An ill wind on Gulf Coast blows casino operators some good - Saturday 22nd of October 2005

Godzilla at his most dyspeptic never visited destruction upon Tokyo such as that inflicted on the Biloxi/Gulfport/Bay St. Louis stretch of Mississippis Gulf Coast. Once home to a dozen floating casinos, with a Hard Rock Hotel franchise due to kick off in early September, the shore is now the scene of gambling barges either flung violently ashore or sunk at their moorings.

Only the Imperial Palaces casino vessel remained afloat. Its scheduled for a Christmastime reopening. Even the industrial-strength cofferdam girding Beau Rivages casino platform could not prevent the first two floors of the resort from being washed out. For one casino after another, up and down what some call the "redneck Riviera," it was Game Over.

But Mississippi is determined to rebuild its Gulf Coast gambling industry, this time with the casinos erected on land.

The shell of the former Treasure Bay casino sits on the Biloxi shore, in the aftermath of Hurricane Katrina. It is one of 12 casino barges and platforms either demolished or sunk in the storm.

"Weve had casino gaming here for 13 years," recalls Beverly Martin of the Mississippi Casino Operators Association. "So we know were going back at least 14 years. But if we can build onshore, we can get some semblance of business back in about nine months."

Martins timetable for full recovery is considerably longer: "Were looking at probably five years."

Nor was the gambling industry the sole victim. For a mile inland, an entire way of life had been cut down as though by an enormous scythe. From the Gulf shore to the CSX railroad tracks that bisect the peninsula, houses and apartment buildings, museums and businesses alike were flattened by the Category 5 storm.

"As you approach (Beau Rivage), it looks like it suffered little damage," said MGM Mirage Chairman J. Terrence Lanni shortly after Katrina dealt its blow. "All of the ground floor is basically gone."

Citing a serious mold problem, among other concerns, Lanni predicted the financial loss at the $750 million Beau Rivage would be the biggest of any Gulf Coast resort, adding that "rebuilding will take well in excess of a year" and cost in excess of $200 million.

Still less fortunate was the brand-new Hard Rock casino pier, which collapsed into the Gulf. Treasure Bay Casino Resorts pirate ship was driven aground and Palace Casino Resorts barge listed heavily into the water. At least four casino barges -- Grand Casino Gulfport, Grand Casino Biloxi, President/Silver Slipper and Casino Magic -- were hurled across U.S. 90 by the storm surge, crushing many a historic home in their path.

TAXES TRUMP MORALISM?

In the wake of such total devastation, the question was not so much whether the Biloxi/Gulfport area would be rebuilt but rather, What its new incarnation would look like?

"Everybodys taking a wait-and-see attitude at this point," says Beau Rivages director of public relations, Bruce Nourse, whose own 108-year-old beach house was lost to Katrina.

Part of the question was answered last Monday when Mississippi Gov. Haley Barbour signed House Bill 45, enabling the Gulfs waterborne casinos to come 800 feet onshore (plus highway easements and rights of way).

Thats one football field more than some legislators would have allowed. They proposed only 500 feet of relief from Neptunes wrath, but the 800 feet is still considerably less than Barbours initial proposal of 1,500 feet inland. Harrahs Entertainment and Biloxi Mayor A.J. Holloway both initially urged bringing casinos 2,000 feet onshore -- a plan from which Holloway backpedaled after he realized it would mean a clump of casinos in the middle of east Biloxis venerable Point Cadet area, according to Biloxi city spokesman Vincent Creel.

"Those knowledgeable about the industry have always known that when the first hurricane blew the barges off the beach, the Legislature would allow them on land," observes Dave Palermo, a former correspondent for the Biloxi Sun-Herald newspaper. "Once the casino tax dollars stopped flowing to Jackson, legislators could no longer be moralistic about gambling."

