Growing synergies between hotels and casinos

Major hotel brands are establishing loyalty and distribution partnerships with casino operators. Jon Lucas, chief operating officer, Hard Rock International, explained: “Database in our world is king. It's so critical to our success and these partnerships between hotel large brands and casino companies are just growing your databases.”

Expanding partnerships to generate revenue

He added: “The fun part of our business is always thinking of new and different ways to drive that customer to us versus someone else. It's coming up with partnerships, with cruise lines, or Formula One where we have a sponsorship with the Red Bull team, or partnerships with Lionel Messi. And so we've really gotten creative and I think every company's gotten creative in the gaming space to figure out how we can keep driving people to your property through experiences and through other avenues such as partnering on the database.”

Ed Bowers, president of global development, MGM Resorts International underlined the importance of gross gaming revenue (GGR) as the means to finance the ancillary experiences within a resort. Las Vegas, for example, has relatively small GGR but 35 percent of total revenue comes from only 4 percent of the floorspace, so the ROI is very significant, and it helps fund everything else, he said.

In Asia, the GGR percentage is much higher at 75 percent: “It allows you to spend all this money on all these other things. So you end up with these massive integrated resorts and ultimately you can deliver experiences that normal hotels simply cannot do.”

Challenges

Lucas at Hard Rock International, underlined that high interest rates and high construction costs made opening new venues difficult: “Building entertainment facilities which are not high margin and trying to put pencil to the paper to make the math work has been very challenging.”

He explained: “In our case, we've done three projects where we've done a phased approach with a temporary facility, to get the cashflow going. This also helps in the financing when we're performing so well in the temporaries, but trying to make the math work with the full-blown integrated resort is a little challenging in today's world.”

For Bowers at MGM, scale is the way to go: “You need a huge casino base and casino revenue – more than a billion dollars. We're developing in Japan where we expect gaming revenues to be $4 to $5 billion and it's probably going to be the largest casino in the world. These are the only kind of projects that ultimately make sense when the price tag keeps going up. And this Japan project is now at around $10 billion.”

Regulation

With a regulatory process that started in 2018, MGM Osaka is the only casino project underway in Japan and is scheduled to open in 2030.

Governments are very involved in the development of casinos which can lead to long timeframes. Bowers commented: “Ultimately the role of government is super critical pretty much unlike other developments. And governments can either get it right, half right or not right at all. And depending on where they are on that scale will depend on which operators decide to bid and whether you continue to stay bidding because ultimately, we need to have a financial model that's going to work for us. And sometimes some governments want too much and they don't fully understand how a casino makes money and how the business actually works.”

In the past, MGM and Hard Rock have pulled out of projects in Canada because the tax rate was too high at 68 percent. Governments want the revenue and the jobs but there is a delicate balance to strike for a casino resort to successfully satisfy all stakeholders, said Len Wolman, chairman and CEO, Waterford Hotel Group.

Casino businesses are hitting record highs in EBITDA and margins, but public company valuations are at decade lows. John Payne, president, VICI Properties, said: “Think about if you bang your head every day and you're delivering the best results you ever could, and someone's telling you, yeah, but your company's not worth as much anymore.”

Reza Akhavi, managing director, Deutsche Bank, added: “We’re seeing it across basically anything that is consumer discretionary – theme parks, fitness clubs, entertainments centers – the overarching thesis is that the consumer just can't continue to spend and spend their discretionary dollar. So multiples are depressed across that entire spectrum. I don't personally think it's warranted to this degree.”

All quotes from ‘Place your bets: casinos and the hotel market’ panel at IHIF Americas 2024