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How JKH benefits from the Casino License?

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DeepFreakingValue

DeepFreakingValue
Manager - Equity Analytics
Manager - Equity Analytics

How JKH benefits from the Casino License? Bup_df10

Cinnamon Life Integrated Resort is the first integrated resort in Sri Lanka and the largest private investment in the country. Sri Lankan-British architect, Cecil Balmond designed the resort while Hyundai Engineering & Construction is the main contractor. The construction of the resort began in 2014. All the buildings in the resort topped off in May 2019. Even though the resort was originally planned to be completed by 2018, the project got delayed several times due to various reasons. John Keells started handing over keys to the suites apartments in August 2021. With handing over of residential and commercial units, revenue recognition started at Cinnamon Life. The remainder of the project is scheduled to be launched in a phased manner, in the first half of 2023, which will result in the generation of significant recurring cash flows for the Group once operations ramp up..

On completion, this project will include an 800-room, 1.4 million sq ft luxury hotel featuring 170m long corridors and a 16.5m high car park in an area of 820,045 sq ft.

"JKH will not operate themselves. In the Cinnamon Life complex in the area connected to the hotel, there is a space of about 165,000 square feet over three floors. One floor is over 100,000 square feet which we intend to rent out as a casino operation. We have been asking that the government introduce regulations and formally license casinos so that we can rent out the space to an operator.” JKH Chairman Krishan Balendra said.

JKH is expected to get rent and a share of the profits of the casino, in addition to higher occupancy for its 800 room hotel and more patrons for the mall.

JKH is expected get a rental income of around 2 dollar per square feet and around 10 percent of profits which will increase to 25 percent by 2030.

The operation expected to bring 7.1 million US dollars to JKH revenues in the first year of operation.


How JKH benefits from the Casino License? Scree148

427 – total number of apartments in the two residence towers
170m – length of typical hotel corridors
8 – number of restaurants in the hotel, excluding bars
85 – number of elevators
25 – number of escalators
48 – number of floors in The Residence tower
153m – height of tallest building
16.5m – height of car park
47m – length of supported cantilever
25m – length of unsupported cantilever
1.4 million sq ft – total area of the hotel

Revenue recognition at 'Cinnamon Life' commenced during the year with the completion and commencement of the handing over of the residential and commercial units. The remainder of the project is scheduled for commencement of operations, in a phased manner, in the first half of the calendar year 2023.

Hotels affiliated with casinos operate in a different manner from typical, non-casino properties. The hotels are primarily ancillary facilities – they exist to serve casino patrons and boost casino demand.

CAL Research in a note to clients said a 5-star hotel in an integrated resort usually earns 50 percent more room rents than a stand alone one. Cinnamon Life is expected to open in the first half of 2023 and the casino in 2024.

JKH is expected to get rent and a share of the profits of the casino, in addition to higher occupancy for its 800 room hotel and more patrons for the mall. Cinnamon Life will transform Colombo as a leisure and entertainment destination for the region, and lead to substantial foreign exchange earnings for the country.

Opening of integrated resorts in Asian destinations like Singapore and Manila resulted in a surge in tourist arrivals. Sri Lanka is close to India and there are no integrated resorts in India or the rest of South Asia. Cinnamon Life is a game changer.

Sri Lanka has gazetted rules to issue five year gaming licenses for 500 million rupees. An operator could apply for a 20 year license with a pre-payment.

https://economynext.com/sri-lankas-jkh-to-up-tourism-game-by-striking-deal-with-casino-operator-100060/

Cinnamon Life

The Cinnamon Life project’s hotel and mall are expected to act as a catalyst for the growth of MICE tourism in the broader Colombo region. The project has already earmarked space to be operationalized by another entity as a gaming centre. Internal estimates by John Keells Holdings (JKH) suggest that though currently there is an over-capacity of room inventory in the Colombo region, given the advent of a single big conference there would be a shortfall in room inventory.

