Casino Journal
April, 2007
Executive View Q & A
Q & A with Thomas J. Barrack, Jr., founder, chairman and CEO, Colony Capital
Thomas J. Barrack, Jr. is founder, chairman and CEO of Colony Capital, a strategic investment company that has grown significantly in the gaming industry in recent years. Before creating Colony Capital in 1991, Barrack began his career as a finance lawyer, gaining valuable financial experience. He served as Deputy Undersecretary of the Department of the Interior under the Reagan administration. He was also a principal with the Robert M. Bass Group, an investment vehicle of the Fort Worth, Texas investor Robert M. Bass. Barrack has helped grow Colony Capital’s gaming industry portfolio through strategic acquisitions and new development projects alike. Barrack recently took the time from his busy schedule to communicate with Casino Journal contributing writer Regina Lafay about his company’s current position in the gaming industry and what the future holds.
Colony Capital has become a significant player in the gaming industry in recent years, largely through the acquisition of existing casino properties. Has that been an intended strategy?
Yes, gaming continues to be a key component of Colony’s opportunistic real estate investing strategy, enabling us to apply our private equity toolkit to an attractive set of operating businesses, which themselves are based on real estate assets. Pending transactions aside, Colony’s gaming investments include: the privatization and sale of Harvey’s Casino Resorts to Harrah’s Entertainment; the merger of Accor’s casino business with that of Groupe Lucien Barrière; Resorts Atlantic City; the Las Vegas Hilton; the four casinos acquired from Harrah’s Entertainment and Caesars Entertainment as those companies prepared to merge: Resorts East Chicago, Resorts Tunica, Atlantic City Hilton and Bally’s; and Kerzner International Limited. These transactions each include a substantial development component, which was a large part of the original opportunity because we have the internal skills to take on these construction projects ourselves. We invest heavily in our properties, and many of them involve major expansions.
With Colony’s leveraged buyout of Harveys, the firm became one of the only private equity firms to navigate the rigorous regulatory and licensing processes. Gaming has high barriers to entry—not only for equity capital formation, but also in terms of developing and operating properties—which lead to inefficiencies we have been able to turn into opportunities. Our limited partner investors value the integrity inherent in the strict licensing and regulatory environment, and benefit financially as well.
Now Colony is essentially becoming a builder as well. One project is the financing of construction for the Meadowlands Xanadu™ project in northern New Jersey. What can you tell us about that project and what it will entail?
Actually, our experience building an impressive new hotel tower and lobby at Resorts Atlantic City (with 399 new standard rooms averaging 520 square feet and an expanded casino floor) several years ago in partnership with the State of New Jersey and the local trades gave us great comfort in underwriting this new investment. The Meadowlands Xanadu™ is a unique sports, leisure, shopping and family entertainment destination development project with 2.2 million square feet of entertainment and retail space being built in northern New Jersey. Colony will lead the $1.5 billion additional financing needed to complete the project, including $500 million in equity and approximately $1 billion in debt and additional capital. Colony is the managing general partner in a joint venture that also includes the Dune Real Estate Funds, an affiliate of the German fund manager called KanAm, and The Mills Corporation. Construction is currently underway, and the partnership expects to achieve a target completion date of late-2008.
Colony Capital is much more than just a casino operator. For the benefit of our readers, can you summarize Colony’s overall business, its portfolio of investments and the company’s mission/strategy?
As a sponsor and manager of real estate-related private equity investment funds and products for the past 16 years, Colony’s mission is to marry the institutional capital we are privileged to steward with mispriced real estate and related assets wherever distress, complexity or inefficiencies predominate. Our opportunity fund business seeks to achieve attractive risk-adjusted returns on a global basis by investing in complex real estate projects, non-performing loans, distressed assets, real estate-dependent operating companies, and select commercial and residential development opportunities throughout the world. Colony has become one of the largest acquirers of hospitality assets through transactions such as the privatizations of the Raffles and Fairmont hotel groups, the purchase of the Costa Smeralda resort in Sardinia, Italy, and a ?1 billion investment in Accor S.A. Colony has also been very active in the office, retail and residential sectors. In Europe, we are among the largest developers of office product in central Paris. Finally, across our global platforms, we seek out real estate value embedded in operating companies in a variety of sectors: restaurants, retail, industrial and of course, gaming.
