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Chris Sieroty

High hopes: Analysts keep strong expectations for The Cosmopolitan

3 September 2013

LAS VEGAS -- Gaming industry analysts continue to have high expectations for The Cosmopolitan of Las Vegas.

The multibillion-dollar resort was hailed as the next generation of Las Vegas hotel-casino when it opened Dec. 15, 2010, with singer/songwriter Mayer Hawthorne throwing a nine on a craps table.

The hotel-casino, now in business for 10 full financial quarters, is still operating in the red, although the property’s recent EBITDA, earnings before interest, taxes, depreciation and amortization figures point toward profitability, analysts say.

“I’m happy with where we are,” Cosmopolitan CEO John Unwin said. “I’m never as happy as I want to be. But our trajectory is really good.”

Unwin said the hotel-casino continues to benefit from a changing Las Vegas market, which attracted more international visitors, more educated and younger visitors in 2012 than in prior years. He described The Cosmopolitan as the “strongest property in the market” in terms of nongaming amenities. Unwin also expected growth in casino revenues this year to be “two times the market in table games and three times the market from slots.”

“We are starting from a smaller base,” Unwin said.” I’m encouraged. We are getting our share of the growth in the market. We are going to get there.”

The Cosmopolitan continues to post quarterly increases across most of its business segments — food and beverage, revenue per room and average daily room rates.

But the luxury Strip resort continues its struggles with casino revenues. The casino generated $30.64 million in casino revenues in the second quarter, compared with $38.66 million in the same period last year.

The Cosmopolitan’s competition in the Las Vegas luxury market, Wynn Resorts Ltd. and Las Vegas Sands Corp., posted casino revenues of $142.6 million, and $105.1 million respectively.

“It sounds kind of obvious, but they’re having trouble with gambling,” said David G. Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas.

The Cosmopolitan operates a 110,000-square-foot casino with 1,376 slot machines and 101 table games, but Schwartz said gambling has never been a priority in The Cosmopolitan’s advertisements or marketing. Instead it has focused on food and beverage and entertainment.

The hotel-casino made a name for itself after opening by launching a provocative advertising campaign with the theme “Just the right amount of wrong.” The Cosmopolitan continued its campaign with a spot last year that told a poolside story to the lyrics of Queen’s “Bohemian Rhapsody.”

In July, The Cosmopolitan rolled out a new ad with a mix of music, kinetic on-screen type and cryptic images. Some of those messages are “Correct is a mistake,” and “Misfit right in.”

Schwartz said The Cosmopolitan still suffers from an insufficient database compared with other Las Vegas-based gaming companies. As a single entity, The Cosmopolitan partnered with Marriott International’s Autograph Collection.

The table games hold in the second quarter was 9.1 percent, below the 10 percent to 14 percent range forecast by the resort.

Cosmopolitan executives continue to focus on table and slot play, a strategy the luxury hotel has been working on since its grand opening. In early 2012, the high-limit Talon room on the second floor opened.

“It’s been a struggle,” said Josh Smith, co-founder of the Colliers International Gaming Group in Las Vegas. “Their customer database is not comparable to its neighbors. But by their (occupancy) numbers … there has to be a gambler in there somewhere.”

The $3.9 billion hotel-casino sits on 8.7 acres between Bellagio and CityCenter.

Germany’s Deutsche Bank has owned The Cosmopolitan since 2008, acquiring the property for $1 billion when it was half-finished and its original developer, New York builder Bruce Eichner and his company, entered foreclosure proceedings.

Deutsche Bank unsuccessfully tried to sell the property, then completed the resort. The German bank established Nevada Property 1 LLC as The Cosmopolitan’s holding company.

Analysts debate whether Deutsche Bank has put up a for-sale sign in the front yard of The Cosmopolitan.

The property has reported a net loss of $392.7 million since it opened in late 2010, filings with the Securities and Exchange Commission show.

“You have to remember The Cosmopolitan opened as a stand-alone property during one of the worst recessions,” Smith said.

Smith said the hotel-casino has “benefited from changing customer tastes.”

Those changing tastes mean more demand for clubs, spas, retail and restaurants not found anywhere else on the Strip. Smith said The Cosmopolitan was able to “make money from so many sources,” despite its unique multilevel design.

Traditional casinos are one floor with the casino as the anchor, with customers passing through on their way to restaurants or other amenities. The Cosmopolitan is spread out over two or three floors, with access available to retail and clubs without passing through the casino, he said.

“It’s functional in its design,” Smith said. “It has made a lot of headway, but it is still lacking in gaming revenue.”

Smith said it's possible to reconfigure the casino “to figure out what works best.”

He said The Cosmopolitan’s average daily room rate of $283 is now one of the highest of the luxury brands on the Strip, while its Marquee nightclub is one of the most profitable. As of June 30, Wynn Resorts Ltd. posted an average daily room rate of $268 in Las Vegas, while Las Vegas Sands Corp. posted $205.

Revenue per available room was $233 at Wynn Resorts and $188 at Las Vegas Sands, compared with $265 at The Cosmopolitan.

“It’s not all bad news,” Schwartz said.

Schwartz said The Cosmopolitan has had an impact on nongaming amenities on the Strip. He said it has been a “major influence” on Caesars Entertainment Corp.’s $550 million The Linq project and MGM Resorts International’s entertainment district between Monte Carlo and New York-New York.

“The rebranding of the (old Bill’s Gambling Hall and Casino) hotel … to the Gansevoort is The Cosmopolitan on a smaller scale,” Schwartz said. “The Gansevoort and SLS Las Vegas are going after the same clientele.”

While new luxury resorts are under construction on the Strip, The Cosmopolitan remains heavily reliant on food and beverage revenue. The resort’s food and beverage revenue increased $7.1 million to $90 million in the second quarter. The company also cited strong business at its Marquee nightclub and restaurants.

Entertainment, retail and other revenues were $9.3 million for the quarter. Analysts expect those numbers to continue to improve into 2014.

The Cosmopolitan’s unique culinary lineup includes Jaleo, Comme Ca, STK and China Poblano. Smith credited the resort with introducing “a lot of brand-new upper-tier brands” to Las Vegas.

On the other hand, negotiations have been stalled between the Culinary union and The Cosmopolitan. Both parties have been unable to agree on job security, health care and wages.

The Culinary also is seeking a successorship clause, which is known as a guarantee that the union contract would carry over if Deutsche Bank sold the resort.

However, after eight protests, including blocking traffic on the Strip, The Cosmopolitan’s 2,000 employees remain without a contract.

Still the underlying financial conditions point toward profitability, according to Smith.

The property has lost $49.9 million for the first six months of 2013. EBITDA as of June 30 was $33.21 million. But Smith said the first three years is a stabilization period for most hotel-casino properties.

“We expect it to only get better from here,” Smith said.

Smith said the property was making progress toward profitability with posting EBITDA in the black. Those figures have piqued the interest of potential buyers, including some who have taken a look at the property and others who are interested in taking a peak.

Smith attributed interest in acquiring The Cosmopolitan to its location “on the world famous Las Vegas Strip.”

“It’s like having beachfront property in California,” he said.

Added Smith “(The property is) just finding a way to piece it all together.”