Long odds for Atlantic City's next chapter

A palpable disappointment shrouds the easternmost end of the Atlantic City boardwalk. After two of New Jersey's iconic casinos, the Showboat and Revel Casino Hotel, went dark over Labor Day weekend-it's becoming clearer, the worst isn't over yet.

Later this month, the two shuttered casinos will be joined by a third. The Trump Plaza will close its doors at 6 a.m. on Sept. 16 , and another 1,100 jobs will be lost.

And a fourth casino is likely on the brink. The Trump Taj Mahal, one of the biggest casinos on the boardwalk, has reportedly broken some of its loan covenants, and could be headed for a Chapter 11 bankruptcy filing, according to a New York Post report.

The Taj Mahal, like its neighbor Trump Plaza, is owned by Trump Entertainment Resorts (Grey Market: TRMY), a holding company in which Donald Trump's Trump Organization has a minority stake, but no day-to-day involvement in operations. The casino has been operating at a loss, according to its latest financial filings with the state's Division of Gaming Enforcement.

The Taj Mahal did not immediately reply to CNBC's request for comment.

The steady stream of closures in Atlantic City has resulted in one of the largest mass filings for unemployment in New Jersey's history, according to the state's Department of Labor.

The local gaming union, Local 54 of Unite-HERE, estimates that 7,400 jobs, including third-party vendors, will have been lost between the Showboat, Revel and Trump Plaza. Factoring in the Atlantic Club, which closed earlier this year, nearly 9,000 gaming-related jobs have been lost so far this year-more than a quarter of the city's entire casino workforce-as Atlantic City's casino supply has shrunk by a third.

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If the Taj Mahal closes, it would add to the misery. The business employed as many as 5,000 workers until recently.

"In the history of Atlantic City, there has never been this sort of layoff," said Ben Begleiter, the casino workers union representative for Local 54.

The closures will have ripple effects. Tax revenue from Revel, the Showboat and Trump Plaza totaled more than $30 million, or roughly 15 percent of Atlantic City's budget. The mayor said cuts will be made to rebalance municipal coffers, including hundreds of city jobs.

The losses will bludgeon a city that's been economically downtrodden for years, with unemployment already teetering near 14 percent and a poverty rate that's double the national average.

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The closure of the Showboat and Revel, adjacent to each other, also brings emptiness to a strip of the boardwalk that was supposed to help revitalize Atlantic City. Revel, in particular, had been expected to usher in a new era for the struggling city. Opened in 2012, the $2.4 billion, 47-story megalith hemorrhaged money, never turned a profit and headed back into bankruptcy for the second time in as many years.

"I don't know if it's hit me yet," said regular Revel patron Lucille Alexander, adjusting a baseball cap emblazoned in rhinestones spelling out the casino's name. "We're going to get in our car and drive home, and at some point we're going to say 'We're not going to the Revel next week.'"

Still, gaming experts said this could be the beginning of a stabilization for Atlantic City's deflating casino business.

Fitch Ratings said it expects the majority of revenue from the shuttered properties to stay local, adding to the balance sheets of other casinos like the Borgata, Harrah's and Golden Nugget.

The owners of both Showboat and Revel are said to be in active discussions with investors. While Revel failed to attract a qualified bidder at its recent bankruptcy auction, parent company Revel AC (Grey Market: REVEQ) has said it will continue to hunt for a new owner. As the casino wound down over the weekend, rumors about which company would next own the gleaming blue megalith were running rampant among employees.

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But the Showboat may change hands more quickly. Last week Caesars (CZR) confirmed that an interested party had toured the facility. According to several people familiar with the situation, a bid could be offered on the property as soon as this week. Whether it would be used as a casino or as a non-gaming venue is still being decided.

It's easy to see why some are discussing what options there are for Atlantic City outside of the casino business. Gaming revenue fell sharply in the city since its 2006 peak, tumbling from $5.2 billion to $2.86 billion in 2013. Fitch said it expects sales to fall further, to $2.5 billion next year, and then, as long as the economy continues to recover, to stabilize at around $2 billion.

