Finance: REAL ESTATE
BIG TROUBLE IN THE BIG EASY
It was quick, slick, and quintessential Chris Hemmeter. In the fall of 1991, Daniel P. Robinowitz, a Dallas-based developer and New Orleans gambling maven, was set to sign a deal with Mirage Resorts Inc. to build a casino if, and when, one was approved in New Orleans. On the eve of the signing, Hemmeter, eager to get a foothold in the nascent Louisiana gaming market, swooped into Dallas aboard his private jet to make Robinowitz a generous counteroffer. Within hours, Christopher B. Hemmeter was in and Mirage was out.
At the time, it seemed like a major coup for the 55-year-old Hemmeter, a flamboyant but soft-spoken developer of luxury resort hotels. He had amassed a $200 million-plus fortune building Disney-style megaresorts in Hawaii in the 1970s and 1980s. By 1991, he had concluded that the Big Easy would be the next great gambling haven. Armed with Robinowitz' political contacts and $140 million in junk-bond financing, he launched his $223 million River City casino project last March.
BETTING THE RANCH. But just nine weeks later, the project ran out of money, and shortly afterward creditors threw it into bankruptcy. In August, Hemmeter was forced out as chief executive of Denver-based Hemmeter Enterprises Inc. and Resort Income Investors, a publicly traded real estate investment trust. He now faces investor lawsuits alleging financial irregularities. "I have to go back to the beginning and start over again," he says with a sigh.
How did Hemmeter, who had expected his New Orleans project to be a slam dunk, manage to blow it? Hemmeter dismisses the debacle as nothing more than his overly optimistic outlook for the New Orleans gambling market, a mistake which he insists was shared by many developers and investors, including his own. "Everyone misread the market," says Timothy Ryan, dean of the business school at the University of New Orleans.
But others who know Hemmeter well say he should bear much of the blame. Hemmeter, they say, is a stubborn, impractical man with grand visions but modest managerial and financial savvy. Yet he seemed bent on making each new project more grandiose than the previous one. Apparently convinced that he couldn't lose, Hemmeter bet the ranch--some $180 million--on the New Orleans market. And by the time he arrived there in 1992, Diane J. Plotts, his financial and operations manager, who played a key role in his ventures.
Although Hemmeter in growing up sometimes lived hand-to-mouth, pragmatism was never one of his strong suits. His five Hawaiian resort hotels, which he began building in 1976, included such lavish features as waterfalls and dolphins in swimming pools. Each project was more opulent than the last. Hemmeter and his investors then sold out, reaping huge profits.
His fortunes began turning in the early 1990s. One cause was Diane Plotts's retirement in 1991, though she remained on the board of directors. "To a great degree, she was responsible for Hemmeter's success," says Robert J. Fishman, a former executive with Hemmeter's aviation subsidiary and now managing director of the city of Honolulu. "She was a CEO-type individual, which complemented Chris, who was the visionary. She had a sixth sense about how to make deals work, which allowed Hemmeter to be creative."
DOOMED. After a few efforts to launch additional resorts failed, Hemmeter turned to gambling. In 1992, he opened two casinos in Colorado. But before they were running profitably, Hemmeter moved on to New Orleans. He was not alone. Big players like Harrah's, Hilton, and Bally's also eyed the Big Easy. Hemmeter originally planned to build a mega land-based casino. But even with Robinowitz' help, Hemmeter lost that project to Harrah's, settling for a one-third interest.
Still convinced he would hit the mother lode, he snagged a license in 1993 to operate a riverboat casino. His Hemmeter Enterprises' subsidiary, Grand Palais Riverboat, and a subsidiary of Atlantic City-based Capital Gaming International Inc. formed a 50-50 joint venture to operate a two-boat casino complex, called River City, near downtown New Orleans.
In December 1993, Hemmeter Enterprises sold $140 million worth of junk bonds underwritten by Salomon Brothers Inc. to finance its half of the project. The projected cash flow would not only fund the junk but pay off debt on its two Colorado casinos. By now, Hemmeter had accumulated more than $200 million in new debt, some of it personally guaranteed by him.
