1. August 16, 2007
Industry Surveys
Lodging & Gaming
THIS ISSUE REPLACES THE ONE DATED FEBRUARY 1, 2007.
THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR FEBRUARY 2008.
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CURRENT ENVIRONMENT..................................................................1
Hotel, casino industries post slowing growth
Hotel industry boom shows signs of maturing
Private equity deals in hotels and casinos
Las Vegas building boom rolls on
Atlantic City casino revenue growth slows
INDUSTRY PROFILE...............................................................................8
Hotel, casino industries post higher revenues
Most large companies are publicly owned
INDUSTRY TRENDS ..................................................................................9
Casino, hotel companies look overseas for growth
Hotels spruce up rooms and add new brands
Condo hotels
Timeshare sales strong
Regional gaming market results
HOW THE INDUSTRY OPERATES..............................................................13
How lodging and gaming are similar
Lodging business models
The gaming scene
KEY INDUSTRY RATIOS AND STATISTICS....................................................20
The lodging industry
The gaming industry
HOW TO ANALYZE A LODGING OR GAMING COMPANY ............................23
Qualitative issues
Analyzing the financial statements
INDUSTRY REFERENCES.....................................................................31
COMPARATIVE COMPANY ANALYSIS ..............................................35
lng_0807.qxp 8/6/2007 10:52 AM Page i
3. Both the hotel and casino industries in the
United States are reporting muted growth in
2007, as the travel industry’s multiyear boom
matures. Hotels continue to charge higher
room rates than a year ago, though occupan-
cy rates are mostly unchanged or declining as
more properties open. Most gaming markets
are reporting higher gambling revenue, but
there are some pockets of weakness. Las Ve-
gas, the largest US gambling market, is post-
ing slower growth, though a number of
multibillion-dollar resorts being built points
to the expected resiliency of that region.
Asia’s Macau has grown to replace Las Vegas
as the world’s largest casino market, benefit-
ing the US companies that have opened re-
sorts there. In addition, private equity firms
that are seeking steady cash flow generators
continue to snap up hotel and casino firms.
Hotel industry boom shows signs
of maturing
A four-year boom in demand for hotel
rooms in the US is showing signs of modera-
tion. Strong demand from business travelers
and spending by consumers on vacations helped
hotels post higher room occupancies and in turn
raise their nightly rates. That in turn led to high-
er revenue per available room (RevPAR, a mea-
sure of occupancy and room rates). RevPAR
has risen every year since 2003, according to
research firm Smith Travel Research Inc.
The hotel industry should continue to do
well in the second half of 2007, as we expect
that higher room rates will more than offset a
flat to down environment for occupancy. The
industry’s success in the last four years has
sparked developers to begin building hotels
again, after several years of few new properties
coming on board. Demand for hotels began a
decline in the first half of 2001; that decline
was later exacerbated by the terrorist attacks
of September 11 that year. The resulting reces-
sion kept travelers off the road and made it
more difficult for builders to get financing for
new hotel construction.
About 136,500 hotel rooms began con-
struction in 2006, a year-over-year increase
of 64.2%, according to consulting firm
PricewaterhouseCoopers LLP and research
firm Torto Wheaton Research. That’s the
CURRENT ENVIRONMENT
Hotel, casino industries post slowing
growth
AUGUST16,2007/LODGING&GAMINGINDUSTRYSURVEY
1
LODGING FUNDAMENTALS
(Selected performance measures)
REVENUE GROSS
ROOM AVERAGE PER OPERATING
SUPPLY DEMAND DAILY AVAILABLE INDUSTRY PROFIT PRETAX
OCCUPANCY ROOM RATE ROOM REVENUE AS % OF INCOME
YEAR YEAR-TO-YEAR % CHANGE RATE (%) ($) % CHANGE ($) % CHANGE (BIL. $) REVENUES (BIL. $)
*2007 1.2 0.6 61.6 102.86 5.8 63.34 5.2 NA NA NA
2006 0.3 0.7 63.4 97.61 7.2 61.88 7.7 133.4 NA NA
2005 0.4 3.3 63.1 90.91 5.4 57.37 8.5 122.7 38.8 22.6
2004 0.9 4.5 61.3 86.23 4.0 52.88 7.8 113.7 36.6 16.7
2003 1.2 1.7 59.2 83.12 0.1 49.18 0.6 105.3 35.0 12.8
2002 1.6 0.3 58.9 83.01 (1.4) 48.91 (2.6) 102.6 35.7 14.2
2001 2.4 (3.4) 60.0 84.92 (1.3) 50.96 (6.9) 103.5 37.1 16.2
2000 3.1 3.7 63.5 85.24 4.9 54.15 5.5 112.1 40.9 22.5
1999 4.1 3.0 63.2 81.29 4.0 51.33 2.9 102.9 39.2 22.1
1998 4.2 3.1 63.8 78.17 4.6 49.86 3.6 93.1 40.2 20.9
*Through May. NA-Not available. Note: Some historic numbers may not reflect subsequent updates.
Source: Smith Travel Research, Inc. Republication or other re-use of this data without the express written permission of Smith Travel Research is strictly prohibited.
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4. AUGUST16,2007/LODGING&GAMINGINDUSTRYSURVEY
2
highest percentage increase since the 67.2%
jump in 1994. The supply of rooms will in-
crease 1.6% in 2007 and 2.3% in 2008, the
highest two-year gains since 2001, according
to the firms.
Hotel chains such as Marriott International
Inc. are saying that their rapid profit growth
may be easing. Marriott, the largest US hotel
chain, in April lowered its 2007 forecast for
RevPAR growth at its North American hotels
to a range of 6% to 8%, down from a Feb-
ruary forecast of 7%–9%. In July, it re-
fined this forecast to 6%–7%. Hilton Hotels
Corp. also cut its RevPAR growth forecast
for 2007. Overall, the increase in develop-
ment will depress occupancy by 0.7% in
2007, according to Smith Travel.
Even with lower occupancy, rate increases
will push RevPAR and margins higher for
large hotel chains. That is because room rate
increases do not involve the incremental costs
associated with higher occupancy (e.g., house-
keeping services). In 2007, we expect that the
lodging industry’s revenue growth again will
be driven more by room rate increases than
by occupancy gains. Profits for the US hotel
industry rose 17.9% to $22.6 billion in 2006,
a record, according to Smith Travel. The rate
of growth outpaced the 8.7% revenue in-
crease to $133.4 billion, the firm said.
Over the longer term, US demographic
trends should prove generally favorable for
the domestic lodging industry. Many baby
boomers (the approximately 77 million
Americans born between 1946 and 1964) are
now in their peak earning years and likely to
have more money to spend on travel. In ad-
dition, older baby boomers are entering re-
tirement, giving them more free time to
travel.
Private equity deals in hotels and
casinos
Private equity firms, flush with cash, are
drawn to industries such as real estate and casi-
nos that produce steady cash flow. The casino
industry’s strength has sparked a multiyear
boom in mergers and acquisitions. In 2006,
US commercial gaming revenues rose 6.8%
to $32.42 billion; on the Las Vegas Strip,
gaming revenues rose 10.9% to $6.7 billion.
MGM Mirage, the No. 2 US casino com-
pany, may be for sale because of the actions
of its majority owner, billionaire Kirk Kerkori-
an, who holds a 56% stake. In May 2007,
Kerkorian offered to buy the company’s
CityCenter project and Bellagio casino in Las
Vegas. Many saw the move by the 90-year-
old Kerkorian as a bid to put the whole com-
pany into play. The following month,
however, Tracinda Corp., Kerkorian’s invest-
ment firm, withdrew the offer after MGM
Mirage announced a joint venture develop-
ment deal with Kerzner International Hold-
ings Ltd. for building a “multibillion-dollar”
resort on the northern end of the Strip. Ac-
cording to Tracinda, the joint venture
demonstrates that there are a number of
ways to unlock the company’s value through
“strategic transactions.” Though Tracinda
LODGING INDUSTRY PRETAX PROFITS
(In billions of dollars)
Sources: PricewaterhouseCoopers LLP; Smith Travel Research
Inc. Republication or other re-use of this data without the express
written permission of Smith Travel Research is strictly prohibited.
30
25
20
15
10
5
0
-5
-10
1986 88 90 92 94 96 98 00 02 04 2006
LODGING INDUSTRY PROFILE
(First five months of year)
OCCUPANCY (%) ROOM RATE ($) % CHANGE 2006–07
ROOM ROOMS ROOMS
SEGMENT 2006 2007 2006 2007 REVENUE AVAILABLE SOLD
Industry, total 64.6 65.1 63.03 67.01 7.8 1.4 2.1
By price
Luxury 73.4 72.8 161.89 171.02 7.8 2.7 2.0
Upscale 66.6 67.0 105.25 111.33 10.1 3.5 4.1
Midprice 61.9 62.4 77.14 81.55 6.9 0.4 1.1
Economy 58.6 59.5 58.71 60.75 4.3 (0.6) 0.8
Budget 59.8 61.0 49.06 50.02 2.9 (1.0) 0.9
By location
Urban 70.3 71.1 141.12 152.99 11.0 1.3 2.4
Suburban 66.0 66.0 86.11 90.46 6.8 1.6 1.6
Airport 70.8 71.5 94.59 99.71 8.4 1.9 2.9
Highway 59.4 60.3 63.10 66.56 8.9 1.7 3.3
Resort 66.1 65.6 131.93 137.11 3.8 0.6 (0.1)
Small metro/town 57.6 59.0 72.61 76.21 8.7 1.2 3.6
Source: Smith Travel Research Inc. Republication or other re-use of this data without
the express written permission of Smith Travel Research is strictly prohibited.
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5. AUGUST16,2007/LODGING&GAMINGINDUSTRYSURVEY
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withdrew its offer, some view Kerkorian as
still being open to selling some or all of the
company.
The takeover battle for Harrah’s Enter-
tainment Inc., the world’s largest casino com-
pany, underscores private equity’s interest in
the sector. In October 2006, Harrah’s (owner
of Caesars, Bally’s, and other casinos) re-
ceived an unsolicited takeover offer from pri-
vate equity groups Apollo Management and
Texas Pacific Group. The two firms offered
$81 a share at first, then raised the offer sev-
eral times, eventually reaching $90 a share.
Harrah’s also drew a bid from Penn National
Gaming Inc., a smaller rival that teamed
with hedge fund D.E. Shaw & Co. and other
backers, according to news reports. Harrah’s
eventually agreed to be acquired by Apollo
and Texas Pacific Group, now known as
TPG, for $27.8 billion in cash and assumed
debt. The deal is scheduled to close by the end
of 2007.
Penn National itself has since agreed to be
acquired. In June 2007, Fortress Investment
Group LLC and Centerbridge Partners LP
said they would pay $8.9 billion for the race-
track and casino operator. Trump Entertain-
ment Resorts Inc., an Atlantic City casino
and hotel operator, put itself up for sale in
March 2007, though it later said it failed to
find a buyer with agreeable terms.
