Red Rock Resorts is heavily dependent on the health of the Las Vegas locals gaming market. In this report, we examine key gaming metrics in the Las Vegas locals market – going beyond simple measures of gaming revenue – in order to gauge the company’s potential to grow back up to the peak levels of 2007.
The company bought out two long-term land leases it had with a related party for $120 million at a price of approximately $1.62 per acre. The company paid about 17 times annual rent to terminate the two leases. It is unclear whether an independent appraisal was performed or if the audit committee of the board reviewed and approved the transaction.
Under a tax distribution agreement, Station Casinos spent $43.6 million in 2016 to cover some of the federal income tax obligations of the Fertitta family and other owners of the company. Should Red Rock shareholders continue to let Station Casinos, of which they own 57%, spend cash on covering the income tax liabilities of pre-IPO owners like the Fertittas?
In the first quarter of 2017, Red Rock Resorts’ Class A share price declined by 7% while the S&P 500 index went up by 4.65%. What explains this significant underperformance of RRR stock? We believe investors are likely concerned with the Palms acquisition and the uncertainty in the company’s growth pipeline.
Red Rock Resorts has been talking up its Las Vegas development sites and master-planned expansions in its presentations to investors and SEC filings. However, after a review of local real estate listings and planning agency documents, we found development sites for sale and no approvals on file for some of the company’s master-planned expansions.
Deutsche Bank sold off its ownership stake on Nov. 10. Deutsche Bank is in dire need of additional capital, so we expected them to sell off its Red Rock Resorts stake as soon as it could. Deutsche Bank investors should certainly welcome the cash infusion and capital boost that can come from selling and exiting the casino assets.