The star-crossed Cosmopolitan Las Vegas was sold last week by Deutsche Bank, which foreclosed on the property after the original developer defaulted, to real estate operator, the Blackstone Group, for .7 billion. The hotel features nearly 3,000 rooms, with a 110,000 square-foot casino. The deal is contingent upon regulatory approvals.
The resort, conceived during a real estate boom, was under construction by developer Bruce Eichner when the recession bottomed out. Originally priced at less than $800 million, it was supposed to open in 2008. With the economic downturn and the change of ownership, the Cosmopolitan did not open until December 2010. By that time, costs had ballooned to almost $4 billion. And in its first three years of operations, the Cosmo has accrued net losses of $298.3 million.
Deutsche Bank had been shopping the property since it took it over, but found no willing purchasers. The company then hired former Caesars Palace executive John Unwin to run it, and it has been very successful as a non-gaming venue. However, its gaming operations continue to disappoint, and Deutsche Bank got what analysts described as a “good” price.
Union Gaming Group did an analysis of the deal.
“The purchase price equates to 17 times 2013 EBITDA,” they group wrote in a note to investors. “The purchase price interestingly was roughly in-line with Deutsche Bank’s estimated fair value of the long-term debt of $1.8 billion (the carrying value was $3.5 billion). Currently, the property underperforms from a gaming standpoint. 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 our view, with a strong gaming operator the Cosmopolitan should be run rating closer to $150 million in EBITDA, which would equate to a purchase multiple closer to 12 times.”
The lack of a database has always been the Achilles Heel for the Cosmo. While thousands of people descend on the property every week to enjoy top-flight concerts and events, as well as an active nightclub scene, those crowds rarely cross over to the casino. Union speculated on whether Blackstone would hire an operator for the gaming operations, mentioning such companies as Caesars Entertainment, MGM Resorts, Penn National Gaming or Boyd Gaming. The company also mentioned some of the non-U.S. Macau operators, such as Melco Crown or Galaxy. Just last month, it was rumored that Crown Casino and its owner James Packer was interested in buying the Cosmopolitan.
Deutsche Bank is clearly relieved to be rid of what it considered a white elephant.
“As part of our Strategy 2015+, the bank is committed to reducing its non-core legacy positions in a capital efficient manner which benefits shareholders,” said Pius Sprenger, head of the bank’s non-core operations unit, in a statement. “We are pleased to have agreed to this sale and to have delivered on our commitment.”
Blackstone, which owns and manages apartment buildings, shopping centers, office complexes (and a small piece of Caesars Entertainment), said the property fits into its portfolio.
“As a significant investor in the hospitality sector Blackstone recognizes the value and potential in the Cosmopolitan and Las Vegas and looks forward to working to build on the success to date,” Tyler Henritze, a senior managing director at Blackstone, said in a statement.
In addition to the Caesars share, Blackstone is hardly a stranger to Las Vegas. The company owns more than 1,000 homes in Nevada and also owns the upscale office complex, the Hughes Center, near the Las Vegas Strip.
Unwin says he’s genuinely excited about the development.
“This marks the beginning of the next chapter for The Cosmopolitan of Las Vegas and the thousands of dedicated CoStars who are committed to providing a compelling guest experience,” Unwin said. “It is a testament to our unique approach to the Las Vegas market.”
The Cosmopolitan is part of the Marriott Rewards system, which gives it access to one of the biggest databases in the hospitality industry. However, Blackstone has strong ties to Hilton Hotels, and it’s unclear if the Cosmo-Marriott relationship will change.
Room rates and food-and-beverage revenues are a positive for the property. The property’s average daily rate of $275 in 2013 compares favorably to other high-end properties on the Strip, such as the Wynn Las Vegas/Encore properties (ADR of $258), and the Palazzo/Venetian (ADR of $205).
One sticking point in the Cosmopolitan deal is the contentious relationship that the Cosmo has had with the city’s Culinary Union, a local of the UNITE-HERE international union. Members have picketed the property in the past for failing to reach a contract with workers over pension benefits, working hours, health care, work rules and more. Union officials have also tried to prevent groups from holding meetings and conventions at the hotel, with some success.