It wasnt just in Jackson where the casino tax dollars, estimated at $450,000 to $500,000 per day on $1.2 billion of annual gambling revenue, were being missed. Gulfport collected more than $5 million in fiscal year 2004, while neighboring Biloxi saw various civic coffers swollen by $23.2 million in gambling taxes. The ripple effect of the casinos closure will be felt by their nearly 14,000 employees and by such small businesses in the area that were not completely wiped out themselves.

The Legislatures vote renders largely moot, however, the question of whether the Gulfs casinos would rebuild. Those that have the insurance proceeds and other wherewithal are expected to do so, now that they are allowed to plunk their casinos onto terra firma.

"Its a great start," says Barry Thalden, of Hendersons Thalden Emery Architects. He sees the glass as half-full, since land-based gaming was confined to the Gulf Coast and not extended to any of the other Mississippi jurisdictions in which it is sequestered aboard riverboats.

"People often only react to significant circumstances," Thalden says, adding that policymakers have difficulty making the correlation between what happened in the hurricane and what could happen on the rivers, given flooding, runaway barges and other maritime hazards.

"These are circumstances that they should recognize as serious problems," the architect says. "Does it make any sense at all to put thousands of people out on the river just because they want to participate in gaming?"

"I cant think of one benefit from having casinos on water," said Gary Loveman, chief executive officer of Harrahs Entertainment, during an appearance at the Global Gaming Expo (G2E), in Las Vegas. "People will look back and think everyone was on ether during the time this was established as policy."

RENAISSANCE OR CUT AND RUN?

Although Treasure Bay President Bernie Burkholder has committed to rebuilding in the wake of Barbours bill-signing ceremony, CB Richard Ellis analyst John Knott points out that Pinnacle Entertainment, owner of Casino Magic Biloxi, is still weighing its options. Locally owned Silver Slipper had planned to move the former President Casino vessel up the coast to Lakeshore, Miss. It now sits hard aground atop a motel in Biloxi -- a total loss.

"We are absolutely leaning toward rebuilding. Were already talking about architectural and building plans," says Pinnacle Entertainments chief financial officer, Steve Capp, predicting that a decision will be made in 12 to 16 weeks. He applauds the Legislature for setting up the 800-foot casino zone, which Capp doesnt think will shake up the competitive dynamics too much.

Capp has other questions, though, ones that will help determine if Pinnacle rebuilds and how grandly.

"Whats Harrahs going to build? Whos not going to rebuild? When does the Ocean Springs bridge get rebuilt? Wed like to know that for sure," says Capp, regarding the bridge that formerly connected Biloxi with its eastward markets. Katrinas storm surge stripped the roadway clean off its pilings.

"Thats an important bridge, from a customer-access aspect," adds Capp, explaining that, without it, casino customers enter Biloxi from the north, via I-10, then swing east along casino row. Approached that way, Casino Magic becomes the next-to-last casino motorists pass, instead of the second. Therefore, the reconstruction of the bridge could have a determining effect on when, or if, Pinnacle reopens Casino Magic.

Roland Weeks, publisher of the Sun Herald from 1968 to 2001, is uncertain of the future of another locally owned property, the Copa Casino. "Im not sure that its going to come back. Im not sure that it isnt," he says. "They havent given some indication that they plan to rebuild."

"Its going to be bad," says Martin of permanent casino closures, "because all those operators have hotel rooms, so our hotel-room inventory would be cut in half. We have an influx of relief workers -- FEMA, Red Cross, construction workers, power company workers -- that literally are staying in tents. A lot of insurance adjusters are sleeping in their cars."

"They would prefer to stay here if we had some rooms for them," says Martin, whos no stranger to privation herself, sharing her Biloxi house with 13 other people. "If we can get the casinos, or at least a semblance of them, up and running, then that will give (relief workers) something to do. Theyre bored to death at night right now, literally bored to death. Even the ones driving back and forth to Mobile would prefer to stay here but we just dont have anywhere to put them."

While the casino industrys megaliths are latecomers to the Gulf Coast, no one expects them to abandon this once-verdant strand of oceanfront.