In January 2007, a unit of real estate firm
Columbia Sussex Corp. was the winner in a
heated bidding war among four parties for
Aztar Corp., owner of Tropicana casinos, for
which it paid $2.1 billion. Station Casinos
Inc., an operator of Las Vegas casinos that ap-
peal to local residents, agreed in December
2006 to a $4.7 billion takeover by members
of management and Colony Capital LLC, a
real estate investment firm.
In the past, private equity firms were reluc-
tant to invest in casinos because of the com-
plex regulatory environments: casino owners
and managements need to be licensed in each
state in which the gaming company owns a
property, and acquiring such licensing often
includes extensive background checks on can-
didates by each state’s casino or gaming
board. More recently, however, private equity
firms with record amounts of cash to invest
have been forced to look for new industries to
consider. The soaring land values on the Las
Vegas Strip, along with continued profit
growth for casino companies both from gam-
bling and other revenue, have turned the casi-
no industry into a private equity target. Some
observers expect the buyers of Harrah’s, for
US CASINO INDUSTRY GAMING REVENUES
(In millions of dollars)
REVENUES (MIL. $) % CHANGE
2003 2004 2005 2006 2003–04 2004–05 2005–06
Nevada/Atlantic City, total 14,114 15,369 16,667 17,841 8.9 8.4 7.0
Nevada total 9,625 10,562 11,649 12,622 9.7 10.3 8.4
Las Vegas Strip 4,760 5,334 6,034 6,688 12.1 13.1 10.8
Atlantic City 4,488 4,807 5,018 5,219 7.1 4.4 4.0
Western towns, total 768 804 839 872 4.6 4.4 3.9
Deadwood, SD 70 78 84 90 10.9 7.7 6.9
Colorado 698 726 755 782 4.0 4.1 3.5
Other land-based, total 1,412 1,509 1,458 1,641 6.9 (3.4) 12.6
New Orleans 282 320 229 338 13.5 (28.4) 47.8
Detroit 1,130 1,189 1,229 1,303 5.2 3.3 6.1
Riverboats, total 10,232 10,626 10,636 12,065 3.9 0.1 13.4
Iowa 694 727 747 1,173 4.7 2.8 57.0
Illinois 1,710 1,717 1,799 1,924 0.4 4.8 6.9
Mississippi 2,700 2,777 2,468 2,570 2.9 (11.1) 4.1
Louisiana 1,566 1,562 1,676 2,229 (0.3) 7.3 33.0
Missouri 1,332 1,473 1,532 1,592 10.6 4.0 3.9
Indiana 2,230 2,370 2,414 2,577 6.3 1.9 6.7
Native American casinos 16,826 19,408 22,510 25,080 15.3 16.0 11.4
TOTAL 43,352 47,716 52,110 57,499 10.1 9.2 10.3
Sources: Primarily state gaming regulatory organizations; Casino Journal’s National Gaming Summary; Las Vegas Convention and Visitors
Authority; Standard & Poor’s estimates.
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6. AUGUST16,2007/LODGING&GAMINGINDUSTRYSURVEY
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example, may shed one or more Las Vegas
casinos to take advantage of land values that
reach $20 million or more an acre.
Hotel firms sold
Private equity has also been active in ho-
tels. Most recently, in July 2007, Blackstone
Group agreed to acquire Hilton Hotels Corp.
for $26 billion in cash and assumed debt.
Blackstone’s offer represented a hefty 40%
premium to Hilton’s share price the day
before the deal was announced.
Firms such as New York–based Black-
stone Group have been drawn to hotels by
record high room rates for properties and a
lack of new hotel construction in the past
five years. Goldman Sachs’ Whitehall
Street Global Real Estate investment fund
agreed in June 2007 to acquire hotel owner
Equity Inns Inc. for $2.2 billion including
debt. The deal is expected to close by the
end of the year. Other recent purchases
include Inland American Real Estate
Trust Inc.’s $850 million acquisition of
Winston Hotels Inc. in July 2007, Apollo
Investment Corp.’s $1.5 billion buyout
of Innkeepers USA Trust, and Highland
Hospitality Corp.’s agreement to be sold
for $1.2 billion to private equity firm
JER Partners.
Blackstone also purchased MeriStar
Hospitality Corp. in May 2006. MeriStar,
like Equity Inns, was a real estate invest-
ment trust that owned hotels under a vari-
ety of brand names. Blackstone previously
bought La Quinta, an owner and operator
of roadside hotels, for $3.4 billion in cash
and debt in January 2006. Luxury hotelier
Four Seasons Hotels Inc. is being acquired
by its chief executive and certain investors,
including Saudi Prince Al Waleed bin Talal
bin Abdulaziz Al Saud and Microsoft Corp.
founder Bill Gates. Earlier, Prince Al Waleed
and investment firm Colony Capital LLC
acquired Toronto-based hotelier Fairmont
Hotels & Resorts Inc.
Investors are also buying individual hotels
or portfolios of properties. This is allowing
hotel chains such as Hilton to shed assets
and generate more of their profit from man-
aging rather than owning properties.
The Hilton deal raises speculation that
other large hotel operators will be taken pri-
vate. One potential candidate is Starwood
Hotels & Resorts Worldwide Inc., which
recently ousted its CEO. Starwood owns a
number of upscale and luxury properties, in
addition to operating a lucrative hotel man-
agement business for other owners.
Hotel chains shed assets
Hotel companies such as Starwood are
using the heavy investor demand for lodging
assets to shed their owned real estate and
get more of their revenue from franchising
agreements and managing hotels on behalf
of others — a tactic that generates a more
consistent profit stream than ownership
does. In this manner, Starwood and many
other hotel companies are following the lead
MARKET SHARES OF ATLANTIC CITY CASINOS
REVENUES (MILLIONS OF DOLLARS) % SHARE
YEAR-TO-DATE YEAR-TO-DATE
DATE —AS OF MAY— —AS OF MAY—
CASINO OPENED 2003 2004 2005 2006 2006 2007 2003 2004 2005 2006 2006 2007
Bally’s Atlantic City† 12/79 678.2 644.7 645.6 677.3 279.1 264.9 15.1 13.4 12.9 13.0 13.2 13.1
Borgata 7/03 266.9 636.5 704.4 739.3 290.3 306.4 … 13.2 14.0 14.2 13.8 15.2
Caesar’s 6/79 519.1 496.0 523.5 555.2 216.8 236.0 11.6 10.3 10.4 10.6 10.3 11.7
Harrah’s Marina 11/80 451.0 449.9 476.3 509.0 201.9 212.4 10.0 9.4 9.5 9.8 9.6 10.5
Hilton* 12/80 309.4 295.4 289.4 330.1 136.1 126.0 6.9 6.1 5.8 6.3 6.5 6.2
Resorts Int’l. 5/78 233.1 252.8 272.0 282.9 111.7 116.6 5.2 5.3 5.4 5.4 5.3 5.8
Sands 8/80 185.8 190.2 176.6 148.0 74.1 NA 4.1 4.0 3.5 2.8 3.5 NA
Showboat 3/87 377.8 392.6 414.4 429.5 177.8 170.6 8.4 8.2 8.3 8.2 8.4 8.5
Tropicana** 11/81 372.4 363.9 441.9 459.1 187.0 173.4 8.3 7.6 8.8 8.8 8.9 8.6
Trump Marina*** 6/85 259.7 263.0 250.7 257.2 102.9 97.2 5.8 5.5 5.0 4.9 4.9 4.8
Trump Plaza 5/84 318.2 318.3 303.5 300.9 118.0 110.6 7.1 6.6 6.0 5.8 5.6 5.5
Trump Taj Mahal 4/90 517.1 503.3 519.9 529.2 213.6 202.4 11.5 10.5 10.4 10.1 10.1 10.0
*Formerly known as Golden Nugget Casino and as Bally’s Grand. **Formerly known as TropWorld. ***Formerly Trump’s Castle. †Formerly Bally’s Park Place.
NA-Not available.
Sources: New Jersey Casino Control Commission; Casino Association of New Jersey; Atlantic City Action.
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7. AUGUST16,2007/LODGING&GAMINGINDUSTRYSURVEY
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of Marriott, which mostly franchises the
hotels in its system or manages them for out-
side owners.
Since 2005, Hilton has sold or agreed to
sell assets including 31 owned hotels, 10
European hotels, and the Scandic hotel
chain, which was acquired by private equi-
ty firm EQT Partners AB. The sales have
generated total proceeds of $4.5 billion.
Starwood raised $4.7 billion from the sale
of hotels in 2006, lowering the share of
cash flow from owned hotels to 36%, from
56% before the hotel sales were completed.
The company plans to generate $425 mil-
lion from additional hotel sales by the end
of 2007.
Las Vegas building boom rolls on
With casino revenue reaching new highs
year after year and occupancy rates hovering
around 90%, resort operators are in the
midst of a building boom along the Las
Vegas Strip. Old properties are being torn
down to make way for new mega-resorts,
while others are building on vacant or under-
used land. Many of the new developments
are on the northern end of the Las Vegas
Strip, which has seen little in the way of de-
velopment in the past few decades. The last
such building boom in Las Vegas took place
in the late 1990s, when casinos including the
Bellagio, Mandalay Bay, and Paris Las Vegas
were built, replacing 1950s-era casinos such
as the Dunes.
Most of the large publicly traded casino
companies have developments underway.
Many of the newer resorts mix residential
and retail space with the standard hotel and
casino configuration.
MGM Mirage’s $7.4 billion Project
CityCenter is a mixed-use development that
NEW RESORTS IN LAS VEGAS
11 Resort name: (unnamed)
Developers: MGM Mirage and Kerzner International
Cost: Multi-billion dollar development cost
Opening date: 2011
22 Resort name: Echelon
Developer: Boyd Gaming
Cost: $4.8 billion
Opening date: 2010
33 Resort name: Plaza
Developer: El Ad Group
Cost: $5 billion
Opening date: 2011
44 Resort name: Encore at Wynn Las Vegas
Developer: Wynn Resorts
Cost: $2.1 billion
Opening date: 2009
55 Resort name: Palazzo
Developer: Las Vegas Sands
Cost: $1.8 billion
Opening date: 2007
66 Resort name: Project CityCenter
Developer: MGM Mirage
Cost: E$7.4 billion
Opening date: 2009
● Indicates an existing casino/resort. E-Estimated.
Sources: Company reports; About.com.
11
22
33
44
55
66
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8. AUGUST16,2007/LODGING&GAMINGINDUSTRYSURVEY
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is scheduled to open in late 2009. With this
project, MGM Mirage is moving beyond
building another themed resort on the Las
Vegas Strip. CityCenter will include a
4,000-room casino/hotel, two smaller
“boutique” hotels, about 500,000 square
feet of dining, retail, and entertainment
space, and more than 2,600 condomini-
ums. MGM Mirage is building another re-
sort on the northern end of the Strip with
joint venture partner Kerzner International.
