May 23, 2024

DealBook: Deutsche Bank’s $4 Billion Las Vegas Bet

LAS VEGAS — The names of the biggest players in gambling — Wynn, Caesars, MGM — dominate the neon-drenched skyline of the Las Vegas Strip.

But the owner of the most expensive casino ever built in this hedonistic city, Deutsche Bank, is not announcing its arrival in lights.

Even before that casino, the Cosmopolitan of Las Vegas, opened in December, the German financial company was planning its exit strategy from a $4 billion investment that could take years, if not decades, to recoup.

“There has to be pressure on Frankfurt to do something,” said Bill Lerner, an analyst with the research firm the Union Gaming Group. “They are a bank, and I don’t think they have any interest in running a casino.”

Deutsche Bank spared no expense on the Cosmopolitan, whose casino floor is dominated by a three-story glass chandelier that encompasses a cocktail bar. Guests rave about the oversize luxury hotel rooms with wrap-around terraces, which are often sold out. And management has lured popular restaurateurs and retailers.

The Cosmopolitan is missing just one major component: a deep base of gamblers. It is betting on a relatively young demographic, a challenging crowd that usually prefers partying. On a recent Saturday night, the casino was almost empty as visitors flocked up one flight to the Marquee nightclub, where one inebriated partygoer threw up in line.

The investment is also putting Deutsche Bank at odds with its own clients. In 2009, it hired the general manager at Caesars Palace to run the Cosmopolitan — a move that upset the parent company, Caesars Entertainment, a crucial customer of Deutsche, according to people with knowledge of the situation who were not authorized to speak publicly.

While big banks bristle at comparisons to casinos, big banks — by choice and by circumstance — have become a force in Las Vegas and other gambling hot spots. Goldman Sachs acquired the Stratosphere in 2008 for roughly $1 billion. The bond powerhouse Cantor Fitzgerald runs the sports books at the Tropicana and other locales. Until recently, Credit Suisse owned a stake in the Hard Rock Hotel and Casino.

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But few companies have as much riding on the industry as Deutsche Bank.

The bank reluctantly inherited the Cosmopolitan in 2008, just as the local and national economy began to crumble. After running into cash-flow problems, Bruce Eichner, then the owner of the casino and a developer mainly known for high-end residential properties in New York and South Beach, defaulted on his $768 million construction loan from Deutsche Bank. The lender foreclosed on Mr. Eichner and took control of the property — one of the first signs that the city was headed for hard times.

“It’s a story that’s closely linked to that of Las Vegas’s fortunes,” said Anthony Curtis, a former professional gambler who now runs the Web site Las Vegas Advisor.

Many big lenders and opportunistic investors ended up owning troubled, half-built properties in recent years. Some walked away, like Morgan Stanley, which took a $1 billion write-off on the Revel in Atlantic City. Others decided to wait out the economic downturn. The billionaire Carl C. Icahn, who picked up the unfinished Fontainebleau resort in Las Vegas in bankruptcy for $156 million in 2009, still has not restarted construction on it.

In contrast, Deutsche Bank doubled down on the Cosmopolitan, opting to go it alone after failing to find a partner. Almost immediately, the bank scrapped Mr. Eichner’s vision for the Cosmopolitan, which was originally planned as a modern residential building with 28-foot robots playing guitars in the lobby area. The bank also provided the project with a low-interest loan, potentially making Deutsche liable for roughly $4 billion.

Deutsche Bank soon recruited a high-powered management team, led by John Unwin, the former Caesars executive. The Cosmopolitan, say rivals who have lost staff, is offering pay packages 30 percent higher than the industry standard. Mr. Unwin collected $1.8 million in 2010, including a $1 million bonus.

After three years and an enormous financial commitment, the Cosmopolitan opened late last year to favorable reviews, said Mr. Curtis. Many of the hotel rooms, which are retrofitted condos from the housing bubble era, come equipped with kitchens and terraces that overlook Bellagio’s famous water show. Room rates — which can top $300 a night — are among the most expensive in Las Vegas, and the property is often filled to capacity.

