Red Rock Resorts Silent on Sports Betting

Red Rock Resorts has not made any significant moves to bolster its position in sports betting following the overturn of the Professional and Amateur Sports Protection Act (PASPA) in May 2018. Public investors in Red Rock Resorts should ask: Does management at Red Rock Resorts have plans to pursue sports betting or other gaming opportunities outside of Nevada? If not, why not?

Read our new report, “Red Rock Resorts Silent on Sports Betting“. 

Estimates about the potential size of a mature, national U.S. sports betting market vary from $67 billion to $287 billion in annual wagers.[1],[2] Legal sports betting in the U.S. has amounted to $763 million of gaming win over the last twelve months.[3] Over half of the gaming win in the last twelve months ($430 million) was generated outside of Nevada.

Other gaming companies acted quickly by partnering with sports leagues and teams, betting and data firms, and even with competitors in order to build strong foundations for emergent sports betting markets.

Frank and Lorenzo Fertitta reportedly led a $17.5 million investment round in The Action Network via their family office, Fertitta Capital, in February 2019.[4] Fertitta’s investment in The Action Network not only presents a potential conflict of interest to Red Rock Resorts public shareholders, but also a potential risk.

Read our new report here.

Notes

[1] $67 billion estimate. Jay L. Zagorsky, “Opinion: The U.S. market for sports betting is far smaller than the $150 billion proponents claim,” MarketWatch, May 15, 2018, https://www.marketwatch.com/story/the-us-market-for-sports-betting-is-nowhere-close-to-150-billion-no-matter-what-proponents-say-2018-05-15.

[2] $287 billion estimate. Oxford Economics, “Economic Impact of Legalized Sports Betting,” American Gaming Association, May 2017, p. 5, https://www.americangaming.org/wp-content/uploads/2018/12/AGA-Oxford-Sports-Betting-Economic-Impact-Report1-1.pdf.

[3] Last twelve months refers to November 2018 through October 2019. Gaming win data come from state government gaming agencies or lotteries.

[4] Action Network Staff, “The Action Network Completes $17.5 Million Series B Financing Round Led by Fertitta Capital,” The Action Network, press release, February 21, 2019, https://www.actionnetwork.com/press/action-network-funding-series-b-fertitta-capital.

Amidst chaos at Palms, Fertittas’ UBS margin loan collateral fell 38%

The now-closed KAOS day/nightclub at Palms was canceling shows the same month shares in Palms’ parent company Red Rock Resorts hit their lowest since the company’s IPO. When in that same month Red Rock controlling owners Frank and Lorenzo Fertitta borrowed $64 million from a related party to fund the purchase of 3.4 million Class A shares in the company (see here, here and here), some claimed the purchases were a show of confidence in the company.

But that is not all that happened in August.

Almost a year prior to these transactions, Frank and Lorenzo Fertitta pledged 6 million Class B shares in Red Rock to secure a margin loan from UBS AG in September 2018 (see UCC here). We estimate the loan was up to $155 million, assuming the ability to borrow 95% of the pledged share value and that the Class B shares were valued the same as Class A shares.

At the time of loan’s filing on September 27, 2018, RRR’s Class A shares traded at about $27.21. When the company’s stock price dropped to $16.76 per share on August 7 this year, the value of the Fertittas’ Class B share collateral for the margin loan would have lost over 38% of its value.

While RRR has not disclosed why the Fertittas needed the UBS margin loan in the fall last year, UBS promotes its securities-backed loans as useful for purchasing yachts, among other things.

Since the UBS loan to the Fertittas, two of the three new Fertitta yachts have launched. Lorenzo Fertitta’s 285-foot Lonian (estimated cost of $160 million) was ready to launch one month prior to the UBS loan, the 216-foot “crazy custom catamaran” Hodor launched in February, 2019, and the 308-foot Viva (Feadship project 817) is scheduled to launch for 2020.

How much has Palms cost Red Rock Resorts shareholders?

The simple cost of Palms to Red Rock Resorts so far is well known: the company paid $312.5 million to buy the casino in May, 2016, and by the end of September this year had completed a $690 million project to “fully reimagine and repurpose the property.”[i] In spite of the billion-dollar overall capex, management disclosed on the third-quarter conference call that Palms has not generated significant incremental EBITDA. The property’s 3Q19 adjusted EBITDA was either negative $9.8 million (including the now-shuttered KAOS day/nightclub) or positive $3.7 million (excluding KAOS). (The company overall had $110 million in adjusted EBITDA in the quarter.) It appears the property is unlikely to achieve management’s one-time “mid-teens return” goal any time soon.

