Casino Journal

Cover Story

Market Perspective

For the Mississippi Gulf Coast, 2007 is a year of evaluation as a bevy of new projects are considered

By Andy Holtmann

On July 7, the Hard Rock Biloxi Hotel & Casino is expected to open, bringing the number of new or reopened casinos on the Mississippi Gulf Coast to 11. Of course, these months before such a grand opening are nothing new to the Hard Rock—owned by Premier Entertainment—or its staff.

The property was just days away from celebrating its grand opening in August 2005 when Hurricane Katrina blew into town and wrecked the party, along with everything else in its path. Now, almost two years later, the Hard Rock is trying again. Only this time, unlike in 2005, it won’t be the only new significant project on the coast in several years. And it won’t be the last.

The Hard Rock will be the only brand new project to open this year on the Gulf Coast. Last year saw a flurry of activity as seven of 10 of the casinos that have reopened or been rebuilt since Katrina came back into operation (the IP, Palace and Isle of Capri properties all reopened in Biloxi in December 2005). While several expansion projects are underway at existing properties and additional new projects and proposals are mulled over by local and state officials and gaming companies, what this year is really about is evaluating the Gulf Coast market.

“I think we’re looking at a year of evaluation in 2007. We’re looking at where we’re going,� said Larry Gregory, executive director of the Mississippi Gaming Commission. “Next year, in 2008, that will be the year of construction.�

Others agree, including Biloxi Mayor A.J. Holloway, who noted that his city is getting ready to do a comprehensive study of the economy and infrastructure, and has hired the Philadelphia-based firm of Wallace, Roberts & Todd to help the city develop long-range plans. The gaming industry, he said, was vital to those plans.

“I think we have a lot of growth potential ahead of us. Right now, we’re talking to three or four casino companies that are interested in Biloxi. Three of them have specific locations, and two already have leases signed on those or have bought the additional properties. And all of the casinos are in an expansion mode,� Holloway said.

Holloway predicted that in the next decade, Biloxi could become home to between 18 and 25 casinos. That’s not counting other Gulf Coast communities like Gulfport and Bay St. Louis, which have casino properties of their own. Other estimates are slightly less optimistic, but one point each public official, gaming executive and market observer seems to agree on is that there is plenty of opportunity on the Gulf Coast at the moment

Cause for optimism

Gregory said that looking at the revenue figures for the Gulf Coast, January 2007 provided a good snapshot of how the market has fared. The market, with 10 casino properties, earned $106 million in gross gaming revenues. While fair comparisons to January 2006 are impossible to make since most casinos were still closed and shuttered, when compared to January 2005’s figure of $118 million, the results were very favorable. Gregory said even that is not an apples to apples comparison.

“We’re looking at this past year (2006) at almost $1 billion in revenues, compared to $1.3 billion before (market-wide in 2005),� Gregory said. “That $1.3 billion was an industry that was well-established, that had all amenities, that had all of its hotel rooms, etc. I would say only 57 percent to 60 percent of the rooms are back. Restaurants—they are just now coming back. The entertainment venues—they’re just coming back. These properties are operating 50 percent to 60 percent less as far as slots, table games, hotel rooms, restaurants and other amenities. It’s almost equating the same amount of gross gaming with about 60 percent of the product that was there pre-Katrina.�

The 10 properties that have reopened since the storm have given the Gulf Coast—and the Mississippi state—economy a much-needed shot in the arm.

“Imperial Palace, which had started a redesign effort before the storm, had a head start. They went gangbusters with the redesign, and when they reopened, it was met with huge fanfare,� said Michael Sunderman, publisher of Mississippi Gaming News. “They were the only casino that had convention space. That was huge in terms of housing meetings, FEMA, and they were a huge help to the community. (General Manager) Jon Lucas and the staff really stepped up and became community leaders.�

Shortly after, The Palace and Isle of Capri casinos opened temporary facilities. Those properties immediately put thousands of people back to work. When other properties such as the Beau Rivage, Harrah’s, Island View, Treasure Bay and Boomtown reopened in mid-2006, they added even more needed jobs to the market.

“We’ve got about 13,500 jobs right now, and we’ll probably add at least another 1,000 to 1,500 more by the year’s end with the opening of the Hard Rock and some of the other casino phases,� said Beverly Martin, executive director of the Mississippi Casino Operator’s Association. That would compare favorably to the 15,000 the gaming properties had employed before Katrina hit.

