Deutsche Bank AG (DBK) agreed to sell the Cosmopolitan of Las Vegas hotel and casino to Blackstone Group LP (BX) for $1.73 billion in cash, ending a six-year money-losing venture into casino development.
“The bank is committed to reducing its non-core legacy positions in a capital-efficient manner which benefits shareholders,” Pius Sprenger, head of the Frankfurt-based lender’s non-core operations unit, said in a statement today. The division is selling and winding down assets that Deutsche Bank doesn’t consider to be central to its business.
Germany’s largest lender foreclosed on the Cosmopolitan after developer Ian Bruce Eichner defaulted on a construction loan in January 2008, and has labeled it a temporary investment. The company was seeking more than $2 billion for the property, a person familiar with the situation said last month. Two others said it was valued at closer to $1.5 billion.
The resort, a two-tower complex on the Las Vegas Strip, cost more than $3.9 billion to build and hasn’t turned a profit since opening in December 2010, as the U.S. tourism industry struggled to recover from the 2008 financial crisis. Business has been improving, with a 9.6 percent increase in revenue last year to a record $653 million.
The Cosmopolitan’s parent company, Nevada Property 1 LLC, today reported that its net loss shrank to $12.7 million in the first quarter from $24.7 million a year earlier. Revenue after promotional allowances rose 15 percent to $182.9 million because of higher room rates, casino betting and other spending by customers.
The hotel has focused heavily on non-gambling revenue. The property, on 8.5 acres (3.4 hectares), features 2,995 rooms, a spa, salon and 14 restaurants. Its website shows video featuring a blindfolded French maid with the slogan “Just the Right Amount of Wrong.”
The Cosmopolitan’s Marquee Nightclub & Dayclub tied with Wynn Resorts Ltd.’s XS as the top-grossing nightclub in the U.S. with more than $80 million in 2012 revenue, according to Nightclub & Bar magazine.
“We are excited to join with the Cosmopolitan and work with its employees and management in the next phase of its evolution,” Tyler Henritze, a Blackstone senior managing director, said in an e-mailed statement. “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.”
The purchase marks Blackstone’s first major casino investment. The firm has been investing actively in Nevada real estate on expectations of further recovery in the state’s economy. The firm last September bought the Hughes Center office complex in Las Vegas for $347 million. It also owns single-family houses to rent in the Las Vegas area and is a major owner and operator of warehouses in Reno.
The price for the Cosmopolitan, at almost 17 times the property’s $103.3 million in earnings before interest, taxes, depreciation and amortization last year, underscores the value in other large Las Vegas operators such as Wynn Resorts and MGM Resorts International, which trade at lower multiples, Joseph Greff, an analyst at JPMorgan Chase & Co. in New York, said in a research note today.
“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,” he said.
The price also illustrates the premium buyers are willing to pay for Las Vegas properties, which generate a large share of revenue from non-gaming amenities compared with other markets, according to Bloomberg Industries research. Gaming and Leisure Properties Inc. agreed yesterday to pay $465 million, or nine times Ebitda, for the Meadows Racetrack and Casino near Pittsburgh.
The Cosmopolitan sale will increase Deutsche Bank’s common equity Tier 1 ratio, a key measure of its financial strength, by about 5 basis points, or 0.05 percentage points, according to today’s statement. The company’s capital adequacy ratio was 9.5 percent at the end of March, its filings show.
Deutsche Bank isn’t the only Wall Street firm involved in the gambling business. Goldman Sachs Group Inc. owns the Stratosphere Casino, Hotel and Tower on the Strip, as well as three other Nevada gaming properties. Morgan Stanley invested about $1.2 billion into the Revel casino in Atlantic City, New Jersey, before writing down 97.7 percent of its value as the casino industry there collapsed. Revel opened in 2012 and filed for bankruptcy less than a year later.
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