While the recession and Hurricane Sandy hit the seaside city hard, the biggest driver of its decline has been ever-increasing competition from casinos in other states-states that once fed Atlantic City its visitors. Just last week the Horseshoe Casino, another Caesars' property, opened in Baltimore, and this fall New York State will award licenses for four more casinos. Proposals have even been batted around for casinos in northern New Jersey.

The additional supply has caused casino saturation, as supply has outpaced demand. Since the number of regular gamblers has remained relatively constant for decades, it's a losing bet: the same market is being divided up among more players.

In Atlantic City, the casinos that posted profits-are the ones that reinvested in casino and hotel renovations, and added non-gaming amenities like restaurants and conference spaces. In the second quarter, three posted year-over-year gains in gross operating profit: the Borgata, by far the city's most successful operation; the Tropicana (TPCA), and Resorts, which posted its first profit in nearly a decade.

"Clearly there's no question that the convenience gaming in the regional areas have had a negative impact," said Resorts CEO Mark Giannantonio. "We feel that the remaining casinos-Resorts in particular-those that have invested in their property over the years, will do very well in the future."

City officials said they plan to cultivate more conference and convention business, adopting a model similar to Las Vegas.

The mayor's office is also hoping to lure housing developments, a college campus, even start-up tech companies-all in an effort to diversify away from a monopolistic model that's no longer sustainable.

"The new business model is already being formed," Atlantic City Mayor Don Guardian told CNBC. "Places like Harrah's, Golden Nugget, don't see themselves as casinos but resorts with fine dining, big nightclubs."

Guardian also thinks hoteliers will become a much bigger business. "For years, the hoteliers ran Atlantic City," he said. "You made your money on the room, on food, on beverage, on perhaps some other type of entertainment. Then we got all excited with the casino business, but the hotel, like the Claridge, which was formerly a casino, is going to take over and be a successful model."

Not surprisingly then, one of the most innovative new ideas harks from the developer of the Chelsea, the first high-end non-gaming hotel built here in four decades.

With legislation that will be introduced this fall, Curtis Bashaw, co-founder of developer Cape Advisors, said he hopes to convert the fifth floor of his boardwalk hotel into a boutique gaming floor, focused on intimate table games and devoid almost entirely of slot machines. The pool would have private cabanas where dealers could host games for private groups. The concept is in stark difference to the current model employed by the city's big casinos businesses, employing gaming as an add-on to the hotel business.

"The rooms are a very profitable component, but what we want to do with the gaming amenity is control our destiny on rate," Bashaw said. "Right now we are at the mercy of whatever casinos decide to charge because their model is of the inverse because they're not a hospitality company primarily, but a gaming company. So we're adding gaming to a hospitality component as a way to add a revenue stream but also stabilize our own room rates."

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Bashaw hopes to lure a new demographic with this concept: young urban professionals, the very same group that Revel had targeted.

But as Revel and The Showboat sit vacant on the boardwalk, the more pressing issues snap back into focus. Two massive spaces are now empty and dark, a literal black spot on the city's nighttime skyline that will have to try and withstand squatters while the race to find new owners unfolds.

The local gaming union expects 5,000 people to come through the city's convention center for a job fair-hosted by Unite-HERE, the city and the state-that runs through Sept. 10. One hundred stations were set up to do unemployment intake, with translators speaking nine different languages.

"I will be filing for unemployment this week, just like almost everybody," said Ruthann Joyce, a bartender at The Showboat since 1987. "I'm hoping someone buys the Showboat-it's still profitable-and all the workers and all the customers go back."

But the odds are long. In an internal memo circulated Friday, Caesars Entertainment CEO Gary Loveman said 470 Showboat employees had been hired at other Caesars' establishments, roughly half those that had applied for positions within the company.

-By CNBC's Morgan Brennan