And though the 10,000 hotel rooms currently available are down from 2005 figures of approximately 17,500, with all of the planned expansion projects in the months and years ahead, expectations are high that that pre-Katrina levels can be not only reached, but eventually surpassed.

“Beyond the Hard Rock, you’ve got Treasure Bay opening about 250 rooms. I think adding casino hotel rooms is going to be a positive,� said Jacob Oberman, a gaming analyst with CB Richard Ellis’ Global Gaming Group. But in the short term, hotel stays could be an issue, he added.

“Our sense is that the comp percentage of hotel rooms is way higher than pre-Katrina. The reason for that is that there really not a whole lot of permanent stays in the hotel anymore,� Oberman said. “The occupancy rate in non-casino hotels is significantly down. The casinos, although they’ve done well, they’ve had to aggressively comp people to get them to come down.�

Expansions and new entrants

The much-anticipated Hard Rock will feature a 12-story, 300-room hotel, 1,500 slots and 50 table games when it opens this summer. The resort will also feature five restaurants, including Ruth’s Chris Steakhouse and Hard Rock Café; a full service spa and fitness center; Hard Rock Live, a 1,500-capacity entertainment venue; retail shops and many more amenities.

Had the property opened as it had planned in 2005, it would have been the first major development on the Mississippi Gulf Coast since the original $800 million Beau Rivage opened in 1999. Today, of course, the Hard Rock’s entrance into the market comes in the midst of a major construction wave.

The Beau’s parent company, MGM Mirage, spent another $800 million to get the property refurbished and reopened by Katrina’s one-year anniversary in August. Many operators are taking advantage of emergency legislation passed just months after the storm that allows casinos to be rebuilt on the shore rather than on the floating barges they had been limited to. Harrah’s Entertainment, just two weeks before the Beau’s opening, reopened a temporary facility in its surviving Bay View Hotel. Soon after, it acquired the adjacent Casino Magic Biloxi site, and the company has been planning a $1 billion-plus project for the two sites. Although Harrah’s was recently acquired by two private equity firms—Apollo Management and Texas Pacific Group—there have been no indications that Harrah’s intends to change course in Biloxi.

Treasure Bay Casino Resort, which opened in June 2006 as a temporary facility, has been renovating the property in phases since (the first floor has opened with 330 slot machines). At the end of the property’s current phase, it will have 250 rooms and suites, an additional 400 slot machines and 22 table games. A new buffet, gift shop, conference rooms and a fine dining restaurant and lounge on the ninth floor are also planned.

A second phase for Island View will open this May, adding an additional 50,000 square feet of gaming space and more food and beverage outlets. The property currently features 562 hotel rooms and suites, 30,000 square feet of gaming space and a 350-seat buffet. Emeril’s Gulf Coast Fish House will also open at the property this summer.

Isle of Capri unveiled a $180-million expansion for its Biloxi property in January. The project—largely funded with insurance proceeds from Hurricane Katrina—will have a land-based casino with about 2,100 slot machines, 50 table games and a new poker room. The company said the project will complete a phased expansion that had been planned before the hurricane. About 45,000 square feet of convention space in the Isle’s hotel that had been converted into a temporary casino will be restored to its original use.

Most other existing properties have some form of ongoing renovation or expansion plans in the works as well. But after the Hard Rock’s opening is when new construction is really expected to kick into gear.

Widely expected to be the next casino is the $500-million Bacaran Bay Casino Resort. Owned and operated by Torguson Gaming Group, the planned resort calls for a 638-room all-suite hotel; 432 one- and two-bedroom condominiums; an Arnold Palmer signature 18-hole championship golf course; a 40-lane bowling alley; and six movie theaters. The anticipated completion date is slated for late-2008.

“Never underestimate (owner) Marlin Torguson,� Sunderman said. “He’s got an amazing plan and a dynamic marketing team behind it. He’s got a tremendous piece of property right off of I-10, in between the Imperial Palace and the Beau Rivage. Just the traffic that goes between those two properties, I think a casino could do well with. He’s going to have a luxury hotel, condos, restaurants, bowling, wedding chapel, so he’s adding new assets and attractions. I hope that Marlin’s plan goes ahead full-steam because it would be a tremendous addition to this coast.�

Another project is the proposed $1-billion Broadwater (at the site of the former President Casino). It would consist of two casinos; 3,375 condo units; 1,900 hotel rooms; a 180-acre, 18-hole golf course; 585,000 square feet of retail and entertainment space; a 125,000-square-foot gaming floor; 104,000 square feet of convention space; and a marina. Work is currently underway to clear the site.

