by Andrew MacDonald and William R Eadington
THE CASE FOR INTEGRATED RESORTS
By Andrew MacDonald and William R Eadington
THE EVOLUTION OF THE CONCEPT OF “INTEGRATED RESORT”
One of the latest buzzwords that has come into general usage in the world of legal gambling is that of “Integrated Resorts” (or “IR’s” as they are sometimes known). The notion of Integrated Resorts came into prominence with the bid process for the two Singapore Casino licenses. The Singaporean government as early as 2004 made it quite clear that what they did not want was “just” casinos or resort facilities dominated by their casino operations, so they mandated that only a very small proportion of the actual physical facilities would be for casino utilization. The rest would be support facilities and consumer oriented amenities that would dominate the developments. The Singapore authorities therefore set up a licensing structure that mandated that less than ten percent of the gross floor area would be for casino use – the rest would be for hotels, theatres, convention centres, theme parks, museums, retail, and food and beverage offerings.
The concept of Integrated Resorts is in reality nothing new in the world of gaming. Singaporeans were requesting international world class developments combining elements already found in other major casino developments such as the Crown Entertainment Complex in Melbourne, Australia; The Venetian and Palazzo in Las Vegas; The Atlantis on Paradise Island in the Bahamas; Genting Highlands outside of Kuala Lumpur in Malaysia; or the Grand West Casino in Cape Town, South Africa, just to name a few.
At present, many operators claim to have the first Integrated Resort in their region, but arguably the mid-20th century Nevada developer Jay Sarno can lay claim to the distinction of being the first to establish this type of facility. Caesars Palace - which Sarno opened in 1966 - ushered in a new era for Las Vegas casino facilities. Caesars acted as a critical catalyst for the more diversified styles of casino resorts that were to follow. Sarno built the Circus Circus Casino which opened two years later as a heavily themed family resort which continued the transformation of the Las Vegas Strip and served as an additional model for future developments. Along with Caesars Palace, it brought about a significant shift in the composition and profile of Las Vegas visitors that has continued over the past four decades. While Caesars and Circus were still principally “casinos,” they were no longer just centred on gambling but also offered much more in the way of non-gaming amenities to their guests.
Today’s concept of Integrated Resort has come a long way since those first resort developments. The Mirage in Las Vegas - which Steve Wynn opened in 1989 – had capital costs of around US$630 million. Many Wall Street analysts and other industry observers felt that this was far too ambitious a project to succeed and would never provide a reasonable return on investment. Of course, Steve Wynn proved his critics wrong, as The Mirage demonstrated the attractiveness and revenue generating capabilities of non-gaming amenities to diverse audiences who are interested in more than “just gambling.”
Integrated Resort developments at the present time might cost US$4 billion or more, and include facilities and amenities that create virtual “cities of entertainment.” These new style resorts also change the landscape around them by spurring complementary developments and even enhancing the interest amongst some to have residences in close proximity to them. Thus they can become substantial hubs of economic activity and catalysts for further development.
DEFINING “INTEGRATED RESORTS”
The scale and mix of amenities and assets as well as their ability to act as catalysts that can transform a region’s economy are what makes such developments distinct from traditional casinos and casino-hotel complexes. How should one define an Integrated Resort, and what outcomes can typically be expected when such a facility is developed in a region?
An Integrated Resort is really a euphemism for a very large scale entertainment development based around a casino. The casino component, while physically small, must still act as the primary economic engine which drives overall returns and facilitates investment in other facilities and amenities. Thus the casino element must be of such magnitude and importance that it can generate over half of the development’s annual cash flow. With capital costs associated with Integrated Resorts at, say, US$4 billion, such a facility would need to generate at least US$500 million in EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) to be viable. Even with the casino occupying less than ten percent of the gross floor area, it has the capability to generate a disproportionate contribution to EBITDA so that substantial investments can be made in non-gaming facilities that might not be otherwise sustainable. With the casino as the nucleus, the structure of the rest of the Integrated Resort may be developed. This could include a sizeable hotel development (15 of the 20 largest hotels in the world are affiliated with “mega-casino” projects located within a two mile radius along the Las Vegas Strip) of at least 1,500 rooms and would also likely include significant space for conferences and conventions.
As with any development planned for so many visitors, an array of food and beverage outlets and facilities are needed as complementary amenities. The range and breadth of restaurant and lounge offerings create an even greater magnet effect that can enhance the overall appeal of a venue and allows for even more facilities to be added. Other non-gaming assets that might be considered include cinemas, showrooms, nightclubs, golf courses, spas, wild animal exhibition areas, art galleries, amusement parks, and retail shopping malls. A new trend, yet fully tested, is the integration of mixed-use tourist accommodation units into Integrated Resort complexes, on the belief that a certain proportion of the population will want to live or have second residences in close proximity to such attractions. Thus, many new Integrated Resorts are incorporating apartments, condominiums, time-share units and other residential hybrids to the mixed-use master planning of such developments.
However, to create a modern Integrated Resort, it must be developed proportionate to the demand that can be generated in the market where it is located. It is important to note that most gambling markets are local; they rely on the demand created from within a catchment of about one hundred kilometres drive time. There are, of course, some exceptions to this guideline, such as Las Vegas and Macau, but for the great majority of gambling markets in the world, their primary clientele are local or regional residents.
PLANNING AN INTEGRATED RESORT
In planning an Integrated Resort, there is little point in just putting a pin into a map and drawing concentric circles to determine the number of individuals who live within three, four or five hours flying or driving time of a location. Dropping such a pin almost anywhere in Asia can result in hundreds of millions or even billions of people being located within the area.
Market and feasibility studies are essential in creating the appropriate sizing of any IR development under consideration. Such studies should focus on those segments of the population who have the means and interest to participate in the kinds of resort activities being contemplated. As the primary economic engine, it is important that adequate attention is given to the casino segment and the returns likely to be generated from this portion of the operation. Gravity models that take into account the local population may be essential to determine base-line revenue generation potential and income contributions from the casino. This modelling should take into account
Date Posted: 29-Oct-2008