Also on the northern part of the Strip,
Boyd Gaming Corp. is building Echelon, a
$4.8 billion project comprising five hotels as
well as retail space and condos. Echelon will
sit on the former site of the Stardust casino,
which was demolished in March 2007.
Other projects include Palazzo, a 3,025-
room resort that Las Vegas Sands Corp. is
building next to its Venetian casino. Palazzo
will open in late 2007. Wynn Resorts Ltd.
is spending $2.1 billion to build Encore, a
2,034-room hotel and casino that will sit
next to its existing Wynn Las Vegas.
There are also projects planned by pri-
vate developers. ElAd Group, a real estate
investment firm that three years ago ac-
quired New York’s famed Plaza Hotel,
bought the aging New Frontier casino on
the northern end of the Strip in May 2007.
ElAd plans to tear down the New Frontier
and build a casino hotel using the Plaza
name. ElAd said the development will cost
$5 billion and open in 2011, though press
reports say the price tag may be as high as
$8 billion, including the price of the land.
The $2.8 billion Fontainebleau, another re-
sort on the northern end of the Strip, is
scheduled to open in 2009.
More developments may be announced.
MGM owns a total of 865 acres of land on
the Las Vegas Strip, more than 250 of
which are undeveloped or underutilized,
according to the company. Investment bank
Goldman Sachs in April 2007 agreed to
buy three Las Vegas area casinos and an-
other property in Laughlin, Nevada, from
financier Carl Icahn’s American Real
Estate Partners LP. The sale includes the
Stratosphere casino in Las Vegas and 17
acres of adjacent land, which could be re-
developed. In addition, the Riviera casino
on the north end of the Strip has attracted
a number of bids from real estate investors
over the past several years.
Land values on the Strip have soared with
the interest in development. ElAd paid a
reported $1.2 billion for the 35-acre New
Frontier site, putting the land value at nearly
$35 million an acre.
Atlantic City casino revenue growth
slows
Atlantic City, the No. 2 US casino market
behind Las Vegas, is posting lower gambling
revenue growth than a year ago. Part of the
reason is the closure of the Sands casino in
November 2006 to make room for a new re-
sort, but an increase in competition from slot
machines in New York and Pennsylvania
also contributed.
Through May 2007, Atlantic City’s gam-
bling revenue was down 4.4%, year over
year, according to the New Jersey Casino
Control Commission. (Excluding the Sands,
revenue was down 0.9%.) Atlantic City’s
gambling revenue totaled a record $5.2 bil-
lion in 2006, up 4.0% from the year before.
Competition for Atlantic City is coming
from such feeder markets as Pennsylvania
and New York. Atlantic City is 130 miles
from New York City and 60 miles from
Philadelphia. In New York, video gaming
machines, which are similar to slot machines,
were added to three racetracks in 2006. The
largest is Yonkers Raceway, less than 20
miles from New York City, with 5,500 gam-
ing machines.
In Pennsylvania, politicians voted in 2004
to allow the addition of 61,000 slot machines
in 14 locations, spread among seven race-
tracks, five slot parlors (two of which will be
in Philadelphia), and two resorts. The state is
allowing slots (but not table games such as
blackjack) in an effort to reduce residential
property taxes. Racetracks in five cities now
have slots, including Philadelphia Park and
Chester, a nearby suburb. The two Philadel-
phia slot parlors, which sit on the Delaware
River and include restaurants, bars, and en-
tertainment, may open as soon as 2008. At-
lantic City’s gambling revenue may decline
by as much as 10% or more when the slot
parlors are added in Philadelphia, drawing
away weekday business, according to Stan-
dard & Poor’s Credit Market Services.
Atlantic City is showing signs of losing
slot players to other markets. The amount of
money won from slot machines fell 6.9% in
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the five months ended May 2007, though
winnings from table games rose 2.2%.
In April 2007, the Atlantic City council
adopted a smoking ban that required at least
75% of a casino floor to be smoke free.
Casino companies argue that smoking re-
strictions and bans hurt because gamblers
smoke more than the regular population and
because Pennsylvania still allows smoking at
its racetracks and slot parlors. New Jersey
may yet impose a full smoking ban: as of
June 2007, the state legislature was consider-
ing bills to ban smoking outright in casinos.
Can AC shed its day-trip image?
Atlantic City is in the middle of a turn-
around in a bid to shed its image as a day-
trip for slot players who often arrive on
casino buses. The city is hoping to emulate
the success of Las Vegas, where nongaming
amenities, such as restaurants, retail space,
and nightclubs, account for 50% or more
of revenue at the largest resorts. Having at-
tractions beyond the casino floor insulates
the casino operator from lucky streaks by
big gamblers; at the same time, it allows
casinos to attract consumers who do not
like to gamble or who want to spend part
of their time gambling before moving on to
other pastimes.
Another issue for Atlantic City is its num-
ber of hotel rooms. Atlantic City has about
15,000 hotel rooms, compared with 133,000
for Las Vegas. Building more hotel rooms
would open the city up to the lucrative con-
vention market, which helps fill hotels in the
slower midweek period and would bring
more gamblers in on weekends. Overnight
guests also spend more money for lodging
and additional meals.
City not sitting still
The arrival of the $1.1 billion Borgata
casino raised the appeal of a gaming mar-
ket that had not seen a new casino since
the Trump Taj Mahal in 1990. The Borgata
features an open layout, posh hotel rooms,
and a variety of upscale bars and restau-
rants. The new casino quickly became one
of the highest grossing in the market and
spurred upgrade projects at other Atlantic
City casinos.
◆ Trump. After emerging from bank-
ruptcy protection in 2005, Trump Enter-
tainment is investing in its three casinos.
The company is building a $250 million
hotel tower at the Taj Mahal casino that
will add 786 rooms. The company previ-
ously renovated all its hotel rooms and
added new restaurants and nightclubs.
◆ Harrah’s. In June 2006, Harrah’s, the
owner of three Atlantic City casinos, opened
the Pier (a mall with restaurants and luxury
retailers including Burberry, Louis Vuitton,
and Gucci) with partner Gordon Group
Holdings LLC. The company is spending
$550 million to add an indoor pool, 44-story
hotel tower, and a Red Door spa to its Har-
rah’s Atlantic City casino.
◆ MGM Mirage–Boyd Gaming. The Bor-
gata is not being left behind. The casino, co-
owned by MGM Mirage and Boyd Gaming,
added more casino space and restaurants in
June 2006 as part of a $200 million expan-
sion. A second expansion, a $325 million
boutique hotel called the Water Club at Bor-
gata, is scheduled to open in late 2007.
◆ Colony Capital. This private real estate
investment firm owns the Resorts and At-
lantic City Hilton casinos. Colony is consid-
ering a $1 billion expansion at the Hilton to
double the casino floor, add a parking
garage, and open 1,000 new hotel rooms, ac-
cording to published resorts. The Hilton is
currently the smallest casino in Atlantic City.
Resorts in the planning stages
More resorts are coming to Atlantic City.
In 2006, Pinnacle Entertainment bought the
aging Sands casino and closed it down. The
company plans to build a new mega-resort
on the site by 2011. MGM Mirage is study-
ing options on its 72-acre plot next the Bor-
gata. Revel Entertainment Group, a closely
held firm, is designing a casino to be built
on 20 acres of land along the Atlantic City
boardwalk. In addition, a group of investors
including the former CEO of Caesars Enter-
tainment Inc. bought an 11-acre parcel in
Atlantic City, with plans to open a small
casino. ■
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10. Based on revenue and number of properties,
lodging is a much larger industry than gam-
ing. The two industries generated combined
revenues of about $184 billion in 2006, up
from approximately $172 billion in 2005,
according to Standard & Poor’s estimates.
Room sales accounted for roughly 55% of
revenues in 2006, while casino revenues
(“winnings”), a category that excludes other
forms of legal gambling, represented about
27%. We estimate that about 18% of rev-
enues came from other sources, such as food
and beverage sales.
We estimate that $101 billion was spent
to rent rooms at US hotels in 2006, an av-
erage of about $275 million a night. This
compares with the estimated $138 million
per day that people lost, on average, at US
casinos.
There is an overlap between the US
lodging and gaming industries. Most of the
highest-volume casinos in the United States
are attached to big hotels. Moreover, some
of the largest hotels, with more than 2,000
rooms each, are located in gaming markets
such as Las Vegas and Atlantic City. How-
ever, most US hotels do not offer casino
activity. By our estimates, fewer than 10%
of the roughly 4.5 million hotel rooms in the
United States are part of gaming facilities.
Most large companies are publicly
owned
In the lodging and gaming industries,
most of the largest companies, and many
smaller businesses, are part of publicly owned
firms. However, some major participants re-
main privately held, including Carlson Com-
panies Inc., which owns the Radisson Hotels
chain, and the Pritzker family’s Hyatt Hotels.
In the past several years, a number of hotel
and casino firms have been acquired and
taken private by private equity firms.
Both industries have become more consol-
idated over time, due to acquisitions and
internal growth. However, no single lodging
company encompasses hotels (including fran-
chises) that account for more than 15% of
all hotel rooms in the United States.
Based on affiliated rooms worldwide, the
largest US-based hotel company is franchisor
Wyndham Worldwide Corp., the parent of
nine lodging chains, with about 6,500 prop-
erties and 540,000 rooms. Wyndham’s lodg-
ing brands include Days Inn, Howard
Johnson, Knights Inn, Ramada, Travelodge,
and Super 8. Wyndham was created in a
four-way split of conglomerate Cendant
Corp. in 2006.
In the gaming industry, the largest com-
pany (ranked by casino winnings) is Har-
INDUSTRY PROFILE
Hotel, casino industries post higher
revenues
AUGUST16,2007/LODGING&GAMINGINDUSTRYSURVEY
8
LARGE HOTEL COMPANIES
(Based on number of affiliated rooms worldwide)
NO. OF NO. OF
COMPANY MAJOR CHAINS PROPERTIES* ROOMS*
InterContinental Hotels Group Holiday Inn, 3,763 558,153
Inter-Continental
Wyndham Worldwide Days Inn, Ramada, 6,500 540,000
Super 8, Howard Johnson,
Travelodge (N. Amer.)
Marriott International † Marriott, Courtyard 2,868 517,202
Residence Inn,
Fairfield Inn, Renaissance
Accor S.A. Motel 6, Mercure, Ibis, 4,100 486,000
Novotel, Red Roof Inns,
Hotel Sofitel, Formule 1
Hilton Hotels ‡ Hilton (U.S.), Hampton Inns, 2,838 483,090
Doubletree, Embassy Suites,
Homewood Suites
Choice Hotels Int'l § Comfort Inn, Quality Inn, 5,406 441,256
Econo Lodge
Best Western Int'l § Best Western 4,200 315,714
Starwood Hotels & Resorts Sheraton, Westin 868 266,226
Total 30,543 3,607,641
*Based on latest data available as of July 2007. Property and room totals are worldwide,
and may include timeshare and executive apartment properties, including some time-
share units in active sales but not ready for occupancy. †Includes vacation ownership
properties and Marriott Executive Residences. §Not-for-profit association. ‡Includes
some hotels that are part of other chains.
Sources: Company reports; American Hotel & Lodging Association; Standard & Poor’s
estimates.
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rah’s Entertainment Inc. Based on the num-
ber of hotel rooms, Las Vegas is the largest
US hotel market, with about 133,082
rooms as of April 2007.
Lodging
Standard & Poor’s estimates that, as of
mid-2007, the US lodging industry com-
prised roughly 4.5 million rooms at perhaps
50,000 properties — about one hotel room
for every 65 US residents. US lodging in-
dustry revenues totaled $133.4 billion in
2006, according to research firm Smith
Travel Research, up 8.7% from 2005.
Demand for hotel rooms comes from both
US residents and international travelers. In
2005, the number of overseas visitors to the
United States totaled 21.7 million, according
to the US Department of Commerce’s Office
of Travel and Tourism Industries. This in-
cluded 4.18 million visitors from the United
Kingdom, 3.67 million from Japan, and 1.39
million from Germany.
While a number of international visitors
likely stay with family or friends, we believe
that foreign visitors contribute significantly
to hotel room demand, particularly in such
cities as New York and Washington, D.C.
Through March of 2007, the number of
overseas visitors to the US had risen 10.3%
from the year earlier.
Gaming
We estimate that more than 450 legal
casinos operate in the United States. This
excludes facilities whose primary emphasis
is bingo, as well as other facilities (such as
racetracks in Delaware and Iowa) where
casino-type activity is limited to gaming
machines.
By state, Nevada has the largest number
of legal casinos. As of December 2006, the
state had 274 locations with annual gaming
revenue of at least $1 million each, in addi-
tion to smaller facilities, such as taverns and
retail stores, which have video poker machines,
according to the American Gaming Associa-
tion, a trade group.
Other locations with legal casinos include
Atlantic City, with 11 high-volume gaming
facilities (the most recent of which opened in
July 2003), and six southern and midwestern
states, with a total of about 93 casino pro-
jects (excluding Native American casinos)
open as of June 2007. In Mississippi, two of
12 casinos remained closed following dam-
age from Hurricane Katrina, which struck
the state in late August 2005.
Detroit has three casinos, and New Or-
leans has a land-based casino. More than 80
limited-stakes casinos operate in three small
Colorado towns and in Deadwood, South
Dakota. In addition, more than 350 casinos
now operate on Native American land in
various states, including two in Connecticut
that are among the highest-volume gaming
facilities in the United States.
Of the estimated $50.8 billion in casino
winnings in 2006, we estimate that about
35% came from the two oldest gaming
areas: the state of Nevada ($12.4 billion)
and Atlantic City ($5.2 billion). Another
estimated $11.3 billion was generated from
casinos in the six states that allow water-
based (“riverboat”) gambling, while an es-
timated $19.1 billion came from casinos on
Native American land. The final estimated
$2.5 billion came from gaming facilities in
Detroit, Colorado, and South Dakota, plus
the land-based casino in New Orleans. In
addition to these sums, we estimate that
gamblers lost more than $2 billion during
2006 to gaming devices (often resembling
slot machines) located at racetracks, and at
facilities sometimes known as “racinos,”
which are located in such states as Iowa
and Delaware.
INDUSTRY TRENDS
Among the most prominent trends cur-
rently being exhibited in both the lodging
and gaming industries are expansion into
overseas markets and hotel industry upgrades.
Casino, hotel companies look
overseas for growth
Though they are tapping new markets in
the US, casino companies may find richer op-
portunities overseas, especially in Asia. One
of the most promising markets is Macau, a
Special Administrative Region (SAR) of the
People’s Republic of China. In 2006 Macau
passed the Las Vegas Strip for the title of
world’s largest casino market, measured by
casino winnings. Macau’s winnings rose
23% to reach $7 billion, while in Las Vegas
winnings rose 10.8% to $6.7 billion.
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For hotel firms, moving into overseas
markets provides new opportunity away
from the saturated US hotel industry. The
expansion of the middle class in India, China,
and other developing countries means mil-
lions more will have disposable income to
vacation and visit far-flung relatives.
Macau becomes gaming giant
Macau, which sits along the South China
sea west of Hong Kong, is currently a boom
market for gambling. The region recently
opened its doors to competition from West-
ern companies, ending a 40-year monopoly
for Stanley Ho’s Sociedad de Jogos de Macau.
Macau’s location and demographics make
it a highly desirable market in which to oper-
ate casinos. It is a 40-mile ferry ride from
Hong Kong, where about seven million peo-
ple live. Going a bit farther out, Macau is
within a three-hour drive for 100 million
people and a three-hour flight for one billion
people.
Gaming revenue in Macau has more than
doubled since 2002, helped by the opening
of Sands Macau, the first Las Vegas-style
casino, in 2004. In September 2006, Wynn
Resorts’ Wynn Macau opened. That same
month, the Grand Waldo casino and hotel,
owned by Asia’s Galaxy Entertainment
Group Ltd., opened in Macau.
More casinos are on the way. Las Vegas
Sands Corp., owner of the Sands Macau, is
spearheading the development of the Cotai
Strip, a swatch of reclaimed land in Macau
that Sands chief executive Sheldon Adelson
predicts will become the “Las Vegas of
Asia.” The company is building the Venetian
Macau, which is scheduled to open in late
August 2007. Through his developments,
Adelson is hoping to transform Macau from
a stop for just hard-core gamblers into a va-
cation destination. The Venetian Macau, the
first resort to open on the Cotai Strip, will
include 3,000 hotel suites, 1.2 million square
feet of meeting and convention space, and
1.0 million square feet of retail space hous-
ing 350 stores. The entire resort will total
11.0 million square feet.
Las Vegas Sands is partnering with hotel
companies including Four Seasons Hotels,
Inc., Hilton Hotels Corp., and Fairmont
Hotels & Resorts Inc., to eventually open
seven resorts in Cotai. The area will eventu-
ally contain 20,000 guest rooms, 1.5 million
square feet of casino space, 3.0 million square
feet of shops, and 3.0 million square feet of
meeting and convention space.
MGM Mirage joined with Pansy Ho
Chiu-king, one of Stanley Ho’s daughters,
to build the MGM Grand Macau. The $1
billion resort will open in late 2007.
Las Vegas Sands also plans to build else-
where in the Macau region, planning a col-
lection of convention sites, hotels, and golf
courses on nearby Hengqin Island. The de-
velopment may cost as much as $15 billion,
according to published reports.
Singapore is also targeted for casino
development. Las Vegas Sands in May 2006
won a license to build the city-state’s first
casino, beating out rivals including MGM
Mirage and Harrah’s Entertainment. The
company plans a 2,500-room resort, a
160,000 square foot casino, and outdoor
recreation areas. Malaysian developer Genting
Group and cruise operator Star Cruises Ltd.
received the other Singapore license.
Harrah’s is using gaming’s famed Caesars
name as a way to expand overseas. In 2005
Harrah’s bought Caesars Entertainment for
about $9.3 billion, gaining the Caesars and
Flamingo brand names, among others. The
company has since announced casino devel-
opment projects in Spain and the Bahamas.
There are some signs of caution concern-
ing whether the Macau market can absorb
all the new supply. Wynn Resorts in June
2007 said it would open only part of an ex-
pansion at the Wynn Macau this year, with
the rest opening at a future date. Wynn cited
new, more restrictive visa requirements
imposed by the Chinese government which
have slowed the number of visitors from
Guangdong province. The company also cit-
ed the “dramatic expansion” in the number
of casinos opening.
Hotel chains open overseas
Both India and China are experiencing
surges in travel from outside their countries,
and also from travel from consumers going
from one part of the country to another. US
hotel chains are moving into these markets
and acquiring overseas hotel chains.
Hilton Hotels of the United States ac-
quired the United Kingdom’s Hilton Group
PLC in February 2006 for about $5.7 bil-
lion. The deal reunited the Hilton brand,
as Hilton Hotels spun off its overseas oper-
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ations into the Hilton Group in the 1960s.
The combined company owns, manages, or
operates 2,838 hotels with about 484,000
rooms. The deal allows Hilton to compete
more effectively with Marriott Internation-
al Inc. and Starwood Hotels & Resorts
Worldwide Inc., both of which have an ex-
tensive presence overseas. Hilton is rapidly
expanding overseas, including striking a
partnership with a local hotel chain in the
UK to build 25 hotels with 3,000 rooms in
the UK market.
International tourist arrivals to Asia and
the Pacific have risen at an annual rate of
7.1% since 1990, according to the World
Tourism Organization, with that figure rising
to 7.6% in 2006. The main driving force in
Asia travel is China and India, the group
said. Travel from overseas into China has
quadrupled to 109 million in 2006 from
1990, according to Asian investment bank
CLSA. China will become the world’s top
destination by 2020, attracting 130 million
tourists each year.
Consumers in India, China, and other
developing areas are also traveling in their
home countries more. Domestic tourism in
China makes up more than 95% of all Chi-
nese tourists, according to CLSA. The num-
ber of domestic tourists in India will more
than double to 750 million by 2010 from
368 in 2004, according to consulting firm
Deloitte & Touche LLP and India’s Ministry
of Tourism.
Hotel chains do not currently have as
strong a presence in foreign markets as they
do in the US. Outside its home market, Mar-
riott has a less than 1% market share. The
company, though, will open 600,000 addi-
tional hotel rooms by the end of 2009, with
20% of those rooms outside the US. Current-
ly, 12% of the company’s revenue comes from
overseas hotels. The company said in June
2007 that it would triple its presence in India
by the end of 2010, expanding to 21 hotels.
Consumers in developing countries are
also venturing abroad in greater numbers,
thanks to increased wealth. US hotel opera-
tors such as Marriott are hoping that by
opening hotels in India and China they will
familiarize local residents with those brands,
and that those residents may seek out a Mar-
riott or other US brand when they travel
overseas.
The 2008 Summer Olympics, which will
be held in Beijing, should provide another
boost to China’s tourism industry.
Hotels spruce up rooms and add
new brands
As a surge in travel lifts profits, hotel
companies are making over their properties
and improving amenities to remain competi-
tive. Hotels now offer spa-quality shampoos
and lotions in bathrooms, high-speed Inter-
net access in rooms and lobbies, flat-screen
televisions, and docking stations for MP3
music players. Many are following Star-
wood’s success with the “Heavenly Bed” in
its Westin hotels, which was introduced in
1999 and features down comforters, white
sheets, and multiple pillows. The improve-
ments are meant to foster customer loyalty
and allow hotels to charge higher room rates.
Marriott added new bedding to most of
its hotels in 2005. The company now is
sprucing up its technology offerings with a
plug-in panel for its high-definition TVs.
Guests can plug their laptops, MP3 players,
portable DVD players, digital cameras, and
the like into a panel that then projects the
images or sounds through a 32-inch high de-
finition TV. The company is also in the mid-
dle of redoing the rooms in its Residence Inn
extended-stay brand.
