Wynn positioning itself as ‘best-in-class’ in free cash flow margin as it funds UAE project, analyst says

June 18, 2024 2:51 PM
Photo: Wynn Resorts (courtesy)
  • Buck Wargo, CDC Gaming Reports
June 18, 2024 2:51 PM
  • Buck Wargo, CDC Gaming Reports

Wynn Resorts is well positioned to fund its integrated resort project in the United Arab Emirates and position itself as the “best-in-class” in free cash flow margin in global gaming, according to note to investors from CBRE Credit Research Director Colin Mansfield.

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CBRE estimates Wynn Al Marjan Island will be de-leveraging to Wynn on a pro forma basis relative to its 2026 estimates, declining to about 4.2x gross lease-adjusted leverage at project maturity. This assumes proportional consolidation of the project-level debt estimated at $2.25 billion and adding $356 million in management fees and recurring distributions to EBITDAR, the note said.

Wynn owns 40 percent of the UAE project, but “comfort should be taken” in Wynn’s local partner as a 60 percent owner being an investment grade sovereign, the note said. It said Wynn free cash flow profile will “meaningfully improve,” – estimated at $1.4 billion in 2026 net of dividends and minority distributions.

“This forecasted 18 percent free cash flow margin will be best-in-class within global gaming,” Mansfield said.

The note said strong internal liquidity sources and relative ease of cash movement throughout the enterprise affords Wynn the ability to self-fund its approximately $900 million equity investment into Wynn Al Marjan Island, a $3.9 billion resort of which it has a 40 percent stake.

The note said that assumes about $300 million in annual shareholder returns and distributions from Wynn Macau increasing as its cash flows continue to grow.

“Wynn Al Marjan Island equity ownership sits underneath the parent and does not flow through Wynn Resorts Finance, but the parent’s access to Wynn Resorts Finance cash and 72.2 percent of Wynn Macau’s makes funding a non-issue,” the note said. “The parent already generates $280 million to $300 million in annual fees from existing properties. Even if Wynn chose to fully debt fund its equity investment, consolidated leverage wouldn’t increase by more than 0.5x.”

In its report, CBRE said they see UAE seen as the “next gaming frontier” and “Las Vegas of the Middle East” with $8.5 billion in annual gaming revenue potential and plenty of players looking to participate in the marketplace.

Mansfield said “certain qualitative credit characteristics for Wynn will improve” should their views on the UAE regulatory structure and their project return profile come to fruition.

“Wynn will add a high quality property to its portfolio in an attractive international jurisdiction, further improving its already strong diversification position globally,” Mansfield said. “With leverage in the low-4x range on a pro forma basis and strong free cash flow generation expected, these qualities are not too dissimilar from investment grade peer Las Vegas Sands. LVS has a public commitment to investment grade and about 3x-4x leverage threshold at the rating agencies, operating in two jurisdictions with high degrees of exclusivity in Macau and Singapore.”

Mansfield said they don’t anticipate Wynn committing to certain rating levels or leverage targets and that winning a New York City development “could have meaningful leverage implications, which may weigh on positive ratings momentum.”

Wynn historically has priced through its ratings, diminishing the benefit from a public commitment to ratings or leverage, the note said.

The yield on Wynn Resorts Finance ’29s is about 50 basis points wide of the Las Vegas Sands ’29s and the tightest they’ve been since 2019, the note said. They are typically about 100 to 150 basis points wide.

“Despite being positive on Wynn Al Marjan Island and the overall Wynn credit profile, we remain market perform on the Wynn Resorts Finance box given their already strong trading levels that even Al Marjan Island’s performance likely won’t budge further,” Mansfield said.