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Will Station Casinos’ Fourth-Quarter Financials Surprise Like They Did in the Third Quarter?

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At the Nevada gaming regulators’ meeting on January 21, Red Rock management “hinted that it would like to launch the IPO before it announces fourth-quarter earnings next month,” according to the Las Vegas Review Journal. But what is the rush? Will there be any surprises in the fourth-quarter numbers?

There was a surprise in the company’s third quarter financial statements with respect to cash distributions to members: Station Casinos’ third-quarter cash payouts to its owners was were approximately 118% of its EBITDA. Through the prior eight quarters, from the third quarter of 2013 through the second quarter of 2015, the company’s distributions to members had been running at an average level of about 30.9% of EBITDA per quarter.

The company made $106.4 million of distributions to members of Station Casinos LLC (excluding $3.5 million to non-controlling interests in certain subsidiaries). This amount was greater than the company’s third-quarter Adj. EBITDA of $90.0 million. This large cash distribution followed approval by the Nevada Gaming Commission to allow Station Casinos to “pay financial distributions to the company’s owners without approval from gaming regulators” on May 28, 2015.

Investors should wait until the company has released its fourth quarter results before making a decision on whether to invest in the Red Rock IPO.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

The Tax Receivable Agreement of the Red Rock Resorts IPO

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Read our in-depth analysis of the tax receivable agreement here.

Investors should demand a cap on the TRA payments to protect themselves and Red Rock Resorts against potentially unlimited exposure and draining of the company’s cash.

Tax receivable agreements are criticized by experts. TRAs found in IPOs are frequently criticized for benefiting pre-IPO owners at the expense of the public company and outside shareholders. Moreover, TRAs have been promoted by corporate tax firms as a way to monetize tax attributes for the
pre-IPO owners during an IPO even though such agreements “are not fully understood by public stockholders.”

What are the terms of the Red Rock Resorts TRA? Red Rock Resorts will be required to pay pre-IPO owners a yet-to-be-disclosed, “substantial” amount of money for the tax benefits it realizes from acquiring partnership interests in Station Holdco LLC. The January 14th amended S-1 filing states that the public corporation will pay pre-IPO owners 85% of its tax benefits in cash and keep only 15% for itself. The 15-plus year agreement will not be based on continued ownership by the pre-IPO owners and the Fertittas, who will be the controlling shareholders after the IPO, can cause Red Rock Resorts to accelerate the TRA payments at any moment.

TRA payment liabilities can increase after the IPO. An examination of other companies which have gone public with similar TRAs reveals that estimates made at the time of an IPO commonly increase, exceeding the company’s IPO proceeds and annual EBITDA. Red Rock Resorts admits its calculations will be “imprecise” and there is no guarantee the company will realize the tax benefits it is paying to insiders. Furthermore, the company discloses that payments made under the agreement will spur additional payments to insiders and may significantly impact the liquidity of the company.

Investors deserve more information and protection. Red Rock Resorts should provide justification for the 85%-15% split, clear estimates of the annual and lump-sum payments to the pre-IPO owners, and disclosures regarding how the payments will affect free cash flow and capital expenditures. Furthermore, prospective investors should demand a cap on Red Rock Resorts’ TRA payments to the Fertittas and other pre-IPO owners to avoid potentially outsized or even unlimited exposure in the future.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO: