Little Caesars Arena in downtown Detroit is home turf for the Detroit Red Wings. The team and the arena are owned by the Ilitch family, and the venue name wasn’t plucked out of the air. The Ilitches also own Little Caesars Pizza as well as the Detroit Tigers and the MotorCity Casino Hotel, Motown’s only locally operated casino.
Clearly, the Ilitch name is a big deal in Detroit City. Now the clan is making noise 650 miles away, in Atlantic City.
In April, with little fanfare, Ilitch Holdings inked a deal to acquire as much as a 50 percent stake in Ocean Casino Resort from Luxor Capital Group, a New York hedge fund.
“We are extremely excited about the proposed investment by the Ilitch organization, which, if approved, will give Ocean access to growth capital and provide a strategic partner to Luxor. We look forward to continuing to grow Ocean in partnership with the Ilitch organization for years to come.” Luxor said in a prepared statement.
Ilitch Holdings declined comment on the acquisition until regulatory approvals are secured. But in a statement, the company recognized “the success that the team at Ocean has achieved over the past two years and looks forward to building on their accomplishments through continued investment in both the property and the customer experience.”
The Detroit Model
So, what attracted Ilitch Holdings to Atlantic City, and to Ocean?
The complete answer remains to be seen, but the Boardwalk property makes sense for a number of reasons. Originally named Revel and borne in the crunch of the Great Recession, the property opened, closed, continued to falter under previous owners, and is owned by a hedge fund instead of a casino operator. The property has room to expand, and not just within its existing footprint. The gleaming silver tower, the last resort property on the Boardwalk’s north end, Ocean lies adjacent to plenty of undeveloped and underdeveloped land.
Therein lies a comparison to Detroit. Both Little Caesars Arena and MotorCity were surrounded by distressed properties, available on the cheap for redevelopment.
However, “It’s important to keep in mind that community redevelopment is not the core mission of Ilitch Holdings,” said Joseph G. Eisenhauer, dean of the College of Business Administration at University of Detroit Mercy. “To the extent that adjacent properties are improved, their business expands and everyone wins.
“But aggressive revitalization of all the neighborhoods where they conduct business may be expecting too much, even from one of the largest private enterprises in the city.”
That said, in the past seven or eight years, since it emerged from the largest municipal bankruptcy in American history, Detroit has become a much more desirable city, both for residents and tourists, Eisenhauer said. A once-desolate downtown is packed with pedestrians, and cranes still punctuate the skyline. More than $24 billion has been invested in commercial, retail and residential projects since 2006.
“The Ilitches have played a role in this comeback, though the contributions of the automakers, (Quicken Loans) Dan Gilbert’s companies and others have been larger,” Eisenhauer said. “The ‘walkable neighborhoods’ idea has been touted more by the mayor than anyone else, so I would look to the public sector rather than the private sector to evaluate progress on that front.”
For the past 12 months, cities like Detroit and Atlantic City have operated under the cloud of the coronavirus and its impact on economic well-being. Which brings us back to the original question: Why Ocean for the Ilitches?
“It’s obvious Ocean paid attention to the demographics,” said Robert Ambrose, a former casino executive, consultant and adjunct professor of hospitality/casino management. “They identified the right niche marketing areas and took time to understand the competition. The end result was the selection of the correct hospitality products and amenities, while deploying strategic marketing initiatives to tie it all together.”
Above all, Ambrose said, Ocean is a survivor and a testament to creativity. “It’s withstood both the hurricanes of nature and the storms of commercial failure (as Revel) to find its place within the top tier among the resort hotel casino experiences in Atlantic City.”
Remarkably, Ocean was the only one of nine casino hotels in Atlantic City to report an increase in gross operating profit in 2020. What’s more, for the nine months leading up to the coronavirus pandemic closures in March 2020, Ocean posted double-digit year-over-year growth.
According to Ambrose, whoever took over the expensive but flawed Revel after its quick closure needed deep industry experience, ready capital and a commitment to move the property forward. “I walked the dark and musty halls when it was closed under the Revel name with one of its past owners. I’ve literally seen the property’s bones first-hand, front and back, and they’re solid. It just needed the right mix of investment and leadership.”
As Ocean, the property has completed several unfinished hotel floors, added branded amenities and made productive use of underutilized or misconfigured space, he added.
“There is a certain feel when you walk through a property. You either get the experience presented to you or you don’t.” He says Ocean made it happen.
Will Luxor Sell Out?
Luxor Capital purchased the $2.4 billion property at rock-bottom price, likely around $250 million, when the prior owner couldn’t pay the debt service. The hedge fund put $70 million into the property and started to rebrand it, said Michael Busler, professor of Finance at New Jersey’s Stockton University. But Luxor wasn’t in the business of running a hotel casino.
Even so, “They had an operating profit because they were able to charge the highest prices in Atlantic City for rooms, and they operated very business-like to keep costs down.”
The success of the past 12 months speaks to Luxor’s decision to part with as much as half of its stake.
“The value of an income-producing property is based on the amount of income earned,” said Busler. “Even during a pandemic, Ocean was able to generate a $27 million profit. That likely means the increased value of the property results in selling half of the ownership and return all of their original capital investment. That’s how hedge funds work.”
And Ocean could easily reach business levels of the larger casinos in town, Busler said.
“In general, assuming the virus is contained and the Jersey shore weather is good, I think the South Jersey resort economy is in for a boom year,” he said. “Most businesses will see record-setting sales, likely 8 percent to 10 percent higher than 2019, the last normal year. Ocean will probably see rapid growth numbers putting it in the middle of the pack.”
These dynamics were not lost on Ilitch Holdings. “They saw Ocean Casino Resort as an opportunity to leverage their expertise in casino and hotel management,” Busler said. “If I’m right and Ocean’s profit doubles or triples or more, that increases the value of the property by two or three times, allowing Ilitch to reap phenomenal return on their investment.”
Indeed, the time seems perfect for a seasoned company such as Ilitch Holdings to bring its diverse entertainment and gaming industry experience and huge customer database and incorporate it with the Ocean brand, Ambrose said.
Unlike Luxor, Ilitch comes to the table as a seasoned casino operator, with a portfolio of food and beverage companies and franchises in sports and entertainment. “The ability for the Ilitch enterprise to promote their brands and cross-market casino loyalty options to their guests will only increase the customer data base and the potential of growth for Ocean Casino Resort,” Ambrose said.
Buying a stake in a resort in Atlantic City makes sense from a business perspective for Ilitch, said Eisenhauer: it diversifies its portfolio while leveraging its expertise in casino and hotel management.
“Clearly, it wouldn’t make sense for them to operate a competing casino near the MotorCity Casino, so Ocean Casino Resort gives them an opportunity for expansion that doesn’t exist in Detroit. I wouldn’t expect them to follow a different approach in an out-of-town investment than they follow in their home town.”
Ocean also has plenty of room to grow. The original Revel design called for two equal hotel towers, but only one was built, due to the recession. And don’t discount those blocks of adjacent, vacant land, much of it smack on the oceanfront.
“If the economy picks up,” said Busler, “there are some great investment opportunities. As they operate the casino, they’ll keep their eye on development and any land bargains that always pop up in Atlantic City.”
But another question remains: Why would an experienced casino and entertainment company invest in Ocean without a controlling interest”
“It is unlikely Ilitch Holdings would be satisfied to be what amounts to a silent partner. It seems reasonable to assume the company will increase its stake to hold a majority interest,” Eisenhauer said.
This is pure speculation, but speculation that makes sense, agrees Busler. “I suspect that in a few years,” he said, “they’ll buy the other half of Ocean.