Why is Red Rock Resorts’ Share Price Underperforming the Market and Its Peers?

Why is Red Rock Resorts’ Share Price Underperforming the Market and Its Peers?

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%.

rrrvsp500-1q17

(Source: Yahoo Finance)

RRR’s share price dropped while other regional gaming operators’ share prices rose in the quarter:

rrrvregionals-1q17

(Source: Yahoo Finance)

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:

Is the Palms acquisition meeting management expectation?

When the $316-million Palms acquisition was first announced last May, the company said that “[f]actoring in anticipated synergies, the Company estimates that the Palms will generate $35 million in EBITDA during the Company’s first full year of ownership.” Is the company on track to meet this goal?

When Station Casinos officially took ownership of the Palms on Oct. 1, Michael Jerlecki, who had been the general manager of Palace Station, became the resort’s GM. However, Jerlecki was replaced by Anthony Faranca by early February without any public announcement from the company. (The new GM is mentioned in passing in a local columnist’s write-up on new assistant manager Jon Gray.) We do know from the company’s recently filed 10-K that Palms had a net pretax loss of $1.3 million in the fourth quarter on net revenues of $38.5 million.

Given these numbers, investors might wonder whether the Palms is on track to make $35 million in EBITDA through September 30 this year. While the company did not provide property-level breakout of Palms’ EBITDA for the fourth quarter, investors should demand greater clarity going forward so they can better understand whether the expensive, debt-financed purchase is paying off as management had anticipated.

What happened to the Palms Place hotel rooms?

The company’s 10-K shows there were 713 hotel rooms at the Palms, but makes no mention of the condo-hotel units at Palms Place. Back in September, the company’s investor presentation showed that, at Palms, in addition to 713 rooms across two hotel towers, there were “approximately 448” condo units at the stand-alone Palms Place tower in the “room rental program, pursuant to which the Company receives 50% of the room rate and 100% of the resort fee on any such rentals.”

What happened to these 448 hotel units at Palms Place? They would account for about 39% of total available hotel units at the company’s new acquisition. The 10-K does not say anything about this Palms Place condo-hotel program. Has the company decided not to manage Palms Place’s hotel pool anymore? If so, how might that affect the goal of making $35 million in EBITDA at the Palms through September 30?

Why is no one adding significant capacity in the Las Vegas locals market?

We recently took a closer look at the company’s new development pipeline in Las Vegas and found little that was “shovel ready.” Given the lack of discussion on this issue during the analyst call, we believe some further questions are warranted.

For example, when will the company tell investors more about the planned second hotel tower at Palace Station, which received planning approval in September? The planned tower is absent from the discussion of the on-going $115-million “upgrade” of Palace Station in the company’s latest investor presentation from March 20.

While the company continues to tout its “Existing Development Sites” in Las Vegas such as “Durango” and “Viva” in its March presentation, it has not announced any concrete plans to build out those sites. Moreover, there are ten “Gaming Enterprise Districts” in the Las Vegas Valley which are not owned or controlled by Station Casinos.

non-rrr_geds

(See our interactive map of casinos and casino sites in the Las Vegas locals market.)

The existence of these non-Station future casino sites should make investors skeptical of any claims of barriers of entry to the Las Vegas locals market. Moreover, if the Las Vegas locals market is growing significantly, why have these other developers not seen fit to build out new Las Vegas locals casinos?

What will happen in the company’s tribal casino management segment in 2021?

Outside of Las Vegas, there are looming challenges in the company’s tribal casino segment. Its two existing management agreements expire in February, 2018, and November, 2020, respectively. The company estimates that its only other tribal casino project will require another 36 to 48 months to begin construction and 18 months after construction begins to complete and open.

This means the earliest opening date would fall around September, 2021, and that the company most likely will not have a tribal casino management fee revenue stream in 2021. To be clear, the tribal casino management segment accounted for 7.6% of the company’s net revenues and 18.0% of adjusted EBITDA in 2016.

