremely high-end hotel/casino from Australian Mogul James Packer will be opening right near SLS on the currently dreary (but not for long!) north end of the Strip. During my recent visit to Vegas, two ribbon cuttings took place: one for the ground breaking of a new arena and the other for the opening of Linq (also owned by a Caesars division), an overhaul of the old and decrepit Imperial Palace. The new incarnation is targeted at demanding but budget-minded millennials.
Caesars Entertainment Operating Co. is struggling with debt and has warned investors of a possible bankruptcy filing. If a restructuring were to occur, Linq and Cromwell should be safe, because they’re operated by a different division called Caesars Growth Properties. Other Caesars properties would emerge as part of a real estate investment trust.
Slated to open this coming spring will be Rock In Rio USA, a music festival site being put up by MGM, which will have nothing to do with gambling. “Possessing the dominant number of rooms in Las Vegas, we can’t justify building more resorts here, but we can build amenities that make our existing resorts more profitable,” says Murren, explaining that the initiative goes beyond this outdoor festival space. “We’re building a $100 million park, open to the public. Ten years ago, doing that would have gotten you fired.”
A lot of Vegas’s new product is all about diversification and catering to a fresh group of visitors. But the focus has to be recalibrated. Over the last few years, something stunning happened: the median age of visitors dipped from 51 to 46. John Unwin, CEO of Cosmopolitan of Las Vegas (who announced he was stepping down as this magazine went to press), describes the shift as “seismic.” Considering that Vegas attracts 40 million visitors anually, the change signifies a serious movement to a crowd less interested in gambling and more interested in music, food and shopping.
That reality cannot make Arash Azarbarzin any happier. He is president of SBE Hotel Group, the parent company of SLS Las Vegas, designed to tap into the burgeoning generation of visitors. SBE purchased the old Sahara in 2007, at the height of the market. But the place was such a wreck that they got it for the relative bargain price of $300 million. Then all they had to do was find funding in order to gut and redo the place at the hands of virtual in-house designer Philippe Starck. That took four years. The fact that gaming does not seem to be a growth business in Vegas does not worry Azarbarzin. He is going for the higher end of the millennial market and recognizes what members of that demographic like to spend their money on. “We hope to make 25 percent from gambling; the Vegas average is 36 percent,” he says. “People were worried about regional casinos and Macau and Indonesia. But our business model is approachable luxury. We’re not going after high rollers who want 12,000-square-foot villas.” His customers are looking for clubs, cool dining and a great pool experience.
The SLS ethos here is reflected in the design and amenities. While paying tribute to the Sahara—once favored by Johnny Carson and Rat Pack approved—with sleek design and a pool that echoes the 1950s, this is far from a retro trip. High-definition screens loaded with animation help to goose the casino’s energy level; José Andres’s steakhouse serves excellent, high-priced food in a surreal environment; the blood-red themed casino looks like it could have come out of a Tarantino movie. “We don’t have the budget for a $300,000 chandelier or the lagoon inside Wynn Las Vegas,” Azarbarzin admits. “We’re using design, dining and attractions to bring people in.” Just check out the dealers, wearing snazzy vests with monkeys patterned on the back.
If that’s enough to draw folks and their credit cards to the far northern reaches of the Las Vegas Strip, it has yet to be fully confirmed. But Ghenting, James Packer and even MGM seem to believe in the location—and those guys don’t make many mistakes. Quoting Steve Wynn, Azarbarzin says, “You’re worst neighbor is a vacant lot. And soon, we’re not going to have them here.”
