The Cosmopolitan of Las Vegas may have lost more than $308 million over the last three years, but gaming industry analysts believe the hotel-casino is poised for profitability under its new owner, a subsidiary of Blackstone Group.
The Cosmopolitan’s new owner is Blackstone Real Estate Partners VII, a division of the New York-based private equity firm. The fund paid $1.73 billion in cash to acquire the Strip property from Deutsche Bank.
The deal is subject to approval of Nevada gaming regulators. The sale ends Deutsche Bank’s ownership of the property after it foreclosed on the resort’s developer, Bruce Eichner, in January 2008 when he defaulted on a $700 million loan.
Blackstone’s purchase continues a trend of non-traditional ownership for the luxury Strip property between Bellagio and CityCenter. Joshua Smith, a commercial real estate consultant with the gaming division at Colliers International in Las Vegas, wasn’t surprised a private equity firm was the winning bidder for the Cosmopolitan.
“Over the last 3 to 4 years and during the depth of the recession what we really have seen is (gaming) operators have had enough on their plate,” Smith told KNPR. “They wanted to refresh their propertied. They were taking care of home based and a lot of opportunistic capital came in and started to take a peak under the hood and realized there was something there to be had.”
Smith said he represented a group of interested bidders that were looking to acquire the Cosmopolitan from Deutsche Bank. He declined further comment.
The property, with its two 52-story towers and 110,000-square-foot casino, has never turned a profit. Nevada Property 1 LLC, the parent of the Cosmopolitan, on Thursday reported a $12.6 million loss for the first quarter, compared to a loss or $24.7 million in the same period last year.
The Strip resort’s decline in red ink last quarter was helped by gains in casino, hotel and entertainment revenues. The Cosmopolitan posted casino revenues of $49.2 million in the first quarter of 2014, compared with $40.8 million in the same period last year. Hotel revenues quarter-over-quarter jumped by more than $12 million to $75.7 million, while revenues generated by entertainment and retail climbed $10.7 million to $85.3 million in the first quarter.
“We have also heard the gaming floor wasn’t as expansive or well programmed as initially thought,” Smith said. “I wouldn’t do too much to it. What I would do is pay a little more attention to gaming.”
Robert Shore, an analyst with Union Gaming Research in Las Vegas, said Blackstone is paying about 17-times Cosmopolitan’s cash flow of $103.3 million last year, which was up materially from $66.3 million in 2012. Shore said the purchase price was “roughly in-line with Deutsche Bank’s estimated fair value of debt of $1.8 billion.”
But moving forward, Shore agreed it was all about casino revenues.
“Currently, the property underperforms from a gaming standpoint,” Shore said. “Should an experience gaming operator be brought in to run the property, especially one with a strong database, there should be a significant upside to current earnings.”
The bank completed construction of the 8.7 acre Strip property, opening the Cosmopolitan in December 2010 at a cost of $4 billion. The Cosmopolitan has never turned a profit. Deutsche Bank has held the Cosmopolitan in a part of the bank designated for non-core operations, which the bank is looking to sell.
“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," Pius Sprenger, head of the bank’s non-core operations unit, said in a statement. “We are pleased to have agreed to this sale and to have delivered on our commitment.”
The transaction is a significant gaming investment by Blackstone’s Real Estate Group and its global fund, Blackstone Real Estate Partners VII. The firm also owns some 1,000 homes in Nevada and has owned a small piece of Caesars Entertainment Corp.
“As a significant investor in the hospitality sector, Blackstone recognizes the value and potential in the Cosmopolitan as well as Las Vegas itself and looks forward to working with management and all (employees) to build on the success to date,” Blackstone’s Real Estate Group Managing Director Tyler Henritze said in a statement.
This is Blackstone's second major purchase in Las Vegas in less than a year. In September, Blackstone Real Estate Partners VII spent $347 million to acquire the Hughes Center. The Hughes Center is a 68-acre master-planned development comprised of 10 office and retail properties that is located on Howard Hughes Parkway between Flamingo Road and Sands Avenue, just west of the Strip.
Cosmopolitan CEO John Unwin said he appreciated the "support and partnership" provided by Deutsche Bank over the last few years. He said the sale to Blackstone represents "the beginning of the next chapter for the Cosmopolitan of Las Vegas."
GUEST:
Joshua Smith, Commercial Real Estate Consultant, Gaming Division, Colliers International
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