For Red Rock shareholders, there is a significant cost to management’s decision to borrow and spend $1 billion on a project that has ended up not meeting ROI expectations. Net long-term debt increased from just under $2.00 billion at the end of 1Q16 (just before the Palms purchase was announced) to over $2.94 billion at the end of 3Q19 (when the renovation was completed). The company essentially borrowed and spent a billion dollars to gain no new EBITDA when it comes to Palms.

In a basic valuation model: EV (EBITDA x multiple) – debt = equity. With no new EBITDA and thus constant enterprise value, one billion dollars of additional debt means one billion dollar less of equity value. Therefore, Red Rock’s $1 billion “Palms debt” means a $1 billion reduction of Red Rock’s equity value. With the Palms project, Red Rock management wiped out $1 billion of shareholder equity. More than $8.00 per share of equity value (with 117 million diluted shares outstanding) evaporated because of the Palms project.

On the company’s quarterly call on Nov. 5, management announced the company’s goal is now to “[reduce] our net leverage ratio to a targeted level of 4x or less through a combination of paying down debt and increasing EBTIDA.” There was no acknowledgement that the company had levered up its balance sheet for no gain in EBITDA from Palms and thus significantly hurt shareholder value. In fact, if Red Rock had not borrowed $1 billion to spend on Palms over the last three-plus years and stuck with organic growth from its pre-Palms Las Vegas operations and tribal management fees, it would have already achieved a pro forma leverage of 3.94x at the end of 3Q19. Instead, now more of the company’s cash flow must go toward paying down the “Palms debt”, leaving less free cash flow for potential share buybacks or dividend increases.

It is true that Red Rock enjoys relatively low borrowing cost because of the company’s strong overall cash flow. But even at its current blended long-term debt interest rate, $1 billion of debt would require about $45 million of annual interest expense. Some Wall Street analysts have projected Palms to produce $25 million in annual EBITDA by the end of 2021.[ii]

Notes

[i] Red Rock Resorts, 3Q19 conference call, 11/5/2019, transcript by FD Wire.

[ii] JP Morgan, “Red Rock Resorts: Another Mixed Quarter; 3Q19 Core LV Fine, Palms Not So; Palms’ Chaos and EBITDA Losses Coming to an End. PT to $24”, 11/5/2019.

Fertitta Capital’s sports betting deal highlights disclosure dilemma at Red Rock Resorts

Investors in Red Rock Resorts (NASDAQ: RRR) lack the necessary information to know if they lost a business opportunity to Fertitta Capital, the investment firm founded in 2017 and run by Red Rock Resorts controlling owners, according to letters sent by the Culinary Union to the U.S. Securities Exchange Commission (SEC) and NASDAQ Stock Market.

See press release here.

In the letters to regulators (available here), the Culinary Union asks for a determination if potential conflicts of interest for those with dual roles at Red Rock Resorts’ and Fertitta Capital should be disclosed to investors, and questions whether Fertitta Capital’s investment in The Action Network, a sports betting media company, means the family firm receives opportunities owed to shareholders and now competes with Red Rock Resorts’ sports betting business.

To date, Red Rock Resorts has not informed investors that its principals, brothers Frank and Lorenzo Fertitta, and its Senior Vice President of Government Relations, Michael Britt, have dual roles at a firm whose business interests are similar to Red Rock Resorts, including in gaming, sports betting, leisure, live events, wellness, and food and beverage. The company’s proxy statement, released this week on April 29, makes no mention of Fertitta Capital at all.

Who’s on the Hook for the Palms?

Red Rock Resorts has set a big ROI target for its Palms Casino Resort. What started as a $312.5 million acquisition with $35 million of EBITDA expected in the first full year of RRR ownership, has now become a $1 billion project, with a capex budget that has increased to $690 million over the past year-and-a-half.

Can they get there?

Investors should ask management to set clear markers: who will be held accountable if the post-renovation Palms doesn’t generate the kind of ROI management has projected?

Read out report: Who’s on the Hook for the Palms?

