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Chris Sieroty

The Cosmopolitan continues slow, steady climb toward profitability

16 May 2013

LAS VEGAS -- Even before The Cosmopolitan of Las Vegas opened in December 2010, analysts were debating how long it would take for the most expensive casino ever built on the Strip to turn a profit.

In business for a full nine financial quarters, the $3.9 billion resort is still operating in the red, although the property showed quality year-over-year increases across its business segments — casino, food and beverage and entertainment — in the first quarter.

The resort was open for 17 days in the fourth quarter of 2010.

But there are potential threats to the resort’s efforts to move into the black as new clubs open nearby and Wynn Resorts Ltd., Caesars Entertainment Corp., and MGM Resorts International continue to dominate the Strip’s skyline.

“The property remains heavily reliant on food and beverage revenue,” Bill Lerner, an analyst with Union Gaming Research, said in a research report. “The recent opening of Hakkasan at the MGM Grand and the opening of Light and Daylight at Mandalay Bay (Memorial Day weekend) could pressure the property’s nightlife operations.”

Lerner noted that food and beverage revenue of $74.7 million equaled 40 percent of gross revenue in the first-quarter. Since the resort opened, food and beverage has generated more than $648.5 million.

The Cosmopolitan’s unique lineup includes Jaleo, Comme Ca, STK, and China Poblano.

“Their biggest impact has been on the nongaming side,” said David Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas. “But it’s a very competitive business.”

Schwartz said with an average life span of five years, restaurants and clubs need to “consistently update” themselves. He cited Wynn Resorts as an example of a Strip resort that has successfully adapted its offerings to meet a changing environment.

“They should always be looking to reinvent themselves because they cater to a very fickle crowd,” Schwartz said. “The Cosmopolitan has raised the bar for restaurants and clubs.”

It’s also looking to raise the bar for event spaces. The Chelsea, a new event and performance space, will be completed later this year, the resort said. The company declined to disclose construction costs.

“We estimate capital expenditures will total $70 million to $80 million during the year ending Dec. 31,” the resort’s parent company, Nevada Property 1 LLC, said in a first quarter earnings report. “We intend to finance ongoing major capital expenditures, including our event center, with borrowings from ? our credit facility.”

Once completed, the 50,000-square-foot venue will hold more than 3,000 people.

Lerner noted room revenue, which is 34 percent of gross revenue, increased 8 percent in the first quarter to $63.7 million. He said the room segment benefited from the implementation of a $25 nightly resort fee on Jan. 1.

The property’s average daily room rate of $273 topped other high-end properties. For example, Wynn Las Vegas and Encore reported ADR of $258, while The Venetian and the Palazzo reported a combined ADR of $211.

On the gaming side, Lerner said casino revenues were 22 percent of gross revenue. By way of comparison, gaming revenue as a percentage of total revenue for the average Strip property was 36 percent in 2012, according to Union Gaming Research.

The Cosmopolitan said it is looking to increase international hosting services, building a database of slot customers and expanding its alliance program to generate higher casino revenues.

Meanwhile, the Cosmopolitan also has to contend with some negative publicity in its negotiations with the Culinary Union. The argument led to union supporters blocking part of the Strip in March.

Messages left with Yvanna Cancela, political director for the union, were not returned. Cosmopolitan officials have said they believe they can reach a mutually beneficial solution.

Negotiations have stalled over a number of issues including pension benefits, working hours, health case, and the number of rooms housekeepers are required to clean.

“A protracted battle with the union could weigh on near-term operating results if it disrupts access to the property,” Lerner said. “A potential deal that results in increased wages and/or benefits would also impact profitability.”