Atlantic City Is Seen as a Loser’s Bet for Donald Trump
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Contrary to Donald Trump’s claim that his gambling empire’s bankruptcy last week was nothing more than a technical maneuver to boost cash flow, his Atlantic City concern is a long-term loser, say analysts, investors, and even a former executive.
The ubiquitous mogul’s Trump Hotels, Casinos, and Resorts – the owner and operator of gambling emporia like the Taj Mahal, Trump Plaza, and the Trump Marina Hotel – is flanked on either side by bigger competitors who have ready access to larger amounts of lower-cost capital, as well as the ambitious expansion plans to deploy it.
Last week, as an interest payment was due, Trump Hotels filed for bankruptcy protection for the second time in 12 years. Under the reorganization plan – which has the consent of about 57% of the $1.8 billion in bondholders – the bondholders will accept a reduction in interest payments from 12.5% to 8%, accept a small cash payment, and will take some newly issued stock. All debt will be secured by the mortgages of the casino properties.
As part of the reorganization, Donald Trump will reduce his equity stake in Trump Hotels to 27% from 56% and relinquish the title of president to the former CFO, Scott Butera. Mr. Trump will keep the title of chairman and his $2 million salary.
In return, the company will reduce the amount of debt outstanding to $1.25 billion, increase cash flow by lowering its annual interest expense by $98 million, and extend the maturity of its debt. Even in bankruptcy, the company has acquired some flexibility, having signed a $500 million line-of-credit agreement with Morgan Stanley in late October to develop new casino properties in Pennsylvania and Las Vegas. Trump Hotels also inked a $100 million interim financing loan from Dallas’s Beal Bank. The bank loans are secured by first liens on all corporate assets, meaning that should Trump Hotels declare bankruptcy again, they will have first claim on assets to get their money back.
In its third-quarter 10-Q filing, Trump Hotels said that in a year-to-year comparison, its three Atlantic City casinos’ operating income dropped more than $21 million to $88.9 million through September 30. Though interest expenses contributed to its $91.5 million, nine month loss, the company said its “inability to reinvest in the maintenance of its owned properties” is also hurting its ability to compete against its “increased competition.” The company spent $45.2 million on its three Atlantic City properties through September 30.
Unfortunately for Trump Hotels, it will emerge from its creditor protection into a full-fledged capital spending war in Atlantic City. Two of the company’s primary competitors, Harrah’s Inc. and Caesar’s Entertainment, announced a $9.4 billion merger in July, taking care to announce that expanding their presence in the Atlantic City market will be a key component of Harrah’s expansion plans.
Prior to the merger, Harrah’s two Atlantic City casinos made $69.5 million in operating income and the company stated that it would spend $600 million to $625 million to expand its casinos.
Two Wall Street analysts, speaking on background, said Harrah’s capital expenditures in Atlantic City could go as high as $300 million during the next year. Moreover, with an investment grade debt rating, $1.96 billion available in credit lines, and $290.7 million in operating income through September 30, Harrah’s has the flexibility to sharply expand those plans.
Also troubling for Trump Hotels is that it has had to increase promotions to keep customers who are increasingly being wooed away by competitors. In the first nine months of 2004, the company spent $233.9 million on promotions – such as “comping” rooms and meals – and discounts to frequent visitors in its three Atlantic City casinos to make $772.37 million, according to documents filed with the Securities and Exchange Commission. For the same period in 2003, the company spent $222.56 million to get $800 million.
By comparison, Harrah’s 25 casinos spent $638 million to generate $3.36 billion.
One independent Wall Street analyst, Susquehanna Financial Group gaming analyst Eric Hausler, cannot see how Trump Hotels can avoid “being in hot water again, and soon.” He said that relative to a Harrah’s, Trump Hotels’ problem is that it is “entirely undercapitalized and way too overleveraged to be a competitor down there.”