Withhold the Vote 2018: Failure to Sunset Perpetual Dual-Class Stock

We encourage Red Rock Resorts shareholders to withhold authority to vote on their proxy card for the company’s board of directors – Frank J. Fertitta III, Lorenzo J. Fertitta, Robert A. Cashell, Jr., Robert E. Lewis, and James E. Nave, D.V.M. – at the upcoming annual stockholders meeting on June 14.

The many problems arising from the company’s perpetual dual-class stock make it necessary for outside shareholders to withhold their votes, especially after the company has made no attempt to address the significant shareholder discontent expressed at last year’s annual meeting.

Perpetual dual-class shares trade at a significant discount, risk index exclusion, and are opposed by major shareholder advocacy groups.

Read our report, Withhold the Vote 2018: Failure to Sunset Perpetual Dual-Class Stock

Selected Results: 2017 Corporate Governance Survey of Red Rock Shareholders

Following shareholder discontent at Red Rock’s annual meeting this July, in which 9% to 16% of equity holders withheld from the directors, we decided to survey Red Rock investors about their corporate governance issues. The survey this year measured shareholder sentiment toward Red Rock’s takeover defenses and features of its board of directors. We believe these topics are particularly important following another year of strong M&A activity in the gaming industry.

Despite the dissatisfaction expressed by shareholders and the negative voting recommendations from Institutional Shareholder Services for Red Rock’s entire board of directors surrounding the 2017 annual meeting, the company has not announced plans to remove, sunset, or put to a vote its takeover defenses. Nor has the company done anything to resolve its problematic board structure, which ISS gave its highest governance risk rating of 10 (as of June 19, 2017).[i]

The results of our survey reveal shareholder respondents expressed consensus for a hybrid format for the annual general meeting, took issue with the dual-class capital structure and other takeover defenses, and shared their preference for a more diverse board, an independent board chair, and their doubt regarding shareholder representation on the board.

See the selected results of the corporate governance survey below:

supervoting

preferred-stock tra supermajority written-consent special-meetings agms board-diversity independent-chair shareholder-representation

Notes

[i] Institutional Shareholder Services, “Proxy Alert: Red Rock Resorts, Inc.,” June 19, 2017, original publication date June 16, 2017, p. 1.

Baron’s Sunk Cost Trap: Red Rock Resorts

Over the past year, Baron has been building a position in Red Rock Resorts, Inc. (NASDAQ: RRR) and is now the second largest outside investor, owning just over 10% of the publicly listed Class A shares of RRR. Red Rock’s shares have underperformed both the market and its peers, year-to-date. Baron’s efforts to double down on Red Rock’s stagnant stock suggest its stock pickers have fallen into a sunk cost trap, unwilling to recognize the opportunity cost they’ve incurred by putting millions more of their clients’ money in RRR over the past year.

Sunken Costs
Baron filed a 13G on October 10, 2017, announcing its 10.42% ownership of Red Rock Resorts, Inc.’s Class A shares outstanding.[i] Baron began developing its position in Red Rock following the latter’s IPO in April 2016. As early as June 30, 2016, Baron reported owning 3,605,258 (or approximately 8.7% at the time) of Red Rock’s Class A shares outstanding.[ii]

Baron’s stock pickers slowly increased the firm’s holdings in Red Rock through late 2016 and early 2017, with significant increases both in the 2Q17 (29% increase in number of shares since previous 13F) and in a 13G filed on October 10th, 2017 (28% increase) (Chart 1).[iii],[iv],[v] What value do Baron’s stock pickers see in a stagnant, underperforming security such as Red Rock?

Chart 1: RRR Share Price and Baron’s RRR Class A Ownership
171109_chart-1_bamco-rrr-ownership

Red Rock’s share price has underperformed the markets year-to-date. As of the closing prices on November 8, 2017, the NASDAQ composite index is up 24.0% and the S&P 500 is up 14.3%, while Red Rock’s share price has increased by 11.0%. On the other hand, Red Rock’s peers have significantly outperformed the markets year-to-date (Chart 2).

Chart 2: Share Price Performance of RRR and Industry Peers (YTD)
171108_yahoofinance_rrrpeers

Opportunity Cost
What would it look like if instead of sinking more money into Red Rock, Baron’s portfolio managers had chosen to invest in one of its peers? Baron’s reported ownership of 3,900,959 of Red Rock’s Class A shares as of December 31, 2016.[vi] The value of this number of shares at the start of 2017 was approximately $91 million.[vii] Baron’s decision to stay invested in Red Rock came with a significant opportunity cost (Table 1). If Baron had bought shares in any of these other gaming companies instead of Red Rock Resorts, it would have seen a sizable YTD gain instead of a negligible return from RRR Class A shares.

