Deutsche Bank Finally Sells Cosmopolitan For $1.73 Billion
Deutsche Bank (NYSE:DB) inked a deal with the Blackstone Group (NYSE:BX) earlier this week to finalize the sale of casino and hotel Cosmopolitan of Las Vegas in an all-cash transaction for $1.73 billion. [1] The German banking giant assumed ownership of the resort in mid-2008 after the original developer defaulted on a $760 million construction loan, and has been looking for a buyer since then as the economic downturn hit the real estate industry. The bank has spent almost $4 billion developing and running the property over the years, and the property has incurred losses of around $100 million in each of the last three years. [2] The sale finally lets Deutsche Bank take the loss-making investment off its balance sheet.
Deutsche Bank’s announcement of the sale comes shortly after the bank exited its stake in BHF-Bank. [3] The three largest investments held by Deutsche Bank under its Non-Core Operating Units (NCOU) division at the end of 2013 were Maher Terminal, Cosmopolitan of Las Vegas, and BHF-Bank, and the divestment of the latter two represent major steps by the bank towards winding down the NCOU over coming years.
We are in the process of revising our $52 price estimate for Deutsche Bank’s stock in view of the bank’s recently announced plans to raise €8 billion (~$11 billion) in fresh capital this June. [4]
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Deutsche Bank’s organization-wide restructuring plan, dubbed Strategy 2015+, focuses considerably on cutting costs. The disposal of non-core assets housed under the group’s Non-Core Operations Units (NCOU) plays an important role in this cost-cutting plan. The bank’s investment in Cosmopolitan of Las Vegas figured high on the list of disposals due to the long string of impairments the property forced the bank to incur since the downturn.
The bank initiated foreclosure proceedings for the Cosmopolitan in March 2008 after the developer defaulted on a construction loan of $760 million from it, and ended up buying the property that April by paying an additional $1 billion. [2] As real estate prices went bust within months of the deal, Deutsche Bank decided to develop the property in hopes that it would be able to sell it once the situation improved – a decision that led the bank to pump another $2 billion into the property that finally opened in late 2010. The Cosmopolitan, however, has yet to break even due to the slowing fortunes of casinos in Vegas over recent years.
The sale to Blackstone means that Deutsche Bank will finally be able to put the loss-making investment behind it for good. As an added bonus, the sale will boost the bank’s fully loaded common equity tier 1 ratio by 5 basis points (0.05%) on completion – from 9.46% at the end of Q1 2014 to a little above 9.5%. The sale, along with Deutsche Bank’s recently announced sale of BHF-Bank, represent important steps towards the bank’s overall focus on shrinking NCOU assets as shown in the chart below.
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Notes:- Deutsche Bank Agrees to Sale of The Cosmopolitan of Las Vegas, Deutsche Bank Press Releases, May 15 2014 [↩]
- Deutsche Bank Said to Seek Sale of Cosmopolitan Resort, Bloomberg, Apr 16 2014 [↩] [↩]
- Deutsche Bank completes sale of BHF-BANK, Deutsche Bank Press Releases, Mar 27 2014 [↩]
- Deutsche Bank raises capital and reaffirms Strategy 2015+, Deutsche Bank Press Releases, May 18 2014 [↩]