It should be noted that the company’s $225-million Term Loan A and $685-million Term Loan B both mature in June 2021, and its $500 million of 7.5% senior notes are due March 1, 2021. That is a total of approximately $1.4 billion of debt coming due when the company will likely not have any tribal casino management revenue. Will the company be able to roll over that debt given this potential lack of tribal casino management revenue in 2021?

Fallow Land, Hollow Claims

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. We present our findings in a new report that you can download here.

Our report on Red Rock’s Las Vegas growth pipeline raises some important questions for investors:

  • Why does the company continue to describe the Cactus and Castaways parcels as “development sites” when they are listed for sale?
  • After over a decade of delays, what is the timeline to build out the Durango development site?
  • Does the company still see value in developing a resort hotel on the Flamingo site, which lies between Red Rock Casino and the Durango site?
  • When will the conditions of Inspirada’s master-planned community improve enough to warrant building a resort hotel?
  • When will the company submit plans for the new hotel tower and meeting space at Red Rock Resort or the meeting space expansion at Sunset Station?

See our report for more information from our review into RRR’s development sites and master-planned expansions.

Check out our map of existing properties and future casino development sites in Las Vegas, including those not controlled by RRR.

Deutsche Bank Sells 19.6 Million Class A Shares After IPO Lock-Up Period Expired

Update 2: Deutsche Bank sells off its ownership stake, per Red Rock Resorts 8-K filing on Nov. 10, 2016.

Update 1: See “Deutsche Bank to sell $400m stake in Las Vegas gambling group” in Financial Times (Oct. 30, 2016).


Deutsche Bank will soon be able to dispose of its 17% ownership of Red Rock Resorts (NASDAQ: RRR), when the Las Vegas gaming company’s IPO lock-up period expires on October 24.

Deutsche Bank is in dire need of additional capital, so we expect it to sell off the Las Vegas casino stake as soon as it can on or after October 24. Deutsche Bank investors should certainly welcome the cash infusion and capital boost that can come from selling and exiting the casino assets.

Deutsche Bank is in the process of selling other non-core assets such as Abbey Life and its stake in China’s Hua Xia Bank. CEO John Cryan noted in July that the lender’s second-quarter revenues “benefited from the IPO of Red Rock Resorts.”

We estimate the German bank’s Las Vegas casino stake to be worth approximately $440 million. (The bank has not disclosed the specific number of Red Rock shares it beneficially owns.) In addition, according to the tax receivable agreement Red Rock signed as part of its IPO, the company is required to pay Deutsche Bank and other pre-IPO owners 85% of certain tax benefits to be realize when Deutsche Bank and other pre-IPO owners sell their ownership interests. The TRA payments will need to be made in cash before the company makes its dividend payments. As of June 30, the company’s TRA liability was $44.5 million.

As Deutsche Bank gaming analysts observed on May 22: [I]t is worth noting that at present, ~21% of the shares outstanding are held by legacy strategic investors, whose core business does not include owning gaming equities. Thus, post the 180 day, from IPO, lock up expiration, we believe the risk of secondary issuances could potentially weigh on shares.”

Workers at Boulder Station Vote to Unionize Through NLRB Secret-Ballot Election

LAS VEGAS, NV – Over Labor Day weekend, workers at Boulder Station Casino & Hotel have voted by a landslide of 67% to be represented by the Culinary Workers Union Local 226 and the Bartenders Union Local 165 through an NLRB secret-ballot election. Over 570 Boulder Station workers will be represented by the Unions.

“It is very simple: we voted for the union because we want to have a union at Boulder Station,” said Rodrigo Solano, a cook at the casino, which opened in 1994. “After all these years of fighting to make our jobs better, it is time for management to listen to us: we want to have fair wages and good health benefits like tens of thousands of other casino workers in Las Vegas.”

