Blackstone’s Cosmo Buy: A Bet on Las Vegas’ Future

cosmopolitan01hweb.jpgThe Cosmopolitan has finally sold. For $1.7 billion. To the Blackstone Group, a “premier global investment and advisory firm” that already has some significant interests in Las Vegas, including a share of Caesars Entertainment. And it might not be the last big transaction on the Strip this year.

That the Cosmo has been on the market since before it opened is no secret. Its current owner, Deutsche Bank, opened the property, which it acquired when developer Bruce Eichner’s chances of finishing the project unraveled.  Finishing and operating the Cosmopolitan was the least-bad option.

The Cosmo was built for $3.9 billion and sold for $1.7 billion—and it’s still possible to argue that Blackstone overpaid. Casinos are often valued at a multiple of their annual cash flow, typically between seven and eight times that number. The Cosmopolitan sold for 17 times its 2013 cash flow. When you add in that the property has suffered a net loss of about $100 million in each of the past two years, you’ve got to give Deutsche Bank some credit for negotiating a good deal for itself. It is very unlikely that there was another suitor out there somewhere willing to pay more.

But Blackstone’s purchase, when added to the company’s existing portfolio of commercial and residential holdings in Las Vegas, is a bet on the future of Las Vegas.

This could mean that other properties are ready to change hands. The LVH is in need of new owners, new investment and a new name. The Riviera has been at the center of speculation for years. There is also the possibility that one of the major owners on the Strip might be looking to free up some cash by selling a casino or two—Caesars Entertainment is the most likely candidate here. If any of those owners are hoping to get a premium for their properties, the Cosmopolitan sale is good news: Someone is willing to pay top dollar for Strip real estate. This makes it more likely that a potential seller will find a buyer willing to meet its price.

The net result will be more investment in Las Vegas and a reinvigoration of the Strip, something that seemed unlikely only a few years ago. As they say, the market price of something is only determined by how much someone is willing to spend on it, and the Cosmopolitan’s sale is proof that, in 2014, someone is willing to spend handsomely for a spot on the Strip.



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