The Mississippi Gaming Commission also recently approved what would become the first casino in the city of D’Iberville, just north of Biloxi. Plans for the Royal D’Iberville Casino & Hotel calls for the project to be built on the west side of Interstate 110, and would be a cutoff before motorists reach casinos on the Biloxi peninsula. Developers—including former Mandalay Resort Group executive Peter Simon, who owns the land—envision a 60,000-square-foot casino with a 400-room hotel with 99 waterfront condo units. A second D’Iberville casino could also become a possibility, as Mark Seymour and Terry Moran have filed a notice of intent with the gaming commission for their property, which borders Simon’s, to be declared a legal gambling site.

Isle of Capri, meanwhile, has been picking up where other proposals have sputtered out. In February, Isle purchased the property initially purchased by Landry’s on Biloxi’s Point Cadet. The land includes about five acres just north of the Isle’s main property. Landry’s envisioned building a significant project on the site, but pulled out largely due to issues over the lease of land.

Casino magnate Donald Trump recently ended negotiations with Diamondhead Casino Corp. to build a casino near the border of Harrison and Hancock Counties on land approved for gaming, known as the Diamond-head site. Isle of Capri recently announced plans of its own near the Diamondhead location, proposing to develop a $250-million to $300-million resort with a minimum of 500 rooms.

Gregory said these announced or proposed projects could be just the tip of the development iceberg. “I’ve not had any less number of developers come into my office. Believe me, they are here—names that people in Vegas are well-familiar with, but around here we’re not as familiar with. These are big, brand-name companies that are looking at Mississippi in terms of investment. Realistically, I think we’re going to see two or three big-name companies to come in within the next year to 18 months. These are projects that are not announced yet.�

The changing market

Another thing visitors to the Mississippi Gulf Coast will see more of are condo developments. Already about a dozen proposed or underway projects dot the coast, carrying on a trend that began on a smaller scale before Hurricane Katrina.

“We’re just not going to recognize it as the old Gulf Coast because of the condo development that’s going to come with it and all other changes that have occurred post-Katrina,� Gregory said. “The market is fertile for economic growth.�

Many of the condo projects are being built as condo-hotels, which could eventually add more available hotel rooms to the market.

“When you buy one of these condos, they sometimes can rent them out in a rental pool. They are managed by a third party to be let out like hotel rooms, the condo owner will split the profits with the third party,� Oberman said. “It’s different than timeshares in that the condo owner actually owns the condo and renting it out this way allows them to recoup their investment. Our understanding is, so far, that only 10 to 30 percent of the condo owners have opted to be in the rental pool. I think over time, as the perception improves, the rental pool will be higher. We think that half of the people buying the condo units are out of state. These people will see these condos as investments.

“The traditional non-casino hotel supply is not going to come back the way it was. These condo hotels are going to replace it.�

In addition to condos, there are plenty of other signs of growth. The Biloxi-Gulfport Airport is enjoying record numbers and is expanding by adding flights. Several new retail developments have also popped up around the communities.

“Then we’ve got our Mississippi Gulf Coast Coliseum & Convention Center that had begun expansion plans prior to the storm,� Martin said. “It will double the square footage of meeting space, which will be really great, especially for things like the Southern Gaming Summit. That expansion is on schedule to be completed by 2009.�

The next key infrastructure development will be the opening of the Biloxi-Ocean Springs Bridge on Highway 90. Closed since the storm, it had been the main feeder of traffic into Biloxi and the casino properties east of Interstate 110.

“That cut off a lot of traffic from Florida, Alabama, Georgia, Carolina,� Sunderman said. “Now it’s so much easier to just come across I-10 and avoid that Ocean Springs exit. Following I-110 will take you right into the Imperial Palace, Boomtown, Beau Rivage…the others are really having to fight hard to get people to come all the way down to what they refer to as a cul-de-sac now.�

The bridge is expected to reopen in a limited capacity in November.

“As of now it’s scheduled to open with one span, and I’m anxious to see how that’s going to spur additional growth and revenue,� Holloway said.

With all this development, some have said the Gulf Coast is ripe to become more of a tourist destination. But in the short term, there’s still a big roadblock to overcome in terms of convincing visitors that the Gulf Coast ready to accommodate them.

“When you sit down with marketing or GM, you hear the word perception a lot. The perception is that gaming has been wiped out or that the coast is gone.�

That’s a perception operators and community and state leaders hope will soon change.

