Trop Owners Play it Cool - Wednesday 14th of December 2005

By Liz Benston

By Partners at the Las Vegas Sun

In a city built on big bets, the Tropicana is the very definition of a property that doesn't like to gamble.

While demolition rumors continue to swirl about older properties on the Strip, no property has likely been subject to as many of those rumors for as long as the Tropicana.

The company that owns the Tropicana has long discussed the potential for redeveloping the property and even obtained county approval for revised redevelopment plans as recently as July.

These days, however, executives won't discuss those plans or any potential timeline for redevelopment, leaving a cloud of uncertainty surrounding the property and its almost 1,900 rooms.

Observers familiar with the company say it's just a matter of time before the Tropicana is rebuilt. Parent company Aztar Corp. may not be the company to build it, however.

A number of factors have come along to complicate the company's redevelopment plans, industry sources say.

"They're a conservative company, and there's nothing wrong with that," according to one source, who declined to be named. "They are zealous about protecting shareholder value. If you look at where the company was six to seven years ago, they are in a much better place today."

Aztar, based in Phoenix, contains the gaming assets that were spun off from the Ramada hotel chain in 1989. The transaction saddled Aztar with a lot of debt.

"They had their backs up against the wall to a certain extent," the source said. "They had to pay down debt and improve operating results before they could invest in Las Vegas."

In 2002 Aztar bought out its 50 percent partner in the Tropicana, the Jaffe family of Chicago. Aztar had previously leased the Tropicana from the partnership. The deal put into motion plans to develop two interconnected resorts at the Tropicana site, one at the north end facing Tropicana Avenue and a second on the southern half of the parcel.

Some observers believe Aztar's former chief executive, Paul Rubeli, preferred investing in Atlantic City over Las Vegas.

Rubeli, who joined Ramada in 1979 and became chief executive of Aztar in 1990, retired in March. He was succeeded by Robert Haddock, who joined Ramada in 1980 and became chief financial officer of Aztar in 1989.

Standard & Poor's estimates that Las Vegas is expected to generate the highest casino revenue growth of any major casino market in the United States next year. Gaming revenue is anticipated to grow about 11 percent from January through September compared with 4 percent for Atlantic City.

"They invested conservatively in Las Vegas and aggressively in Atlantic City," according to one source, who declined to be named. "In hindsight it wasn't a good strategy. They could have made a good investment on that great location in Las Vegas a long time ago. But hindsight is always 20-20."

The expansion under way at the Tropicana in Atlantic City took a tragic and costly detour in 2003 when a building accident at a Tropicana parking garage under construction claimed four lives and injured others. The accident ended up delaying the opening of the expansion by several months and miring the company in insurance claims.

In December 2004, the company opened the expansion, which included a 500-room hotel tower, meeting space and a 200,000 square-foot dining, retail and entertainment district called "The Quarter." While performance in Las Vegas remained fairly flat for the most recent quarter, the mall attracted urbanites and big spenders to Atlantic City and helped boost operating cash flow at the property by 59 percent.

Last month Aztar became one of gaming casino companies vying for casino licenses in Pennsylvania when it announced plans to build a $325 million hotel and casino in Allentown. Meanwhile, the redevelopment of the Las Vegas property has gone from the "front burner to the back burner to the front burner and back again," one source said.

"To this day I don't believe they are 100 percent sure" whether to rebuild, said the source, who declined to be named.

In September 2003 the Clark County Commission approved a use permit for a new, 2,550-room resort at the Tropicana site. The plan included partially demolishing the existing property and building the new resort at the north end of the site facing Tropicana Avenue. The lower floors of the resort would be built right up to Tropicana and Las Vegas Boulevard to the west a more efficient and some would say more profitable use of space than some of the older properties on the Strip that had been set back from the sidewalk.

In 2004 officials said they planned to make a decision on the future of the resort by March 31 of this year. But March came and went, with executives saying they would postpone that decision until fall.

Officials said they wanted to wait until the company's delayed expansion of the Tropicana in Atlantic City began to generate higher revenue over the busier summer months. They have yet to announce their Las Vegas plans.

Some say Aztar has already lost its best window of opportunity to redevelop.

The company missed out on the latest wave of development on the Strip that has included new hotel towers at Mandalay Bay, Bellagio, Venetian and Caesars Palace, they say. Wynn Las Vegas opened in April to big crowds, giving Las Vegas another bump in gaming revenue and tourism traffic. Wynn and Venetian are already under way with second, super-luxury resorts on the Strip.

In addition, resorts that might have cost $800 million a few years ago now cost more than $1 billion given the rising cost of construction materials such as steel and concrete as well as competition from other building projects under way in Las Vegas.

"If there's anything that could potentially hurt them today, it would be that the cost to build is higher than it was a few years ago. I don't think that means they they've lost their opportunity," said John Botti of Botti Brown Asset Management in San Francisco, which owns 1.6 million shares of Aztar.

Botti said he appreciates Aztar's more conservative approach.

"It's easy to go into Vegas and say, 'Let's build something for $3 billion bucks,' but what kind of returns are you going to get? Returns on invested capital in Las Vegas have come down substantially in recent years. The management team has been an intelligent custodian of free cash flow."

Aztar's recent expansion in Atlantic City has generated returns of more than 20 percent, Botti said.

"We'd like them to (redevelop the Tropicana) with the conviction and commitment that they've answered all their questions and they are absolutely going to get the kind of returns investors expect rather than Wall Street pressuring them to build," he said. "We're talking about committing some significant capital there. We want returns (in the long term) rather than a brief pop in the stock."

Some observers say they aren't sure that Aztar will be able to pull the trigger. There have been investors willing to buy the entire company simply for the opportunity to acquire the Tropicana's turf.

Aztar's silence is understandable, observers say. The stock has been bouyed in part by the prospect that a buyer or partner would redevelop the property, they say. Mario Gabelli of Gabelli Asset Management in New York, another major investor in Aztar with more than 4 million shares, is still bullish on Aztar and the gaming industry.

"We like this industry and we like this location," he said of the Tropicana. "Shareholders are not going to be patient forever. It's time to move on. You've got to make your bet. The real question is whether this company is better off in the hands of someone else who can make the decisions," he said.

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