Expanding Your Casino with a Hotel: Moving From Playing To Staying By Elaine Sahlins

As a means of expanding their businesses and diversifying their investments, casino owners and operators are now exploring complementary developments such as hotels, golf courses, retail malls, and entertainment venues.

HVS The proliferation of casino facilities has in a short time become one of the most dramatic growth opportunities for the gaming and lodging industry. The American public is, by and large, embracing the idea of casinos in their hometowns, as evidenced by the amount of wagering and revenue generated by these new facilities. An evening's entertainment in downtown U.S.A. has, in an increasing number of markets, become a choice of shopping at the mall, going out to dinner and to a movie, or going to the casino.

While this new acceptance of gaming as a recreational alternative has driven the initial development of casinos, from the casino's standpoint, revenue levels can quickly become stable. Many casinos experience strong revenue growth in the first 18 to 24 months of opening a new facility, with minimal growth or perhaps some decline thereafter. As a means of expanding their businesses and diversifying their investments, casino owners and operators are now exploring complementary developments such as hotels, golf courses, retail malls, and entertainment venues.

These facilities can be analyzed and developed as stand-alone facilities. Each are operating concerns in their own right. From a casino destination strategy, however, the most successful expansions are based on an integrated development plan. On a day-to-day operating basis, the cost savings of running multiple ventures using the same management team can be significant. Management, staffing, maintenance, and marketing costs can be shared among the enterprises, reducing the overhead for all. The combination of different entertainment, lodging, and retail uses can attract a wider variety of guests whose individual spending at the destination can increase exponentially. With additional facilities, the infrastructure and development investment costs can also be shared, reducing the individual investment in each asset.

The synergy created by the expanded destination should also be analyzed in terms of the financial benefit to the casino. Of all the entertainment and operating concerns typically developed in conjunction with a casino, most cannot expect to be as financially profitable as the casino and many may require a few years to be feasible on their own. As part of the pre-development analysis, the increased traffic generated by additional facilities can be analyzed for its impact on gaming utilization and income.

Developing a lodging facility can be a significant business enhancement to a casino. Casino owners must consider their objectives, such as growing a visitor destination, augmenting their capital investments, increasing net gaming revenue by keeping guests on property longer and/or improving the demographic of the guest. The strategy of adding a hotel includes qualitative and quantitative results. A lodging facility can establish and expand the identity of the casino, providing a destination that attracts a greater number of users. From the guests' perspective, meeting space, retail shopping, dining, golf, and entertainment facilities provide reasons to visit the destination aside from the casino. The casino destination becomes a daytime venue, expanding its usage from primarily a night and weekend location. Additionally, the infrastructure costs, such as parking and site development, and the fixed operating costs, such as management and maintenance, can be spread over a larger facility, improving the overall efficiency of the development.

The positive aspects of many of the qualitative motivations for developing ancillary facilities cannot be directly calculated. However, the financial feasibility can be analyzed, as illustrated by the following example, which compares a stand-alone full-service hotel development to one built in conjunction with a casino.

A stand-alone full-service hotel with 293 rooms is developed for a total cost of $125,000 per room. Using HOST averages for full-service hotels nationally, the following representative year is forecast:

Representative Year - Proposed Full-Service Hotel

Capitalizing this net operating income at 10% results in a $4,700,000 feasibility gap. Over the long term, the development could generate a profit as it ramps up its operations, but the investment opportunity going in is not attractive.

Feasibility Gap - Proposed Full-Service Hotel

When developed as part of a casino complex, the same hotel could be expected to generate a higher occupancy and a lower average rate as casino patrons are offered incentives to stay on property. This example considers the hotel as a stand-alone venture without the operating efficiencies associated with common ownership and management of a multi-purpose complex. The higher occupancy and lower average rate would result in different operating margins as seen in the following chart:

Representative Year - Proposed Full-Service Casino Hotel (without operating savings)

The difference in occupancy and average rate, the net operating income from the casino hotel example would result in a substantially higher feasibility gap. The short-term benefit for this hotel investment, however, is the incremental income to the casino. Assuming a 1.5% double occupancy percentage and that two-thirds of the guests spend $100 each at a 60% incremental casino net income, the contribution to the overall development is calculated as follows.

Incremental Casino Net Income - Full-Service Casino Hotel

In order to analyze the feasibility of this development, the two incomes are combined and capitalized. A higher capitalization rate is selected by weighting the higher returns required for the riskier casino income with the full-service hotel capitalization rate.

Feasibility Analysis - Full-Service Casino Hotel

The results of the analysis indicate that the development of the hotel can be profitable when a certain level of incremental gaming profit can be generated from hotel guests. The contribution of the casino income can subsidize the initial ramp-up period of a new lodging facility.

Of course, this example is a simplified calculation. Numerous other factors need to be considered regarding the site, hotel market, and capacity of the casino facility. Selecting a particular product type or brand for a lodging facility associated with a casino can also impact the ultimate development strategy. Not all casino projects require full-service luxury resort facilities with golf. Some are better served by limited-service facilities. Analyzing the most beneficial facilities should include qualitative and quantitative considerations. As with other hotel projects, a well-conceived and analyzed development can provide long-term financial benefits enhancing the entire destination.

Elaine Sahlinsa
Address: 116 New Montgomery Street
Suite 620
San Francisco, CA, 94105
Phone: (415) 896-0868 x325

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