Table 1: Market Appreciation and Opportunity Cost YTD (through 11/8/17)

Company Share Price
YTD % change (through 11/8/17)
Potential Value
(as of 11/8/17)
Opportunity Cost
Eldorado Resorts 67.3% $152 mm $51 mm
Boyd Gaming 42.4% $130 mm $29 mm
Golden Entertainment 154.4% $232 mm $130 mm
Pinnacle Entertainment 81.6% $165 mm $64 mm
Penn National 91.1% $173 mm $73 mm

What makes Baron’s position in RRR even more interesting is that the firm has nearly doubled (82% increase) its ownership of Red Rock’s Class A shares from the beginning of the year until its latest filing on October 10, 2017.[viii],[ix]  Given the opportunity cost of its RRR investment, Baron’s stake will need to generate a much greater return than what can be expected from RRR’s current 12-month consensus price target of $28.50 for the firm’s position to make financial sense.[x] Whatever Baron’s internal price target for RRR might be, the firm must assume that RRR will greatly outpace its gaming peers over a reasonable investment period.

Baron’s fund managers should not be satisfied with seeing RRR reach $28.50 by the end of 2018, considering the much bigger returns it could have gotten if it had invested in one of its peers.

Notes
[i] BAMCO, Inc., SEC Form 13G, filed on October 10, 2017.
[ii] BAMCO, Inc., SEC Form 13F, Information Table, filed on August 14, 2016, as of June 30, 2016.
[iii] BAMCO, Inc., SEC Form 13F, Information Table, filed on May 15, 2017, as of March 31, 2017.
[iv] BAMCO, Inc., SEC Form 13F, Information Table, filed on August 14, 2017, as of June 30, 2017.
[v] BAMCO, Inc., SEC Form 13G, filed on October 10, 2017.
[vi] BAMCO, Inc., SEC Form 13F, Information Table, filed on February 14, 2017, as of December 31, 2016.
[vii] Red Rock’s opening share price on January 3, 2017 was $23.36.
Yahoo Finance, “Red Rock Resorts,” Historical Data, website, accessed on October 3, 2017. https://finance.yahoo.com/quote/RRR/history?p=RRR
[viii] BAMCO, Inc., SEC Form 13F, Information Table, filed on February 14, 2017, as of December 31, 2016.
[ix] BAMCO, Inc., SEC Form 13G, filed on October 10, 2017.
[x] Consensus Price Target as reported by NASDAQ’s website. Accessed on November 9, 2017. http://www.nasdaq.com/symbol/rrr/analyst-research

Opportunity Cost: The Case of Cohen & Steers’ Investment in Red Rock Resorts

Cohen & Steers, Inc. (NYSE: CNS) filed a Schedule 13G on December 12, 2016, announcing its beneficial ownership (at the time 15.94% of Class A shares) in Red Rock Resorts. This was an interesting move by Cohen & Steers, which is often praised as the “king of REITs”[i],[ii] and self-described as “pioneers in REIT investing.”[iii] The company has no other investments in the gaming industry besides the REIT Gaming and Leisure Properties.[iv] However, since Red Rock is not a REIT and has not announced any plans to convert its assets into a REIT, why did CNS take such a large stake in Red Rock and continue to hold on to it? Red Rock’s stock (the publicly-traded Class A shares) has struggled year-to-date compared to the market and its regional gaming peers. CNS investors should ask how long the firm is willing to wait for its bet on Red Rock to pay off.

Red Rock’s share price has underperformed the markets year-to-date. As of the closing prices on September 29, 2017, the NASDAQ composite index is up 19.7%, the S&P 500 is up 11.9%, and the Russell 2000 is up 9.8%, while Red Rock’s share price has declined by 0.86%. On the other hand, Red Rock’s peers have significantly outperformed the markets year-to-date (Table 1).