JKH Chairman Krishan Balendra when asked about Cinnamon Life’s casino reiterated the company’s long-term position. He said, “We will not operate it ourselves. It is not a business that we are in. In the Cinnamon Life complex in the area connected to the hotel, there is a space of about 165,000 square feet over three floors. One floor is over 100,000 square feet which we intend to rent out as a casino operation. We have been asking that the government introduce regulations and formally license casinos so that we can rent out the space to an operator.”

Hotels affiliated with casinos operate in a different manner from typical, non-casino properties. The hotels are primarily ancillary facilities – they exist to serve casino patrons and boost casino demand. Although, along with other ancillary facilities, they may be designed to be attractions in themselves, they are specifically intended to attract people to spend time and money in the casino.

As a result, casino hotels do not necessarily compete for the lodging demand present in the market area for other reasons. While in many cases such demand may be valuable, at times it is, in fact, counterproductive, supplanting potentially more lucrative casino patrons. This situation is not limited to casino hotels. Hotels catering to corporate business face the same problem in housing conventions, while for convention hotels the converse is true.

Because casino hotels are designed to attract gaming patrons, their primary competitors are other casino hotels, and their success is inextricably tied to the success of the gaming operation. Rooms may be offered at discounted rates, or, for the most lucrative patrons, "comped" entirely. Consequently, the available demand base can be expanded to improve competitive occupancy levels until the point that the incremental gaming revenue generated by the hotel patrons is no longer sufficient to justify greater discounts.

What Does the Hotel Get from a Casino?
The standard measure of hotel revenue performance is REVPAR (Revenue Per Available Room). While the acronym is not specific, the “revenue” to which it refers is room revenue – more on that later. Mathematically, REVPAR is simply a multiplication of the average occupancy level times the average room rate per night:

Occupancy (%) x Average Room Rate ($) = REVPAR


As you can see, changes in either the occupancy level or the average rate can affect the REVPAR. For example, a hotel that charges $100 per night and has a 50 percent occupancy level has a REVPAR of $50. However, a hotel that charges $50 per night and gets 100 percent occupancy because of the cheaper rate also has a REVPAR of $50. The trick is to find the right rate to charge within that range to get the right balance of occupancy level to maximize the REVPAR.

The relationship is never inversely linear. For instance, if the same hotel charged $75 per night it might get an occupancy level of 75 percent, which would actually yield a higher REVPAR than either of the previous to alternatives, $56.25. But it might only get an occupancy level of 65 percent, yielding a lower REVPAR of $48.75, or perhaps it might even get a higher occupancy and REVPAR. It all depends on the elasticity of demand in the market and the rates and quality levels at competitors.

REVPAR only focuses on room revenue. That is because a typical hotel generates the majority of its revenue and the vast majority of its profits from the sale of the rooms. Revenue from other areas – restaurants, banquet halls, gift shops and the like – accounts for a smaller percentage, even when all added together, and typically yields a much lower profit margin. In this way, a hotel is like a casino, and the rooms are the slot machines – most of the revenue and even more of the profits come from them.

But when a hotel is part of a casino, owned and operated by the same entity, the hotel guests can reasonably be expected to generate additional revenue within the casino, revenue that is much more valuable proportionally, and generates a much higher profit margin than anything in a non-casino hotel beyond the rooms themselves. Indeed, for a casino hotel, its like selling one room for the price of two, or even more.

Casino hotels typically generate between $150 and $500 per occupied room per night in incremental gaming revenue for the casino, with most falling in the $200 to $400 range. Thus, if a casino hotel rents a room for $100 night and gets anoccupancy level of 75 percent, instead of a REVPAR of $75, it generates the equivalent of between $150 to $375 per night in REVPAR with the incre- mental gaming win taken into account. While the incremental gaming revenue goes on the casino’s portion of the income statement rather than the hotel’s, the complex as a whole benefits as if the hotel was charging three or four times its actual room rate.

That is why it makes sense to dis- count, or even “comp” entirely the room to a higher value gambler. Even if you deduct the $100 that would have been paid to rent the room, the complex is still anywhere from $100 to $300 ahead of where they would be if they simply sold the room at full fare to someone who did not gamble. The difference is shown graphically in the figure at right.

http://www.klasrobinsonqed.com/wp-content/uploads/2019/03/IGMag201810_Klas.pdf

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