The $3.9 billion Cosmopolitan of Las Vegas, built by a German investment bank after its original developer defaulted, may have the hippest-ever TV commercials: Over a garage rock soundtrack with a jazzy interlude, guests with crafty smiles stray across a landscape of shiny dance floors, soothing guest rooms and tables laden with food and drink.
But the 2,995-room Cosmopolitan is entering a market that’s struggling. And analysts say that just to cover its debt, it will need to do better than even the top-performing Bellagio, its neighbor to the north with 3,933 rooms and the same amount of casino space as Cosmopolitan.
The Bellagio generated $122.9 million in operating income the first nine months of 2010 for casino giant MGM Resorts International. Caesars Palace, almost as big, is owned by privately held Caesars Entertainment Corp., formerly Harrah’s, so its financial information isn’t broken out. During the nine-month time frame, Las Vegas Sands Corp.’s Venetian and Palazzo had combined operating income of $67.6 million, and Wynn Resorts Ltd. saw a $67.9 million operating loss at its nearby Wynn and Encore Las Vegas, including one-time costs.
“If you take a look at everything that’s opened in recent years, these properties have all struggled out of the gate,” said Bill Lerner, an analyst with Union Gaming Group. “I’m not sure why this will be different.”
The year-old CityCenter, Cosmopolitan’s other neighbor and an MGM Resorts joint venture, generated an operating loss of $1.27 billion the first nine months of this year. It’s now worth about one-third of the $8.7 billion it cost to build, according to MGM financial filings. And Wynn’s two-year-old Encore bumped the company’s Vegas gambling revenue up only 5.4 percent in 2009 despite adding a huge new casino.
Tourism to Las Vegas has increased from the woeful days of 2008 and 2009, though not at the rate developers have added rooms and casino space. And Lerner says the Cosmopolitan will get significant help from being owned by Deutsche Bank, which gave the project far lower interest rates and better terms than usual for commercial loans.
The Cosmopolitan is in a better position than it might have been, says CEO John Unwin — adding he’s not an economist but an optimist.
“Once the consumers get confidence, I think once they see the numbers and see the growth, I think it’ll pick up,” Unwin said. “I’m happy to be opening this year and not last year.”
The Cosmopolitan’s insides are designed to make people gawk. Video-screen columns cycling moving art greet visitors in the lobby. Across the resort, guests can sip cocktails inside a three-story chandelier. And its 13 restaurants (including an unmarked pizza joint) will offer world-class cuisine to please any New York foodie. But the Cosmopolitan’s biggest trump on the competition might be its rooms, most of which offer spacious terraces with incomparable views of Las Vegas. Most were planned as condominiums — big and with kitchenettes.
The resort has enough gambling space to fill almost two football fields, with some spots offering slot-side bottle service. It’ll have just a handful of baccarat tables to start, even though the generally high-stakes game has held its popularity through the recession; Unwin said the Cosmopolitan’s gambling business will adapt to its customers.
Deutsche Bank hasn’t disclosed its long-range plan for the Cosmopolitan, which landed in its lap in August 2008. But its goal is to sell the resort, according to a November regulatory filing. A spokesman declined comment except to say the bank is convinced the resort will serve the bank’s shareholders as well as possible.
Analyst Lerner called Deutsche Bank’s approach “pragmatic.”
“It’s going into a difficult economic environment,” Lerner said. “My sense is there will be some cushion for some flexibility afforded to this project.”
But Kansas billionaire Phil Ruffin — who bought the nearby Treasure Island hotel-casino from MGM Resorts two years ago for $775 million and is in the market for another big resort — says the Cosmopolitan doesn’t pencil out and isn’t worth buying.
It’s too expensively built, the land is too small at 8.5 acres and it lacks a headline show or a database of regular customers, Ruffin said.
“They would have to take such a tremendous hit before anybody would get interested, I would imagine,” Ruffin said. “Their strategy probably is to see what kind of profits the thing can generate, and then they’ll know what they can sell it for.”
That’s where the Cosmopolitan’s marketing comes in. Unwin and his 5,000 employees are seeking customers who either aren’t interested in Las Vegas or feel they’ve been there and experienced all it offers.
The hotel has a partnership with Bethesda-based Marriott International Inc. that lets loyalists earn and redeem points at the resort. And the Cosmopolitan has sponsored events like the New York City Wine & Food Festival, the U.S. Open tennis tournament and Lollapalooza. Customers will get loyalty points for everything they do in the resort, not just gambling as at other Sin City resorts, and they’ll earn a free night’s stay for every eight they pay for, Unwin said.
Competitors, including Ruffin, are concerned that as the swankest hotels lower prices to fill vacancies, the discounts will ripple through the market and push older resorts’ prices to rock-bottom. But that’s not worrying Unwin.
“I might say the same thing if I was in their position, but I think the market’s in a condition that it can absorb the rooms, and I think we’ll help bring some new business to Las Vegas,” Unwin said.