Others are renovating as well. Hilton Ho-
tels and the owners of properties it manages
are spending a combined $1 billion on im-
provements including lobby renovations, in-
stalling the Hilton “Serenity Bed,” in rooms,
and offering more healthful food in restau-
rants. (The $1 billion investment includes ad
spending.) Hilton is upgrading its technology
LODGING CONSTRUCTION EXPENDITURES
(In billions of dollars)
Source: US Department of Commerce.
20
18
16
14
12
10
8
6
4
2
0
1993 94 95 96 97 98 99 00 01 02 03 04 05 2006
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as well: at its namesake chains, so-called
Sight+Sound rooms include 42-inch televi-
sions, surround sound, and the ability to
view recent episodes of hit television shows
at any time.
Hotels are also rolling out new brands to
cater to different niches of travelers. More
members of Generation X and Generation Y
are beginning to take vacations and travel
for business. Younger travelers prefer more
modern hotel design, high-tech features in
the rooms, and gathering spaces outside of
rooms that are more functional than hotel
lobbies. Global Hyatt Corp. is introducing
Hyatt Place, which offers 42-inch high defin-
ition TVs, free wireless Internet access, and a
check-in area that includes a coffee and wine
café and space to work.
Starwood’s aloft hotels feature loft-like
rooms, oversized showers, and cordless
phones in rooms. In the public space, guests
can buy a variety of healthful foods that are
available 24 hours a day in the re:fuel shop,
and there is a lobby that transforms into a
bar at night.
Hotel chains are also capitalizing on the
boom in luxury travel. Hyatt’s upscale Andaz
brand will feature environmentally friendly
details such as organic food and beverages,
and ecologically sound building materials.
Marriott’s Ritz-Carlton Reserve hotel brand
will feature smaller hotels in more out-of-
the-way markets than are currently served
by Ritz-Carlton.
Marriott said in June 2007 it was teaming
with Ian Schrager, who is credited with pio-
neering the hip boutique hotel concept, on a
chain of properties in major cities such as
New York, London, and Tokyo. Schrager,
who co-owned nightclub Studio 54 in the
1970s, will design the properties, and Mar-
riott, known for its conservative-looking
hotels, will oversee development and operate
the hotels.
Condo hotels
Strong consumer interest in residential
real estate has made its way into the lodging
industry, as developers and hotel owners cre-
ate properties which offer both hotel rooms
for rent and condominiums for purchase.
These projects, known as condo hotels,
are most likely to be found in resort or ur-
ban markets. The purchaser of a condo unit
is likely to have access to a number of the
services and amenities associated with the
hotel, including such things as a fitness cen-
ter and the use of a concierge. The condo
owner can also get some extra income by
making the unit available to the building
operator for rentals when the owner is not
there. The developments have proven popu-
lar in vacation areas such as Las Vegas and
southern Florida.
For developers of new condo hotel prop-
erties, the ability to pre-sell condominium
units (before construction is completed) often
makes it easier to get attractive financing for
a project. For the owner of such a hybrid
property, the payback of construction costs
should come more quickly with a condo
unit. Instead of getting $250 a night for a
hotel room, the sale of the same space as a
condo might bring in hundreds of thousands
of dollars when the unit becomes ready for
occupancy.
Condo hotels now make up a sizable
share of all hotel development. In 2007, 50
hotels with a total of 8,857 condo units will
open, making up 9% of all hotel openings in
the US, according to research firm Lodging
Econometrics. Some notable hotels being
converted to condominiums or condo hotels
to take advantage of expected residential de-
mand include New York’s Plaza and Stan-
hope hotels.
In the future, however, hotel developers
may run into trouble selling condo units.
The overall boom in residential real estate
has ended: sales of both new and existing
homes are declining, as borrowing costs rise
and mortgages become tougher to obtain
because of tighter lending standards. In ad-
dition, a number of second-home markets
are experiencing weakness.
Some owners, who anticipated that in-
come from renting the property would cover
the mortgage, are finding the units are gener-
ating less income than they budgeted for.
Moreover, fees are reducing the owners’ take
from renting their condos.
Timeshare sales strong
A steady revenue producer for hotel com-
panies has been timeshares. By buying a time-
share, a consumer typically buys the right to
occupy a condominium in a resort area for
one week every year. The resorts are popular
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in warm weather vacation spots and skiing ar-
eas. Owners who want to visit a new area can
also swap their timeshare weeks with other
owners.
The entrance of Marriott, Hilton, and
Starwood into the timeshare business has
helped the industry shed a reputation for
high-pressure sales tactics and inferior prop-
erties. Timeshare sales jumped 16% to $10
billion in 2006, according to the American
Resort Development Association, a trade
group, and Ernst & Young. The average
price of a timeshare was $18,502, with most
buyers opting for two-bedroom units. The
hotel companies generate revenue both from
selling units and helping owners finance their
purchase. Timeshare sales have risen each
year since 1993, seemingly immune from
economic cycles that often hurt the hotel
industry.
Selling timeshare and condo hotel units is
becoming a bigger part of the largest hotel
companies’ revenues. Starwood said sales of
timeshare and residential units rose 13% in
2006 to $1 billion, and made up 17% of
overall sales for the year. For Hilton, time-
share sales rose 17% to $650 million in
2006, accounting for 17% of revenue. For
Marriott, timeshare sales totaled $1.84 bil-
lion in 2006, or 15% of total sales.
Regional gaming market results
Most regional markets are posting higher
gaming revenue so far in 2007. The perfor-
mance of the largest regional markets is de-
tailed following.
◆ Mississippi. Gaming revenue at water-
based casinos in Mississippi jumped 19% to
$1.24 billion through May 2007. As of June
2007, there were 27 casinos operating in the
state. The state’s Gulf Coast area was hit
hard by Hurricane Katrina in 2005, de-
stroying or damaging most casinos in the
area. Harrah’s in May 2007 said it would
spend about $700 million with singer Jimmy
Buffett to build a “Margaritaville”-themed
resort in Biloxi.
◆ Indiana. In Indiana, where 11 water-
based casinos currently operate, gaming rev-
enue in the first five months of 2007 reached
$1.13 billion, up 4.3% from the comparable
year-earlier period. Indiana authorized its fi-
nal gaming license to a casino boat in French
Lick that opened in November 2006.
◆ Illinois. The nine casino boat projects
in Illinois generated $827.3 million in gam-
ing revenue in the first five months of 2007,
up 2.7% from the year-earlier period. Illinois
has authorized 10 casino boat licenses; nine
of those are currently being used for gaming
operations in the state. Activation of the
tenth license could lead to the development
and operation of another casino boat license.
◆ Michigan. The three casinos in Detroit
posted gaming revenue of $554.1 million in
the first five months of 2007, up 2.4% from
a year ago. All three Detroit casinos are un-
dergoing expansions, including MGM Mi-
rage’s $800 million renovation of the MGM
Grand Detroit.
◆ Missouri. Gaming revenue at Missouri’s
11 casino boat complexes totaled about
$539.4 million in the first four months of
2007, down less than 1% from a year ago.
Pinnacle Entertainment Inc. is planning two
new casino projects in the St. Louis area.
In Missouri, casino customers are allowed
to buy $500 of chips or tokens every two
hours, which limits the amount of money
that people can lose.
HOW THE INDUSTRY OPERATES
The hotel industry provides travelers a
refuge for rest and privacy. However, many
hotel properties possess features well beyond
the basic bed, bathroom, and telephone. For
example, some facilities provide conference
centers in order to attract business meetings
or conventions, while others maintain recre-
ational facilities, such as pools and tennis
courts, for the benefit of both vacation and
business travelers. The level of amenities and
service that a hotel provides is reflected in its
room price.
The gaming industry is more dependent
on recreational visitors than the hotel busi-
ness is. Whether it is for a day trip, a long
weekend, or a more extended vacation,
many patrons visit a gaming facility to en-
gage in games of chance and entertain their
fantasies. Larger casino complexes typically
also offer hotel rooms, food and beverages,
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and entertainment, such as nightclubs.
Based on the number of lodging rooms,
some of the largest US hotels are connected
to casinos, especially in Las Vegas, where
Standard & Poor’s believes the MGM
Grand property is the biggest, with about
5,000 rooms or suites.
Casinos compete with many other forms
of recreation for patrons’ discretionary dol-
lars. (This description clearly excludes prob-
lem gamblers, who may feel that they have
little control over their betting activity.) The
potential for winning money from a casino
creates excitement for visitors, which may
offset their knowledge that odds favor the
house. In some cases, gaming businesses offer
free amenities, such as lodging, food, and
beverages, as a means of rewarding and at-
tracting preferred customers.
How lodging and gaming are similar
The lodging and gaming industries are
interrelated to a certain extent; a connection
that lets the gaming companies encourage
longer stays and offers their casino visitors a
wide assortment of amenities, including com-
plimentary rooms for their best customers.
However, most of the roughly 50,000
hotels in the United States do not offer casi-
no activity. In large part, they are prohibited
from doing so. Much of the gaming industry
is highly regulated, and the introduction of
casino activity requires licenses or agree-
ments with state authorities.
Common characteristics
Here, we detail some of the characteristics
shared by the two industries. Later, we de-
scribe operational features that are more par-
ticular to each sector.
◆ Three ways to grow. For hotel and
casino owners and operators, there are three
main avenues to growth: raise sales or profits
at existing properties, open new units, or
make acquisitions.
With existing hotels, potential means of
boosting revenues include refurbishing or ex-
panding the property, or changing the hotel’s
brand affiliation (i.e., leaving one chain and
joining another). New unit development en-
tails finding attractive sites and making sure
that capital is available for new construction.
As for acquisitions, one rationale supporting
this approach is that they can offer faster
and possibly more economical growth than
would new construction.
◆ Sizable capital investments. Much of
the capital that hotel and casino owners re-
quire — for such fixed assets as land, build-
ings, furnishings, and equipment — is likely
to be borrowed. For a large new casino/ho-
tel project, capital spending can total hun-
dreds of millions of dollars. The financial
viability of each new lodging or gaming fa-
cility depends partly on the level of interest
rates and the amount of related debt that
the owner has incurred.
◆ Large-scale employment of service-
oriented workers. Both industries sell
hospitality to their customers. Employees are
needed to provide such functions as house-
keeping and food service. In some cases,
unions represent industry employees.
◆ Dependence on tourism and leisure
travel. Leisure travelers are an important
source of revenue and profit for both the
lodging and the gaming industries. As a re-
sult, lodging demand and casino activity
alike are affected by factors such as personal
income, consumer confidence levels, and
people’s willingness to travel. We generally
view the hotel industry as being more sensi-
tive than the gaming industry to macroeco-
nomic conditions, due to the importance of
business travel to its results.
◆ Influence of supply and demand. Both
industries are subject to supply and de-
mand cycles, with new construction likely
to be influenced by interest rate levels and
lenders’ receptivity. Because casinos are
still quite new in some parts of the United
States, they are more of a novelty than are
traditional hotels.
