How Will Red Rock Grow in a Saturated and Stagnant Market?

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In its IPO prospectus, Red Rock Resorts (NASDAQ: RRR) told investors two important pieces of information about its Las Vegas business:

  1. “Our Las Vegas properties are broadly distributed throughout the market and easily accessible, with over 90% of the Las Vegas population located within five miles of one of our gaming facilities.”
  2. “[W]e estimate that nearly half of the adult population of the Las Vegas metropolitan area are members of our Boarding Pass program and have visited one or more of our properties during the year ended December 31, 2015.”

(Check out our interactive map of “Station Casinos and the Las Vegas Regional Market“)

While these numbers may sound impressive, they also appear to leave little room for growth with respect to the company’s Las Vegas locals business. It is difficult to envision significant revenue bumps from building or acquiring more properties to cover the 10% of the population not currently living within a five-mile radius of an RRR property. In addition, if the company’s estimate is right a nd nearly half of the adult population in Las Vegas are members of its player rewards program, RRR will find difficulty signing up new locals since  a recent survey tells us that only slightly over half of the adult population gambles (see section below on “Local gaming behaviors”).

The flip side of the company’s saturation of the locals market means growth in its core Las Vegas business would have to come from significant increases in (1) the population of Las Vegas and/or (2) customer spending per capita. In this report, we examine available data to assess the likelihood of either happening. Our conclusion: facing low population growth and a decline in locals’ gaming behaviors, RRR is unlikely to experience much, if any, upside in its core Las Vegas locals business, which accounted for 92% of its net revenues and 89% of its adjusted EBITDA in the first quarter of 2016.

Las Vegas population trends

The Las Vegas metropolitan area has shown some growth in population over the past five years, in spite of a slight dip in 2011. However, what we are seeing now does not compare to the significant population growth Las Vegas experienced during the early to mid-2000s. Moreover, Las Vegas is unlikely to see the same kind of population boom like it did in the 2000s, according to expert projections.

From 2010 to 2015, the Las Vegas population grew 5.46% (Figure 1), compared to 26.5% population growth from 2002 to 2007 (Figure 2).

160802_RRRIPOdissected_fig1

160802_RRRIPOdissected_fig2

Annual population growth from 2010 to 2015 averaged 1.2% with a peak of 2.7% in 2013. From 2002 to 2007, annual growth averaged more than 4 times higher at 4.9% with a peak of 6.4% in 2004.

This kind of population explosion is not likely to return, according to projections by experts. Population forecasts show low, single-digit growth for the Las Vegas metropolitan area. The Nevada State Demographer’s Office predicts 0.9% annual growth rates or lower for 2017 through 2033 and UNLV’s Center for Business and Economic Research (CBER) estimates annual growth rates of 1.7% and lower from 2017 through 2050 (Table 1).

160802_RRRIPOdissected_tab1

With little population growth ahead, the Las Vegas locals market looks like a mature market that is unlikely to expand significantly. As 90% of the existing population already lives within five miles of one of the RRR properties, growth in the company’s core Las Vegas business would need to come from more customer visits and greater customer spending, not population expansion.

Local gaming behaviors

A useful source of information to gauge the health and growth potential of the Las Vegas locals market is the Clark County Residents Study commissioned by the Las Vegas Convention and Visitors Authority (LVCVA). These biennial studies are conducted with a random sample of 1,200 local participants and provide useful insights into locals’ gaming behavior and their overall entertainment spending patterns.

A comparison of the 2006 and 2014 Resident Study shows a significant decline in locals’ gaming activity, frequency, and budgets (Table 2).

160802_RRRIPOdissected_tab2

As we noted earlier, almost half (46%) of Las Vegas residents did not gamble in 2014, a percentage that rose significantly from the one-third (33%) who said they did not gamble back in 2006. In addition, how locals rank gambling among both their most frequent and favorite leisure activities, how often people gamble, and how much they budget for gambling are down across the board. These declining gauges of locals’ gaming behavior are consistent with what we have observed in the stagnant slot handle for the Las Vegas locals market, which we described in a previous report.

