THE DOOMSDAY SCENARIO

Everyone knows that room rates in Vegas have taken a big hit. However, we thought it would be interesting to attempt quantifying the effect of lower ADR rates on EBITDA for the WYNN, MGM, and LVS.

Unlike occupancy, change in ADR is a direct hit to EBITDA. In the table below we illustrate the flow-through to gross profit of a theoretical ADR decline. In addition to direct room expenses, there is also overhead (reservations team, back office, front desk management, utilities, etc) which we believe comprises of about 90% fixed costs. Realistically, casino operators will try to cut costs to offset some of this pain, but a 50% rate cut may render many properties unprofitable.

As a point of reference the average ADR for the Las Vegas properties of WYNN, LVS, and MGM for the last twelve months was $295, $235, and $151 respectively. On Wynn’s pre-announcement conference call (or whatever it was) management spoke about room pricing of $169/$199 post Encore opening. If Wynn is charging under $200 a night at their properties, a 35% YoY decline, this bodes very poorly for LVS and MGM, as WYNN’s property’s typically set the ceiling on pricing.

We estimate that at a blended ADR of just over $210, WYNN’s consolidated EBITDA in Las Vegas will fall to below $200MM from a peak of over $400MM in 2007. For LVS, we believe that a 35% drop in rate will translate into an aggregate Las Vegas EBITDAR of approximately $240MM, down from our $409MM estimate for 2008. For MGM, our best guess is that rates will be off 30% to an ADR of just over $100 night causing Las Vegas EBITDA to plummet to approximately $825MM (pre-condo rentals) for 2009, down from over $2BN in 2007.

Is there a scenario where profitability drops to zero for these companies? Without factoring in changes in casino and other spending, we’ve carried the analysis to the break-even point for each company. WYNN, LVS, and MGM would have to see a further 25%, 45%, and 50% decline, respectively, in YoY ADR beyond our estimate to drive EBITDA to zero. A highly unlikely outcome but the fact that we are even having this discussion is telling. The good news is that free and independent room rates on the Strip appear to have stabilized recently, down in the 20-25% range over the past several weeks. Not good, but a little better sequentially and offering an ever so small ray of hope.


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