Raising the Stakes
To a surprising degree, the streets of this salt-air amusement park have maintained their relative real estate values since Charles Darrow, an out-of-work engineer from Germantown, Pa., carved their names into the American psyche with his Depression-era board game, “Monopoly.”
Boardwalk and Park Place remain the priciest addresses; Baltic and Mediterranean avenues are still low-rent. In the real-life city, as in the game, the only way to riches is by owning the hotels.
Today, however, the Atlantic City game board is being shaken up more profoundly than at any time since the down-at-the-heels resort--in a last-ditch attempt at revival--embraced casino gambling in 1978.
An explosion of new construction will double the number of hotel rooms and casino floor space by 2000. Nearly $4 billion worth of expansion has been announced by the world’s biggest gambling and entertainment companies--Mirage Resorts Inc., MGM Grand Inc., Hilton Hotels Corp., ITT Corp. and Sun International Hotels Ltd. among them. That is more than two-thirds as much as all the investment that this city of 37,000 has attracted in the 18 years since the first quarter clanked into a slot machine here.
The companies are gambling on the same economic formula that has propelled Las Vegas: Supply creates demand--or, in “Field of Dreams” terminology, if you build it, they will come.
And with any luck, investors hope, they won’t all come by bus.
Atlantic City from the start has been a day-trippers’ gambling destination, with an average visit of eight hours, as opposed to two to three days for Las Vegas. Bus traffic is so important that most of the 12 casinos have in-house bus depots.
To become more like their glitzy desert cousins in Nevada, the Atlantic City casinos want to move their customer base higher on the income scale and lower on the age scale. That means getting people to stay overnight and providing more ways for them to spend their money than just on games.
A few non-casino attractions are starting to emerge. A Ripley’s Believe It or Not museum recently opened on the Boardwalk, and a flock of new themed restaurants is on the drawing board.
Angling for younger gamblers, Donald J. Trump, the New York real estate tycoon who dominates the Atlantic City market with four casinos, is negotiating with Britain’s Rank Organization to re-theme his Trump Castle casino along the lines of Rank’s Hard Rock Cafe.
Trump’s archrival, Mirage Chairman Steve Wynn, plans to weigh in with his own new casino in the Marina section next to the Castle.
Wynn’s deal hinges on a controversial agreement with the state and city under which Mirage gets free title to about 150 acres of land in exchange for cleaning it up, developing it and bearing $55 million of the estimated $330-million cost of building a new highway tunnel from the Atlantic City Expressway to the Marina district.
The deal has attracted lawsuits from owners of several of the nine homes that would be demolished to make way for the tunnel. Wynn has dismissed the suits as “frivolous” and expects the agreement to be completed soon.
Two other renowned financiers, Los Angeles’ Marvin Davis and New York’s Ronald O. Perelman, also are kicking the tires on the Boardwalk. Acting independently during the summer, Davis and Perelman each applied for and received licenses to run Atlantic City casinos, although neither has announced a specific project.
Wall Street is excited about all the activity, eagerly providing equity and debt financing to the casinos and ignoring the lonely handful of critics who warn of overbuilding.
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A few streets away from the casinos, however, the city’s intransigent poverty becomes apparent in the tenements, pawnshops and strip joints. Although the city’s crime rate has dipped in recent years, its poverty and unemployment rates remain stubbornly higher than those of New Jersey as a whole, despite the fact that about 10,000 of the more than 30,000 casino jobs are held by city residents.
“There isn’t a lot of trickle-down,” acknowledged Jim Kennedy, a South Jersey native who runs the New Jersey Casino Redevelopment Authority, the agency that funnels the 2.5% state tax on gambling revenues into public projects in Atlantic City and other urban areas.
The agency has provided 1,100 units of subsidized new housing, primarily for low-income residents, over the last five years and is involved in a $175-million refurbishing of the corridor along the expressway.
Except on the Boardwalk, private non-casino investment is almost nil. Pressed for examples of these kinds of projects, officials point with pride to a gas station-convenience store under construction near the center of town and to a local restaurant that apparently thrives without depending on casinos for customers.
“Remember,” Trump intoned during a recent interview in his Manhattan office with its gallery of magazine covers featuring his granitic face, “Atlantic City is about gaming.”
To understand the recent surge of investor enthusiasm for Atlantic City, experts say, it’s necessary to look back to February 1995, when new Republican Gov. Christine Todd Whitman and the New Jersey Legislature--reacting to what looked like serious threats to the state’s gaming business--relaxed some of the regulations that casino operators had found most onerous.
These included rules that required kitchen workers, chambermaids and other hotel employees to undergo the same kinds of criminal background checks as blackjack dealers and casino pit bosses. If a casino wanted to move a card table or slot machine to another spot on the floor, to cite another example, it had to petition the state Casino Control Commission.