In the gaming industry, the debut of a
splashy new casino project can help to
boost overall demand in the market where
it is located. However, at least initially, the
new gaming facility also may capture
enough market share to cause revenue and
profit levels to drop at older, competing
gaming facilities.
◆ Regulation is a key factor. The lodging
and gaming industries are both subject to
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state and local regulation. Zoning approvals,
for example, often are needed before con-
struction can begin on a lodging property.
In the gaming industry, regulation is
even more significant. Acquiring a license
or reaching an agreement (or compact) with
a state government is a key requirement for
opening a new casino. Thus, a state license
can be a barrier to entering the industry
and is one of a gaming firm’s most impor-
tant assets.
Some states issue a limited number of li-
censes, while other states set no specified up-
per limit. However, even if they do not cap
the number of licenses, state regulators still
subject casino developers to review processes
and background checks.
Lodging and gaming companies often
face special taxes that are specific to their
industries. For example, states and locali-
ties may apply room taxes for lodging cus-
tomers and a casino tax on money won by
a gaming establishment. A relatively high
tax rate on casino winnings may discour-
age companies from investing in new gam-
ing facilities.
State taxes on gaming revenues tend to be
higher in the casino boat states than they are
in Nevada and Atlantic City. At least initial-
ly, these costs can be more than offset by
lower investment costs and stronger operat-
ing margins. However, profitability levels can
fluctuate over time, affected by factors such
as economic conditions, the entry of new
competition, and a change in tax rates.
◆ High fixed costs. Lodging and gaming
companies alike must accommodate a high
level of fixed and semifixed costs (such as
payrolls). For example, hotels face such on-
going costs as property taxes, insurance, de-
preciation and amortization, interest, rent,
and equipment leases. In addition, for a hotel
or gaming facility to be operational, a mini-
mum level of labor is necessary. Thus, a por-
tion of a facility’s labor costs can be viewed
as fixed (of course, incremental labor may be
added as business activity grows). Once rev-
enues pass the break-even point, however, a
substantial percentage of incremental rev-
enues typically becomes profit.
Transportation system important
A well-functioning transportation system
in which consumers have confidence is im-
portant to both the lodging and gaming
properties. With airline travel, we believe
that fear of terrorism activity in the United
States has receded, and that increased secu-
rity measures at airports are functioning
more smoothly.
Automobiles are the primary means by
which many travelers arrive at hotels and
casinos. In 2007, despite gasoline prices
that approached or exceeded $3.00 per
gallon, we did not see energy prices having
a large adverse impact on hotel and gaming
industry demand.
Lodging business models
In the lodging industry, companies can
choose to own, manage, or franchise their
properties; some do all three.
Franchising
Under franchise agreements, the parent
company (the franchisor) typically grants the
use of its brand name to lodging properties
that it neither owns nor manages. The fran-
chisor receives some revenues — typically a
percentage of room sales — without invest-
ing much incremental capital. It also gains
visibility by having more affiliated proper-
ties. In addition, most franchisees help pro-
mote the brand name by contributing some
of their own marketing dollars to national or
regional ad campaigns.
From a franchisee’s point of view, potential
advantages include leveraging brand-name
recognition and having access to shared re-
sources such as national reservation systems.
Chain affiliation often gives prospective
property developers an edge with lenders,
who are reassured by the connection to an
established business. Franchising has helped
many people to become entrepreneurs with-
out having to assume as much risk as going
into business on their own.
Owning
Owning a property is a capital-intensive
business, requiring more of an investment
than franchising or managing. In return, it
offers both control of the business and the
possibility of future gains from appreciating
property values.
There are various forms of ownership for
hotels, including corporations, partnerships,
and real estate investment trusts (REITs). A
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company that owns lodging properties also
may have some hotels or motels that are part
of another firm’s franchise system.
Managing
Managing is a service business. A manage-
ment company may work with properties
that it owns and/or with hotels belonging to
another party. Customer satisfaction and the
efficient use of resources, including labor, are
important factors. Management contracts
may include incentive fees based on a given
property’s financial success.
Chain or independent?
One decision that hotel owners and oper-
ators need to make is whether they want
their properties to be independent or part of
a chain. Standard & Poor’s estimates that
about 70% of the roughly 50,000 lodging
properties in the United States are affiliated
with a chain.
The foremost feature of a lodging chain is
a shared name (generally an owned trade-
mark) that identifies facilities whose prices
and amenities are standardized. Potential ad-
vantages of chain affiliation include the use
of a name that consumers know (e.g., Holi-
day Inn or Ramada), and access to a chain-
wide reservation system. Chain membership
also can increase the likelihood of obtaining
financing from lenders.
A company may become part of a hotel
chain in several ways: by owning and operat-
ing its own branded hotel facilities; by own-
ing a hotel that it hires another company to
manage; by managing another firm’s proper-
ty; or by licensing to franchisees the right to
operate its branded hotels. In the latter case,
franchisees generally are expected to pay roy-
alty fees to the chain’s parent company and
possibly to contribute to marketing costs to
promote the brand.
The owner or operator of an independent
(nonchain) hotel does not need to conform
to a franchisor’s established guidelines, giving
it greater flexibility to develop a unique style
and ambiance for a given property. However,
it may be more difficult to attract new cus-
tomers without the name recognition, reser-
vation system, or marketing support of a
well-known chain. Nonetheless, there always
will be room for hotels that go it alone, par-
ticularly if they have a prime location or dis-
tinctive qualities that attract visitors.
Room sales as a revenue source
Standard & Poor’s believes that, based on
data from Smith Travel Research (STR), a
provider of lodging data, about 76% of the
US lodging industry’s revenues come from
room sales, while approximately 18% are
generated by food and beverage service. The
remainder likely comes from sources such as
phone call charges, movies viewed in the
room, and other purchases. (Although most
of the largest US casinos are attached to
hotels, we believe that gaming revenues are
generally not included in these percentages.)
However, the distribution of revenues varies
widely by type of property. At limited-service
properties, which generally offer fewer
amenities, we believe that room sales account
for about 96% of total revenues, based on
STR data.
Segmentation offers choices
Hotel companies have established differ-
ent ranges of pricing, service, and accommo-
dation size and style for different types of
guests.
While the addition of more hotel brands
probably does not contribute much to over-
all demand for rooms at present, individual
companies use new brands to broaden their
customer bases, and to more fully leverage
corporate resources, management experi-
ence, access to capital markets, and back-
office operations. The extent to which
additional brands or properties succeed
depends largely on whether they take sales
away from competitors or cannibalize a
company’s other hotels.
For the consumer, the proliferation of
brands has brought new types of chains
(such as all-suite hotels) and possibly a sense
of renewal in the lodging industry. A recently
constructed facility with a new name — or
even a remodeled older property — can im-
part a sense of freshness, beyond meeting the
customer’s primary requirements of a roof
and a bed.
The gaming scene
The gaming industry is immature com-
pared with the traditional hotel business. As
recently as 1988, legal casinos operated in
only two states — New Jersey (specifically,
Atlantic City) and Nevada. During the 1990s,
US gaming industry revenues increased rapidly,
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due largely to geographical expansion into
new regions, such as the Midwest and the
South, and to sizable new investment in
older markets, especially Las Vegas. Today,
more than 20 states allow gambling. None-
theless, the business remains much less wide-
spread than hotel services. Much of gaming’s
geographic expansion has been attributable
to casinos being allowed on Native American
land in various states.
By becoming more geographically accessi-
ble and creating “must-see” attractions, the
gaming industry has broadened its customer
base and increased the likelihood of repeat
visits. When casinos open up in a new area,
they make gaming more convenient for local
residents and are likely to attract visitors to
the region. A splashy new facility in an older
gaming market, such as Las Vegas, can be a
draw for both new and returning visitors.
With the opening of new gaming markets,
joint ventures (typically between a large gam-
ing company and a group of local partners)
have become increasingly common. Through
these alliances, different assets — such as
real estate ownership, access to capital, man-
agement experience, and political connec-
tions — can be combined.
The growth of Native American-owned
gaming creates opportunities for casino com-
panies via management contracts. Although
outsiders cannot own Native American gam-
ing facilities, they are allowed to manage
such properties under contract.
Over time, we expect the incremental de-
mand created by geographic expansion and
new facilities to slow. The novelty of new
casinos eventually fades, and the amount of
incremental revenue generated by easier ac-
cess should diminish. In addition, the avail-
ability of gambling sites on the Internet is
likely to siphon off some demand from tradi-
tional casinos.
How Las Vegas and Atlantic City differ
Two of the largest US gaming locations —
Las Vegas and Atlantic City — remain sub-
stantially different markets. Las Vegas is
more of an overnight destination for both
business and leisure travelers; it has many
more hotel rooms than Atlantic City and a
busy airport serving many popular destina-
tions. It is also a major convention site and
among the fastest growing of the major US
population centers. In contrast, Atlantic City
is more of a day-tripper’s destination, includ-
ing many visitors who arrive by car or char-
tered bus.
Gaming-related operations (including
casino/hotels) are typically more profitable
in Las Vegas than in Atlantic City. Because
the Las Vegas market developed earlier, gam-
ing operators there have had more time to
pay back debt. Furthermore, casino/hotel
operators in Nevada probably face less cost
pressure from regulatory requirements and
labor costs than do those in Atlantic City.
Large casinos dominate
Casino development is more tightly re-
stricted in Atlantic City than in Nevada, in-
cluding a requirement that a gaming project
in Atlantic City include at least 500 hotel
rooms. While there are only 11 gaming facil-
ities in Atlantic City, we believe that Nevada
is home to more than 250 casinos, including
more than 35 in the Las Vegas Strip area.
The Sands casino in Atlantic City closed in
November 2006, and will be replaced with a
larger resort.
On average, Atlantic City gaming facilities
generate much higher casino winnings than
those in Nevada. In 2006, Atlantic City casi-
nos averaged $435 million in winnings, in-
cluding winnings from the now-closed Sands,
which operated for less than 11 months in
2006. We estimate that the average amount
of winnings in Nevada (for approximately
270 facilities, with gaming revenue of at least
$1 million) was about $46 million. Also, we
believe that Nevada’s higher-volume casinos
accounted for most of the profits generated
by the state’s gaming facilities.
The big casino/hotels generally represent
significant capital investments. Especially in
Las Vegas, they are often decorated with a
distinctive theme, which helps to attract large
numbers of walk-in customers who are stay-
ing overnight at other facilities. Some of the
larger casinos may place a special emphasis
on high-end gamblers for games such as bac-
carat. While these big bettors can get lucky
for a while, in the end their collective play is
likely to benefit a casino’s bottom line.
Riverboat casinos
As of year-end 2006, about 81 water-based
casino projects (some comprising more than
one boat) were open in Iowa, Illinois, Missis-
sippi, Louisiana, Missouri, and Indiana. We
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estimate that the approximately 84 gaming
boat projects at which a casino was open
during at least a portion of 2006 averaged
about $135 million of casino winnings.
Among such gaming projects, we believe that
the annual casino winnings ranged from less
than $40 million to more than $400 million.