But River City was probably doomed from the start. For one thing, it was located beyond walking distance from most of the city's hotels. And it was in a seedy part of town with warehouses, manufacturing plants, and a low-income housing project. Hemmeter, whose company built the project, pressed ahead with characteristic flourishes, such as the creation of a mythical Louisiana river town in the casino boat terminal and $250,000 faux oak trees. Within months, costs ballooned from $196.3 million to $223 million, creating a cash crunch from the start. "If they had been on budget, they might be around today," says analyst Larry Klatzkin of Donaldson, Lufkin & Jenrette Securities Corp. "But they didn't have any money left for day-to-day operations."
When the two riverboats finally began operating in late March and early April, they faced fierce competition in a saturated market that has failed to attract large numbers of gamblers, who tend to prefer Vegas and Atlantic City. According to Hemmeter, River City was taking in only about one-third of projected revenues. After racking up $8 million in operating losses in the first nine weeks, the partners were left with little choice but to "shut it down immediately," he says. The sudden closure in June left hundreds of creditors holding $30 million in unpaid bills. Hemmeter now calls the project a "disastrous mistake," though he asserts that other gaming ventures made similar mistakes.
When it failed, Hemmeter's world came tumbling down. "Hemmeter was so highly leveraged that all that was needed was to push that first domino over," says Randy Havre, a Honolulu-based investment analyst who has followed Hemmeter closely for years.
Other dominoes are also falling. Hemmeter Enterprises is on the verge of joining its Grand Palais Riverboat subsidiary in bankruptcy court. Hemmeter has been forced to turn over Hemmeter Enterprises, which had sales of $45.5 million and losses of $32.8 million in 1994, to bondholders, who will receive at least a 90% ownership stake.
"HEMMETER'S BANK." Resort Income Investors, which Hemmeter began in 1988 to raise cash for developments, is liquidating. That's because its entire $36.6 million loan portfolio is tied to Hemmeter's New Orleans gaming ventures, Hemmeter personally, or other companies affiliated with him. He has said he wouldn't be able to repay the bulk of the $15 million lent to him personally.
Resort Income's problems spawned at least three lawsuits by shareholders, who have watched their stock tumble from a high of 10 in early June to under 2 recently. In one, shareholders allege that Resort Income officers and directors breached their fiduciary duties and wasted the company's assets by allowing Resort Income to effectively serve as "Hemmeter's bank." In 1994, Resort Income paid Hemmeter-controlled RII Advisors $517,500 for its services, which largely consisted of approving extensions of loans to various Hemmeter affiliates. Hemmeter denies the allegations. Resort Income declined to comment.
In July, Robinowitz, who parted company with Hemmeter in March, 1994, sued his former partner and one of his companies for allegedly failing to pay $4.9 million in consulting fees. Robinowitz--who also has ownership stakes in Hemmeter Enterprises and Hemmeter's New Orleans casino ventures--now says getting involved with Hemmeter was "the biggest mistake and the worst decision of my life" because his investments are virtually worthless now. Hemmeter admits he owes Robinowitz money, but says the dispute is over the amount.
Hemmeter vows eventually to repay Resort Income investors with profits from a $100 million luxury resort hotel complex he plans to develop on the Caribbean island of St. Maarten. That project, he says, will mark his return to resort hotel development. "I don't foresee us pursuing gaming opportunities any longer. We created the [luxury] resort. We think we know something about it," he says. Too bad it took a grueling four years in the casino business for Hemmeter to realize that.
The Rise and Fall of Chris Hemmeter
1976 Develops 1,260-room Hyatt Regency Waikiki, the first of five resorts he would build in Hawaii.
1984 Nets $188 million on sale of Hyatt Regency Waikiki and Hyatt Regency Maui.
1988 Develops 1,244-room, $360 million Hyatt Regency Waikoloa resort on the Big Island of Hawaii, featuring small boats to transport guests, who swim in a pool with dolphins. Hemmeter and investors later sell out, taking big profits.
1990 Leaves Hawaii seeking to develop more than a dozen resort projects worldwide. But projects never materialize.
1992 Opens two casinos in Colorado. Begins plans for a $1 billion casino project in New Orleans.
1993 Loses bid to build New Orleans casino, but snags one-third ownership stake. Wins license to operate gambling riverboat.
1995 Opens elaborate River City casino complex, but runs out of money and shuts it down in June --nine weeks after opening; Hemmeter unit thrust into bankruptcy in July by creditors. In August, Hemmeter removed as CEO of two of his companies after they rack up big losses.
DATA: BUSINESS WEEKBy Stephanie Anderson Forest in Bel Air, Calif.