Colony has established a value-added platform which acquires and manages a diversified portfolio of small- to medium-sized real estate assets throughout the United States. Investments include traditional brick and mortar properties across the office, industrial, multifamily and retail spaces in major U.S. markets. The firm also has a global securities portfolio to invest in real estate-related securities on a long/short-term basis. The securities platform invests in REITs, property companies and real estate operating companies, including hospitality, homebuilding and mortgage companies.
Many of the gaming properties Colony acquired were underperforming at the time. Since then, they’ve experienced resurgences in customers and better overall performance. What approach does Colony take with reinvigorating gaming properties?
We are contrarians at heart, and it’s always nice to invest at the bottom of the cycle. With that said, you correctly note that the larger contributor to the success of our gaming investments has been through adding value, be it through repositioning a property in its market, investing in a capital project or creating synergies among a number of separate venues. Colony depends on a deep team of operating partners to lead this. In the United States, Nick Ribis, president & CEO of Resorts International, has developed the Resorts International brand across six of our properties, which are now linked by an impressive customer affinity program, cross-marketing and a common set of themes and practices to deliver consistent value to the customer.
As a private investment firm, Colony has enjoyed success in an industry that in recent years has been significantly influenced by Wall Street. Now it seems more and more publicly traded gaming companies are seeking to go private. What’s your take on why we’re seeing this trend today?
I have to be circumspect here due to pending activity (Colony is part of a joint, $5.5 billion buyout of Station Casinos), as you know. In general, it is fair to say that at present, private equity and debt often cost less than public equity and debt. This can enable private buyers to deliver more value to shareholders of asset-intensive companies than the public markets can. Moreover, Wall Street cherishes recurring, predictable earnings above all else. Colony focuses on asset-rich companies with development activities, emerging markets exposure, multiple lines of business and similar factors which the public markets may have trouble digesting.
From your perspective, what are the benefits to being privately run?
As a private company, Colony can work with management to assess and steward a longer-term value creation approach differently than can public shareholders, who need to live and die with quarterly earnings. Moreover, the public markets tend to be less tolerant of debt levels than private investors are, though we keep our borrowing to roughly 65 percent across our portfolio. Are there gaming jurisdictions in the United States/North America that you’d like to see Colony move into?
Colony already has a very broad exposure to the leading U.S. gaming markets, and is actively reviewing additional opportunities all the time. We enjoy partnering with the various governmental agencies to bolster state or municipal revenues, and believe we are viewed as one of the very best operators from a probity perspective, so would welcome more exposure in the space. Importantly, the proliferation of gaming is now being complemented by a broader acceptance of gaming in the financial markets, which in turn enhances asset values and bodes well for the future of the sector.
How would you describe your own leadership style? Are you hands-on? Do you prefer to let your employees and assets run themselves?
I have long been able to surround myself with a deep team of seasoned pros, both at Colony and at the level of our portfolio companies. This continuity of leadership enables me to act according to a philosophy of having myself and the Colony principals “doing on those things they can do.” In parallel to this, I try to abide by the notion that complacency leads to atrophy. At Colony, personal and professional growth is best engendered by pushing people at all levels of the organization to reach beyond their comfort zone, so we are always standing at the edge. What prevents us from falling is that the individuals function as a team. So long as we are all rowing in the same direction and with the same cadence, our adventures lead to wonderful results.
Polo is rumored to be a favorite hobby of yours. What else do like to do when you’re not running a multi-billion-dollar company?
For me, the lessons learned from teamwork and competition have always served me best, whether we are discussing business or leisure. I play polo and surf whenever I get the chance. Both sports teach you how to manage your skills and enthusiasm when at the edge—just like investing.
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