Since locals are gambling less and population growth is slow going forward, it is unclear how Red Rock can grow its core Las Vegas business.

 

Download this report

Fidelity Would Have Valued Station Casinos at $9.19 at the End of January

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If Fidelity bond funds valued Station Casinos at an estimated $9.19 per share at the end of January, what will Fidelity equity funds value the company at if they decide to participate in the upcoming Red Rock Resorts IPO?

As a result of Station Casinos’ Chapter 11 bankruptcy reorganization in 2011, Fidelity owns approximately 8.7% economic interest in the gaming company in the form of Station Holdco LLC units held by several of its bond funds. These funds disclose the value of their Station Holdco holdings regularly.

Most recently, 22,418,968 Hold LLC units in the Fidelity Capital and Income Fund (FAGIX) were given a value of $78.018 million as of 1/31/16 in a 3/30/16 N-Q filing.

Using the same methodology as before, we estimate that this implies a valuation of Station Casinos’ equity at approximately $1.06 billion, which would translate to about $9.19 per share based on the fully-diluted number of shares outstanding of Red Rock. That is, Fidelity would have valued Red Rock at $9.19 at the end of January.

What valuation will Fidelity give Red Rock if the mutual fund giant decides to participate in the IPO, which has an offering price range of $18 to $21 per share? Will Fidelity ask itself, internally, how Station Casinos could have doubled in value in less than three months?

More Growth Questions about the Las Vegas Locals Gaming Market

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Station Casinos has not entered any commercial gaming market outside of Nevada since it had to leave Missouri in 2000, while the gaming industry has expanded into many more new states since then. If investors seek a gaming company that can expand into multiple commercial markets outside of Las Vegas, be sure to ask Red Rock management what happened in Missouri. Station also aborted its online gaming venture within 2 years. But for tribal gaming, Station has been landlocked in Nevada.

All of these facts seem to warrant the classic warning for prospective investors: Do you want to put all your eggs in one gaming basket?

There has been little growth in overall gaming revenue in the Las Vegas locals gaming market since 2009. And Station Casinos has not noticeably gained market share.

Download our new report on growth questions about the Las Vegas locals market here.

Marc Falcone, Red Rock’s CFO, told the Nevada Gaming Control Board in January 2016 that

I do think we are encouraged by the backdrop of the economy. We do expect to experience additional growth. We think we are in the early stages of recovery, particularly in the locals business, and we are enthusiastic and excited about the backdrop, what we see economically and how that can translate into further growth across all revenue categories in our business today.

Yet economic data from federal agencies and gaming data from the Gaming Control Board suggest the current recovery in the Las Vegas area is moving slower than a previous post-recession recovery.

According to the National Bureau of Economic Research, there have been two recessions so far in the 21st century: one in 2001 and another that ended in June 2009. Four years after the first recession, Station Casinos opened its Red Rock Casino Resort & Spa.  Four years after the second recession, Station Casinos’ founding family is cashing out $460 million through the Red Rock Resorts IPO.

Comparing Recoveries in Las Vegas Economy

Post-Recession Growth Population ↑ Average Weekly Wages ↑ Number Employed ↑
2002 – 2006 22.3% 19.2% 24.5%
2011 – 2015 9.4% (through Aug.) 3.6% (through 3Q15) 13.5% (through 3Q15)

Recovery after the 2001 recession meant that, from 2002 to 2006, the population of the Las Vegas Valley grew by 22.3%, the average weekly wages of Clark County residents grew by 19.2%, and the total number of employed Clark County residents grew by 24.5%.  During the current recovery, from 2011 to 2015, the population of the Las Vegas Valley grew by 9.4%, the average weekly wages of Clark County residents grew by 3.6%, and the total number of employed Clark County residents grew by 13.5%.

