By Craig Karmin
At the Cosmopolitan of Las Vegas, the top four floors of the
hotel's 52-story east tower offer some of the Strip's prime real
estate. Views from the wraparound balconies stretch for miles, and
ceilings soar up to 16 feet. Yet these rooms sit unfinished and
have never been occupied by guests.
Now, Blackstone Group LP plans to transform that space into
grand suites in hopes of attracting high rollers from around the
world who have largely ignored the property's underperforming
casino thus far. The New York investment firm bought the hotel and
casino property for $1.73 billion in December from Deutsche Bank
AG.
The makeover is part of Blackstone's vision for turning around
the Cosmopolitan, which has been one of the biggest real estate
busts of all time. Deutsche Bank, which took control of the
property in 2008 after the original owner defaulted, spent about $4
billion on the project before unloading it.
Blackstone executives said they expect to spend up to $200
million on the property, in part by completing elements of Deutsche
Bank's aborted plan. In addition to the top-floor suites,
Blackstone has ideas for new VIP rooms in the casino areas and is
looking to add new bars and restaurants in vacant space on the
first three floors.
This is a big wager for Blackstone. While it already has
invested in Nevada industrial real estate, a portfolio of almost
1,000 single-family homes and the Hughes Center, a 68-acre office
complex in Las Vegas, the Cosmopolitan is its largest
single-property investment.
Other financial firms that have become involved with casinos
have been hit hard. Morgan Stanley pulled out of Revel Atlantic
City in 2010 and wrote down nearly all the $1.2 billion it spent on
the project, according to people familiar with the matter. Goldman
Sachs Group Inc.'s real-estate fund values the $345 million in
equity it invested in 2008 in four Nevada casinos at $210 million,
said people familiar with the fund.
But Blackstone has some things going for it. Las Vegas had a
record 41.1 million visitors last year. The Cosmopolitan's hotel is
already one of the most popular on the Strip, and its restaurant
and night life businesses are a big draw. The Cosmopolitan's
earnings before interest, taxes, depreciation and amortization in
2014 were $150 million, up 48% from the previous year, said people
familiar with the results.
In December, Blackstone hired veteran casino executive Bill
McBeath as chief executive of the property. "There are high-end
clients coming to Las Vegas from China and Southeast Asia, but the
Cosmo hasn't targeted those individuals," said Mr. McBeath, who
previously was president of the Mirage and the Bellagio in Las
Vegas. "We are going to change amenities, the gaming space and
suite product to bring them here."
Blackstone is part of a small but expanding group of investors
looking to cash in on casino-hotels, often acquired at steeply
discounted prices. Financier Carl Icahn bought the Fontainebleau
Las Vegas out of bankruptcy in 2010 when it was only about
two-thirds finished, paying a fraction of the project's estimated
$3 billion to complete. Stockbridge Capital Partners, a San
Francisco-based real-estate investor, is the majority owner of the
SLS Las Vegas hotel and casino, which opened this past summer.
None, however, has made as big a bet as Blackstone has on the
Cosmopolitan.
The hotel's nearly 3,000 rooms had an average daily rate of $309
in 2014, said people familiar with the property. That compares with
an average daily rate of $125.80 last year for hotels on the Strip,
according to the Las Vegas Convention and Visitors Authority.
But the Cosmopolitan's casino revenue was just $203 million last
year, according to people familiar with the company. That is ahead
of Blackstone's initial expectations but still ranks among the
worst on the Strip.
While Blackstone's first order of business is to boost gambling
revenue, its longer-term bet is that hospitality, entertainment and
retail will power the Las Vegas economy.
"Las Vegas is becoming more of a diversified entertainment
destination," said Tyler Henritze, a Blackstone senior managing
director in the real estate group. "Blackstone has deep experience
in the hospitality and real estate sectors." Blackstone, one of the
largest owners of real estate in the world, has majority control of
Hilton Worldwide Holdings Inc. and owns the most hotel rooms in the
U.S.
Some gambling industry analysts said most of these real-estate
investors face long odds. If Blackstone turns around the
Cosmopolitan, "it would be one of the few recent successes by firms
in the investment business," said Chris Jones, a senior analyst at
Union Gaming, an investment bank that focuses on the casino
industry.
Casino properties offer one of the few ways to find lodging
assets at deeply discounted values, in part because 41 states in
the U.S. now offer some form of casino gambling. The excess supply
has led to casino closings from New Jersey to Biloxi, Miss.
But Mr. Jones warns that the regulatory environment is stricter
for casinos than other businesses, which makes it harder to sell a
casino than a hotel.
The Cosmopolitan was conceived as a luxury condo project, and
the rooms still have the high-end finishes associated with
permanent residences. In 2008, the developer defaulted on $760
million in loans and Deutsche Bank took control of the
property.
Rather than dump the Cosmopolitan as the financial crisis was
brewing, Deutsche Bank hired its own gambling specialists and
interior designers to create a world-class hotel-casino. The
Cosmopolitan's television ads became famous for the tagline, "Just
the right amount of wrong."
That much, at least, won't change. "We love the slogan," Mr.
Henritze said.
Write to Craig Karmin at craig.karmin@wsj.com
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