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Colony Casino Bid Is No Roll of Dice

The real estate firm, moving toward a deal with Harrah's and Caesars, is in the business of buying properties and then selling them at a profit.

September 01, 2004|James F. Peltz | Times Staff Writer

For Colony Capital, plunging deeper into the casino business isn't entirely a gamble.

The Century City-based real estate investment firm, which is looking to acquire four gaming properties from Harrah's Entertainment Inc. and Caesars Entertainment Inc., has a good track record at buying assets -- and then ditching them at a profit.

That's its business: scouring for undervalued or distressed properties that it can overhaul and eventually resell to earn the 20%-plus annual returns its investors have come to expect.

One of the largest private real estate investment firms in the West, Colony Capital manages $1.25 billion of investors' cash, which it can borrow against to raise billions more. Since its founding in 1991, the firm has raised $4.5 billion to purchase an array of assets, including hotels, casinos, public storage facilities and movie theaters.

Now Colony Capital is leading a group that is close to an agreement to buy the Atlantic City Hilton and three other casinos in the Chicago area and Mississippi for more than $1 billion, according to people familiar with the talks. Two of the casinos are owned by Harrah's, and the other two are units of Caesars. Harrah's has agreed to buy Caesars for $5.2 billion, and the proposed sale of the four casinos is seen as an effort to head off antitrust concerns about the merger.

Harrah's and Caesars confirmed the potential sale Tuesday but cautioned that there was "no assurance that an agreement will be reached." They declined to elaborate.

Thomas J. Barrack Jr., Colony Capital's co-founder and chief executive, and other executives declined to be interviewed.

Colony Capital acquired the Las Vegas Hilton in June for $280 million, and it also owns the Resorts casino in Atlantic City, N.J. In fact, the company has an asset not many other real estate investors can match: gaming licenses in both Nevada and New Jersey.

For Colony Capital, the purchases from Harrah's and Caesars would fit with the strategy of buying real estate that has a substantial business behind it. Colony Capital doesn't want to be a landlord or passive bargain hunter; it seeks operating companies with room for improvement that throw off substantial amounts of cash in the meantime.

In the early 1990s, the firm made a splash by purchasing $1 billion of apartment buildings at 50 cents or less on the dollar from the Resolution Trust Corp., the agency that was selling property assets from the U.S. savings-and-loan debacle of the time. When the real estate market improved in the mid-1990s, Colony Capital sold the units for an estimated 90% gain.

Overseas, Colony Capital captured undervalued properties hit by economic downturns. In the late 1990s, for instance, Barrack took advantage of Asia's economic woes to buy real estate and other assets at cheap prices. The firm's holdings also include the luxurious Costa Smeralda resort in Sardinia.

Barrack, 57, has succeeded not only because he excels at finding undervalued properties and selling them for profit, but also because "he has the ability to make buyers and sellers feel that when they're finished with a deal, they both won," said William Rogers, a longtime Barrack friend and chairman of Halifax Group, a Dallas investment firm that's been among Colony Capital's investment partners.

That helps Colony Capital get a bargaining seat when properties become available, and "it's a talent very few people have, even though lots of people have the capital," Rogers said.

Not all of Colony Capital's moves have paid off.

In the mid-1990s, it teamed with Britain's Richard Branson and his Virgin Group to invest in British movie theaters. Later, that investment was rolled into Virgin's record store business, which subsequently suffered from the explosion of Internet file-sharing services and the downloading of songs. Colony Capital got out after only breaking even.

Colony Capital also sold a 70% interest in the firm in 2000 to Los Angeles investor Gary Winnick, who had rapidly built Global Crossing Ltd. into an international telecommunications firm. But Barrack, sensing trouble ahead, bought back the stake for an undisclosed sum that same year, and Global Crossing filed for bankruptcy protection in January 2002.

The firm hasn't always snared its prey, either. In 1997, it was part of a group seeking to acquire the horseracing track Santa Anita Park in Arcadia. The track's owners spurned the offer and accepted a buyout from another suitor instead.

Barrack, whose father owned a small Culver City grocery store, earned a bachelor's degree from USC in 1969 and a law degree from the University of San Diego in 1972.

He ran his own real estate management firm, served as a deputy undersecretary of the Interior Department in the Reagan administration and managed the property investments of billionaire Robert M. Bass before starting Colony Capital.

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