Table 1: Share Price % Change YTD (through 9/29/17)

Company or Index

Share price (1/3/17, open)

Share price (9/29/2017, close)

Year-to-date % change

Red Rock Resorts

$23.36

$23.16

-0.86%

Eldorado Resorts

$17.10

$25.65

50.0%

Boyd Gaming

$20.40

$26.05

27.7%

Golden Entertainment

$12.24

$24.38

99.2%

Pinnacle Entertainment

$14.65

$21.31

45.5%

Penn National

$13.90

$23.39

68.3%

Gaming and Leisure Prop (REIT)

$30.77

$36.89

19.9%

MGM Growth Properties (REIT)

$25.31

$30.21

19.4%

NASDAQ composite index

$5,425.62

$6,495.96

19.7%

Dow Jones Industrial Average

$19,872.86

$22,405.03

12.7%

S&P 500

$2,251.57

$2,519.36

11.9%

Russell 2000

$1,357.99

$1490.86

9.78%

Source: Yahoo Finance

Cohen & Steers’ 13G filed on December 12, 2016, shows the company owned 9,739,009 of Red Rock’s Class A shares. At the start of 2017, the value of these shares was approximately $228 million.[v] Red Rock’s share price has not appreciated year-to-date (through 3Q17). If Cohen & Steers had put this $228 million investment in nearly any other gaming company, including the two actual gaming REITs, it would have generated sizable returns for its investors and clients (Table 2). Holding onto Red Rock’s Class A shares had a significant opportunity cost for Cohen & Steers.

Table 2: Market Appreciation and Opportunity Cost YTD (through 9/29/17)

Company

Share Price
YTD % change (9/29/17)

Potential Value
(9/29/17)

Opportunity Costs

Eldorado Resorts

50.0%

$342 mm

$116 mm

Boyd Gaming

27.7%

$291 mm

$65 mm

Golden Entertainment

99.2%

$454 mm

$228 mm

Pinnacle Entertainment

45.5%

$332 mm

$106 mm

Penn National

68.3%

$384 mm

$158 mm

Gaming and Leisure Prop (REIT)

19.9%

$273 mm

$47 mm

MGM Growth Properties (REIT)

19.4%

$272 mm

$46 mm

Red Rock’s investment risks are very clear, such as its limited geography diversity, dependence on Las Vegas macro fundamentals, and its long-held but vacant land holdings with few shovel-ready development plans. In its S-1 filed on October 26, 2016, Red Rock states:

We depend on the Las Vegas locals and repeat visitor markets as our key markets, which subjects us to greater risks than a gaming company with more diverse operations.

Except for fees from its set-to-expire management contracts at Gun Lake and Graton ($111 million in 2016)[vi], Red Rock relies on the Las Vegas valley for all of its revenues. In 2016, 92% of the company’s consolidated net revenues were from its Las Vegas operations.[vii] This should be a red flag for investors skeptical about the Las Vegas locals market recovery. (A notable economist and gaming analyst recently cast doubt on the strong growth narrative surrounding the Las Vegas economy.[viii],[ix]) By comparison, Red Rock’s peers are much more geographically diverse (Table 3).

Table 3: Geographic Diversification of Gaming Companies

Company

U.S. States with Operations

Red Rock Resorts

1

Eldorado Resorts

10

Boyd Gaming

7

Golden Gaming

3

Pinnacle Entertainment

9

Penn National

16

*Management contracts excluded

Source: SEC filings and company websites

Red Rock is also the only company among its peers to have a dual-class capital structure – providing 10-to-1 super voting stock to the Fertitta insiders – as well as numerous other anti-shareholder provisions that have been the subject of governance alerts by Institutional Shareholder Services and the Council of Institutional Investors. Given the abundance of better performing securities in the gaming space, why did Cohen & Steers bet on Red Rock?

The decision by Cohen & Steers fund managers to invest in Red Rock comes at a time when active managers are facing increased pressure to both outperform their passive counterparts and reduce fees. Nearly $500 billion shifted from active to passive funds in the first half of 2017 and Morgan Stanley estimates that global asset managers’ revenue could drop as much as 30% by 2019.[x],[xi]  According to S&P Dow Jones Indices’ SPIVA® scorecard, actively-managed large-cap, mid-cap, and small-cap funds have underperformed their respective indices over the 1-, 3-, 5-, 10- and 15-year periods (Table 4).[xii]

