Make way for the Cosmopolitan

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Even before The Cosmopolitan of Las Vegas opens Wednesday, gaming industry analysts are saying that to succeed financially the hotel-casino will have to offer something different from what is found at other properties along the Strip.

The Cosmopolitan also needs to generate income for Deutsche Bank AG, which acquired the property out of foreclosure in 2008 and spent $3.9 billion to complete the 2,995-room hotel-casino.

"It’s important for them to maximize the property’s long-term financial potential, no question," said Edward King, managing director of Morgan Stanley’s investment banking division.

Union Gaming Group principal Bill Lerner said The Cosmopolitan would need to generate cash flow as soon as possible to reduce the burden of costs associated with opening the property. He said those costs include, among other things, labor, construction and taxes.

Deutsche Bank issued an initial $60 million to fund construction of the two-tower development along the Strip between CityCenter and Bellagio.

When Ian Bruce Eichner and his company, 3700 Associates LLC, defaulted on his loan two years ago, Deutsche Bank seized the project and financed its completion.

When Deutsche Bank seized the property, the bank had loaned Eichner $1 billion. According to regulatory filings, Deutsche Bank has written off about $1 billion of its investment in The Cosmopolitan.

"They brought in their own team and have demonstrated by honoring their obligations that they are here for the long term," King said.

Lerner disagreed, saying he expects Deutsche Bank to "wait until the environment fosters a reasonable return" on their investment before selling the property.

"Gaming is not its priority or a part of its future strategy," Lerner said.

Soon after acquiring the 8.7-acre site, Deutsche Bank hired its own architects, interior designers and gambling experts to build a world-class casino and luxury resort.

Deutsche Bank, for example, redesigned the casino floor to place slot machines closer to entrances along the Strip to attract pedestrians.

The 100,000-square-foot casino will feature 83 table games and 1,474 slot machines, according to the company.

Cosmopolitan officials also signed a deal with Cantor Gaming to run the property’s race and sports book. The book is expected to open in the first quarter of 2011, pending regulatory approval.

An agreement with Marriott International Inc. that will provide The Cosmopolitan with access to a database of travelers is also expected to help attract visitors.

The property features 36,000 square feet of high-end retail shops, including British-brand AllSaints and Beckley, a boutique featuring women’s clothing and accessories.

The Cosmopolitan is unique among Strip hotel-casinos in that its vertical design places shops, restaurants and other amenities on multiple floors throughout the two 50-story towers.

"The Cosmopolitan is about creating a resort experience that is truly different than anything else that exists right now in Las Vegas," CEO John Unwin said in a statement.

Unwin, a former general manager with Caesars Palace, took over The Cosmopolitan in October 2009.

"Like any prudent investor, we will continue to evaluate all of our options," Deutsche Bank spokesman John Gallagher said. "We are extremely pleased with the final result."

But the Strip’s latest addition opens with a handicap: the lack of a built-in base of loyal gamblers.

When Wynn Resorts Ltd. or Las Vegas Sands Corp. have opened new properties, they have had a built-in gambling clientele from other properties in their portfolios, Lerner said.

"They need to have a solid base, which is something this entity will be building from scratch," he said. "It will take some time before it will be disruptive on the gaming side."

The current plan is for a staggered opening for the hotel, with some rooms not scheduled to open until early 2011.

Overall, The Cosmopolitan was expected to increase room capacity by 1.5 percent in Las Vegas, said David G. Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas.

Schwartz said he was concerned about how the added capacity will affect the market. "What we saw is 5 percent capacity added to the market with the opening of Aria, Planet Hollywood (Resort) and other projects," Schwartz said. "Year-to-date, visitation has only increased 2.4 percent. It’s a very legitimate concern."

Standard & Poor’s analyst Ben Bubeck said the property’s success largely would be tied to an increase in consumer demand that still hasn’t returned to prerecession levels.

"We are not seeing the consumer demand, and we are forecasting un­employment to remain around 8 percent through 2012," Bubeck said . "That’s not very encouraging."

Whether The Cosmopolitan will succeed in attracting new tourists to Las Vegas rather than just siphoning customers from other properties doesn’t seem to bother some of its competitors.

However, Mike Leven, president and CEO of Las Vegas Sands Corp., expects The Cosmopolitan to harm the market and delay any recovery.

"I don’t know how Cosmopolitan … will play out, but it can’t be helpful obviously," Leven said during a recent third quarter conference call with analysts.

"More capacity in an already difficult market can’t be positive for the market. How big a negative? I just don’t know."

Leven said he didn’t know how the market would get any better in 2011, especially with the additional capacity The Cosmopolitan brings to the Strip.

"As you may well know, we want everyone to succeed," Paul Berry, vice president of hotel operations for Aria at CityCenter, said after a panel discussion Nov. 16 at the Global Gaming Expo at the Las Vegas Convention Center.

Berry said if The Cosmopolitan succeeds in bringing more traffic to the Strip, then "absolutely everyone will benefit" from its success.

"I don’t have any concern about The Cosmopolitan and the additional rooms it’s bringing to the Strip," said George Maloof, co-owner of the Palms. "It’s about 3,000 rooms. It’s not like it’s 20,000 more rooms."

Maloof said he hoped the new attraction will bring more people to town, but he added that the Palms’ advanced bookings for the first quarter of 2011 were already "very good."

Kevin Kelley, chief operations officer at Station Casinos Inc., said his company’s business model is different in that it caters to locals more than tourists.

"They are employing 5,000 people," Kelley said. "The city needs more jobs. We are hoping they are a huge success."

He said those 5,000 new jobs have created a nice pool of new potential Station customers.

"Even though people work on the Strip, they like to play off the Strip," he said. "It’s just a great opportunity for Station Casinos."

Contact reporter Chris Sieroty at csieroty@reviewjournal.com or 702-477-3893.