In defense of Atlantic City
Longtime gaming observer Gary Green doesn’t pull his punches when it comes to analyzing the ongoing problems and, yes, promise, of the Atlantic City casino marketplace
A recent Wall Street Journal headline bemoaned, “Atlantic City’s Blues Play On” while a New York Times headline analyzed, “Atlantic City Grapples With Empty Spaces” and CNBC commentators wondered if “glitzy corporate headquarters, condos or timeshares, entertainment-related rentals or even student housing could be among the new uses” for the shells left behind from a dying casino industry in Atlantic City.
The Atlantic City casino market is not crumbling, not disintegrating, and not failing... and we don’t need to turn the casino towers into a student dorms. There is absolutely nothing wrong with the Atlantic City gaming market; it is healthy, viable, and sound. In fact, Atlantic City casinos generate more slot machine revenue than almost every gaming market in America. The Mark Twain-esque reports of its death, indeed, have been greatly exaggerated.
Consider the average slot machine win-per-unit figures for a dozen casino venues nationwide, reported to state tax authorities and gaming commissions at the end of the first half of 2014. During this time period, New Jersey-based slot machines generated an average win-per-unit of $270 each day, well ahead of the results reported by Nevada, Colorado, Mississippi, Florida, Ohio, Louisiana, Missouri and Maryland (see chart). More surprisingly, the three worst-performing, and recently shuttered, properties in Atlantic City likely out-performed many casinos in these “healthier” jurisdictions, at least when win-per-unit-per-day figures are compared; with Trump Plaza averaging $99 in daily win per unit, Revel $152 and Showboat Atlantic City $188. Even the much-maligned Atlantic Club was winning around $169 per slot machine per day just before its January closure.
So, at least based on the all-important win-per-unit-per-day of slot machines, there is absolutely nothing fatal about Atlantic City casinos.
If this is the case, then what’s the deal… why is everyone running in circles and announcing that the sky is falling in Atlantic City? Why are these casinos closing there? Why are thousands of jobs being lost? Why is everyone saying the gaming industry is dead in Atlantic City?
A MATTER OF PERCEPTION
No doubt Atlantic City gaming is maturing, changing, and shifting; but that does not mean its dying. At worst, Atlantic City gaming operators are experiencing the decline phase of a normal business lifecycle, where there is often both economic peril and promise. Here are a few things we know for certain about the A.C. market:
- Overall gross gaming revenues are in decline. The days of people standing five and six deep in line to play slots at Atlantic City casinos are decades gone. Gaming properties in Pennsylvania, Connecticut, New York, Delaware, Maryland, West Virginia, and other I-95 corridor venues have cannibalized the glory days of the New Jersey casinos and those days will never be recaptured; Atlantic City is simply not as “in demand” as it was a decade ago or three decades ago. As a result, Atlantic City gross gaming revenue had declined to $2.86 billion in 2013; down from its peak of $5.21 billion in 2006.
- Despite the decline in revenue, New Jersey is still a large gaming market. Even at $2.86 billion, the state likely remains one of the top five gaming marketplaces in the United States, trailing only Nevada and Pennsylvania. Indeed, a market generating “only” $2.86 billion is a lot more interesting and likely has more potential than a market generating $286 million. That difference combined with many other positive features, indicates there is something less-than-fatal about the current state of Atlantic City gaming.
- The daily average win per slot machine appears to be rebounding. While gross gaming revenue is on a downward trend, the average win per slot machine unit per day appears to be recovering, reaching $270 for the first six months of 2014. This is well above the $218 reported for 2013, and is the second highest such total in the state’s 37-year casino history.
- Atlantic City casino taxation rates remain reasonable. New Jersey’s paltry 9.25 percent effective rate on casino revenue would be a welcomed relief to the oppressive tax rates of Florida (35 percent), Maryland (67 percent), and many other “successful” casino venues.
While the decline in gross gaming revenue is unpleasant, the overall size of the market, its win-per-slot figures and reasonable tax rate all point to a gaming situation that will eventually stabilize.
In my opinion, there are two things that are hurting both the perception and reality of casino gaming in Atlantic City: questionable casino management practices and unrealistic investor expectations.
From a management perspective, the operation of a casino is an extremely formulaic business. From my observations and experience, full casino operating costs should range from 31 percent to 51.5 percent of just slot revenue —inclusive of labor, tables, food and beverage (F&B), and general and administrative (G&A) expenditures— depending on the property’s location, percentage of games that are leased (rather than owned), and marketing/promotional programs. That means if the operator can simply “break even” on table games, F&B, entertainment, retail, etc., the business should still be economically sound from slot machine proceeds alone. This holds true even in the face of the distinct move away from properties’ exclusive dependency on gaming revenue.