Table 4: Percentage of U.S. Equity Funds Outperformed by Benchmarks

Fund Category Comparison Index

1-year

3-year 5-year 10-year

15-year

All Large-Cap Funds S&P 500

66.00

93.39 88.30 84.60

92.15

All Mid-Cap Funds S&P MidCap 400

89.37

94.21 89.95 96.03

95.40

All Small-Cap Funds S&P SmallCap 600

85.54

95.69 96.57 95.64

93.21

Source: S&P DJI, SPIVA U.S. Year-End 2016 report

 

Notes

[i] Larry Swedroe, “Cohen & Steers: The King Of REITs Poised To Provide Investors 42% Annualized Returns,” Seeking Alpha, May 15, 2014, https://seekingalpha.com/article/2218583-cohen-and-steers-the-king-of-reits-poised-to-provide-investors-42-percent-annualized-returns

[ii] Arturo Neto, “Cohen & Steers: King Of REITs Moving In The Right Direction But It Will Take Patience For The Big Payoff,” Seeking Alpha, September 16, 2014. https://seekingalpha.com/article/2497685-cohen-and-steers-king-of-reits-moving-in-the-right-direction-but-it-will-take-patience-for-the-big-payoff

[iii] Cohen & Steers, Inc., “About Us,” website, accessed on October 5, 2017. https://www.cohenandsteers.com/company

[iv] Cohen & Steers, Inc., SEC Form 13F, Information Table, filed on August 14, 2017. https://www.sec.gov/Archives/edgar/data/1284812/000114036117031503/xslForm13F_X01/form13fInfoTable.xml

[v] Cohen & Steers, Inc., SEC Form SC 13G, filed on December 12, 2016.

[vi] Red Rock Resorts, Inc., SEC Form 10-K, filed on March 13, 2017, p. 21.

[vii] Red Rock Resorts, Inc., SEC Form 10-K, filed on March 13, 2017, p. 48.

[viii] Wade Tyler Millward, “Southern Nevada economy still growing, UNLV economist says,” Las Vegas Review-Journal, June 13, 2017, https://www.reviewjournal.com/business/southern-nevada-economy-still-growing-unlv-economist-says/

[ix] Howard Jay Klein, “Boyd Gaming: Has It Expanded Its Locals Market Base At The Expense Of Bigger Possibilities,” Seeking Alpha, September 18, 2017, https://seekingalpha.com/article/4108010-boyd-gaming-expanded-locals-market-base-expense-bigger-possibilities

[x] Charles Stein, “Active vs. Passive Investing,” Bloomberg, July 6, 2017, https://www.bloomberg.com/quicktake/active-vs-passive-investing

[xi] Sarah Jones, “Asset Manager Revenue May Fall 30% by 2019, Morgan Stanley Says,” Bloomberg, March 17, 2017, https://www.bloomberg.com/news/articles/2017-03-17/asset-manager-revenues-could-slump-30-percent-by-2019-ms-says

[xii] S&P DJI, “SPIVA U.S. Year-End 2016,” report, April 12, 2017, p. 8, http://us.spindices.com/search/?ContentType=SPIVA

The Palms Conundrum

What is Station Casinos doing with Palms?

That’s a question that should be on investors’ minds since the company has committed nearly half a billion dollars to the latest addition to its portfolio of casinos in Las Vegas. Adding $146 million of renovation cost to the $312.5-milion purchase price brings the total capex on Palms to $452.5 million. As explained by CFO Stephen Cootey, the company’s “expected returns” on “any capital expenditures” are in the “mid to low teens” range. This would suggest that, in a best-case scenario, investors might see Palms’ making annual EBITDA of close to $70 million (425.5 x 15% = 67.9) after the renovation is done by the end of second quarter next year. This is a much more ambitious target than the $35 million the company originally put forth when it announced the acquisition. (We raised some questions about that projection previously, given our estimate that Palms’ LTM EBITDA was approximately $28 million at the time.) So how will Station Casinos get there?

Palms is not a typical Station Casinos property

A major challenge facing Station Casinos is the fact that Palms is a very different kind of property from what the company is used to operating. Even though Palms was described as a “leading gaming asset” by Station management, it did not generate most of its revenues from gaming. In fact, the casino department contributed only approximately 37% of its property-level gross revenue during the fourth quarter of last year, according to Red Rock Resorts’ 10-K. Even assuming there was some disruption due to the change in ownership and management, that figure shows Palms is a very different breed of casino resort than other Station properties.

