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Liz Benston

Here comes Atlantic City's transformation

28 January 2008

ATLANTIC CITY, New Jersey -- Now, Atlantic City — reeling from competition for penny-pinching slot players — is on the cusp of a sort of salvation, as experts predict a Las Vegas-style transformation of the aging seaside town.

At least three casino operators — each with connections to Wynn and his epic-making Mirage — are pursuing luxury resorts in Atlantic City even as the East Coast gambling mecca is reporting its first annual decline in gaming revenue since the first casino opened there in 1978.

Their confidence, not surprisingly, springs from Las Vegas, which hasn't always had growth years either.

Strip revenue, when measured year-over year, has fallen three times over the past two decades — in 1996, 2001 and 2002. The largest drop was but 2 percent in 2001, as a result of the 9/11 terrorist attacks. In 1996, the Asian banking crisis slammed global stock markets and hurt high-roller play on the Strip, resulting in a 1.4 percent decline.

The closest comparison to the trend in Atlantic City is the spread of tribal casinos in California, the Strip's largest feeder market. And though some consumers may be taking fewer Las Vegas trips as a result, Vegas can't directly attribute any slowed growth to California casinos. In fact, there's some evidence that easier access to gambling spurs interest in Las Vegas, which hosts the biggest poker tournaments and offers more eye candy.

With only 11 casinos — and only one of them built in the past 15 years to the luxury standards of the Strip — Atlantic City is far from Las Vegas by any definition.

When Boyd Gaming opened the Borgata resort with MGM Mirage in 2003, the resort soon became the biggest and most profitable revenue generator in Atlantic City, with some of that growth coming at the expense of other casinos in town. The Borgata also is attracting new, more discriminating customers who wouldn't otherwise travel to Atlantic City. Though some wonder whether Atlantic City's proximity to multiple gambling markets will make it hard for the city to rise much beyond its roots as a gambling fix for day trippers, others say the city is primed for Las Vegas-style growth. Here's what's in store for Atlantic City: • MGM Mirage is planning a $5 billion resort with at least 3,000 hotel rooms called CityCenter East. • Revel Entertainment, with investment bank Morgan Stanley, is proposing an oceanfront resort with two hotel towers of 1,900 rooms each. • Pinnacle Gaming, which bought and imploded the old Sands casino in Atlantic City, envisions a major resort there.

All the players have ties to Wynn and his former company, Mirage Resorts.

Pinnacle Chief Executive Dan Lee was Wynn's chief financial officer at Mirage Resorts, sold to MGM Grand in 2000. Pinnacle's Kim Townsend, who is leading the Atlantic City development, is another Mirage Resorts grad and was involved in the openings of Mirage and Treasure Island. Revel Entertainment is a new gaming company formed by Kevin DeSanctis, a former Trump Plaza executive who began his career in Las Vegas and was president of casino operations at the Mirage. MGM Mirage inherited the vacant CityCenter land (as well as the land now occupied by the Borgata resort) from Wynn, who sold it in his exit from Mirage Resorts.

There's already evidence that the Borgata's nongaming attractions are motivating customers to stay longer than one night — which might otherwise be enough for a quick gambling fix.

On the Strip, where nongaming spending is nearly 50 percent of the total, fancy dinners, expensive baubles and elaborate entertainment are helping offset only moderate growth in gambling revenue. In Atlantic City, nearly 80 percent of revenue comes from gambling, though that number is as low as 65 percent at the Borgata.

The best indicator of Atlantic City's development as a resort destination, experts say, comes down to a hard-and-fast number.

New Jersey's gaming tax, which comes to about 9 percent with state and local assessments, is the second-lowest in the nation next to Nevada's rate of 6.75 percent. And if the Nevada teachers union gets its way, a statewide petition could raise Nevada's towline gaming tax to 9.75 percent — putting New Jersey in the financial lead, so to speak.

With the Strip becoming saturated and riverboat markets across the country becoming a more competitive place to make a buck, Atlantic City — which sits next to one of the largest and most dense affluent populations in the country, with New York on one side and Philadelphia on another — has become more appealing for long-term investors, analysts say.

The Borgata experiment, coupled with New Jersey's low tax rate, is paving the way Atlantic City's first wave of multibillion-dollar resorts.

"The future of Atlantic City is its evolution into a Las Vegas-style multi-entertainment destination resort," said Harvey Perkins, an analyst with Spectrum Gaming Group, a global gaming consultant based in Atlantic City. "Just as the tens of thousands of slot machines (in California) have had no material impact to Las Vegas, if Atlantic City is properly capitalized due to its low tax rate, the same should prove to be true here."

Spectrum recently projected that Atlantic City's gaming revenue will rise to $5 billion, a 2 percent increase from 2007 yet less than the record-setting $5.2 billion generated there in 2006. (Gaming revenue fell 5.3 percent at the city's 11 casinos for the first 11 months of 2007.)

A more upscale future presents a double-edged sword for Atlantic City's long-standing properties.

As in Las Vegas, some of Atlantic City's older casinos will lose some business as customers trade up to more expensive resorts. And yet, several older properties on the Las Vegas Strip have benefited from the new competition, reporting some of their most prosperous periods in recent years as customers who couldn't afford to stay at the priciest properties stayed elsewhere.

"There were many skeptics when Borgata was built who said customers wouldn't spend more or necessarily appreciate higher-end surroundings," MGM Mirage President and Chief Operating Officer Jim Murren said. "All properties with the exception of Borgata compete mostly on the deal."

But Atlantic City is a competitive market like Las Vegas in that it doesn't issue a specific number of licenses and "rewards investment" while penalizing the opposite, Murren said.

CityCenter East, he said, "is another leap of faith — that we can transform the market with a significantly larger investment."

Atlantic City will add more than 2,000 hotel rooms next year, including 800 premium rooms at the Borgata's upcoming Water Club addition, offsetting some of that new competition from Pennsylvania.

The city will eventually offer a critical mass of attractions to lure customers from Pennsylvania's more conveniently located casinos, Perkins said.