Post-Recession CAGR Population ↑ Average Weekly Wages ↑ Number Employed ↑
2002 – 2006 5.2% 4.6% 5.6%
2011 – 2015 2.3% (through Aug) 0.3% (through 3Q15) 3.2% (through 3Q15)

Another way to compare these two sets of indicators would be to look at the growth rates.  Following the 2001 recession the population grew at a compound annual rate of 5.2% and the number of people employed grew at a compound annual rate of 5.6%.  In the four years after the more recent recession, not only did wages grow at a slower rate, but Las Vegas area population and the number of people employed grew at compound annual rate of 2.3% and 3.2%, respectively.

Recoveries and Tighter Slots in Las Vegas Locals Market

Post-Recession Growth Slot Unit Count Slot Handle Slot Handle
Avg Monthly Growth
Dec. 2002 – Dec. 2006 ↑18.7% ↑36.2% $19.8 million
Dec. 2011 – Dec. 2015 ↓11.5% ↑  1.1% $0.66 million


In the Las Vegas locals gaming market, from December 2002 to December 2006, slot unit count grew by 18.7%, while slot handle climbed by 36.2% at an average of $19.8 million per month over the four-year period. In the current era, from December 2011 to December 2015, slot unit count declined by 11.5%, while slot handle climbed by 1.1% at an average of $660,000 per month.

Furthermore, we identify a potential limit to the current recovery in terms of the slot win percentage, i.e., how tight the slots are.  From December 2011 to December 2015, total slot revenue amount grew 23.5%, while the slot unit count declined and slot handle was stagnant.  This growth in market-wide gaming revenue was made possible because slots got tighter.  Overall slot win rates (by the house) in the market went from 4.39% in December 2011 to 5.36% in December 2015, while slot win per unit per day rose 40%, from $75 per unit per day in December 2011 to $105 per unit per day in December 2015.

Growing casino revenue through tighter slots has its limits.  The addition of more slot units, by comparison, indicates confidence in expanding demand.  As noted in a previous report, when casino operators see their customers spend more on slots, they put more slots out on the floor.  This was the case between 2004 and 2006 when slot wagers in the locals market rose by 20%, and owners added 7,343 slots to the market.

If the Las Vegas locals market has reached an inflection point and is about to take off, why is Red Rock selling its specially zoned casino development sites? You have no doubt read in the prospectus and heard from the company that Station Casinos has taken advantage of a Nevada law that restricts new neighborhood casinos from being developed and has bought up the only available future casino sites so that they “own and control” their own destiny. So why are they selling some of these sites now? Is it a reflection of what those economic numbers could be telling them about the future of their core business?

 

Deutsche Bank Would Have Valued Red Rock at $5.39 Per Share a Year Ago

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Prospective investors in Red Rock Resorts should ask Deutsche Bank how, in its opinion, the value of Station Casinos could have more than tripled in little over a year.

According to a 2/17/15 analyst report by Deutsche Bank gaming high-yield analyst Andrew Zarnett, Station Casinos LLC, as of 12/31/2014, was estimated to have an enterprise value to be $2.59 billion, which would have implied an equity valuation of $624.6 million after subtracting net debt of $1.97 billion. That equity valuation would have translated to about $5.39 per share with the fully-diluted number of shares outstanding of 115.9 million found in Red Rock’s 4/15/16 S-1/A filing

Red Rock’s 4/15/16 S-1/A filing shows an IPO price range of $18.0 to $21.0 per share. Using the mid-point of $19.5 per share and the fully diluted shares outstanding figure of 115.85 million, the company and its underwriters, one of whom is Deutsche Bank, are offering an equity valuation of $2.26 billion and, adding net debt of $2.04 billion, an enterprise value of $4.30 billion for Station Casinos LLC.

