Scheetz’s Folly, otherwise known as the Hard Rock Hotel & Casino, will soon be in new hands. After several addled years under Morgans Hotel Group, whose bright ideas included “building a hotel suite with an S&M theme and a human cage,” lender Brookfield Asset Management will take title to the hard-luck property. It will now be steered by Warner Gaming (a consortium of Station Casinos alumni) and get $30 million in new capital. That’s assuming that all goes according to plan, whereby suckers minority owner Morgans gets the heave-ho on March 10 and Warner takes command — collision with a $1.25 billion balloon payment having proven unavoidable. Lenders will eat $357 million but get the casino.
For all the battering Morgans’ image has taken, it will get off easily from the whole debacle. According to the Wall Street Journal, it managed to keep its equity commitment to the $770 million purchase and (equally costly) revamp of the HRH to a puny $75 million. That’s offset by management fees Morgans has been paying itself but which aren’t on track to cover the whole 75 mil enchilada. (By trading off $178 million in debt for the keys to the HRH, Brookfield, however, is positioned to eventually flip the resort at a profit … if Warner can improve that $22 million EBITDA by 50% or so.) Morgans inflicted more damage on itself than others, its Hard Rock venture indirectly torpedoing its involvement in Boyd Gaming‘s Echelon and eventually putting Echelon itself into a coma.
Credit Suisse affiliate DLJ Merchant Partners, majority owner of the megaresort, however, stands to get taken to the cleaners, however. When then-CEO Ed Scheetz‘s appeal for joint-venture partners to bail out Morgans fell upon deaf ears, DLJ was left holding the bag. Morgans gave the bank percentage upon percentage of the white elephant on Paradise Road, eventually reduced to a 13% toehold, then nothing.
One of the most sensible reforms proposed for the upcoming Nevada Legislature is eliminating the requirement for the Nevada Gaming Commission to sign off on each relicensing. Almost every top executive at Warner Gaming has already been licensed as a key employee in the Silver State, so there’s no point in making them jump through all those hoops a second time. With so many properties changing hands on short notice, expediting smooth transfers of management is clearly imperative.
As for Morgans’ future, SeekingAlpha.com forecasts a bleak scenario — although its analysis of the company’s future (or lack of same) in Vegas went 100% awry. Extravagant executive compensation and burdensome debt — interest on Hard Rock-related loans exceeded cash flows — leave the hotelier deeply in the red. That’s even with lucky breaks like getting a sweetheart deal on a San Francisco hotel: a lower rent from the landlord, which just so happens to be a Morgans subsidiary. Even being shot of its Vegas misadventure, Morgans may not be out of the woods. In the meantime …
So long, Morgans, and thanks for playing. I guess the house really does lose, every now and then.
David, I’m disappointed in you. The obvious caption for this blog entry is “When The Scheetz Hits The Fan”.
As for Morgans…I remember them when it was Ian Schrader Hotels, a great series of boutiques all over the world. How far they’ve fallen, due to hubris more than anything else.
A friend of mine notes the real problem with the casino business these days is that casino guys no longer run casinos for the most part. They’re run by finance guys (and IMHO mediocre ones at that), marketing guys, RE guys, etc. who view the business the wrong way.
Exhibit A: Consider guys like Steve Wynn, Jack Binion and Stanley Ho (a younger one, obviously). They’ve proven the test of time and knew how to be profitable in tough economic times. That’s because they’re true casino guys.
Exhibit B: Consider Gary Loveman. Loveman’s a behavioral psychologist who has forgotten about human nature. It’s an interesting strategy Harrahs (sorry, I can’t call them Caesars, Clifford and Stuart would put paper out on me from the grave for being so insulting to their memories). His investors take the company private over the top of the market, bidding against themselves, and the economy almost immediately goes into the toilet. Pretty much every dime they’re making is going to debt service.
Their response is to borrow more money to buy more casinos, call it a “defensive” purchase to bootstrap legitimization of the purchase, and blame a bunch of low margin (video poker) players for their woes. So, it’s a) spend more money to reduce debt and b) blame the customers for your mistakes. (the video poker drama is hilarious in itself, but that’s for another day…let’s just say if it were back to being HET and I owned shares, I’d be screaming for Loveman’s head). These are clear signs the company has become completely dysfunctional and delusional.
Now frankly, its the same with guys like Jim Murren (who is CEO of a near bankrupt, highly factionalized MGM Whatever We’re Calling Ourselves This Week), and former Wynn protege Dan Lee (although from Lee’s tenure with Wynn, I’d think he’d learn something about vision, we’ll soon enough find out I suppose). Or even worse, Colony Capital, Morgans, etc.
At some point, there has to be a contraction of The Industry. Yet, all I read is about more and more casinos being put online. Apparently, one taste testing of the Kool Aid wasn’t enough, I suppose.
It is no secret that they over-paid for the place. Then they essentially made the place evolve into something that was not even close to what made it so successful in the first place (although Morton was planning the same thing). It did well as an intimate party place. Building a Billion dollar strip-like resort can not sustain itself on the sale of booz.