"Companies that have a presence in multiple markets are very likely to rebuild," contends Knott, adding that MGM Mirage and Harrahs understand their contribution to the community and wouldnt look good bugging out.

"You probably have companies that say, Gee, we better take the insurance proceeds and re-sell the license," Knott cautions. "A guy whos an entrepreneur who has just a single asset doesnt have the same issues" and can more easily relocate. If the entrepreneur can get $150 million in insurance plus a $50 resale value on his site , Knott argues, compared to $15 million in annual cash flow, he might prefer to take the money and bank it.

"Not everything will be rebuilt," predicts Charles Anderer, former editor of International Gaming & Wagering Business magazine. "If its lower than 13, then itll be made up for with bigger facilities, with a more extensive nongaming (component), because once you move it on land you can do more. Loveman has said hell build bigger and better if he gets regulatory satisfaction."

WHITHER HARRAHS GULFPORT?

But the Harrahs CEO kept people guessing after he said the company was undecided as to whether it would rebuild its now-imploded Grand Casino Gulfport. This, despite the fact that a Harrahs report on hurricane damage stated "the insurance proceeds are expected to equal or exceed the net book value of the impacted assets."

Company spokesman Alberto Lopez couldnt elaborate on Lovemans statement, adding, "Im sure that our people have spoken to (Gulfport Mayor Brent Warr) but Im not aware of the content of those conversations. This is a $10 billion company. There are issues we concentrate on a daily basis. Right now, no one else has asked (about Gulfport)."

In the absence of a definitive statement from Loveman, alternative explanations flourished. Anthony Sanfilippo, a divisional president of Harrahs, said that Biloxi was "more robust," telling the Sun Herald the city was a true casino destination and its post-Katrina redevelopment would be casino-centric, unlike Gulfports. Mayor Warr had also taken a stand against bringing casinos north of U.S. 90, which runs along the coast -- a dictum that may have factored into Lovemans noncommittal stance.

Knott thinks Loveman could get as much bang for his buck by building one big casino in Biloxi, arguing that the Grand casinos (which had been destined for re-branding as Horseshoe properties) may have been obsolete anyway. Building two new casinos would represent a substantial investment in a market where the $750 million Beau Rivage now sets the threshold.

Whats more, argues lobbyist Martin, construction bucks will go twice as far on dry land: "So they could take their same budget and build twice the casino."

VEGAS + WATER =

THE NEW BILOXI/GULFPORT?

What will the next generation of Biloxi and Gulfport casinos look like? Several observers believe the gaming operators already own enough land to bring their casino facilities onshore, especially if they cannibalize their parking lots.

Ironically, thats exactly where Copa Casinos barge was deposited by the storm surge. Ballrooms and other hotel spaces may be adapted as gambling venues, high-rise parking garages may ascend along the shore and casino-resort complexes could evolve into more integrated structures.

Only a couple of casinos own land above U.S. 90, but given the overall devastation, enough acreage may come on the market to permit the northward expansion of the resorts. "A lot of the properties have a tremendous amount of space that theyve been sitting on and havent developed," adds Stephen Richer, executive director of the Mississippi Gulf Coast Convention & Visitors Bureau.

"You have to get a little more creative. You still have to be right next to the water," says Ferenc Szony, CEO of Sands Regency Casino Hotel, in downtown Reno, which owned Copa Casino from 1996 to 2000, back when it was aboard a venerable cruise ship. Szony says Mississippi now has an opportunity to learn from previous mistakes.

To some, the consignment of Mississippis casinos to barges, platforms and so-called "boats in moats" was a fig-leaf arrangement to appease the states bluenoses.

"Mississippis lawmakers have always been hypocritical about the states gambling industry. Gambling is the states bastard child," says Palermo, now a special assistant to the Hopi Tribe, in Arizona. Its fine as long as the wagering is done over a river, a tributary or in the Mississippi Sound. Its as if water kind of sanitizes gambling."