Station Casinos Valuation Jump

12/31/14 4/15/16
Enterprise value $2,590 million $4,298 million
Net debt $1,965 million $2,039 million
Equity $625 million $2,259 million
Implied per share price on 115.85 million shares outstanding $5.29 $19.5

From 12/31/14 to 4/15/16, the share prices of four publicly-traded regional gaming operators (BYD, PENN, PNK, ISLE) rose by an average of 61%.

Investors should ask Deutsche Bank how, in its opinion, the value of Station Casinos could have more than tripled in little over a year.

(See also our earlier piece on the estimated valuation Station Casinos equity as implied by SEC filings by Fidelity, a current minority owner.)

Dividends on Your Second-Class Red Rock Shares? Don’t Count on It

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Red Rock Resorts says they “intend to pay quarterly cash dividends” to Class A shareholders “initially equal to $0.10 per share” starting in 3Q16. For an investor buying second-class shares in a company facing stagnant growth and market contraction, dividends are perhaps the only upside. But how likely is it that Red Rock will pay dividends at the promised level? Will it have enough free cash flow to pay dividends? We take a closer look.

Red Rock has a number of obligations that must be met before it can pay dividends to Class A shareholders. The first obligation stems from the indebtedness of Red Rock’s affiliate, Station Casinos LLC. According to Red Rock’s S-1/A filing on April 15, 2016:

The existing debt agreements of Station LLC limit the ability of Station LLC to make distributions to Station Holdco, which effectively restricts the ability of Station Holdco to distribute sufficient funds to permit Red Rock to pay dividends to its stockholders.

On a consolidated basis, Red Rock had total long-term debt of $2.16 billion as of December 31, 2015. The company estimates that in 2016, following the public offering, it will be required to pay $209 million in principal and interest payments on this indebtedness.

The company will also have to spend a significant amount of cash flow on maintenance capital expenditures every year. For 2016, Station Casinos expects to spend “approximately $100 million to $125 million” on capex. From 2013 to 2015, capital expenditures consisted “primarily of various renovation projects at our properties, information technology equipment purchases and slot machine purchases.”

After debt obligations and maintenance capex, Station Casinos or its direct parent Station Holdco can make distributions to its members. We remind you again that Red Rock will have only one-third economic interest in Station Casinos, so any distributions upstream made will primarily go to pre-IPO owners who stay on after the IPO. And these LLC distributions will include payments to cover LLC members’ income taxes.

In addition, after Red Rock receives its one-third distributions from Station Casinos, it is required to make payments under the tax receivable agreement (TRA) to pre-IPO owners equal to 85% of its tax benefits. The company estimates it will owe a maximum aggregate payment of $28.1 to $59.0 million under the TRA, although we have seen how TRA liabilities can dramatically increase after an IPO.

For some historical perspective, let’s take a look at Station Casinos’ dividends the last time it was a public company. The following table compares Station Casinos’ historic dividends with Red Rock’s proposed dividends.

Station Casinos, Inc. Dividends vs. Red Rock Resorts Proposed Dividends

Year Annual Dividends Prior Year EBITDA

(millions)

 Total Dividend Payments (millions) Total Dividend Payments/Prior Year EBITDA
2004 $0.69 295.2 $44.3 15.0%
2005 $0.92 385.4 $62.6 16.2%
2006 $1.08 480.9 $65.4 13.6%
Red Rock (proposed) $0.40 $451.4 (2015) $15.4 3.4%

*Station Casinos paid no dividends from 1993-2002 and only two quarterly dividends in 2003.

Red Rock’s proposed 10 cent quarterly dividend at the midpoint of its pricing range ($19.50) equates to around a 2% dividend yield. For those looking for a dividend play, there are plenty of companies with higher dividend yields. Furthermore, Red Rock’s dividend as a percentage of EBITDA is significantly lower than what Station Casinos used to pay out before. Red Rock’s proposed dividend is only 3.4% of 2015 EBITDA, whereas Station Casinos paid an average 15.0% of prior-year EBITDA in dividends from 2004 to 2006.

