You don't spend $600 million on a hotel that's 70% complete if you don't plan to eventually open it to guests. And if that hotel is on the Las Vegas Strip, you'd better be intending to open a casino as well.
Real estate company Witkoff just bought the Fontainebleau Las Vegas for the lofty price of $600 million, and while it hasn't said precisely how it intends to unlock its potential, you can bet a resort opening is on the horizon. With Las Vegas Strip hotel occupancy hovering over 90% and room rates over $140 per night, there may be room in the marketplace for another mega-resort on the north side of the strip.
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What is Fontainebleau Las Vegas?
Named after its sister resort in Miami, the Fontainebleau Las Vegas was part of the building boom in Sin City just before the Great Recession. Construction got underway in 2007, and the resort was supposed to feature nearly 3,000 hotel rooms, over 1,000 condominiums, a 3,300-seat theater, and a 95,000-square-foot casino. But in 2009, in the depths of the downturn, the developer defaulted and the resort went into bankruptcy.
Carl Icahn eventually bought the property for $156 million, sold the furniture left in the property, and had the building stabilized to give him time to decide what to do with it. But for eight years, Fontainebleau Las Vegas has sat empty.
A relative bargain ... but also, a risk
Current estimates are that it will cost between $1 billion and $1.5 billion to complete Fontainebleau Las Vegas, putting the total bill for Witkoff and other investors at around $2 billion. Though that's a steep discount to the cost of building a similarly sized resort on the Las Vegas Strip from scratch, it's no guarantee this one will be a financial success for its new backers.
The property is nearly a mile north of Wynn Resorts' (NASDAQ: WYNN) flagship Las Vegas property, and is almost two miles from Caesars Palace at the heart of the Strip. The nearest resorts are SLS Las Vegas, which was recently sold, and has been experiencing financial hardship since its renovation in 2014, and MGM Resorts' (NYSE: MGM) Circus Circus. For comparison sake, Circus Circus generated $62 million in property EBITDA in 2016, and could only charge $80 per room per night, well below the average room rate of $136 per night on the Strip. That far north, it's harder to charge the premium prices that will be required to justify a nearly $2 billion investment.
Existing casinos shouldn't worry
Normally, any development that increased room and gaming supply on the Las Vegas Strip would be concerning for existing operators. When CityCenter and the Cosmopolitan opened, for example, they certainly sucked some custom away from neighboring resorts owned by Caesars Entertainment and MGM Resorts. But Fontainebleau Las Vegas is far enough from the heart of the Strip that I don't think it will immediately take much business from its more conveniently located peers. And based on the financial results of its closest neighbors, it's owners may struggle to bring the new project up to profitability.
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