Casino companies have spent much of the last decade thinking about how to spin off non-core assets in an effort to reduce debt and focus their business on running hotels, entertainment, and casinos. Las Vegas Sands (NYSE: LVS) has long taken a strategy of selling off retail assets to mall operators, helping pay for The Venetian and Palazzo Las Vegas. MGM Resorts (NYSE: MGM) recently spun off some real estate assets.
Steve Wynn and his company Wynn Resorts, Limited (NASDAQ: WYNN) have always taken a more conservative approach to asset sales. He wants to control the entire Wynn experience, and owning the assets that drive that experience are key to the company's operations. Yesterday, he gave up a little control by selling some shopping assets, although Wynn won't give up complete control just yet.
Image source: Wynn Resorts.
Cashing in on Las Vegas retail
The retail sale Wynn announced yesterday will take place in two phases. First is the $292 million sale of 49.9% of Wynn Las Vegas' owned and leased retail, which includes the high-end retailers in the resort today. The second phase is the $180 million sale of 49.9% of the Wynn Plaza when it opens in 2017. In total, $472 million will be paid for just under half of Wynn Las Vegas' retail space.
That falls well below the $2.0 billion Las Vegas Sands has gotten for The Venetian and Palazzo mall, or the $1.1 billion paid to MGM for CityCenter's Crystals mall. But the Wynn retail space is smaller than both of those malls, and Wynn Resorts will maintain control of the entire space.
The control piece is key for Wynn Resorts. Wynn Las Vegas is constantly changing, and this gives the company the freedom to make changes when necessary while still taking cash out of existing assets.
Why selling retail makes sense for casinos
The sale of an important asset within the casino may sound strange, but it has to do with selling assets to investors who value them more highly than a gaming company. Wynn said the first sale will have a capitalization rate, or net operating income divided by what was paid for the asset, of 4.7%, and the second sale will be a cap rate of 4.5% to 5%.
When a resort is built, gaming companies usually target equity returns of over 20% and returns on the overall investment of over 10%. So, if others value those assets more highly, it makes sense to sell them, which is happening with retail in Las Vegas.
What to do with all that cash
The cash infusion comes at an opportune time for Wynn Resorts. The balance sheet had $9.44 billion in debt at the end of the third quarter to $2.02 billion in cash, and that's before the $1.9 billion to $2.1 billion that's expected to be spent on Wynn Boston Harbor.
This will give management the opportunity to pay down some debt or keep cash on the balance sheet for future cash needs. For investors, it gives the company a little time to bring Wynn Cotail up to speed and move forward with Wynn Boston Harbor, which will bring a new level of cash flow to the company. The future for Wynn Resorts just got a little brighter, and it's all about the new influx of cash.
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