States that limit casinos to rivers, lakes,
and oceans are, in effect, enforcing a form of
zoning. Some states also limit the number
of licenses available. These methods permit
them to control the proliferation of gaming
within their borders.
The image of nineteenth-century America
evoked by the term “riverboat gambling”
has helped to make the casinos’ arrival more
palatable to many people. Technically, how-
ever, not all such facilities are riverboats.
Some are on immobile barges, and some
operate on lakes or on Mississippi’s Gulf
Coast, rather than on rivers.
In the aftermath of Hurricane Katrina,
legislation was passed in Mississippi that al-
lows for casinos to be placed up to 800 feet
inland from a high tide point. This should
allow newly built casinos to have a stronger
foundation to withstand future hurricane
activity. We believe that the new law has al-
ready led to the relocation and reopening of
several Gulf Coast casinos at hotel sites near
the water, after previously being located on
barges that were damaged by the hurricane.
The first modern-day, state-licensed boat
or barge casino in the United States opened
in Iowa in April 1991, followed by the debut
of water-based gaming in Illinois (September
1991), Mississippi (August 1992), Louisiana
(November 1993), Missouri (May 1994),
and Indiana (December 1995).
Of the six states that permit waterborne
casinos, Mississippi is the most liberal in
terms of regulation. It limits neither the num-
ber of gaming licenses nor the size of gam-
blers’ bets and losses. However, casino
development is subject to local approval.
And while Mississippi’s gaming tax is the
lowest among states that currently permit
waterborne gaming, growing competition has
contributed to the closure of roughly 10
gaming facilities since the first casino opened
there. The city of Detroit is now home to
three land-based casinos: two opened in the
second half of 1999 and the third in Novem-
ber 2000. A land-based casino in New Or-
leans that was closed by Hurricane Katrina
reopened in February 2006. Limited casino
gambling is available in four historic Western
towns — three in Colorado and one in Dead-
wood, South Dakota. Outside of Native
American land, other forms of legalized gam-
bling include gaming devices (video lottery
terminals) at racetracks in various states.
Native American gaming
Under the Indian Gaming Regulatory Act
of 1988 (IGRA), Native American tribes
have the right to negotiate for the develop-
ment of a gaming facility if casino-type activ-
ity already exists in a given state. Typically, a
tribe will seek an agreement or compact with
the state, detailing the gambling activity for
which it desires approval.
Based on data from the National Indian
Gaming Commission, a federal regulatory
agency, we believe that more than 200 of
approximately 550 Native American tribes in
the United States own and/or operate casinos
in the nation. Two of the highest-volume
Native American gaming projects are on
Mohegan and Mashantucket Pequot land in
Connecticut.
Native American casinos are typically not
subject to the same state or local taxes on
their revenues as other casinos in the same
state. Under federal law, Native Americans
are entitled to negotiate agreements with a
state, through which they can typically move
to offer any form of gambling that is already
legal in that state. Often, compacts do not
require payment of state or local taxes on a
casino’s winnings.
In some cases, however, Native American
gaming facilities do pay taxes or fees based
on casino winnings. In Connecticut, for ex-
ample, the two Native American casinos pay
25% of their slot-machine winnings to the
state, essentially for the right to have such
gaming machines in their facilities. (Slot ma-
chines were not already legal in Connecticut
before the authorization of gaming at Native
American facilities.) Together, the two casi-
nos’ slot-machine winnings now total more
than $1 billion annually.
Different stakes for different states
Reflecting diverse state regulations and
strategic opportunities, there is considerable
variation in the appearance, scope, and loca-
tion of the new casinos popping up around
the United States.
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Some waterborne gaming projects have
more related land-based infrastructure (such
as garages, hotels, and entertainment facili-
ties) than others. In general, when a sizable
investment has been made in relatively per-
manent structures, a company is less likely to
sail its gaming vessel to a new site.
In states that recently have legalized casi-
nos, various projects have been developed in
stages. A boat or barge with a gambling
facility can be opened relatively quickly. Sub-
sequently, if conditions seem favorable and
financing is available, a company can enlarge
its gaming space and add related facilities
such as hotel rooms. The development of
lodging capacity helps casinos attract visitors
who stay for more than a day.
Most of the early US casino boat projects
did not include hotels. However, Standard &
Poor’s sees regulators and localities now
putting more emphasis on encouraging new
facilities that provide hotel rooms and other
amenities. This should favor financially
stronger companies that can better afford
such investments.
Gaming markets: standing out in a crowd
As both the new and traditional gaming
markets have seen several new players, many
operators are trying to differentiate their
casinos. Casino floors, with their slot ma-
chines and table games, tend to look alike.
Therefore, operators need to find ways to
make each facility seem interesting and at-
tractive to customers.
Developing special themes and attractions
are ways to differentiate one casino/hotel
from the next. For example, the world-
famous Las Vegas Strip includes gaming pro-
jects that are intended to evoke such varied
settings as ancient Egypt, present-day New
York City, a pirate ship, and a medieval castle.
Some gaming companies, such as Harrah’s
Entertainment Inc., are trying to develop
strong brand recognition among consumers.
Other firms put more emphasis on the dis-
tinctiveness of individual properties. Another
strategy is to emphasize strong locations. In
general, proximity to interstate highways and
major population centers provides a signifi-
cant advantage for new gaming facilities. For
a gaming project to be visible from a well-
traveled road is an added bonus.
Some casinos are focusing on particular
groups of customers. For example, Boyd
Gaming Corp. has sought to attract resi-
dents of Hawaii, including focusing on
travel agents in the state and operating six
charter flights from Honolulu to Las Vegas
each week. As a result, 67% of guests at
the California casino in downtown Las
Vegas are Hawaiian, as are more than half
the guests at the company’s Freemont and
Main Street Station casinos. Other Las
Vegas facilities emphasize attracting local
residents to their casinos.
Some casino/hotels target high-stakes
players, particularly those who will wager
large sums at table games. Because such
players can win or lose millions of dollars
during a visit, particularly while playing bac-
carat, there can be pronounced short-term
fluctuations in the revenue and profit levels
of such casinos.
Finally, some casino facilities, such as
those in Laughlin, Nevada, are weighted
primarily toward slot-machine activity.
Paying to play
Casinos’ popularity is enhanced by the
significantly better payouts they give players
compared with other forms of gambling.
MGM Mirage says it typically keeps about
20% of monies wagered on table games such
as blackjack and 7% of money gambled in
slot machines. Casinos in large casino mar-
kets such as Atlantic City and Las Vegas
often advertise that their slot machines pay
back to gamblers more than 90% of the
money wagered.
Such comparisons are somewhat mis-
leading, however, because winnings are put
back into play (or “recycled”) in casinos
much faster than they are in other activi-
ties. Thus, a casino has more opportunities
to win from a customer. This largely offsets
a casino’s lower retention rate from the
total amount bet.
To generate business for their casinos,
operators of gaming facilities provide billions
of dollars’ worth of complimentary rooms,
food, beverages, coins, and other items every
year. The value of such giveaways can vary
widely between properties. A casino/hotel
that hopes to attract a greater number of
high-rolling customers is more likely to give
away free rooms. In Atlantic City, where
casinos also seek to entice lower-stakes gam-
blers who do not generally stay overnight,
rolls of quarters are a big item.
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Wagering at gaming tables and slot ma-
chines in the two highest-revenue US gaming
areas — Atlantic City and the state of Neva-
da — totaled roughly $455 billion in 2006,
according to Standard & Poor’s estimates.
However, this does not represent the total
amount of dollars that came out of gamblers’
wallets; most of the wagering is money that
comes from a customer’s winnings in the
course of play. An estimated $437 billion
of the total wagering in 2006 went back to
gamblers, with casinos in Nevada and
Atlantic City winning about $18 billion.
Although long-term odds favor the casino,
the fact that gamblers can bet quickly and
repeatedly — often with these recycled
funds — is part of casinos’ appeal.
Slots prove popular — and profitable
Slot machines are a major revenue genera-
tor for the gaming industry. We believe that, in
2006, about 69% of total gaming revenues in
Atlantic City and Nevada came from coin- or
ticket-operated machines, up from 53% in
1987. Slot machines in Atlantic City receive
much greater volume, but those in Nevada
likely give gamblers significantly better odds.
We believe that Nevada machines, on average,
retained about 5.7% of the amount fed into
them, while the win percentage in Atlantic
City casinos was roughly 8.0%.
A significant portion of the money or to-
kens fed into a slot machine consists of win-
nings from the machine itself (i.e., recycled
funds). When these recycled coins are exclud-
ed, we estimate that slot-machine gamblers
lose roughly half of the money that they risk
from their own wallets.
Table games chip in
Casinos win about 18% of the chips that
gamblers purchase for table games. However,
because the same chips are bet repeatedly,
visitors’ table game losses end up as about
2% of the total amount bet.
KEY INDUSTRY
RATIOS AND STATISTICS
Consumer confidence. Measures of
consumer confidence indicate how Ameri-
cans feel about the current economic envi-
ronment and its prospects. If their mood is
positive, they are more likely to open their
wallets. If they are worried about their
financial situation, they are more likely to
postpone or forgo discretionary purchases.
Casino visits and vacation travel, which may
include hotel stays, are commonly regarded
as discretionary expenditures.
One source of information on consumer
sentiment is the Conference Board Inc., a
nonprofit business research organization that
surveys a representative sample of 5,000 US
households to produce a monthly index. In
June 2007, the Conference Board’s consumer
confidence index, which measures both con-
sumers’ attitudes toward current conditions
and their short-term expectations, was at
103.9 (1985=100), down from 108.5 in
May, as concerns were expressed about the
short-term economy. The index level remains
considerably below the peak level of 144.7
reached in 2000.
The lodging industry
Room supply or construction levels.
This information indicates how much new
industry capacity is coming on stream. If in-
dustry supply grows faster than demand, this
may signal trouble for industry revenue and
profit growth.
Lodging industry construction data, mea-
sured in both current and constant dollars,
are available through a federal government
Web site. (See this Survey’s “Industry Refer-
ences” section.) Figures for the number of
new properties or rooms being added may be
found from research firms such as Lodging
Econometrics, Inc., Smith Travel Research,
Inc. (STR), or PricewaterhouseCoopers LLC.
Supply growth, or the net number of new
hotels opening, will increase 1.6% in 2007
and 2.3% in 2008, the highest two-year lev-
els since 2001, according to consulting firm
PricewaterhouseCoopers LLP and research
firm Torto Wheaton Research.
The US Census Bureau provides data
about private lodging construction spending
in its monthly news release Value of Con-
struction Put in Place. Through May 2007,
the seasonally adjusted annual amount of
hotel construction was $28.79 billion, up
69% from the year-earlier period. Keep in
mind that these numbers do not reflect prop-
erties that have been taken out of service. In
addition, as with various industry statistics,
they may be subject to future revision.
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Revenue per available room (RevPAR).
