Deutsche Bank has finally gotten out from under the Cosmopolitan, selling the luxury resort for US$1.73 billion in cash to real estate investor Blackstone Group in a deal that suggests the recovery of the Las Vegas Strip may be picking up steam.
The price, representing almost 17 times the Cosmopolitan’s 2013 cash flow, bodes well for an ongoing reassessment of Strip valuations to pre-recession levels, especially since the 2,995-room resort has never turned a quarterly profit since opening at the end of 2010.
JP Morgan analyst Joe Greff sees it as “a historically smart real estate buyer making a statement on the length of the Las Vegas Strip recovery, also a positive,” and UBS’ Srihari Rajagopalan suggested the sale could lead to other Strip casino transactions at higher price-to-cash flow multiples than previously speculated.
“The purchase and multiple is a clear positive for Las Vegas Strip gaming operators,” Union Gaming Research said in a client note. “Our ongoing market observations and data continue to suggest an improvement in Las Vegas Strip fundamentals. We remain bullish in the short, intermediate and longer term.”
The Cosmopolitan was one of the poster children for the excessive exuberance that saw billions of dollars of new resort supply added to the Strip in the teeth of the worst financial crisis since the Great Depression.
Deutsche Bank ended up owning it when it foreclosed in 2008 on tapped-out developer Bruce Eichner, and it eventually cost the bank $4 billion to complete and open it. But the property was never able to find its gaming revenue legs at a time when the recession was dampening spend up and down the Strip, and the bank has never made a secret of its desire to unload it.
The deal represents the first significant casino investment by Blackstone, a multinational private equity group whose $81 billion in property assets includes apartment complexes, office buildings (the massive Hughes Center in Las Vegas is one of them) and shopping centers. The group also holds a small stake in Las Vegas-based Caesars Entertainment.
“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, said in a statement.
Union Gaming says the next step will be finding the right operator. “We wouldn’t expect a financial buyer to manage the property,” the firm said. “A potential operator that has a large player data base, experience with high-end Asian play and managing high-end properties would be immediately accretive to the property’s performance.”
Occupying 8.7 acres at the heart of the Strip between Bellagio and CityCenter, the Cosmopolitan was conceived by Mr Eichner as a luxury residential complex. Deutsche Bank scrapped that idea and converted its two 52-story towers into a hotel and added a 110,000-square-foot casino, 300,000 square feet of restaurant and retail space, an 1,800-seat theater, a 40,000-square-foot spa and fitness facility and 150,000 square feet of meeting and convention space.
Best-known for its restaurant and nightclub offerings—Rose. Rabbit. Lie and a branch of New York City’s Marquee, one of the top-grossing clubs in the US—the property has struggled overall. Last year’s average daily room rate of $275 was a premium to other high-end properties in the market—Wynn/Encore reported $258, Venetian/Palazzo $205— but the year ended in a net loss of $94.8 million on total net revenue of $652.5 million. But that was an improvement over 2012, when the property lost $106.6 million on revenues of $595.2 million.
Challenges on the gaming side have continued into 2014. First-quarter F&B revenue of $85.4 million was 42% higher than casino revenue; and while total revenues were up 14.6% year on year, the three months ended in a net loss of $12.7 million.
