The year 2018 has become an interesting year for gaming investors.
In addition to the usual course of business, Macau has continued to boom, sports betting is proliferating, and two major casinos are opening in Atlantic City, of all places.
Macau and sports betting have been covered in this space frequently, and will be again, especially as more sports betting jurisdictions open.
Atlantic City, however, is something of a closed box that could surprise us upon opening.
AC’s recent history has been one of modest growth after having been right-sized—12 casinos reduced to seven.
Now, with Hard Rock opening in place of Trump Taj Mahal and Ocean Resort in place of Revel, no one really knows what to expect. Hard Rock CEO Jim Allen says his property will grow the market by bringing in a different customer. Some observers expect 20 percent cannibalization.
One businessman is betting on growth. Philadelphia real estate developer Bart Blatstein is opening more rooms at Showboat, the former casino now a non-gaming hotel that sits between Hard Rock and Ocean. The property is reopening 479 rooms, meaning all 1,330 rooms now are available. Obviously, Blatstein wouldn’t open those rooms if he didn’t think opportunity outweighs risk.
AC has 19,300 hotel rooms. Revel, Ocean and Showboat will add around 3,800, a 20 percent increase in citywide room inventory, and 30 percent to the existing 11,300 casino hotel rooms.
Obviously, cannibalization will not be 20 percent to 30 percent because the new properties will draw new customers, especially Hard Rock.
Indeed, the argument used to be made that Atlantic City needed more hotel rooms to draw conventions and build non-gaming revenues. That might still hold true. Consider that Hard Rock, with 2,000 hotel rooms will sponsor major concerts. If over 7,000 people fill up its Etess arena for a concert, Hard Rock will fill competitors’ rooms.
But there will be cannibalization. The two public companies with the most at risk are MGM Resorts, whose Borgata comprises about 30 percent of the entire market, and Caesars, whose three properties account for around 35 percent.
Borgata may be especially vulnerable because its trendy young customers are those most likely to be attracted to Hard Rock; and being several miles away from the Boardwalk in the Marina District will limit cross traffic between the two.
Caesars’ Harrah’s in the Marina likewise attracts some younger customers to its Pool nightclub who could be lost to Hard Rock, though the numbers should be small relative to property size.
Caesars AC and adjacent sister property Bally’s could also be affected by losing customers to the new casinos at the far end of the Boardwalk.
Whatever the losses, they will be modest on the overall corporations. Borgata represented less than 9 percent of MGM Resorts EBITDA last year. AC was less than 12 percent of Caesars’ revenues, and Las Vegas and regional market growth should offset some AC impact.
The third public company to be affected will be Eldorado Resorts, which is buying Tropicana Entertainment, whose namesake property in AC generated $391 million in gaming revenue last year.
Eldorado’s executives say they anticipate a hit to revenues and factored that into their purchase decision. And Eldorado has a track record of growing profitability while squeezing out efficiencies at the expense of revenues, so it expects the Trop to add to its earnings.
One risk to profitability is a marketing war if casinos return to the bad old days of buying business to protect market share.
However, that risk is lessened by the commitment to profitable marketing all the companies have demonstrated in recent years.
Finally, the sentiment around AC has changed. A few years ago, the sounds were like a dirge. Now, they are more like a buzz with casino and sportsbook openings.
In brief, the new competition is something that Caesars and MGM should be able to manage.