“Even the color of the chips had to be regulated,” said Milton Leontiades, dean of the Rutgers University School of Business in Camden, N.J., who said the state’s heavy hand stifled innovation by the casino operators and drove one of the most prominent--Mirage’s Wynn--out of town.
“Sometimes it takes a crisis to make a change,” observed Marvin B. Roffman, a veteran gaming industry analyst based in Philadelphia.
The crisis in this case was competition. Indiana and Mississippi had legalized riverboat gambling in the early 1990s, and Connecticut’s Mashantucket Pequot Native American tribe had opened what would prove to be the world’s largest and most successful casino, the Foxwoods Resort in Ledyard, Conn.
Even closer to home, there was a major legislative thrust for casino gambling in Pennsylvania and even some talk about casinos in New York City.
“The talk started to scare the New Jersey pols,” Roffman said. From a regulatory climate that Roffman called “extraordinarily strict, even hostile,” the state swung to a much more accommodative posture.
Bradford S. Smith, Whitman’s appointee as chairman of the Casino Control Commission--the top gaming watchdog--said unabashedly in a recent interview that promoting the gambling business and Atlantic City itself is a key part of his job.
When Salomon Bros.’ influential gaming analyst W. Bruce Turner was in town in early 1995, for example, Smith saw to it that he got a guided tour of the city from Mayor Jim Whelan. Turner’s glowing report, titled “Atlantic City: Worthy of a Second Look,” was regarded as a major step toward winning back Wall Street’s confidence.
Meanwhile, the threat from Pennsylvania receded when incoming Gov. Tom Ridge said he would not endorse casino gaming without a referendum. Although cities such as Phildelphia might support gambling as a job-and-revenue producer, the idea is thought to have little chance of success in a statewide vote.
Perhaps the biggest sign that things had changed in Atlantic City was Mirage’s decision to return. Fed up with what he regarded as excessive regulation, Wynn sold his Golden Nugget casino to Bally’s in 1987, vowing never to return. Instead, he focused his attention--and hundreds of millions of dollars of investments--on Las Vegas.
But now Wynn is back, with plans to build his own 2,000-room, $500-million hotel-casino and preliminary agreements with Circus Circus Enterprises Inc. and Boyd Gaming Corp. to put major new casinos on the same large block of Marina-area property.
The stampede into Atlantic City has some observers wondering whether the new casino capacity will outstrip the number of customers.
Atlantic City boosters point to the enormous size of the regional market, saying that Atlantic City is within a tankful of gas of a quarter of the U.S. population. Trump said the local market is so huge that, in effect, it doesn’t even need people from the Midwest or West Coast.
At least for the area north of New York City, however, Native American gaming in Connecticut has siphoned off a large part of the car and bus business.
One stark example: For many years, Rhode Island-based Bonanza Bus Lines Inc. used to run eight full buses a week between Providence and Atlantic City, executive vice president George Hunter said. But when the mammoth Foxwoods Resort introduced slot machines two years ago, he said, the flow of Rhode Islanders to Atlantic City instantly was choked to a trickle, causing Bonanza to cut back to just two trips a month. Hunter said the story has been similar for other New England bus lines.
And Foxwoods--a $1-billion-a-year dynamo--has just been joined by the Mohegan Sun Casino in nearby Uncasville, where 20,000 people passed through the doors in the first two hours it was open on Oct. 12.
Al Glasgow, publisher of Atlantic City Action, a newsletter that follows the local gaming scene, said one threat is the “ShopRite-type marketing” employed by some of the casino operators, who compete with one another by showering players with coins and coupons and adjust the “hold” on their slot machines to boost player winnings.
By some estimates, as many as half of Atlantic City’s casino hotel rooms are “comped,” or given free of charge, to gamblers.
Glasgow, who says such discounting is more pervasive in Atlantic City than in Las Vegas, has noticed that when a new or renovated casino opens, the price cutting gets more intensive. In theory, a better winning percentage encourages a slot machine player to deposit more coins, he said, but the added volume doesn’t necessarily translate into higher total profits.
The opening of a slew of big new casinos within a relatively short period may lead to a discounting frenzy in which poorer-capitalized operators see their market shares badly eroded and even the stronger companies suffer reduced profitability, Glasgow said.
Others say such worries miss the point that Atlantic City is on the verge of achieving its long-promised destiny of becoming a “destination resort.”
At MGM Grand Inc., for example, Alex Yemenidjian, president and chief operating officer, pronounced himself “very bullish on the future of Atlantic City.”
The Las Vegas-based company, controlled by financier Kirk Kerkorian, was bullish enough this past July to announce a $700-million hotel-casino to be built on 30 acres of Boardwalk property owned by shopping mall developer Forest City Ratner Cos.
Next to the casino, Forest City Ratner will construct a 335,000-square-foot retail and entertainment complex--one of the largest private non-gaming projects ever undertaken in the city.
When Atlantic City’s hotel capacity expands to 20,000 to 25,000 rooms in a few years, Yemenidjian said in a recent interview, the resulting “critical mass” will cause airlines to offer cheap fares to the city, thereby attracting customers from all over the country.