He said Harrah’s and Caesar’s – which he said would keep their brand names – will likely add new towers to each of their flagship properties within the year. Moreover, he predicted that Caesar’s and Harrah’s will follow up with a large advertising and promotion program lasting up to a year to hype the new properties.
“Everything Trump does [to improve his casinos] will be matched and raised by his competition. He might be able to stay afloat, but there is no way he can get ahead,” he said.
One of the bigger headaches facing Mr. Trump’s Atlantic City casinos is the presence of the Borgata Resort and Spa, a $1.1 billion luxury casino and 2,010-room hotel, that opened in July 2003.A former Taj Mahal marketing executive turned consultant, White Sands Strategy and International Gaming Consultant’s managing director, Saverio R. Scheri III, said the Borgata is so enticing, that nearly 10% of its guests have no interest in gaming and simply visit the hotel’s restaurants, clubs, and spa. A Borgata representative confirmed that it is regularly fully booked in and out of season. By comparison, Atlantic City’s hotel occupancy average is about 85% to 90%. Mr. Scheri said.
Boyd Gaming, co-owner of the Borgata with MGM Mirage, said the hotel had operating income of $63.1 million in the quarter ending September 30. In the equivalent period last year, the hotel had $30.5 million in operating income.
The Borgata announced last month it is adding a tower with 500 rooms, a new gambling level, and six restaurants. The company estimated it would cost $350 million and be completed by early 2007.
Mr. Scheri said that, given Borgata’s dominance in the coveted, free-spending “high-roller” demographic, Trump Hotels’ management has to decide how it will keep and add to its numerically large middle- and slightly upmarket client base. He said that two of the casinos – Trump Plaza and the Trump Marina – have real problems. He said the Trump Plaza is “falling apart” and will require a multimillion dollar facelift. He declined to offer a number but said it was probably well above $25 million. Through September 30, the casino made $17.52 million in operating income, down from $31.38 million a year ago.
At Trump Marina, he said the problem is that there is “no niche, there is no compelling reason to go there,” despite its oceanfront locale. Also, the presence of Hooters in the casino makes a fundamental statement about whom the management seeks to attract, he said.
“Casinos are about sexiness and attractiveness. If you have a Hooters, you are attracting people interested in guzzling beer and wings, not dressing up and spending thousands,” he said. Moreover, he said Harrah’s has long had a lock on attracting Atlantic City’s budget conscious, lower-income gamblers, whom he said are referred to as “grinders” for their cautious habits. Mr. Scheri said the cost structure of Trump Hotels is too large to be supported by the demographic it attracts.
Trump Hotels’ new CEO, Mr. Butera, conceded that the casinos need “tens of millions of dollars worth of work.” He said the company is planning to aggressively expand spending, but declined to get more specific.
He said there are no plans to sell older properties like the Trump Plaza.
He added that though Trump Hotels’ competitors in Atlantic City present challenges, their expansion plans will bring more people to the area, and that “eventually they will make their way to our casinos.”
Asked how he planned to restore investors’ trust after the contentious initial stages of the reorganization, he said, “execute. The public needs to have faith in the people who manage the Trump brand.”
Not everyone on Wall Street views Trump Hotels as a sucker’s bet. One hedge fund investor who owns bonds backed by the Trump Marina Casino Hotel mortgage, Virtus Capital principal Steven Gidumal, said the publicity generated by Mr. Trump’s starring role in the top-rated television show “The Apprentice” is a huge competitive asset. “People across America will walk through the doors to see what it’s all about,” he said. Mr. Gidumal said the advertising the show provides for the casinos “has to be worth many millions.”
Mr. Gidumal said investors in Trump’s Atlantic City bonds have generally done well. He said that owning the 11% and 12.5% bonds has provided a handsome return for many bond managers, especially since many high-yield and distressed managers bought into the bonds when they were in the low 80s. Despite Trump Hotels’ woes, he said that since the bonds were backed by the mortgages on “some attractive properties, I felt pretty good about the investment.”