New emphasis on gaming could turn it around for Cosmo
Blackstone Group LP, the world’s largest private-equity firm, has staked its claim in Sin City with the acquisition of the troubled Cosmopolitan resort on the Strip. On May 15, the company agreed to pay $1.7 billion in cash for the 3,000-room hotel and casino.
Former owner Deutsche Bank invested about $4 billion in the resort, first as a lender and then as an owner after developer Ian Bruce Eichner defaulted on a construction loan.
Conceived during the real estate boom and completed after the bottom had dropped out, Cosmo was originally priced at less than $800 million. With the economic downturn and the change of ownership, the resort opened two years later than expected, in December 2010. In its first three years of operations, the Cosmo has seen net losses totaling $298.3 million.
Blackstone has been in an acquisitive mood, reports the Wall Street Journal. Over the past two years, the New York-based company has acquired about $3.5 billion of property in Nevada, sources said. That includes buying 1,000 single-family homes, 16 million square feet of industrial space and the Hughes Center, a 68-acre office complex that sold for $347 million last fall.
According to the Journal, Blackstone is “betting the properties will increase in value as the gambling business bounces back from a downturn and the city’s economy improves and becomes more diversified.”
Blackstone is using cash from its $13.3 billion real-estate fund, but later is expected to borrow around $1 billion toward the acquisition, sources told the publication.
It’s good news for Deutsche Bank, which said the sale will have a “positive impact” on its Tier 1 capital ratio. And it could pay off for Blackstone, as Vegas enjoys a resurgence of business and tourism. In March, 3.7 million visitors came to Las Vegas, the highest monthly total ever, according to the Las Vegas Convention and Visitors Authority. Hotel room rates are back to prerecession levels and occupancy rates are exceeding 90 percent.
Total revenues on the Strip were $15.5 billion in the fiscal year that ended June 30, up from $15.3 billion in fiscal 2012 and the most since 2008, according to Union Gaming Research.
“For the first time, I am willing to say that I see Las Vegas getting a footing that it hasn’t had quite as clearly in the past,” said Wynn Resorts Ltd. Chairman Steve Wynn on the company’s recent first-quarter earnings call.
Blackstone’s acquisition “speaks to a historically smart real-estate buyer making a statement on the length of the Las Vegas Strip recovery,” agreed J.P. Morgan casino analyst Joe Greff in a report.
Though Cosmo has yet to turn a profit, “The property’s results showed significant year-over-year improvement,” reported Union Gaming. “The Cosmopolitan has been making a focused effort to increase gaming play at the property. … Should an experienced gaming operator be brought in to run the property, especially one with a strong database, there should be a significant upside to current earnings.”
In recent weeks, speculation was strong that Crown Resorts Chairman James Packer of Australia would buy the Cosmopolitan.