Yet Mississippi has always been a hotbed for gambling, long before casinos were legalized in 1990, Palermo says. "The coast was a Mecca for illegal casino gambling in the 1940s, 50s and 60s. Before casinos were declared legal, the biggest cash business in the state was sports wagering."

According to a Jefferies & Co. study, at least two additional casinos had been announced for Biloxi (Havana Casino, Baccaran Bay) and one for Gulfport (Casino World Europa). "Thats a pretty loose description, announced," says Knott, laughing. He explains that CB Richard Ellis spent considerable time on a project near the Palace Casino Resort site but found no appetite for investment from either gaming companies or capital markets. Hes more optimistic about a 404-acre project in Diamond Head -- most likely Casino World Europa -- arguing that its position on the north shore of Bay St. Louis -- where the trees are still standing -- shields it from future storms.

Nor is the fate of all the existing casinos assured. According to Palermo, gamblings major operators steered clear of the Gulf Coast, expecting Louisiana and Florida to develop more rapidly as casino markets.

The Gulf market was trailblazed instead by more homespun, first-generation casino companies like Isle of Capri, Grand Casinos, Casino Magic and President. Most of those have now been absorbed by larger corporations with diversified revenue streams and easier access to debt financing, placing the few remaining independents at a disadvantage.

"Gaming companies that are not currently owners there will buy those properties that had problems and rebuild themselves," says architect Thalden with regard to some of the Gulfs more marginal casino operations.

Szony thinks operators not currently in the Gulf Coast market may be poised to enter it, Sands Regency included. "The weaker performers in that market ... if they had been challenged and wanted to quit, its probably a good time to get out," the CEO says. "Wed definitely take a look at that market again and see what goes on."

"Were going to come up with some really good ideas and its not going to just be what some people are already calling C&C: casinos and condos," maintains the Convention & Visitors Bureaus Richer. "The fact that the casinos were on barges did make it a very scenic place. Its much too early to project what it will all look like other than people are using this as an opportunity, though tragic, to see how we can make things even better."

WILL THE GULF BECOME THE NEW STRIP?

The casinos obliterated by Katrina, it has been suggested, could be supplanted by a generation of Vegas-style megaresorts.

One variant was proposed by Thalden, who designed many of the now-defunct casinos. He calls for leaving the areas 12 miles of man-made, white sand beaches wide open. North of the highway, he would build "spectacular modern and exciting resorts, casinos, entertainment, shopping, high-rise condominiums and restaurants that look out on an uncluttered coastline," according to Casino Enterprise Management magazine.

Anderer keeps his expectations lower: "Southern-fried Vegas? I dont know. Youre still talking about boxes," he mused.

"That would be the worst thing that could happen to us, to be all casinos, and weve known that since Day One," says Creel, spokesman for Mayor Holloway. "We dont want to be the Las Vegas of the South."

He sees the 800-foot limitation on gamblings inland encroachment as Biloxis saving grace. "The casinos are the engine and, in some cases, the whole train driving our economy. But theyre not the only things we want to have here. We know diversity is important."

"Diversity" and "Las Vegas" arent mutually exclusive concepts, according to Glen Schostak, senior client partner for Princetons Korn/Ferry International. "The ability to redevelop allows them, with master planning (of) the entire area, to reach out to different market segmentations and become a very diversified destination, just like Las Vegas.

"Las Vegas has reinvented itself time and time again, which is one of the reasons its the most successful destination on the planet,"the analyst continues. Understanding that the customer wants a diversity of experiences would allow Biloxi to achieve more than they ever have in the past. After the fact, this is a very unique situation that could be extremely positive for the region."

Looking back on the Katrina calamity, Harrahs Loveman tried to leaven the situation with gallows humor. Noting that Harrahs took possession of the two Grand casinos on June 13, he told G2E attendees, "If you happen to be at anything we acquire in the future, take refuge immediately!"

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