With questionable prospects for growth and poor corporate governance, investors in the Red Rock IPO might want to look to dividends for a reason to invest in Red Rock. But, as a result of its other obligations, there is no certainty the company will be able to pay dividends at a level that satisfies public shareholders.

Red Rock Resorts is a Second-Class Gaming IPO

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Download our unauthorized roadshow presentation and presentation notes here.

Investors who buy Red Rock’s second-class shares on offer will gain a minority (33%) stake in the once-bankrupt Las Vegas casino and tavern operator, Station Casinos. The terms of the offering beg questions about company insiders’ confidence in its long-term prospects.

Prospective investors should ask management the following questions:

Should new shareholders expect significant dilution soon after the IPO thanks to Deutsche Bank’s expected exit? After the IPO, Deutsche Bank owns 16.2-18% of the company after selling very few shares in the current offering. The German lender, which is also an underwriter of this IPO, has been selling off its non-core assets at a loss, including a Las Vegas Strip resort and a New Jersey port operator as it continues to deal with its capital and regulatory challenges. Will it sell off its large Station Casinos/Red Rock stake immediately after the 180-day lock-up period, which may even be waived by Deutsche Bank and J.P. Morgan as underwriters?

Why is Red Rock paying $460 million in cash to insiders to internalize management with the Fertitta Entertainment acquisition? Red Rock’s prospectus does not present any specific potential benefits of this proposed transaction, yet the price represents (1) 20% of the $2.3-billion IPO valuation of Station Casinos’ equity at the mid-point of its offering price range; (2) 8.7x TTM management fees instead of the 1x TTM management fees for a potential termination of the Fertitta Entertainment management agreements covering at least 13 of 19 casinos; and (3) 31x our estimate of Fertitta Entertainment’s 2015 pro forma EBITDA of about $14.8 million. Even though it did not complete a $300-million dividend recapitalization last spring, Station Casinos has paid out over $477 million to its existing owners from 2013 through April 2016, before consummating this pricy acquisition.

How confident is management in Red Rock’s growth prospects? The Las Vegas locals market, which made up over 90% of Red Rock’s total EBITDA in 2015, has been contracting in terms of total amount wagered and number of slot units, and gaming revenue at the company’s Las Vegas operations grew at an annual compounded rate of only 1.4% from 2012 to 2015. The company has even listed hard-to-come-by potential casino sites in Nevada for sale. As for its tribal business, the company has not signed any new tribal gaming development or management agreements since 2004. Its two current contracts are due to expire in 2018 and 2020, with only one more project in development.

If the Fertitta family is cashing out, why should investors buy Red Rock’s second-class shares with uncertain prospects for dividends? The Fertitta family’s Class B Red Rock shares with 10:1 voting power make the Class A Red Rock shares second-class shares in more ways than one. Furthermore, a lopsided tax receivable agreement without a hard cap on future payments to pre-IPO owners will lead to uncertainty about Red Rock’s future free cash flow and its ability to pay dividends to Red Rock’s second-class shareholders.

It is alarming that potential investors in Red Rock’s second-class IPO are being asked to buy out an insider management company at a high, $460-million valuation, instead of paying down company debt or funding new growth initiatives. Data on the ground in Las Vegas show tepid growth in Red Rock’s core business, underscoring the contrast between an IPO that strengthens a gaming company’s finances and one that drains funds to buy a related-party management company, like Red Rock.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

 

 

More Questions about the $460-Million Valuation of Fertitta Entertainment

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A key feature of the Red Rock IPO is the use of proceeds, plus additional debt, to acquire Fertitta Entertainment for $460 million in a related-party transaction. Investors should ask the company how it arrived at and agreed to this price.