Hotel and casino executives all talk a good game, especially when they crow about themselves, but the real indication of where a city is going can be gauged by its incoming investment dollars. Besides Packer, Ghenting and the others, there is the Blackstone Group. It recently ponied up $1.73 billion for the purchase of Cosmopolitan, a star-crossed property that was supposed to be a condominium and went bust. It fell into the hands of financial backer Deutsche Bank, opened as a hotel/casino in 2010 and spent the last four years as a casino so leveraged that it could not turn a profit despite having the highest room rates in Las Vegas, a nightclub tied as the top grossing venue of its kind in the United States and some distinctively cool restaurants. As Unwin puts it: “You can come here for a good steak at STK, but there’ll be a DJ there and it will be fun.” He adds, “You had an era that started with the Mirage, everybody kept trying to improve on it, and it ended with CityCenter. Cosmopolitan came at it with a different, more global view. I am hoping that we’ll be seen as the beginning of a new era in Las Vegas.”
Though Blackstone has said that it purchases underperforming properties to improve and sell, Unwin points to his new boss’s recent commercial and residential real estate acquisitions in Vegas. He believes that the company is there for a long haul. Shore figures that with sharp casino management, Blackstone can significantly raise Cosmo’s gambling revenue. Plus, for the money paid, the place should turn a profit. “Blackstone knows the value of a room rate over $300 in a 3,000 room hotel,” Unwin says. “These guys have to produce returns that are really high. Their investors want 15 or 20 percent annually. Blackstone felt the price was good. They really like the brand and see possibilities. We mutually believe that we have several years of runway to go before the much flatter rate of growth kicks in. Because we have such big, fixed overhead expenses, as we drive revenue numbers, the flow-through on profit is really strong.”
While Vegas works to maintain its mojo, to keep providing more than just gambling and further broadening international appeal, Atlantic City looks to fix itself and trundle toward some kind of stability that does not include casinos declaring bankruptcy. Ray Lesniak, a democratic New Jersey senator who is bullish on expanding all kinds of gambling in the state, has been rallying for sports betting as a revenue builder and spirit booster. “For Atlantic City and the race track industry here, sports betting brings the survival of both,” he says, explaining that current legislation would have tracks and casinos both taking action. “Sports bettors stay in casinos, they dine there, they rent rooms there, they do other forms of gambling there.”
Just one problem: While Governor Chris Christie has decreed that casinos and tracks will not be punished for taking sports bets, the activity remains illegal on a federal level. Plus, following lawsuits from major sporting leagues, U.S. District Judge Michael Shipp put an 11th hour hold on sports wagering in New Jersey. But even if that gets lifted, casino owners who also have properties outside of AC will be gun-shy to participate without a federal green light. Besides, as just about every knowledgeable person believes, it won’t be just one thing—not sports and not the woefully under-performing online poker—that will save Atlantic City. Mayor Guardian points out, “People say that Internet gambling is only $10 million per month. I think $10 million is nothing to sneeze at.”
The Atlantic City Alliance’s Cartmell bursts out with nervous laughter while acknowledging that AC is 20 years behind Vegas in terms of getting the importance of diversifying, but at least things are being figured out now rather than never. Guardian has already put together free concerts on the beach, held air shows and marathons, and is working hard to ramp up convention business. He’s hoping that the remaining casinos can stay solvent by picking up players from the fallen ones—though there is a theory that Atlantic City can now accommodate fewer people, so the end result may be a bit of a wash. He also has plans to clean up the dangerous, unkempt vibe that permeates residential neighborhoods in a town that has earned an unflattering nickname: Detroit by the Sea.
Nevertheless, as Guardian sees it, even the current dire financials can be seen as a positive. “The Revel was bought for $110 million and it cost $2.2 billion to build,” says Guardian. “The Pier [a shopping mall across the boardwalk from Caesars] with Gucci and Vuitton and Burberry was bought for just $2.5 million. I have a townhouse condominium that sold for over $300,000 six years ago. Now it’s $150,000. It’s a bargain to come here. And we are now business friendly, which has not always been the case.”
Whether or not corporate bargain hunters can salvage AC may define the arc of the storied city’s next chapter. If there even is one.
Michael Kaplan is a Cigar Aficionado contributing editor.