Independent audits of financial statements from tribal and commercial casinos show this proven financial modeling ratio of slot win and operating expenses is followed by many successful casino managers and operators across the country; but was unfortunately ignored at two of the recently closed Atlantic City properties. The reason I know this—I had the opportunity to review the financials of these two shuttered properties on the behalf of some potential investors. Neither operated within the standard financial modeling parameters for casinos I describe above. Suffice to say any operator or operational management not performing within these parameters is likely failing; I knew these two were, I had the investors walk away from them due to the atrocious maintenance, infrastructure neglect and dilapidation the managers/operators had visited upon the properties.
And I bet they are not the only properties operating in such a way; modern day Atlantic City is wrought with inexperienced casino management making questionable business decisions. The difficulties investment firms such as Colony Capital and Avenue Capital Group have had in managing Atlantic City gaming assets are well documented.
In addition to dodgy casino resort management skills, some of the investment firms recently involved in Atlantic City still harbored unrealistic financial expectations for recently purchased or developed properties. In the best of times, making an accurate casino valuation is tricky; it quickly becomes impossible if unrealistic investor expectations are involved and can lead to problems such as over-leveraging, over-mortgaging and over-borrowing.
The Revel may be the best example of this mind-set. Despite the first-page SEC warning printed on every investment prospectus that warns “past performance does not guarantee future results,” Canyon Capital, Chatham Asset Management, Morgan Stanley, and Capital Research & Management were jointly willing to pony up billions of dollars to build Revel, a property that stayed open less than three years before closing its doors in what the New York Post called “the casino that took Wall Street for $2.5 billion.” Apparently these investment firms believed the Revel would somehow overcome an obviously shrinking market, that it would perform as Atlantic City casinos had in the past.
How unrealistic did investor expectations eventually end up being for Revel? At its July 2014 daily average win-per-unit figure of $152 and at 2,179 slots, the annual slot win at Revel extrapolates to $119.3 million. With the high end of operating expenses, I estimate the net revenue for the property would have been $60.8 million. Forgetting (for the sake of this discussion) taxes, amortization, interest and depreciation, at that rate of return it would take 41 years just to recover the initial investment in the Revel. Should the Revel fantasy projections match the market-leading Borgota’s $472 win per unit per day, the extrapolated and expense-adjusted revenue would be $257.7 million, and it would still take 10 years just to recover just the investment principal.
What choice was there other than bankruptcy? A standard valuation based on a cash-flow multiple showed the financial situation for Revel was impossible or at best improbable. It is no wonder that the bankruptcy court could not find a viable savior.
REASON TO BELIEVE
Atlantic City is a highly-competitive gaming marketplace that has seen its combined revenue shrink 45 percent in the last eight years. Despite grandiose dreams of attracting new market segments or cannibalizing adjacent casino jurisdictions, any Atlantic City investment must be viewed in this context.
Yet, at the same time, without retreating from that economic reality, such an investment must also be weighed with the knowledge that even a downsized Atlantic City casino market is still much larger than most other gaming markets in the country. Despite the four recent casino closings, gaming properties can still succeed in Atlantic City. Indeed, I would argue that the recent closings have little to do with the reduction of gross revenue for the market; that their failure mainly stemmed from poor management and investment strategy. It is clear to me that the closed casinos are not symbols of a failing gaming market or even an ailing gaming market—they are unrelated examples of bad management and/or investor manipulations thrown against a pseudo-correlation to the natural maturing of the East Coast gaming market and an expanding competitive landscape.
Atlantic City is undergoing a market correction—something Wall Street should readily understand. The East Coast casino monopoly bubble has burst and Atlantic City is finally recognizing a disruptive adjustment for an absurd overvaluation. After the correction, Atlantic City is more than a viable market; it’s a deal. Yes, in a market correction someone takes a hit, but amidst it all, Atlantic City will emerge absolutely healthy if:
- The debt service and investment costs are not unrealistically high;
- Investor expectations are not set unrealistically;
- The casino is operated and managed within specific standard parameters;
- The purchase of the property allows asset value to at least double liabilities;
- The casino(s) is/are treated as gaming properties and not as chessboard pawns for unloading; and
- There is an adoption of non-cannibalistic marketing methodologies that can empirically provide verifiable revenue projections.
In short, Atlantic City is healthy if it is viewed, invested and operated grounded in the reality of the changing market and not in the past or a fantasy of a future. Atlantic City never again will hold the East Coast monopoly; but within the changed parameters it can outperform most other gaming jurisdictions in the country. This is a great time to invest in Atlantic City. Casinos can be grabbed at fire-sale prices. Atlantic City casinos are earning more than most other markets in the country. If you can get in for the same investment as you could get into another market, Atlantic City is healthy, viable, sound… and smart.
Gary Green is a 30-year veteran of the gaming industry who began his casino career in Atlantic City. A former Trump vice president, he is currently the senior consultant to Ortiz Gaming, author of the best-selling books Gambling Man and Marketing Donald Trump. Green is also a frequent (and controversial) speaker at trade shows and seminars, and a seasoned casino developer, operator, and financier. He can be reached at firstname.lastname@example.org.