Cosmopolitan of Las Vegas sold to Blackstone Group for $1.73 billion

16 May 2014

LAS VEGAS -- After nearly six years, Deutsche Bank announced Thursday it was parting ways with The Cosmopolitan of Las Vegas, the stylish — but unprofitable — Strip hotel-casino and the last megaresort to open after the recession tore apart the gaming industry.

Germany’s largest bank, which took ownership of the unfinished property in 2008 after its original developer defaulted on a loan, announced an agreement to sell The Cosmopolitan to a subsidiary of the Blackstone Group, a multinational private equity investment firm, for $1.73 billion in an all-cash transaction.

The deal is subject to approval of Nevada gaming regulators.

Analysts quickly praised the sale of the 2,995-room hotel-casino as a positive sign for the Las Vegas market.

JP Morgan gaming analyst Joe Greff told investors Blackstone is paying almost 17 times The Cosmopolitan’s 2013 cash flow of $103 million, which bodes well for the valuation of other upscale Strip casino companies, including Wynn Resorts Ltd. and MGM Resorts International.

“We also think this announcement speaks to a historically smart real estate buyer making a statement on the length of the Las Vegas Strip recovery, also a positive,” Greff said.

UBS gaming analyst Srihari Rajagopalan suggested The Cosmopolitan sale could lead to other Strip casino transactions, but at higher price-to-cash flow multiples than previously speculated.

The Cosmopolitan’s new own is Blackstone Real Estate Partners VII, a division of New York City-based Blackstone. The business owns $81 billion in real estate assets globally.

In Nevada, the company owns nearly 1,000 homes. Last September, Blackstone subsidiary Equity Office Partners acquired the 1.4-million-square-foot Hughes Center at Paradise and Flamingo roads for $347 million. The office park has since been renamed The HC | Hughes Center.

Blackstone also owns a small stake in casino operator Caesars Entertainment Corp.


In its press materials, Blackstone describes itself as “the largest opportunistic real estate investment manager in the world.” Blackstone says its buys under-performing property for resale after making improvements.

In a statement, Blackstone Real Estate Group Senior Managing Director Tyler Henritze said the transaction marks the “next phase of the resort’s evolution.”

“As a significant investor in the hospitality sector, Blackstone recognizes the value and potential in The Cosmopolitan as well as Las Vegas itself,” Henritze said.

Union Gaming Group analyst Robert Shore speculated Blackstone could bring in an experienced casino operator to manage The Cosmopolitan, suggesting such companies as MGM Resorts International, Caesars Entertainment Corporation, Penn National Gaming, Inc., and Boyd Gaming Corporation as possible candidates.

“We wouldn’t expect a financial buyer to manage the property,” Shore said. “A potential operator that has a large player database, experience with high-end Asian play, and managing high-end properties would be immediately accretive to the property’s performance.”

Shore said he didn’t know how a deal with a gaming operator would be structured.

Deutsche Bank has wanted to sell The Cosmopolitan since it took possession of the unfinished building and 8.7-acre Strip location between Bellagio and CityCenter from New York developer Ian Bruce Eichner for $3.9 billion.

The Cosmopolitan was originally designed by Eichner as a condominium tower, but Deutsche Bank scrapped the residential idea and converted the units into spacious hotel rooms, many with balconies overlooking the Strip. Several condominium buyers and sales agents sued after they were offered their deposits back.

The property, with its two 52-story towers and 110,000-square-foot casino, has never turned a quarterly profit.

The Cosmopolitan reported a net loss of $25.5 million in the quarter that ended Dec. 31 and a net loss of $94.8 million on net revenue of $652.5 million for all of 2013. In 2012, The Cosmopolitan lost $106.6 million on net revenues of $595.2 million.

In the first quarter than ended March 31, The Cosmopolitan said it lost $12.7 million, compared to a net loss of $24.7 million in the same quarter of 2013. Net revenue for the quarter increased 14.6 percent to $182.9 million


The Cosmopolitan is best known by its restaurants and nightclubs, including the recently opened Rose. Rabbit. Lie., and Marquee, which is one of the top-grossing clubs in the U.S. The centerpiece Chandelier Bar in the casino is three stories tall.

Food and beverage revenue of $85.4 million in the first quarter was more than 42 percent higher than revenue produced by The Cosmopolitan’s casino.

Deutsche Bank said it placed The Cosmopolitan into a division designed to sell unwanted investments.

In April, it was reported a casino company controlled by Australian billionaire James Packer was looking to purchase The Cosmopolitan.

“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 Non-Core Operations Unit. “We are pleased to have agreed to this sale and to have delivered on our commitment.”

Bloomberg News reported that Deutsche Bank was seek $2 billion for the hotel-casino.

Shore said the purchase price was “interestingly” in-line with Deutsche Bank’s estimated fair value of The Cosmopolitan’s long-term debt of $1.8 billion.

“The property under-performs from a gaming standpoint,” Shore said. “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.”

Cosmopolitan CEO John Unwin said in a statement the transaction, “marks the beginning of the next chapter for The Cosmopolitan of Las Vegas and the thousands of dedicated (employees) who are committed to providing a compelling guest experience. It is a testament to our unique approach to the Las Vegas market.”

Before the property opened, some 2,000 Cosmopolitan non-gaming employees signed cards seeking representation by Culinary Workers Local 226 and Bartender’s Local 165. However, the unions and management have not reached a contract.

Last summer, Culinary members held several informational pickets in front of The Cosmopolitan, blocking entrance into the hotel-casino.

Culinary Secretary-Treasurer Geoconda Argüello-Kline said in a statement the union looks forward to “positive relationship” with the new owner.

“The labor dispute has been about whether workers can have a contract with the opportunity to provide for their families,” she said. “The Blackstone Group owns the Hilton hotel company, which is one of our union’s largest employers. We will work tirelessly to ensure workers are retained during this transition.”

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