First of all, here is some perspective on the price tag of this insider deal. $460 million equals:

  • 93% of the estimated IPO net proceeds of $495.9 million (assuming the mid-point of the offering price range and that the underwriters do not exercise their options to purchase additional shares)
  • 20% of the IPO valuation of Station Casinos’ equity of $2.26 billion (with the same assumptions as above)
  • 8.7 times Fertitta Entertainment’s 2015 management fee revenue from Station Casinos
  • 31 times Fertitta Entertainment’s 2015 pro forma EBITDA of $14.8 million (which we calculated by comparing the financials of the consolidated Station Holdco LLC and Station Casinos)

In addition, we believe prospective investors should ask Red Rock management the following questions:

  • Is Red Rock projecting $34 million of incremental annual EBITDA and therefore only $18 million in annual corporate expenses on a going-forward basis after buying Fertitta Entertainment and internalizing management?
  • If yes, does that projection include potential equity-based compensation expenses?
  • And what is the plan to keep corporate expenses at $18 million a year for 13.5 years?

Even though the company’s IPO prospectus filings do not describe any specific financial benefits of the Fertitta Entertainment acquisition, Red Rock management explained the valuation basis of the Fertitta Entertainment deal what they presented to Nevada gaming regulators on January 21. During the special meeting of the Nevada Gaming Control Board meeting to approve the IPO, CFO Marc Falcone said:

With the transaction and the acquisition of Fertitta Entertainment, we actually improve, EBITDA will go up by $34 million, approximately. So we are basically taking the management fees that were historically paid to Fertitta Entertainment, those now will remain within Red Rock Resorts, Inc., and Station Casinos LLC. We are also adding back some expenses that related to salaries and wages for the employees that are currently employed at the Fertitta Entertainment level that will now be employed at the Station Casinos LLC level [emphasis added].*

That is, the company believes that internalizing Fertitta Entertainment would lead to incremental annual EBITDA of $34 million because that’s the amount it would “save” by (1) not paying out management fees ($52 million in 2015) anymore but (2) paying corporate expenses covering its executives and corporate employees directly, who are currently employed and paid by Fertitta Entertainment. If $34 million incremental EBITDA is the basis for the $460 million price, a 13.5x multiple was used. It thus appears the company has agreed to transfer 13.5 years of potential EBITDA “savings” as an immediate lump-sum cash payment to the owners of Fertitta Entertainment as part of the IPO.

Mr. Falcone’s statement implies that the company is expecting to pay only $18 million a year in corporate expenses going forward ($52 million minus $34 million). Is $18 million in corporate expenses a realistic number for a company the size of Red Rock/Station Casinos?

Let’s consider what Station Casinos used to do when it was a publicly-traded company. In the last three full years when it was a publicly-traded company before the disastrous insider-led leveraged buyout of 2007, the company paid on average about 4.9% of its net revenues out as corporate expenses.

($ millions) 2004 2005 2006
Net revenues $986.7 $1,108.8 $1,339.0
Corporate expenses $47.2 $57.6 $63.1
Corporate expenses as % of net revenues 4.8% 5.2% 4.7%

In 2015, Station Casinos had net revenues of $1.35 billion. If it had paid its own corporate expenses at a level like it used to during the three-period listed above, it would have spent $61 million in corporate expenses. We believe it would be unrealistic to expect to pay only $18 million in corporate expenses after Red Rock internalizes Fertitta Entertainment.

Another concern investors should be aware of is how the company accounts for equity-based compensation. According to section 3.08 of the disclosure schedule of the execution copy of the Fertitta Entertainment purchase agreement (filed as Exhibit 10.10 in Red Rock’s 2/12/16 S-1/A):

With respect to [Fertitta Entertainment LLC’s] consolidated financial statements for the years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015, the Company did not record share-based compensation expense associated with equity incentives issued to current and former executives of the Company from FI Station Investor LLC.  FI Station Investor LLC is an entity that is owned by the parent entities of the Company.  Pursuant to GAAP, this non-cash share-based compensation is required to be recorded as a component of the Company’s statement of operations since these executives were employees of the Company and FI Station Investor LLC is a common-controlled entity of the Company’s equity holders.  The Company’s auditor, Ernst & Young LLP, has determined that each of the foregoing financial statements would require to be restated and has withdrawn its opinions for each audit period that are dated March 25, 2015, May 14, 2014, April 16, 2013 and May 15, 2012, respectively.