RevPAR is calculated as the number of
rooms available times the occupancy rate
(percentage of rooms occupied), times the
average room price in dollars. It measures
dollars generated in room-sale revenue, on
average, for each room available, both sold
and unsold, on an industrywide basis, as
well as for individual companies, chains,
and properties.
STR reports that the US lodging industry’s
occupancy level was 73.3% in the week end-
ed June 30, 2007, while the average room
rate per sold room was $102.77. As a result,
RevPAR for all available rooms was about
$75.33 ($102.77 times 0.733 — the 77.3%
occupancy rate).
When examining RevPAR, several compo-
nents or questions should be considered. Is
the current dollar level sufficient to bring a
reasonable profit? What is the percentage
change (plus or minus) in overall RevPAR
from the prior-year period? Have costs
changed to a similar extent? Hotels and gam-
ing properties often have additional revenue
sources (such as food, beverages, and casino
winnings) that are not included in RevPAR.
However, if such sources have a material im-
pact on how well the company does, they
should also be considered when analyzing
revenue, cost, and profitability data.
Capitalization rate. The capitaliza-
tion rate is the average weighted rate of re-
turn expected from a hotel property. It
typically combines the cost of debt (e.g., a
mortgage, for which the lender charges a
certain interest rate) with the expected re-
turn on equity capital. The capitalization
rate is likely to be applied when the pur-
chase of a property is being contemplated
or financed, or when the property’s value is
being calculated.
For example, a property on the market
for $5 million might be 75% financed by
debt, at an interest cost of 9%. The re-
maining 25% of the property’s cost might
come from equity capital, for which a 15%
return is sought. Thus, the capitalization
rate is 0.75 x 0.09, plus 0.25 times 0.15,
which equals 10.5%.
This measure can be used as a discount
rate to estimate the present value of future
cash from that property. In a highly simpli-
fied example, assume the property is expect-
ed to produce $600,000 a year in future cash
flows (earnings before interest, taxes, depre-
ciation, and amortization, or EBITDA). The
value of that property could be computed as
$600,000 divided by 0.105 (cash flow divid-
ed by capitalization rate), or $5.7 million —
considerably more than the $5 million asking
price. However, we would recommend a
more detailed analysis, taking into considera-
tion likely fluctuations in annual cash flows.
It is also important to keep in mind that
future cash flows could differ significantly
from projections.
The gaming industry
Casino revenues. Casino revenues in-
clude the amount of money won by casinos
from various gaming activities, such as slot
machines, table games, and sports betting.
Various sources — an individual facility, a
company, a state, or other entity — report
casino revenues. Composite US numbers re-
flect a total of actual and estimated numbers
from various states or categories. (For recent
annual numbers, see the table entitled “US
casino industry gaming revenues” in the
“Current Environment” section of this Survey.)
Monthly information for casinos in indi-
vidual states is available from local regulato-
ry groups, such as the Nevada Gaming
Control Board. The kind of information pro-
vided varies by jurisdiction. Some states
track revenues for each casino (excluding
Native American facilities) and publish a
statewide total. At least one state (Nevada)
provides information on a regional and
statewide basis, though not for individual
gaming facilities.
Information may also be found in indus-
try newsletters and magazines and, increas-
ingly, on Internet sites maintained by various
states. (See the “Industry References” section
of this Survey.) Statewide figures can be af-
fected significantly by changes in the number
of casinos operating during a given period or
in the regulatory environment.
Composite casino revenue numbers for
the entire US gaming industry are likely to be
estimates, because precise numbers generally
are not available for various casinos on
Native American land. In addition, some
data may include gaming revenues from
noncasino locations, such as coin-fed ma-
chines at racetracks or bars.
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Visitor levels. Because much of the
gambling at US casinos is done by people
who live in other areas, it can be helpful to
know how many out-of-town visitors a
particular gaming market is attracting.
Estimates, if not actual statistics, may be
available from regulatory groups such as the
Las Vegas Convention and Visitors Authority
(LVCVA).
For example, visitors to the Las Vegas
area totaled 12.94 million in the first four
months of 2007, up 0.6% from the compa-
rable year-earlier period, according to the
LVCVA. In all of 2006, 38.915 million visit-
ed, a 0.9% increase from 2005.
Value of casinos’ complimentary items.
This number indicates the value of items —
such as rooms, food, and drink — that gam-
ing companies give away to customers. For
some gaming markets, composite income
statements (including information on compli-
mentary items) are made available for groups
of casinos. This information often comes
from regulatory groups such as the Nevada
Gaming Control Board and the New Jersey
Casino Control Commission. For an individ-
ual company, financial documents filed with
the US Securities and Exchange Commission
may include the total value of complimentary
items provided at all of the company’s gam-
ing facilities.
If the value of complimentary items is in-
creasing as a percentage of casino winnings or
total revenues, it may indicate that the cost of
attracting gaming customers is on the rise. In
the gaming industry, reported gross revenues
typically include the value of complimentary
items, while net revenues exclude them.
Information on complimentary items is of-
ten available from individual companies.
Sometimes, the retail value of complimentary
items may be noted as “casino promotional
allowances.” In 2006, for example, Harrah’s
Entertainment Inc. reported promotional al-
lowances for such items totaling $1.71 bil-
lion, or about 21.8% of the $7.87 billion in
casino winnings reported on its income state-
ment. Harrah’s also said that the estimated
cost of supplying these complimentary items
in 2006 was $787.2 million.
Hold percentage. This number indi-
cates the percentage of customers’ gambling
dollars that are won by casinos. For exam-
ple, if a gambler buys $1,000 worth of chips
to play blackjack and walks away from the
table with $850 in chips, the casino’s “win”
is $150, and its “hold percentage” is 15%
($150 of $1,000). (Chips purchased by gam-
blers, of which the casino generally ends up
winning a percentage, are sometimes referred
to as “table drop.”)
Typically, the hold percentage is available
as an aggregate of all the casinos in a given
gaming market. Occasionally, however, it
may be disclosed for individual gaming facili-
ties or for all facilities operated by a particu-
lar company.
Hold percentage indicates whether a mar-
ket (or casino or casino group) has been par-
ticularly lucky or unlucky during a specific
period. A sizable fluctuation in the hold per-
centage is more likely to occur in casinos
that emphasize high-stakes games (such as
baccarat) versus lower-stakes activities (such
as blackjack or slot machines).
Sources for hold percentage information
include state regulatory groups, industry
publications, and the companies themselves.
Gaming taxes. When looking at a casi-
no company, it is important to know what
type of tax obligations it is likely to face.
These include prospective state fees and/or
taxes on gaming revenue, which can range
from less than 10% to more than 20% of
casino winnings. Keep in mind that tax levels
can change, which could affect the profit
outlook for a casino. Information related to
tax levels in various gaming markets can be
LAS VEGAS OVERVIEW
VISITORS CONVENTION ATTENDANCE HOTEL/MOTEL ROOMS
YEAR MIL. % CHG. MIL. % CHG. TOTAL % CHG.
*2007 12.9 0.6 2.8 0.2 133,082 0.7
*2006 12.9 1.4 2.7 2.4 132,176 (1.2)
2006 38.9 0.9 6.3 2.3 132,605 (0.4)
2005 38.6 3.2 6.2 7.7 133,186 1.3
2004 37.4 5.2 5.7 1.2 131,503 0.8
2003 35.5 1.3 5.7 10.8 130,482 2.9
2002 35.1 0.2 5.1 1.8 126,787 0.1
2001 35.0 (2.3) 5.0 30.1 126,610 1.9
2000 35.8 6.0 3.9 2.1 124,270 3.3
1999 33.8 10.5 3.8 14.3 120,294 10.0
1998 30.6 0.5 3.3 (6.2) 109,365 3.8
1997 30.5 2.8 3.5 6.5 105,347 6.3
1996 29.6 2.2 3.3 13.0 99,072 10.0
*Through April.
Source: Las Vegas Convention and Visitors Authority.
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found in corporate filings (e.g., annual 10-K
filings) with the Securities and Exchange
Commission, and at Web sites of government
regulatory bodies. (See the “Industry Refer-
ences” section of this Survey.) Proposed
changes in tax levels can be monitored
through newspaper and magazine reports
and, at times, through company news releases.
HOW TO ANALYZE A LODGING OR
GAMING COMPANY
A number of qualitative and quantitative
factors should be considered when evaluating
a lodging or gaming company.
Qualitative issues
It is important to consider how well a
company is positioned and managed. In
doing so, questions to ask include: How
big is the company, and does it exploit the
potential advantages of being either large
or small? Can it raise the capital needed to
maintain its operations and to grow? Has
the company differentiated itself from its
rivals in ways that give it a competitive ad-
vantage? What is the likelihood that other
companies will turn up the competitive
heat in its particular markets?
We also advise considering whether a
lodging or gaming business is likely to be
viewed as providing good value to customers.
The perception of value should influence the
number of repeat visits that a property re-
ceives and what types of recommendations
are passed on to other people. However, low
prices and giveaways also can have an ad-
verse impact on profitability. Thus, if aggres-
sive pricing or marketing is being used to
woo customers, we advise looking at whether
prospective volume or market share gains are
sufficient to make this a good strategy.
These and other questions can be addressed
by examining the following factors. Some of
these issues are also factored into quantitative
measures, which are discussed afterward.
Location
Important considerations include a hospi-
tality business’s site selection and its proximi-
ty to population centers and transportation
networks. Easily accessible and visible loca-
tions (e.g., those at airports or next to heavily
trafficked highways) offer convenience, which
can be the deciding factor in where a traveler
stops. For resorts, the proximity of attractive
beaches or ski slopes can be a deciding factor.
Different companies that cater to different
consumers approach locating a new property
differently. Some pay top dollar for only
the most prime locations, while others are
satisfied with lower cost locations that en-
able them to operate at lower price points.
Offsetting factors can diminish the impor-
tance of location. These might include price,
as well as the presence (or absence) of nearby
competitors and/or such amenities as a pool
or business center.
Hurricane activity in 2005, especially in
southern Mississippi and Louisiana, provided
a reminder that some locations may be espe-
cially vulnerable to bad weather. A number
of lodging or gaming properties were dam-
aged and closed due to hurricane activity
that year.
Geographic diversity
We advise looking at the geographic mix
of a company’s business. A relatively narrow
geographic focus may heighten its sensitivity
to changes in local and regional conditions,
including economic and regulatory factors.
Some US companies have expanded over-
seas in the pursuit of markets that are less ma-
ture or developed than those in the United
States. We note, however, that foreign markets
may include different consumer behaviors and
expectations, and different economic and
regulatory environments.
Brand names
For chains, the value of company brands
depends on several factors, including how
the brands are perceived by consumers and
how successfully shared services such as na-
tional advertising are administered. However,
even nonchain properties can create valuable
brand equity, as in the case of a unique re-
sort that gains recognition for its ambiance
and amenities. Meanwhile, hotels that are
part of a chain still may cultivate an image
of uniqueness.
Theme properties
In the gaming industry, operators have
developed theme properties to differentiate
themselves. A distinctive look often helps to
attract visitors, particularly in the first year
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