It didn't take long for Wynn Resorts, Limited's (WYNN 1.61%) new CEO Matt Maddox to take control of the company after Steve Wynn stepped down and sold his shares. In the company's first-quarter 2018 conference call, he outlined a very different vision of the company's future compared to what Steve Wynn had seen.
The biggest change is a shrinking scope of expansion in Las Vegas and expanded plans in Asia. All the evidence says that's the right strategy -- and Maddox may be pointing the company in a better financial direction than Steve Wynn would have just a few months ago.
Image source: Wynn Resorts.
Why Asia, not the U.S., is where the money is
Steve Wynn made his name building massive resorts on the Las Vegas Strip, so it's not surprising he had plans to expand Wynn Las Vegas east onto the old golf course and west onto the old Frontier site, which he called Wynn West.
But building in Las Vegas wasn't necessarily the smartest move financially. There are far better returns in Asia, where Wynn Macau and Wynn Palace's EBITDA returns (property EBITDA over the last 12 months divided by construction costs) are much higher than Las Vegas'.
| Development | Plan under Wynn | Plan under Maddox | Historical EBITDA Return |
|---|---|---|---|
| Las Vegas-lagoon and tower 3 | $3 billion | $360 million | 10.6% |
| Wynn Macau | $0 | $100 million | 58.5% |
| Wynn Palace | n/a | n/a | 15.2% |
| Japan | none | $5-$10 billion | n/a |
Source: Company earnings releases and construction estimates. Calculations by the author.
Even Wynn Palace, which is still ramping up its operations, already has a better return profile than Wynn Las Vegas.
Maddox said he's reducing the scope of the development on the east side of Wynn Las Vegas to include a new lagoon and convention space, but the hotel tower Steve Wynn had planned is currently on hold. Instead, he's spending about $100 million to upgrade Wynn Macau's hotel rooms and putting a high priority on winning a bid to build a multibillion-dollar project in Japan.
We don't know what the return of a resort in Japan will be, but estimates of the gaming market's size range from $10 billion to $40 billion, bigger than the $6.5 billion in gaming revenue for all of the Las Vegas Strip, so winning one of the two or three gaming licenses would be extremely valuable. It's conceivable that a $10 billion investment could have EBITDA returns of over 15%.
Wynn Resorts can't afford to make mistakes
Building the $4.2 billion Wynn Palace in Macau and the $2.5 billion Wynn Boston Harbor has put a strain on Wynn Resorts' balance sheet, which you can see below. A debt-to-EBITDA ratio of three to four times would be a comfortable amount of leverage, so at a ratio of nearly nine times, Wynn Resorts is stretching itself right now and can't afford to spend billions more on a low-return project in Las Vegas.
WYNN Total Long Term Debt (Quarterly) data by YCharts
As Wynn Palace and Wynn Boston Harbor ramp up operations, the debt-to-EBITDA ratio will naturally fall, alleviating some of the leverage, but Wynn Resorts is already sitting on a large pile of debt, and I don't think it would be wise to chase construction projects that do little more than build the company's empire.
Steve Wynn's focus may not have been in the right place
It's pretty clear that Wynn Resorts' best investment opportunities aren't on the Las Vegas Strip, where Steve Wynn had spent the last two years making expansion plans. This may have been a case of Steve Wynn becoming an empire builder, trying to expand the footprint of his own Las Vegas legacy rather than exploring opportunities that would be best for shareholders.
Maddox is positioning himself as a CEO who will return Wynn Resorts' focus to the locations and projects that have the best returns long-term. That means less focus on Las Vegas and more investment in Asia. It'll take time for him to prove that his areas of focus will result in superior returns for shareholders, but given the evidence, I think he's pointing the company in the right direction -- and that should be good for the company's financial future.