This disclosure should lead investors to ask whether Station Casinos has an accurate handle on historical, current and projected costs of equity-based compensation, which could be an expensive component of cost for any company. (We have sent a letter to the SEC asking some other questions based on this disclosure, too.)

* The transcript of the Jan. 21, 2016, special meeting of the Nevada Gaming Control Board can be ordered by calling Sunshine Litigation Services at 775-323-3411. The quote is from pp. 32-33.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

Questions about the Audited Financial Statements of Red Rock Resorts

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Last week, we wrote to the SEC with questions concerning the audited financial statements of Red Rock Resorts. In our letter, we ask two specific questions:

  1. Did Fertitta Entertainment, which will be acquired by Red Rock for $460 million, provide audited financial statements with an unqualified opinion by its auditor – also Ernst & Young – after it agreed to be acquired by Red Rock?
  2. If Fertitta Entertainment did not provide audited financial statements, how did Ernst & Young handle the inclusion of Fertitta Entertainment when it produced the audited consolidated financial statements of the Station Holdco holding company?

Our questions were based on this disclosure from the Fertitta Entertainment purchase agreement:

With respect to [Fertitta Entertainment LLC’s] consolidated financial statements for the years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015, the Company did not record share-based compensation expense associated with equity incentives issued to current and former executives of the Company from FI Station Investor LLC.  FI Station Investor LLC is an entity that is owned by the parent entities of the Company.  Pursuant to GAAP, this non-cash share-based compensation is required to be recorded as a component of the Company’s statement of operations since these executives were employees of the Company and FI Station Investor LLC is a common-controlled entity of the Company’s equity holders.  The Company’s auditor, Ernst & Young LLP, has determined that each of the foregoing financial statements would require to be restated and has withdrawn its opinions for each audit period that are dated March 25, 2015, May 14, 2014, April 16, 2013 and May 15, 2012, respectively.

This disclosure makes one question how the unnamed financial advisor to the special committee of Red Rock was able to provide a fairness opinion on the Fertitta Entertainment acquisition, if the target company’s auditor had withdrawn its opinion on its financial statements.

It is possible that, since last October, when the purchase agreement was signed and the above disclosure was made, Fertitta Entertainment restated its financial statements for the named periods and Ernst & Young has since audited and provide an unqualified opinion on its restated financial statements. But if that is what has transpired and new financial statements acceptable to the auditors are available now from Fertitta Entertainment, should the $460-million agreement signed last October be revisited to ensure the deal is still fair to Station Casinos and its current and future investors?

See our full letter to the SEC here.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

Why is Station Casinos Selling Valuable Casino Sites?

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See also: More growth questions about the Las Vegas locals gaming market.

In Red Rock Resorts’ most recent S-1/A, the company says it “control[s] approximately 398 acres of developable land comprised of seven strategically-located parcels in Las Vegas and Reno, Nevada, each of which is zoned for casino gaming and other commercial uses” (3/15/16 S-1/A, p. 116). The filing then lists seven such parcels: Durango/I-115 (70 acres), Wild Wild West/Viva (96 acres), Flamingo/I-215 (58 acres), Via Inspirada/Bicentennial Parkway (45 acres), Boulder Highway (30 acres), Mt. Rose Property (Reno) (88 acres), and South Virginia St/I-580 (Reno) (8 acres).

Two of these sites caught our eye, because they are actually on the market. There is no guarantee that IPO investors will be able to participate in any potential growth tied to these parcels, if they are soon sold off.

The large Mt. Rose site in Reno has been on the market since at least November 3 last year, less than a month after the company made its initial IPO filing on Oct 13.

