Red Rock Resorts disclosed in its DEF 14A, filed on May 1, that it had bought out two long-term land leases it had with a related party in Las Vegas:
On April 27, 2017, the Company purchased entities that own the land subject to the Boulder land lease and the Texas land lease from the Related Lessor for aggregate consideration of $120 million.
On its quarterly conference call with analysts on May 4, the company stated that the deal “will be immediately accretive to cash flow and will provide the company full control of this real estate.” Specifically, it would “pick up approximately $7 million of incremental EBITDA related to the purchase of the two ground leases.” This figure likely refers to the combined savings on annual rent payments. Monthly rent was $222,933 per month under the Boulder lease and $366,435 per month under the Texas lease, so total annual lease payment by Red Rock was approximately $7.1 million. The company therefore paid about 17 times annual rent to terminate the two leases.
It is unclear how the company paid for the purchase. If it had financed the purchase – perhaps under its $350-million revolving credit facility — it would have incurred some additional interest expense, so not all of the $7-million incremental EBITDA would flow through to the bottom line.
The two ground leases covered 27 acres of land under Boulder Station and 47 acres of land under Texas Station (The size of the Boulder Station parcel can be found in Station Casinos LLC’s 2017 10-K, p. 77). Red Rock thus purchased 74 acres for $120 million, or approximately $1.62 million per acre.
To put this $1.62-million-per-acre purchase by Red Rock in further context:
- In March, Boyd Gaming purchased approximately 73 acres of land under The Orleans for about $43 million, or approximately $587,720 per acre.
- The NFL’s Raiders recently purchased 62 acres of land just off the Strip for its new stadium in Las Vegas for $77.5 million, or approximately $1.25 million per acre.
For further context, we note that $120 million equals approximately:
- 8.3% of Red Rock’s 2016 net revenues of $1,452 million
- 24.8% of its 2016 adjusted EBITDA of $484 million
- 34.7% of its 2016 cash flows from operations of $346 million, and
- 77.0% of its net income of $156 million in 2016
The announcement in Red Rock’s proxy does not say whether an independent appraisal was performed to determine a fair market price for either or both of the two properties before the company consummated the transaction. It is also unclear whether the transaction was reviewed and approved by the Audit Committee of the company’s Board of Directors.