The Street projects Q1 EBITDA of $151 million for WYNN. We think the number will be closer to $120 million with the shortfall originating in Las Vegas. Our Las Vegas property level EBITDA for the two Wynn properties combined (Wynn Las Vegas and Encore) is only $33 million versus the Street around $60 million.

As we’ve been writing about since June of 2008, the Street continues to underestimate the margin degradation from falling room rates. In our June 6/22/08 note, “MEAN MARGIN MEAN REVERSION”, we determined that the most of the huge margin expansion over the last 15 years in Las Vegas was driven by room rates as depicted in the first chart. Well, we are on the downside of that cycle now, in a big way. WYNN’s Las Vegas EBITDA margin could fall by almost 13 percentage points on a year-over-year basis in Q1. With bad luck on the tables, that number could be even lower.

We think RevPAR could fall by over 30% in Q1-Q3, and 10% in Q4 as the comparisons ease. Part of the decline is due to the additional rooms from Encore. However, most of it is due to soft demand. Wynn’s focus on maintaining occupancy will continue to drive margins down as rates fall. See the second chart below.

All is not lost for WYNN. We continue to be positive on Macau. We’ve worked through our model pretty extensively and we don’t believe the company faces any covenant or liquidity issues. I know some in the investment community are predicting a covenant breach but we are not in that camp. However, we are in the camp that Street estimates need to come down, particularly for Q1.

Rooms and F&B pricing drove industry EBITDA higher in Las Vegas
Precipitous ADR declines are driving margins significantly lower

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