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Gaming Guru

Rod Smith
 

Cost of Wynn Las Vegas Doesn't Faze Analysts

27 April 2005

LAS VEGAS, Nevada -- Even though Las Vegas developer Steve Wynn is building the most expensive resort ever, few industry insiders and experts are betting against him being able to make a profit on his new megaresort.

At $2.7 billion, Wynn Las Vegas will be the most expensive resort ever built. It also has the highest per-room cost ever at $1 million, exceeding the $775,000 average cost of the Grand Wailea Resort in Maui, Hawaii, previously the most expensive. It also will be more than twice the $415,000-per-room cost of The Venetian, and nearly double the per-room cost of Atlantic City's Borgata ($550,000) and the Strip's Bellagio ($533,000).

While some industry observers question whether Wynn will be able to turn his colossus into a profitable venture, Wynn himself acknowledges the importance of the challenge.

"The responsibility of using capital is much more daunting than getting it. The qualitative and quantitative judgments that you have to make when capital is being used responsibly are far more daunting than raising capital," Wynn said in the weeks leading up to Thursday's opening of Wynn Las Vegas.

Some industry experts, including University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, see pitfalls for Wynn because of the project's cost when compared with those of his competitors' resorts. Still, no one is counting Wynn out, given his track record.

"Yes, (Wynn) may be in over his head, but then he has found ways to survive before," Thompson said.

University of Nevada, Las Vegas history department Chairman Hal Rothman compared doubts about Wynn Las Vegas's future profitability to those surrounding the opening of Wynn's first major resort 16 years ago.

"If you remember the opening of The Mirage in 1989, Wynn needed to make a nut of $1 million a day. Everyone thought he was nuts; 'couldn't be done,' they all said," Rothman said.

But Wynn, who had seven years to pay off his debt, paid it off in 18 months.

"The moral of the story? No one has yet made money selling Steve Wynn short," Rothman said.

Analysts generally view Wynn as something akin to a master magician who has another winner on his hands. But they cautioned that his success will hinge on timing and showmanship.

"Wynn will certainly have something up his sleeve," Rothman said. "He's been building to this since 1989: Mirage, Bellagio, Wynn; the compendium of experiences in the collective memory see this endeavor in ways that no other opening ever has (been seen)."

Deutsche Bank analyst Andrew Zarnett believes the critical difference between Wynn Las Vegas and other projects lies in a formula Wynn first used at the Golden Nugget in downtown Las Vegas and its sister operation in Atlantic City, and that has applied to gaming resorts ever since.

"The key is that Steve developed a formula where nongaming revenues drove gaming revenues. He believes in giving the customer more to do because that will drive gaming revenues more than anything else," he said.

Wynn described it as giving guests "a great place to walk around and see, with attractions that are fun, good shopping, good restaurants, some shows, and if there's gambling, that's good, too. It's another thing to do."

Wynn stresses that the average guest does not get carried away with gambling but will play if it is available.

"That's the average person. It's me. It's you. There's nothing wrong with blackjack, but you wouldn't go anywhere because they've got blackjack. You'd play blackjack because it's someplace you wanted to go," Wynn said.

Simply put, Zarnett said Wynn plans to give visitors more reason to come to his resort than to his competitors' and he's going to have a lot more cash registers ringing up sales than his competitors because of the development's complexity.

He said those differences will undercut any comparisons with noncasino resorts, such as Grand Wailea, because the absence of gambling at the Maui eliminates a large revenue stream.

Instead, Wynn Las Vegas should be compared with The Venetian, Bellagio and Borgata, Zarnett said, which fall short in sizzle, precisely because of the money that is spent on other amenities to increase the demand and cachet at those resorts.

Rothman said Wynn operates on a different plane than those competitors.

"Wynn is an idea guy. ... As a result, his amenities have always had the ability to excite in ways that other properties have yet to match," he said.

Zarnett said by increasing excitement and demand, Wynn will be able to command higher room rates, higher restaurant covers, higher ticket prices for shows, more expensive retail prices and higher charges at the spa.

For example, Deutsche Bank analyst Marc Falcone estimates that Wynn Resorts Ltd. is booking rooms at a 10 percent to 15 percent premium to the market so far, with average daily rates of $300 to $330 through November. That is above his earlier estimates of $230 daily room rates.

In addition, the dining and retail outlets are largely owned by Wynn Resorts, with a profit-sharing component for the operators, said Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm.

The exception to the owner-operator scheme is the Ferrari/Maserati dealership, which Wynn will operate with a partner, he said.

Another ace Wynn has up his sleeve, which he did not have at his previous resorts, is a low cost of capital, lower than any other recent development in Las Vegas.

Zarnett estimated Wynn is paying a blended rate of 6.75 percent to bring the multibillion-dollar project to market.

He also compared Wynn Las Vegas with Borgata, the newest resort in Atlantic City.

The Borgata, a joint project of Boyd Gaming Corp. and MGM Mirage with 2,000 rooms, is throwing off about $220 million in earnings before interest, taxes, depreciation and amortization, a key measure of profitability.

By comparison, the 2,700-room Wynn project should be able to generate more than $300 million in EBITDA, which would represent approximately a 15 percent return on the adjusted cost of the resort, "just to do as well as the Borgata."

Zarnett added the resort's $2.7 billion price tag exaggerates its cost because it includes the start-up costs and land acquisition for later phases of the development Wynn plans for the former Desert Inn site.

"When the guy has a cost of capital in the high 6 percents, that's a pretty attractive return on investment, Zarnett said.

Falcone, taking the adjusted cost into account, is even more optimistic.

"While initial staffing levels will be high, with 9,500 full-time employees, we believe management will yield margins much quicker than other new properties, Falcone, leasing to EBIDTA estimates of 26.4 percent in 2005 and 30.6 percent in 2006.

Zarnett estimated that Wynn's recently announced second megaresort, Encore, will bring the number of rooms and suites to about 4,700, significantly cutting the cost per room for the overall project and increasing the company's earnings after it opens in 2008.

Applied Analysis' Gordon estimated the average cost per room when the second resort is done will drop to $820,000. That represents almost a 20 percent reduction in cost, although it would still leave the project at the top of the heap among competing hotels.

However, it is also higher than the original $1.95 billion cost estimate, or $720,000 per room.

Wynn Resorts spokeswoman Denise Randazzo said the main items behind the $750 million cost increase are the addition of 18 fairway villas, the Avenue Q showroom, an employee parking lot on Koval Lane and the purchase of serveral golf course lots.

Beyond cutting the initial per-room cost with Encore, Thompson said Wynn probably has contingency plans in the event his numbers don't meet expectations.

Such contingencies could include building additional towers, which Wynn hinted at when he bought the Desert Inn property five years ago; borrowing added capital or issuing additional stock; leasing or selling portions of the former Desert Inn site; or selling part of his interests in Macau or Singapore, he said.

"I'm sure he doesn't think that way, but I don't think he's ever sold any property in the past in a completely voluntary way, although he told me that he put the deal to (Kirk) Kerkorian (to sell Mirage Resorts) and Kerkorian took his price," Gordon said.