The Cosmopolitan has also attracted a distinctive lineup of retailers and restaurants, many of which are new to the local scene. The trendy British clothing line AllSaints chose the casino for its first Las Vegas shop. The complex also has branches of top restaurants like Jaleo, the tapas restaurant by the Spanish chef José Andrés, and Blue Ribbon Sushi. The Cosmopolitan is also home to Marquee, a popular outpost of a New York City hot spot.

“In a sea of sameness, we are trying to stand out,” said Mr. Unwin.

But the young clientele attracted to the Cosmopolitan is a notoriously fickle group. While they willingly spend on food and drinks, they are less likely to drop thousands on roulette or poker — typically the largest source of industry profits. Rivals like Wynn Resorts, the Palms, and Hard Rock Casino have had varied results tapping into this demographic. The management at Cosmopolitan says its target audience is the “curious class,” well-traveled people who are receptive to different concepts.

The demographic cuts both ways, said David B. Katz, a gambling industry analyst at the brokerage firm Jeffries Company. “The young vibe can be attractive from a volume perspective, and it can become the place to be on the Strip,” he said. “The rub is that demographic profile isn’t the most affluent and most predisposed to spending, inside and out of the casino. People that are 40 years old and older simply have more money.”

Meanwhile, Deutsche Bank also has to contend with a tricky plot of land. The Cosmopolitan sits on a mere 8.7 acres, compared with 120.5 acres at the neighboring Bellagio, the resort modeled after an Italian palazzo. So Deutsche Bank had to build up rather than out, drawing comparisons to a New York City brownstone. The casino occupies the first floor, while restaurants, retailers and a common area with a pool table take up the next two. It is a challenging design, as it forces customers to leave the casino floor for food and shopping.

All that has left Deutsche Bank struggling to attract a critical mass of gamblers. At most Las Vegas properties, the casinos typically represent half of revenue, with the balance coming from lodging, retail and the like. It is less at the Cosmopolitan, according to industry analysts.

“When you build a $4 billion casino in the middle of the Strip, it is important to have a base of gamblers,” said Mr. Lerner of Union Gaming, who previously covered the industry for Deutsche Bank. “They have zip.”

Mr. Unwin, who indicated that the restaurants and retail were at or above targets, would say of gambling only that the “trajectory is good.”

To help build the casino profits, Mr. Unwin cut a deal with Marriott to gain access to its large database of travelers. While the list does not specifically focus on gamblers, it does give the hotel a wider group to whom it can market services.

“As a financial investor in the project, we are convinced that the executive management team will built an outstanding business, and thereby serve our shareholders well,” said John T. Gallagher, a spokesman for Deutsche Bank.

But behind the scenes, executives at Deutsche Bank have balked at some aspects of casino ownership. The Cosmopolitan created a risqué advertising campaign featuring farm animals and proclaiming that the casino had “just the right amount of wrong.” But senior officials in Germany felt that the commercials were too “racy for a bank,” said a former Deutsche staffer who spoke on the condition of anonymity. Despite Deutsche’s concerns, the Cosmopolitan ran the ads.

The bank’s senior management has also kept a low profile in Las Vegas. Its chief executive, Josef Ackermann, has visited the Cosmopolitan only twice in recent years. He was also notably absent from the opening party, a $12 million affair on New Year’s Eve with A-list appearances by Beyoncé, Coldplay and Jay-Z.

Meanwhile, Deutsche Bank is years — if not decades — away from breaking even on the Cosmopolitan, say analysts, given the weak cash flow and heavy debt load. The resort, which was open for just 17 days in 2010, logged a loss of $139.5 million for the year.

“With the world coming to an end in 2008, I wouldn’t have done that project if someone had a gun to my head,” said Mr. Lerner. “I suspect they will look for a liquidity event over a short period of time.”

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