Revel Atlantic City Destined for Failure

John Mehaffey November 19, 2012 1858 Reads

Revel is the newest casino resort in Atlantic City.  It is the tallest building in Atlantic City and the second tallest in all of New Jersey.  Revel has failed to draw many new visitors to Atlantic City.  Revel is the most expensive property to ever be built in Atlantic City but it consistently ranks between 8th and 10th in terms of casino revenue.  The one bright spot has been its non gaming revenue.  Revenue not derived from gaming is 40% of the property’s gross revenue.  The Borgata is the next closest Atlantic City casino in terms of non gaming revenue as a percentage of gross revenue.  The Borgata non gaming revenue is 32% of total revenue.  As Revel has learned, it is impossible to turn a profit without an active casino floor.

Revel Created by Investment Bank

Revel was a concept created by the Morgan Stanley Real Estate Fund, a subsidiary of Morgan Stanley, one of the world’s largest investment banks.  Morgan Stanley owned 90% of Revel Entertainment Group, the parent company of the casino project.  Revel broke ground in June 2008.  The global financial crisis peaked shortly after construction started.  Morgan Stanley was heavily exposed to securities and real estate that lost significant value during the crisis.  Neighboring states were also expanding their legalized gambling and it was deteriorating Atlantic City’s gaming revenue.  In April 2010, Morgan Stanley decided to abandon its $1.2 billion investment in the unfinished project.  The company took a 98% write down with the opinion that it was throwing good money after bad.  Construction was halted on the project until a buyer could be found.

The new owners of Revel Entertainment were able to secure $1.15 billion in financing to finish the project.  They also received $261 million in tax incentives from the State of New Jersey.  Construction relaunched in February 2011.  The casino opened for a soft launch on April 2, 2012.  Revel was not completed for two more months and the resort held its grand opening on May 25, 2012.

Revel Failed to Focus on Gaming

The resort opened with a business plan that made it clear that they felt Revel was a resort first and a casino second.  Revel launched world class restaurants and nightclubs as companions to their five-star hotel.  While these amenities were a draw, the casino floor has been a near failure.

Lack of Marketing to Gamblers

Casino employees greeted visitors at every entry point with wireless player’s club applications upon the property’s launch.  While this made signing up for a player’s card convenient for potential new players, gamblers immediately complained that there were no advanced tiers in the Revel player’s club.

Casino player’s clubs reward players comps based on their level of play.  The higher the theoretical loss a player has, the higher the tier a player will achieve in most casino’s players club.  This is not the case at Revel.  Casino management stated that players would be treated equally and that all players could exchange their points for comps.

Players also complained that there was no VIP lounge.  High volume players often enjoy a private lounge with an open bar and small buffet when they play at high-end casinos.  Revel offers no such VIP lounge and does not even have a buffet as a dining option for any of their guests.

Players have also complained that Revel does not send quality mailers.  Casino players are accustomed to receiving offers by mail.  These types of offers include free hotel, food and slot play.  Players have reported that Revel’s marketing department is very stingy.  Few players have received the level of offers that other casinos would give them based off of the same play.  Disgruntled players have been able to arrange offers at other Atlantic City casinos by simply complaining about their treatment at Revel.

Revel also underestimated how competitive the Atlantic City market was and how loyal players would be to their home casino.  If a player receives the proper benefits from their play at another casino, and they do not receive proper comps from Revel, they will just go back to their home casino.  Some players are so obsessed with working up the tiers of a player’s club that they will not give action to a different casino until they feel slighted by their home casino.

Revel also entered Atlantic City without a mailing list of casino players.  This put them at a huge disadvantage.  It was as if Revel felt that players would come running as soon as they opened their doors.  This has not happened.

Revel’s target audience would appear to be the youngest age range that is allowed to gamble.  The recession has been especially harsh to this demographic.  This has left their target audience with little in the way of discretionary spending.

First Non Smoking Atlantic City Casino

In addition to being the newest and most luxurious resort in Atlantic City, Revel felt that they had a feature that was so unique that casino players would flock there.  Revel opened as a non smoking casino.  This is rare in states that allow casino smoking.  Some states ban smoking in all casinos, but New Jersey does not have a smoking ban in gambling establishments.  The local government in Atlantic City has limited smoking to 25% of the casino floor, but most casinos do not heavily enforce this ban in the 75% of the casino set aside for non smokers.  Revel thought that they had found a niche.  It seems that this policy has not helped their gaming operations.  Considering the number of states that have reported a 10-20% loss in casino revenue after a smoking ban, it could be argued that this policy has hurt Revel.

October Gaming Revenue is Major Disappointment

Revel’s October gaming revenue came in at just $9.3 million.  The casino was closed for four days in October due to Hurricane Sandy.  The Borgata, which is Revel’s most comparable property, posted a $42 million casino win.  Revel ranked 10th out of the 12 Atlantic City casinos in terms of revenue.  Assuming this was 60% of total revenue as it was last quarter, the casino only grossed $15.5 million in total revenue including non gaming revenue.  This makes it impossible to service the $950 million in debt that Revel carries.

September was just as challenging for Revel.  Casino revenue was just under $17 million, but it still ranked 8th out of 12 casinos in the Atlantic City market in terms of casino revenue.  To compare, The Borgata posted a $55.5 million casino win.  Revel’s non gaming revenue would have been around $12 million based on its past 40% non gaming revenue reporting.

Massive Loss in First Operating Quarter

The casino posted a $35 million loss in the second quarter, its first operating quarter.  This trend appears to be continuing and investors are taking note.  Revel’s $850 million in long term debt trades at about 50 cents on the dollar.  This debt matures in 2017.  Revel was also able to secure $70 million in additional financing through its revolving credit facility.  This brought its credit limit to $100 million.  This bump was necessary to pay vendors and contractors that had put a lien on the property for unpaid construction and other service bills.  These liens and potential lawsuits totaled an estimated $30 million.

The Division of Gaming Enforcement feels that Revel is liquid enough to keep its doors open, even with its massive debt and lack of gaming revenue.  This has been disputed by many industry observers.

Cosmopolitan Las Vegas Had Same Business Plan

Cosmopolitan was the last resort to open on the Las Vegas Strip.  It opened in December 2010, in the depressed Las Vegas market.  Cosmopolitan is owned by Deutsche Bank after it acquired the property through foreclosure.  Cosmopolitan has experienced the same challenges that Revel has faced.  Non gaming revenue at Cosmopolitan has met expectations, but casino revenue has fallen well below expectations.  Much of this has been caused by the lack of a customer list targeting casino players.

The worst has yet to come for Revel.  The winter is notoriously bad for Atlantic City resorts as winter weather hurts traffic in the northeast corridor.  Atlantic City revenue has fallen 8.6% every year on average since 2006.  In addition to the recession, legalized casinos in Delaware and Pennsylvania helped accelerate the decline.  Revel is a beautiful property that came to a declining market with a poor marketing plan.   Its inability to meet its financial obligations is imminent unless a major reversal in gambling revenue appears.  It will be tough to survive the winter with its current numbers.

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