The union filed for an election on August 15, and over 530 employees in the union’s bargaining unit voted on September 2 and 3 on-site at the Boulder Station casino-hotel. The decision by Boulder Station workers to unionize comes less than a year after workers at a Station Casinos-managed tribal casino in Northern California ratified their first union contract. Boulder Station is the first of Station Casinos’ properties in Nevada to unionize with the Culinary and Bartenders Unions.

“We applaud the tremendous courage and determination of the Boulder Station workers, who have resoundingly rejected the company’s anti-union campaign to discourage and scare them over the years, especially over the last two weeks,” said Geoconda Arguello-Kline, Secretary-Treasurer for the Culinary Union. “Workers at Boulder Station have made their choice to unionize, and we look forward to contract negotiations starting as soon possible.”

The Culinary Union continues to call on Station Casinos to agree to a fair process at its other Las Vegas properties so that workers can decide whether to unionize free from management interference, intimidation, bullying, and litigation.

“We know about the Culinary and Bartenders Union and the union standard that workers have fought to have for over 80 years, and we made our decision to unionize based on those facts,” said Jeri Allert, a cocktail server at Boulder Station. “I look forward to negotiating a good union contract that protects my coworkers and our families.”

“Our company has enjoyed great success because of the hard work we put in every day to provide great service and hospitality,” said Maria Portillo, a food runner at Boulder Station. “We deserve to have a union contract that gives us job security, fair wages, good healthcare, and a pension so that we can have the opportunity to provide for our families through our hard work.”

At the large casino-hotels owned and operated by Station Casinos in Las Vegas, including soon-to-be-acquired Palms, workers have been demanding publicly a fair process to exercise their right to choose whether to unionize. Responding with a vicious anti-union campaign, Station Casinos has broken federal labor law eighty-eight times and is the worst labor law violator in the history of Nevada gaming. Recent changes to NLRB rules have created new opportunities for workers to choose whether to unionize through secret-ballot elections despite the continued prospect of management interference, intimidation, bullying, and litigation.

Boulder Station is a subsidiary of Station Casinos LLC, which is partially owned by Red Rock Resorts, Inc. (NASDAQ: RRR). Deutsche Bank owns approximately 16% of the Las Vegas gaming company.

(Cross-posted from Culinary Workers Union’s website.)

Questions about the Palms Acquisition

When will Red Rock disclose the Palms purchase agreement?

Since the May 10 press release announcing the acquisition, Red Rock has not filed the definitive purchase agreement with the SEC yet. Investors should be able to review and evaluate the details of this significant transaction, which, at $312.5 million, cost nearly 70% of the company’s 2015 Adjusted EBITDA ($451 million) and is expected to be financed with new debt.

What will Red Rock have to do to bump up Palms’ EBITDA by 25% in one year?

Back in May, Red Rock management stated that they expect the Palms to generate “over $35 million” in EBITDA in the first full year of ownership by Red Rock. At the same time, they say the property’s EBITDA run rate is at “approximately 60% below its peak level.”

The Palms reportedly had EBITDA of about $70 million before the Great Recession, according to Debtwire/Financial Times. If one assumes that was the peak, then “60% below peak” would imply current annual EBITDA of about $28 million. Will Red Rock be able to expand Palms’ EBITDA by 25% (to $35 million) during its first full year of ownership? What kind of revenue growth and/or cost cutting will be required to achieve such a large increase in EBITDA in one year?

Will “Palms Station” cannibalize Palace Station?

Also back in May, Red Rock management described Palms as being “located in one of our most underpenetrated areas in the Las Vegas Valley from a boarding pass member standpoint.”

But the Palms is only 2.3 miles away from Red Rock’s Palace Station, and if you draw a five-mile-radius circle around each of these two properties, there is a 71% overlap between the two circles. How will the company ensure that its efforts to grow the business of Palms will not come at the expense of Palace Station?

 

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

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

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

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

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

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.