Public infrastructure projects already in the works--including the construction of a large convention center and adjacent hotel, plus renovations to the city’s airport, upgrading its baggage-handling facilities and adding other improvements--can only enhance the process, Yemenidjian said.
Travelers who come from farther away will stay longer and spend their money on things other than gambling, changing the profile of Atlantic City to something more akin to that of Las Vegas, according to those holding a bullish view.
Gaming analyst Daniel Davila of Rodman & Renshaw argues that operators like Wynn won’t simply add more product to the Atlantic City market, they will add an entirely new product. Mirage, Circus Circus and others create extravagant spectacles that appeal to a different class of customer than the pure gambler, he said.
Whereas Atlantic City’s casinos earn about 95% of their revenue from the gaming floor, only 55% of the revenue at the Las Vegas Mirage casino comes from gambling. The rest is from food and drink, room rents and entertainment--all of which have higher profit margins than gambling, Davila said.
With the new wave coming, “the operator who stands to lose the most is Trump,” Davila said. “I don’t think he can compete with a Mirage-style product.”
Trump, who holds 40% of Trump Hotels & Casino Resorts Inc., the public company that owns the Atlantic City properties, scoffs at such predictions. Although his critics cite the company’s high debt levels and the embarrassing bankruptcy of the Trump Taj Mahal in the early 1990s, Trump says they ignore the fact that his casino cash flow this year will exceed interest payments by “a couple of hundred million dollars.”
Time is also on his side, Trump claims. “MGM, Circus Circus, Mirage and the others will take a lot of years” to complete their projects while he consolidates his hold, he said. Trump notes that his Taj Mahal and Plaza casinos are running No. 1 and 2 in monthly revenues.
Trump also dangles “a major announcement concerning the Castle” that may be coming in a matter of days. Analysts say a deal with Rank to turn the Castle into a Hard Rock Cafe casino might improve the venue’s chances of holding its own against new Vegas-style attractions.
Meanwhile, Trump has apparently dropped his opposition to Wynn’s highway-tunnel deal. He claims, quite seriously, that the enmity between Wynn and himself stems from his having beaten the Mirage chairman at golf.
And the future competition between the two colorful casino figures promises to be interesting. Resorting to his familiar hyperbole, Trump declared: “Wynn failed here before.”
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Building on a Bet
Atlantic City is seeing the greatest boom in new investment since it opened itself to casino gambling 18 years ago. Not counting several recently completed hotel-casino expansions,about $4 billion is being poured into new gaming facilities. Here is a list of projects that have been announced and their cost estimates.
Company: Hilton Hotels
Project: New Wild West casino at Bally’s Park Place
Status: Due 1997
Cost (in Millions): $100
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Company: Hilton Hotels
Project: 300-room expansion of Bally’s Grand
Status: Due July
Cost (in Millions): $58
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Company: Circus Circus
Project: New 2,000-room hotel-casino
Status: No date set
Cost (in Millions): $500
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Company: Harrah’s Entertainment
Project: 416-room hotel-casino expansion
Status: Due 1997
Cost (in Millions): $81
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Company: Harrah’s Entertainment
Project: New 1,500-room hotel-casino
Status: No date set
Cost (in Millions): $325
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Company: Hollywood Casino
Project: 500-room expansion of Sands Hotel & Casino
Status: No date set
Cost (in Millions): $200
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Company: IIT
Project: 620-room expansion of Caesars Atlantic City
Status: Due 1998
Cost (in Millions): $280
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Company: IIT / Planet Hollywood
Project: New 1,000-room hotel-casino
Status: Due 1998
Cost (in Millions): $490
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Company: MGM Grand
Project: New 2,500-room hotel-casino
Status: No date set
Cost (in Millions): $700
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Company: Mirage Resorts
Project: New 2,000-room hotel-casino
Status: No date set
Cost (in Millions): $500
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Company: Mirage/Boyd Gaming
Project: New 1,500-room hotel-casino
Status: No date set
Cost (in Millions): No est.
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Company: Sun International
Project: 700-room expansion of Merv Griffin’s Resorts
Status: No date set
Cost (in Millions): $200
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Company: Trump Hotels & Casino
Project: 1,500-room expansion of Trump Castle
Status: No date set
Cost (in Millions): $135
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Company: Trump Hotels & Casino
Project: 800-room expansion of Trump Taj Mahal
Status: Due May 1998
Cost (in Millions): $195
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TOTAL: 14 PROJECTS
Cost (in millions): $3,764 * Source: New Jersey Casino Control Commission. (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Adding to the Pot
Casino revenues in Atlantic City haven’t always grown dramatically from year to year, but they have grown steadily, never showing a decrease in nearly two decades. Casino revenues, in billions of dollars.
1995: $3.7
* Source: New Jersey Casino Control Commission.