(In $ millions) 4Q16 % of Total
Casino revenues (reported) 15.5 37.0%
F&B revenues (reported) 8.7 20.8%
Rooms revenues (reported) 11.6 27.7%
Other revenues (estimated) 6.0 14.5%
Gross revenues (estimated)* 41.8

* Red Rock reported the net revenues were $38.5 million at Palms in 4Q16. Assuming promotional allowances of 8% of gross revenues, we calculated the gross revenues to be $41.8 million.

In fact, Palms seems to be very similar to a Strip resort in terms of its revenue mix. Here’s the revenue breakdown of major Strip properties last year, according to the most recent Nevada Gaming Abstract.

(in $ millions) FY2016 % of Total
Casino 5,396 34.1%
Rooms 4,419 28.0%
Food 2,527 16.0%
Beverage 1,126 7.1%
Other 2,335 14.8%
Total 15,805

This is not how Station Casinos has run its business. Before Palms, Station Casinos properties had always generated most of their revenues from the casino floor. Back in 2006, gaming made up anywhere from just under two thirds to over 80% of gross revenues at the company’s “large properties” in Las Vegas (according to a report filed during the Station Casinos Chapter 11 case).

(In $ millions) Gross Revenues Gaming Revenues Gaming as % of Gross
Palace Station 176.1 126.0 71.6%
Boulder Station 216.9 174.7 80.5%
Texas Station 143.3 107.9 75.3%
Sunset Station 222.9 168.0 75.4%
Santa Fe Station 184.1 150.3 81.6%
Green Valley 297.9 202.9 68.1%
Fiesta Rancho 73.2 58.0 79.3%
Fiesta Henderson 83.9 61.0 72.7%
Red Rock (Opened 4/18/06) 250.3 158.8 63.4%
Total 1,648.6 1,207.6 73.2%

This heavy reliance on gaming was true of even Green Valley Ranch (which had been open for five years) and Red Rock Station (which had been open for less than a year). It is true that these “hybrid” properties, which according to the company “appeal to both Las Vegas residents and tourists”, have a greater non-gaming side to their operations, but they still seem to be very different than Palms.

And we do not believe the revenue mix has changed significantly at GVR and Red Rock, since the most recent pre-Palms financial disclosures continued to show the overweighting of casino revenue in its Las Vegas properties. In the first nine months of 2016, Station Casinos earned approximately 67% of its gross revenues from gaming at its Las Vegas properties (i.e., company-wide gross revenues excluding management fees revenues).

(In $ millions) 9M16 % of Gross
Casino revenues 706.2 67.0%
F&B revenues 196.6 18.6%
Rooms revenues 99.6 9.4%
Other revenues 52.4 5.0%
Gross revenues 1,054.6

What kind of management experience can a company like this bring to Palms? Does Station Casinos have the management know-how to operate an almost-Strip property like Palms?

Will casino revenue at a “Stationized” Palms go from one-third of total revenue to two-thirds of the total? If that is indeed the goal, then presumably the strategy is to grow gaming revenue at Palms and not to shrink the non-gaming business there. How would then Station Casinos go about doing that?

Management instability

Whatever the strategy there is for growing revenue (and EBITDA) at Palms, why is Station Casinos already onto its third general manager at the property in less than a year’s time?

When Stations Casinos officially took over last year, Michael Jerlecki, formerly the general manager of Palace Station, which is not one of the company’s “luxury” properties, was made the new Palms general manager. By January 2017, Jerlecki was quietly replaced by Anthony Faranca (according to Faranca’s LinkedIn page), who had been general manager of the Parx racino outside Philadelphia, a change the company didn’t officially announced until April. Then, in July a local magazine profiled new Palms executive Jon Gray and described him as the property’s general manager, in spite of any formal announcement from the company. (Gray did sign as the general manager letters informing workers of their termination due to the closing of several F&B venues at Palms in early September.)

The hiring of Gray was something of a homecoming, for he was an executive at the Palms when it was still owned by the Maloofs and was general manager of N9Ne Group heading up the hotel’s nightclubs, restaurants, and pool events at the property. He also opened the non-gaming F&B/entertainment LINQ District on the Strip and worked for Nike in Oregon before returning to Palms. What is missing from this impressive resume, though, is any significant experience with casino operations.

Assuming he lasts longer than his two predecessors as Palms’ general manager, is Jon Gray the right person to “Stationize” and grow casino revenue at Palms?