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Should You Pay Someone Else’s Income Taxes?

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?

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Questions about the Palms Acquisition

Red Rock Resorts announced its acquisition of the Palms on May 10. We believe investors and analysts should ask the following questions: When will Red Rock disclose the Palms purchase agreement? What will Red Rock have to do to bump Palms’ EBITDA up by 25% in one year? Will “Palms Station” cannibalize Palace Station?

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

The flip side of Station Casinos’ 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. Facing low population growth and a decline in locals’ gaming behaviors, the company is unlikely to experience much, if any, upside in its core Las Vegas locals business.

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The Tax Receivable Agreement of the Red Rock Resorts IPO

The IPO’s tax receivable agreement requires Red Rock to pay out a substantial (and potentially unlimited) amount of cash to the pre-IPO owners for years after the IPO. TRA payments will not be subject to the approval of outside investors, can negatively affect free cash flow (not EBITDA) and Class A stockholders’ equity, and will be in addition to quarterly tax distributions payable to the pre-IPO owners.

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