One of the largest and more luxurious gaming properties on the Las Vegas Strip is on the market. Investment firm Blackstone Group (NYSE: BX) is reportedly trying to unload the Cosmopolitan and is hoping to get at least $5 billion for the property.
This would be a massive sale price and a massive gain for Blackstone based on its sale price. Here's a quick overview of how Blackstone came to acquire the Cosmopolitan, who could potentially buy the property, and what it could mean for the gaming real estate industry as a whole.
A brief history of the Cosmopolitan
Until the recent opening of Resorts World, the Cosmopolitan was the newest casino property on the Las Vegas Strip. However, the early days of the property were rather interesting from a development point of view.
For one thing, the timing couldn't have been worse. Construction on the property started just before the Great Recession hit. After completing only the parking garage, the original developer defaulted on its construction loan, and Deutsche Bank took over the project, seeing it through to completion.
It opened in 2010 as an affiliate of Marriott's (NYSE: MAR) Autograph Collection, but Deutsche Bank remained the owner of the property. Over its first four years in operations, the Cosmopolitan lost a total of $440 million.
Finally, in 2014, the bank decided to get the massive property (which cost a reported $3.9 billion to build) off its balance sheet. It sold the Cosmopolitan to Blackstone Group for the fire-sale price of $1.73 billion -- less than half its development cost. However, since Deutsche Bank didn't cover the project's entire cost, the bank actually made a small profit on the sale.
This isn't the first time Blackstone has tried to unload the Cosmopolitan. It actually tried to sell it two years ago for $1 billion less. However, with the surge in real estate prices and investment activity, now apparently seems like a good time to give it another shot and at a higher price.
Who could buy it?
There is reportedly some interest in the property, although there's no clear buyer willing to pay such a lofty price for the Cosmopolitan. Apollo Global Management is said to be interested. It's also entirely possible that a gaming real estate investment trust (REIT) like VICI Properties (NYSE: VICI) could buy it. Though, with VICI's pending acquisition of MGM Growth Properties (NYSE: MGP), that could be a complicated transaction.
Another possibility would be for a casino operator like MGM Resorts (NYSE: MGM), Caesars Entertainment (NYSE: CZR), or Penn National Gaming (NASDAQ: PENN) to acquire the property directly. While this is less likely than a REIT buying the property, it isn't out of the question, especially with the latter two, where it could be a good strategic move.
All three of these operators own at least some of their properties. While Caesars has a large presence on the Strip, it is severely lacking in newer properties, especially compared to its main rival MGM. And Penn is a regional operator that's only presence in Las Vegas is the aging Tropicana.
Will the property sell?
Of course, the $5 billion question is whether anyone will actually buy the Cosmopolitan at the higher asking price. To put this into perspective, this is more than the development cost of the brand new (and significantly larger) Resorts World, which cost $4.3 billion and was the most expensive Las Vegas property ever developed.
And it's worth pointing out that casino properties have been selling for less than their replacement cost, not more. For example, the MGM Springfield recently sold to MGM Growth Properties for $400 million, despite costing $960 million to develop and build. So, I wouldn't exactly call a $5 billion sale a high probability.
However, if the Cosmopolitan does sell for anywhere close to Blackstone's $5 billion asking price, it could have implications elsewhere in the gaming real estate world. It could signal that investors are willing to pay significantly higher valuations for properties now than just a few years ago -- and it could be a positive catalyst for REITs that own gaming properties.