Even if you’re making money on a daily basis, sometimes a casino-resort can be a bad investment. Take Cosmopolitan of Las Vegas, which finally posted a profitable quarter. However, at $3.9 billion in construction costs (now at or very near the $4 billion mark with expansions and revisions of the property), it’s doubtful that Deutsche Bank made a good investment when it took the project over. Casino revenue constitutes 22% of revenue — well below Strip average — and ROI remains in the low single digits. In other words, the Cosmo won’t pay for itself for decades. Even a recent improvement in room revenues was basically manufactured by imposing new resort fees.
So much of the action happens, literally and figuratively, at the skyway level or higher that the Cosmo’s casino might as well not exist. Bill Lerner can spin this any way he likes, but the only way for a developer to get less bang for their buck on the Strip is to finish Fontainebleau, a project that would make the Cosmo look like a bargain.
Speaking of bang per buck, how’s MGM Resorts International doing next door at CityCenter? Better than ever, it seems. All things being relative, like the Cosmo, CityCenter never had anyplace to go but up and S&G has always hewn to the published construction cost of $8.5 billion, which was a lowball number. ($8.7 billion would be closer to the mark, according to the Las Vegas Sun.) However, tripling one’s cash flow is genuinely impressive and first-quarter condo sales provided a nice revenue bump, up 32%. Partner Dubai World is hinting that it wants to cash out and there’s an overhang of $1.5 billion in long-term debt. Plus, even with dramatically improved EBITDA, CityCenter is eking out a 4% return on investment, though Aria is probably well outperforming those numbers, carrying the freight for its CityCenter siblings.
Still … when revenue in that profit center of all profit centers, the casino floor has fallen to a Strip average, one must question when the multi-billion-dollar resort becomes an anachronism. If we’ve not reached that point, we’re getting close. One can go to Detroit and stay at an MGM property that’s as nice as nearly anything in Vegas and better than most. Other cities will soon experience the same phenomenon. Genting Group‘s $2 billion Resorts World Las Vegas can, at that cost, probably make worthwhile returns … but it is also probably the last such behemoth we will see. I could be wrong, but Caesars Entertainment‘s reinvention of existing properties and the massive facelift (the first of many, I suspect) of some of MGM’s Strip real estate is the new paradigm: Squeeze more money out of your existing boxes rather than reflexively keep building new ones.
When you hear a casino executive say his property “has good bones,” it means that it’s going to be around for a good long while. And, considering that how long it takes to recoup the cost of a casino now, it darn well better. Isn’t it ironic that the next hotel destined for implosion is one so new that it never opened … The Harmon Hotel? The dormers and lintels may change but dramatic alterations to the Strip seem unlikelier than ever.