AC’s Revel Casino: The $300M pension gamble

March 16--Atlantic City's beleaguered Revel Casino & Hotel has lost millions from the start, but that hasn't stopped New Jersey's pension system from placing a $300 million bet with the largest owner of the oceanfront resort.

The state agency that oversees the multi-billion dollar employee pension funds voted late last year to invest $300 million with Chatham Asset Management, the hedge fund that owns 28 percent in the troubled casino property.

The investment deal is complex. Although the state plans to invest in Chatham, treasury officials say the transfer of funds won't happen until later this year -- when Chatham said it hopes to shed itself from the faltering casino. But treasury officials told the State Investment Council that there is no firm timetable for when Chatham will be out of Revel.

The 1,399-room Revel emerged from bankruptcy protection last year from nearly $1.5 billion in debt yet continues to have difficulty attracting customers. It ranked ninth out of 11 casinos in revenue last month, and is expected to be sold sometime this year for as little as $200 million to $300 million, a far cry from the $2.4 billion it cost to build.

The 47-story Revel, touted by Gov. Chris Christie as a model for Atlantic City's rebirth, has been a tremendous failure. It lost more than $100 million in its first year of operations.

Touted as a job creator, Revel was expected to employ 5,500 people but now has about 2,800 on staff. Meanwhile, as Atlantic City continues to struggle to compete with casinos in Pennsylvania and New York, the city's Atlantic Club Casino shut down in January, laying off 1,600 workers.

The Investment Council, which oversees the $76 billion of public employee retirement funds, was divided over investing so much money in a company that has a large stake in Revel, minutes of the Nov. 21 meeting showed.

Board members Marty Barrett and Adam Leibtag questioned Chatham's investment in Revel, but were assured by staff from the state Treasury Department's Investment Division that they expect Chatham to be out of Revel by the time the state provides the $300 million to to the company later this year.

"Therefore no pension fund assets were expected to be invested in that enterprise," according to the minutes. But the minutes also note that Chris McDonough, the investment division's director, said that the division could not guarantee what could happen in the future, since it could not "override the managers' fiduciary duty and investment selection."

In a memorandum sent in November to council members, McDonough noted that Chatham'sHigh Yield Master Fund has returned an average of 9 percent annually since its inception in September 2003. The state has negotiated a lower management fee and preferred returns from the New Jersey-based company, McDonough said, according to the minutes.

Hedge funds, like mutual funds, pool investors' money in an effort to make more money, but they are available only to so-called "accredited investors," typically wealthier individuals or institutions like pension funds or insurance companies.

Hedge funds often try to profit by engaging in riskier investment methods, that can pay off with big returns, but also can lose money.

Leaders of the city's largest casino workers' union, Local 54 of UNITE-HERE, saw the investment council's decision as another sign of what union President Robert McDevitt said is the state's "unprecedented involvement" with the Revel Casino. Most of Revel's workers are not unionized.

"I can't think of anything that's come out of this project that's positive," he said. Local 54 protested the investment council's decision in a February letter sent to Robert Grady, chair of the 14-member council.

Low interest rates over the past several years have led many public pension systems to invest more in so-called "alternative investments," like hedge funds. Such investments now make about 24 percent of pension fund investments nationwide, or about $600 billion, according to a 2013 study by Cliffwater, an adviser to institutional investors, including New Jersey.

New Jersey has been an aggressive investor in hedge funds like Chatham. A September report by Preqin, a New York firm that provides data on alternative investments, noted New Jersey'sInvestment Council is the second-largest investor in hedge funds in the U.S., behind the Texas Teachers Pension Fund. New Jersey's public pension systems have investments in more than 40 hedge funds, and invests more than 10 percent of its assets -- about $8 billion, in hedge funds, according to the Preqin report.

New Jersey's alternative investment portfolio returned 12.9 percent for the fiscal year that ended June 30, compared to 11.8 percent for the pension fund overall, according to the 2013 annual report by the investment council. That compared to a 2.52 rate of return for fiscal year 2012.

The state's decision to invest pension money in a hedge fund that owns a casino led Assemblyman Ralph R. Caputo, D-Essex, to introduce legislation last year that would limit risky investments.

"I don't think it's a wise investment to be investing our money in casinos," said Caputo. "It's not a very winning investment."

Chatham was one of several hedge funds that provided financing for Revel to help the casino complete construction in 2011.

Evan Ratner, a principal of Chatham, did not discuss the company's future plans at February's commission meeting. But Chatham said last year it is pursuing "strategic options," which is code in the industry for looking at a sale or a bankruptcy filing, according to the Associated Press.

In February 2011, the state Economic Development Authority approved a $261.4 million state tax incentive package for Revel in February 2011 that helped convince Wall Street investors to jump start the stalled construction of the project. The deal, touted by Christie, would have returned in state sales, corporate and hotel tax payments to Revel for a 20-year period once the casino began generating profits. In return, the state would have received 20 percent of Revel's owners' profits.

But the casino has never generated a profit, so the tax incentives were never paid, state officials have said.

Other Revel owners include hedge funds Canyon Capital and Capital Group.

McDevitt and other union officials fear that whoever buys Revel will shut it down to revamp it, throwing its employees out of work. They could then be re-hired for lower wages, or not brought back at all, McDevitt said.

"This project was also supposed to be about jobs," McDevitt said. "Revel was supposed to grow the market. Instead it cannibalized it."

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