Apr. 27, 2005
Copyright © Las Vegas Review-Journal
Cost of Wynn Las Vegas doesn't faze analysts
Resort likely to profit despite $2.7 billion price tag
By ROD SMITH
GAMING WIRE
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).
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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.
WYNN LAS VEGAS A COSTLY ENDEAVOR
Las Vegas resorts Cost per room Year built Cost to build Rooms Wynn Las Vegas $1,000,000 2005 $2.7 billion 2,700 Palms $589,000 2001 $268 million 455 Bellagio $533,000 1998 $1.6 billion 3,000 The Venetian $415,000 1999-2003* $1.7 billion 4,036 Paris Las Vegas $269,000 1999 $785 million 2,916 Mandalay Bay $257,000 1999 $950 million 3,700 The Mirage $249,000 1989 $750,000 3,014 MGM Grand $200,000 1993 $1 billion 5,005 New York-New York $165,000 1997 $350 million 2,119 Treasure Island $148,000 1993 $430 million 2,900 Luxor $136,000 1993 $600 million 4,408 Monte Carlo $107,000 1996 $325 million 3,024 Excalibur $65,000 1990 $250 million 3,850
*Including new tower expansion.
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The hotel stands nearly fifty stories above the Las Vegas valley, with a 180-foot tall mountain in front of the main entrance.
The world's most expensive hotel-casino ever has opened in Las Vegas, Nevada. The casino, which was designed and built over a period of five years, cost US$2.7 billion to construct. The hotel stands nearly fifty stories above the Las Vegas valley, with a 180-foot tall mountain in front of the main entrance.

Numerous lavish touches contributed to the high expense of the development. The sign in front of the Wynn property has an unusual mechanical design, with a large piece containing the ''Wynn'' logo, which can move vertically up or down as different announcements are presented.

"I think it's going to start a shift of power. It's been the south for a long time. Things will start moving to the north because of Wynn Las Vegas, Sheldon Adelson with the expansion of the Venetian, the New Frontier -- that whole area will become the new hot area of Las Vegas for the next decade or so," gaming expert Anthony Curtis told ''Las Vegas KLAS TV''.

As the property opened to the public, developer Steve Wynn greeted visitors at the front entrance.

"It's always fascinating to watch people enter the thing and get their first moment after we open the doors," Wynn told the ''Las Vegas Review-Journal''.

===Concern about the cost===

Analysts are not too concerned about the cost of the Wynn development. Wynn paid off the cost of ''The Mirage'' hotel-casino in 18 months, much earlier than the planned seven years for which the debt had been scheduled for repayment.

"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," Las Vegas history department Chairman Hal Rothman told the ''Las Vegas Review-Journal''.

Wynn sold his interest in Mirage Resorts to MGM Grand (which became MGM Mirage and is now run by Kirk Kerkorian) for US$6.4 billion back in 2000, then turned around and purchased the property for the Wynn hotel-casino for US$275 million. The property was previously the home of the Desert Inn.

The hotel has 2,359 rooms, and a few hundred deluxe suites and "parlors" for high rollers. The casino has 1,960 slot machines and 137 table games on a 111,000 square foot casino floor. A Ferrari-Maserati dealership and the ''Le Reve'' stage show, featuring a million gallon water tank, round out the expensive offerings.

A round of golf will go for US$500 on the elaborate golf course located behind the main building.

All of these specifications add up to a record construction cost of over one million US dollars per room. Other expensive Las Vegas properties cost a fraction of the price, such as the Bellagio, which cost half the price at US$533,000 per room. The most expensive hotel property in the world was previously the Grand Wailea Resort in Maui, Hawaii, which cost US$775,000 per room.

"Yes, (Wynn) may be in over his head, but then he has found ways to survive before," Las Vegas professor Bill Thompson told the ''Las Vegas Review-Journal''.

===Reaction from the competition===
The ''Le Reve'' stage show features a million gallon water tank.
Several of Wynn's largest competitors spoke with admiration of the property and looked forward to its impact on Las Vegas.

"I've never understood the hand-wringing about something new, especially in Las Vegas and Atlantic City," Harrah's Chairman and CEO Gary Loveman told the ''Las Vegas Review-Journal''.

Other casino bosses from the Mandalay and the MGM Mirage had positive comments as well, hoping to pick up some new business from the development.

"It's a positive in terms of bringing more visitors," Mandalay Resort Group President and CEO Glenn Schaeffer told the ''Las Vegas Review-Journal''.

"Steve will build a great property and bring new people to town. If we're doing what we're supposed to be doing, then we'll pick up some of that business also," MGM Mirage Chairman and CEO Terry Lanni told the ''Las Vegas Review-Journal''.

===Reaction from the public===
Thousands of visitors gathered for hours in front of the property before it opened. Security guards had to monitor the number of visitors entering the building.

"I think it's spectacular," David Schwartz, coordinator of the Gaming Studies Research Center at the University of Nevada Las Vegas told ''Reuters''.

"People were pushing and shoving," Las Vegan Kathie Anderson told ''Associated Press''.

"There is nobody in the world who creates such entertaining and beautiful casinos," British billionaire Richard Branson told ''Associated Press'' from the casino floor. "I would say every other casino must be nervous. He's lifted the bar dramatically," Branson said.

"This would be hard to top," Las Vegan Marlene DeMarco told ''Reuters''.