Written by Lyle Hall, Hall Hospitality Advisors

Casino gaming has been one of the fastest growing entertainment products of the past decade not only in Canada but also in the United States and internationally. More than seventy five casinos and �racinos� (i.e., slot machines at racetracks) currently operate in Canada with several others either under construction or renovation/expansion. Casino gaming (including racinos but excluding all other forms of gaming such as lotteries and bingo) generated $6.2 billion in Canada last year, an increase of more than 50% in just the last four years.

Consumer acceptance of gaming as an entertainment alternative has seen sustained supply growth. By the end of 2005, all Canadian provinces except Newfoundland and New Brunswick will offer some form of casino or racino product. But as gaming supply continues to grow so does the need to differentiate one gaming site from another, a process often addressed through the addition of non-gaming amenities such as food and beverage, retail and entertainment offerings and in a growing number of instances, hotels.

New hotel supply in Canada has increased at a relatively modest rate since the mid/late 1990s, on a national average not much more than 2% per annum.  However, the number of hotels built in association with, or to support a casino, is growing. Since 1996, some seven casino hotels offering more than 2,300 rooms have opened in a variety of urban and resort settings. Another four hotels with 680 rooms are under construction while at least four others (600 plus rooms) are in the planning and/ or approval stage. And, of course, these numbers do not include new rooms in markets like Niagara Falls, that were built to support the influx of gaming visitors.

The situation in the United States is, arguably, even more aggressive. Leaving aside established overnight gaming destinations like Las Vegas, Atlantic City and the Gulf Coast of Mississippi, hotel accommodation is rapidly becoming �table stakes� at new and existing casinos everywhere from urban destinations to First Nations� on-reserve casinos and even to one-off racinos. In fact, racino and more remote casino projects have been among the most aggressive in the development of non-gaming amenities such as Dover Downs, Delaware (232 rooms and 25,000 sq ft meeting/ entertainment centre), Mountaineer Park, West Virginia (2 hotels with 360 rooms and entertainment centre) and Hollywood Casino Shreveport, Louisiana (450 rooms, four restaurants and meeting space).

Why the interest in such amenities, particularly hotels? Simply put, hotels create an ability to extend the marketing reach of the casino beyond the resident population. Packaged with food, beverage and/or entertainment offerings a casino visit can be transformed into a weekend or other short-term getaway. Typically, the more remote the casino location and/or the more reliant on visitors from outside the market area, the more likely is a casino to offer hotel accommodation (either on site, or in conjunction with arms-length providers).

In those jurisdictions where regulations permit, the casino operator can use the offer of free overnight accommodation as part of the marketing package to entice regular gamblers back to the casino. The practice of �comping� rooms (as well as meals and entertainment) is an established casino marketing approach but the degree to which it is permitted in Canada varies considerably by jurisdiction.

The interest by casino operators in developing or co-locating with a hotel is typically a function of several factors, including the permissibility of comping.  Where comping is permitted, the casino operator will want more control of the hotel and other non-gaming assets, as the �revenue line� of these amenities is essentially the �marketing expense� line of the casino. This doesn�t necessarily imply a lack of opportunity for third-party management, but does greatly reduce the prospect of shared profitability.

Other factors include:

• The degree to which the casino relies on local demand. Where a casino is able to achieve strong utilization from the immediate area, the need for overnight accommodation is limited. In some cases (e.g., Casino Regina), non-gaming amenities have focused on entertainment venues which are capable of generating demand from outside the market area but which can be accommodated at existing local hotels. In others, such as Foxwoods and Mohegan Sun in Connecticut, the remoteness of the destination required overnight accommodation to service some demand.

• Competitive pressures. In monopoly environments, the need for product differentiation is much less pronounced than in extremely competitive markets.

• Source of capital and revenue sharing with government. Is the compensation structure attractive enough to motivate the private sector (where allowed) to finance and operate a hotel?

In British Columbia, Alberta and Nova Scotia private-sector companies are contracted to the Crown Agent to build, finance and operate casino/racino venues as well as any non-gaming amenities. In these jurisdictions, a �commission� on gaming revenue is paid by the province, to compensate for capital and operating costs. Ontario is a hybrid where the private sector provides management services in some cases (i.e., Niagara Falls, Rama, Windsor, Great Blue Heron) and the Crown Agent in others (i.e., slots at racetracks and charity casinos).
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A sure bet for the future though, is continued growth of gaming supply supported by a range of non-gaming amenities such as hotels, as interest in this entertainment alternative swells.

Q1 2005 TRANSACTION SUMMARY

There was tremendous hotel transaction activity in first quarter 2005. While the number of trades increased from 12 (Q1 2004) to 24 (Q1 2005), the most notable change was volume, increasing ten-fold from approximately $75 million to some $771 million (including strategic acquisitions). In fact, Q1 2005 volume more than doubled the total transaction volume reported in 2004 of $372 million. When strategic acquisitions are removed, the average price per room increased by 69.2% from $46,200 in Q1 2004 to $78,200 in Q1 2005. With more than one-third of the hotels trading in excess of $90,000 per room in Q1 2005, the average price per room is some 22% to 28% above the annual price per room reported in 2003 ($61,300) and 2004 ($63,900).

We anticipate activity will remain strong throughout 2005, estimating aggregate volume to exceed $1 billion. This surge in activity is fuelled by the abundance of capital in the market, a sustained low interest rate environment and growing demand for hotel product by a wide variety of investors, including private investors/high net worth individuals, international capital sources, opportunity and pension fund advisors, REITs and other public companies.