“We’re open for business,� Holloway said. “It’s still sometimes a mess to get around in, but every day it gets a little better.�

Challenges ahead

While an issue like public perception is a challenge that the Gulf Coast and the gaming industry has to ultimately deal with, there are many more immediate and pressing concerns.

“If I could put (the challenges) in one word it would be ‘insurance,’� Martin said. “We’ve got several insurance agencies that are pulling out of this market altogether. And not just this market, but the state of Mississippi on the whole. Those who have chosen to stay have increased commercial insurance rates 298 percent. Then you throw in the homeowner and residential, and that’s about 100 percent increase if you can get it. I just got a letter yesterday stating that my insurance company is not going to renew. It’s an ongoing problem, and it’s amazing since insurance companies have reported record profits.�

Holloway agrees. “Insurance is one of the real killers. I’ve talked to several general managers and CEOs, and with regard to the insurance issues, it’s just unbelievable what they’re having to face,� he said.

Gregory noted that for the most part, the gaming industry can access capital fairly quickly and, “that they can reinvest and not have to worry at night about waiting on the insurance checks. But other small businesses do lose sleep over not getting their insurance checks, and it’s been a little slower in the economy for restaurants and other ancillary businesses.�

Insurance has affected the home building process and people’s efforts to return to the coast to live and work as well.

“You’ve got people who want to buy homes, but the problem is if you want to purchase a home, you have X number of dollars that you can pay every month for your house note,� Martin said. “When your insurance note equals your house note, there are problems. That’s what we’re seeing. If you can find a house for $700 a month, you’re most likely going to pay a $700 a month insurance bill, if you can get it. We’re just looking for the government, state legislature, maybe on a national level to equalize that.�

Still, progress is being made, even if slowly.

“you get Goose Bumps Every Time you see a new Building, you see a new House, you see a new Business,� Gregory Said. “it’s Slow, Yes, but There’s no Doubt That on the Gulf Coast, Without Those Casinos Down There, we Would not Even be Close to Recovering in our Rebuilding Efforts. the Gaming Industry is who Gave the B-12 Shot to the Coast.�

The labor market, which was extremely thin in the months after the storm, has also started to improve—the bulk of the jobs coming from the gaming and construction industries. What operators of both industries are finding is that they’re having to pay significantly more than other markets to keep their employees around. A typical service worker in Las Vegas or Atlantic City, for instance, might earn $7 to $8 per hour, and it’s considered a good wage. On the Gulf Coast, casinos have to compete with businesses like fast food-outlets that in some cases are paying their low-level workers $10 to $13 an hour.

And many of the quality gaming employees left the Gulf to work in other markets. “We still have loads of FEMA trailers down here, with nowhere for people to go. To get quality people to move here is going to take a long time. A lot of employees went to other casinos across the country, and they’re settled in with their families, so they’re not coming back,� Sunderman said.

For potential new entrants to the gaming markets, opportunity also comes with a cost.

“Real estate is definitely affecting the industry,� Gregory said. “For people coming in—new developers—the price of doing business has gone up. Some say it will level off, and I think the market will (eventually) rectify any challenges the industry has with real estate.�

Boom or bust?

So with room to grow, coupled with the roadblocks still in place, exactly how will the Mississippi Gulf Coast’s gaming market pan out? No one knows until it happens. Estimates for the number of new gaming/resort projects the market can sustain range from as little as two or three to Holloway’s prediction of a couple dozen total properties for his city alone.

“(All the proposed projects) wouldn’t be able to get off the ground,� Oberman said. “A lot of them don’t have the development experience or the financial wherewithal to do these projects, so they need to go out and get financed, and it won’t happen. I don’t think you’re going to see nearly as many projects as predicted. You’ll most likely see three to five.�

Sunderman said that at the current rate of recovery, the most he could see the market sustaining is two new projects a year. “And that would be aggressive. I think the most that could possibly come down here would be five to 10 casinos. That would be a stretch, as it is.�

There has been more than just scattered skepticism about just how much opportunity exists in the market. Wall Street gaming analysts, real estate companies, insurance issuers, even the tourists and gamblers the market is hoping to attract—many are waiting to see how the market fares in the next couple years before making a commitment.

Still others feel waiting too long would be making a mistake.

“I think the same thing was said about (skepticism of) the Las Vegas and Atlantic City markets, and time proved them wrong in both cases,� Martin said.

From the online archives: Casino Journal has followed the Gulf Coast’s rebuilding efforts exten-sively. To read past articles, columns and news stories about the market, visit our online archives at http://www.ascend_gaming.pubdyn.com/cj/magazine_archive