A 25.5-acre portion of the company’s 30-acre Boulder Highway site in Las Vegas has also been on the market for a while. The parcel for sale is not itself entitled for gaming development, leaving a 5-acre rump for a future casino. The earliest listing we saw was from October 28.

It is unclear why Red Rock does not disclose in its prospectus that these two parcels are currently listed for sale. This lack of disclosure is all the more puzzling given that the company does say that another gaming-entitled parcel in its land bank is for sale – immediately after it lists off the seven parcels mentioned above: “We also own an additional development site in Las Vegas that is zoned for casino gaming and other commercial uses and which is currently for sale.”

This likely refers to what one might call the “Cactus/I-15 site”, which is located off the new Cactus Avenue ramp of I-15 south of the Las Vegas Strip. This parcel has also been on the market since at least October 28, and it is being sold “with a deed restriction precluding any gaming on entire site.” (Station Casinos had announced a “Cactus Station” project at this location back in November, 2008, before the highway exchange was built.)

Gaming-entitled land has been a scarce commodity since Nevada State Senate Bill 208 (“SB 208”) was enacted in 1997 to significantly limit the construction in large urban communities such as Las Vegas/Clark County and Reno/Washoe County. As Red Rock tells prospectus investors, one example of the ability of its “highly-experienced management team, led by the Fertitta family,” to create value has been their “capitalizing on the opportunity created by Nevada’s passage of SB 208 through a series of strategic acquisitions and new developments” (S-1/A, 3/15/16, p. 4). Furthermore, the company believes that “the development of new casino facilities will continue to be limited due to SB 208, which limited casino gaming in the Las Vegas valley to specified gaming districts and established more restrictive criteria for the creation of new gaming districts” (S-1/A, 3/15/16, p. 8). One would thus expect any large, gaming-entitled parcels – such as the ones the company has put on the market – to continue to be quite valuable.

Investors should ask Red Rock Resorts/Station Casinos and its IPO underwriters:

  • Why is the company selling valuable casino sites?
  • Where will growth come from if the company is selling off future casino sites?
  • Does the Fertitta-led management team not see value in these parcels?
  • Do they not see growth opportunities that can be realized by developing these sites?
  • Do the Fertittas and other executives of Red Rock have confidence in the company’s core Las Vegas locals business?

See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

“Too-Big-To-Regulate”

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We recently sent a letter to Nevada Governor Brian Sandoval  to provide the governor with “specific examples of problems related to the approval of the Station Casinos/Red Rock Resorts IPO by the Nevada Gaming Commission on January 21, 2016 in order to illustrate the challenges Nevada faces in regulating a ‘too-big-to-regulate’ significant owner of one of the major gaming companies in Las Vegas.”

The entire letter can be viewed here.

In the letter, we discuss the rushed nature of the approval of the IPO by the Gaming Control Board and Nevada Gaming Commission, Deutsche Bank’s accountability as the parent company and affiliate of a felon, federal regulators’ reactions to the bank’s misconduct, and the relationship between the bank and its designated director at Station Casinos, Mr. Robert A. Cashell, Jr. We also ask whether Nevada’s gaming regulators are too permissive toward “too-big-to-regulator” investors.

Our letter concludes with the following:

We cannot help but worry that Nevada gaming regulators appear unwilling to confront head-on the admittedly complex issues related to a “too-big-to-regulate” investor like Deutsche Bank, which is affiliated with a felon. We are fearful that this apparent unwillingness on the part of our state regulators might invite unwelcome scrutiny from federal officials, especially as federal regulators and investigators continue to work to hold Deutsche Bank accountable for its actions. Some might even begin to question whether Nevada is capable of upholding the “gold standard” of gaming industry regulation when our regulators continue to look the other way and refuse to ask hard questions about why the affiliate of a felon continues to own and profit from casinos in our state.

The entire letter can be viewed here.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO: