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An Update on Private Jets (and Yachts!)

The Fertitta Fleet

fertitta-fleet

Readers may recall that Fertitta Entertainment LLC, the Fertitta-owned company that had no business other than managing Fertitta-owned-Station Casinos’ properties under contract, was purchased by Fertitta-controlled Red Rock Resorts last year using IPO proceeds plus additional debt. One of the interesting features of the transaction was that the private jet of Fertitta Entertainment was not included in the deal. The $30-million airplane was instead “transferred” to Fertitta Business Management LLC, making the Fertittas collectively owners of four private jets.

No More Private Jets for Red Rock: Of the four planes owned by Fertitta entities, a Boeing Business Jet and a Gulfstream G-IV have been on the market since at least February 9, 2017.  The remaining jets not for sale are the 2011 Bombardier Global Express from Fertitta Entertainment and a 2008 Bombardier Global Express.

Even with their own private jets, sometimes the Fertittas would make use of the company jet for their own personal travel. In 2016, Red Rock’s CEO made $41,495 worth of personal use of the Fertitta Entertainment jet, up to the point of the consummation of the IPO, when the plane’s ownership transferred. In 2015 and 2014, the CEO compensation included $246,486 and $187,146 for “personal use of aircraft leased by Fertitta Entertainment,” respectively.[1] Before Station Casinos, Inc. filed for Chapter 11 bankruptcy, executives also made “personal use” of the company’s airplane. In 2006, for example, compensation for three executives included $147,765 of personal use of company aircraft.[2]

That’s a lot of personal travel on these executives’ part. But presumably the company (Red Rock and its pre-Chapter 11 predecessor Station Casinos Inc.) had a company jet for business purposes. Now that Red Rock Resorts is private jet-free, do its executives simply fly commercial as they try to look for growth opportunities outside Las Vegas, even around the world (e.g., Brazil)? Are they looking for growth opportunities?

The Fertittas’ private fleet made 153 flights into airports in southern California in the twelve months following RRR’s IPO. In the same period, international destinations included locations in southern Europe and the Caribbean (but no flights to Brazil).

From Private Jets to Mega-Yachts: While preparing to take their company public, the Fertittas financed the construction of two mega-yachts. Financing for a 285-foot yacht was secured on November 2, 2015, and for a 308-foot yacht on March 24, 2016. Photos of just one of the yachts have surfaced online.

Should billionaire owners of such super yachts continue to be subsidized by Red Rock Resorts outside shareholders, who have been paying the Fertittas’ income tax with cash “tax distributions”?

In 2016, cash distributions to owners of Station Casino LLC totaled $142.8 million, including $43.6 million of “tax distributions.” In 2015, cash distributions to owner of Station Casinos LLC totaled $162.3 million [3], but the amount of tax distributions was not disclosed.


* Based on capacity of yachts of similar length

[1] See Red Rock Resorts Inc., SEC Form 424B1, filed 4/28/16, p. 138; and Station Casinos LLC, SEC Form 10-K, filed 3/10/15, p. 112.
[2] Station Casinos Inc., SEC Form 10-K/A. filed 4/27/07, p. 16.
[3] Station Casinos LLC, SEC Form 10-K, filed 2/29/16, p. 81

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.

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

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?

 


Why is Station Casinos Selling Valuable Casino Sites?

See also: More growth questions about the Las Vegas locals gaming market.


In Red Rock Resorts’ most recent S-1/A, the company says it “control[s] approximately 398 acres of developable land comprised of seven strategically-located parcels in Las Vegas and Reno, Nevada, each of which is zoned for casino gaming and other commercial uses” (3/15/16 S-1/A, p. 116). The filing then lists seven such parcels: Durango/I-115 (70 acres), Wild Wild West/Viva (96 acres), Flamingo/I-215 (58 acres), Via Inspirada/Bicentennial Parkway (45 acres), Boulder Highway (30 acres), Mt. Rose Property (Reno) (88 acres), and South Virginia St/I-580 (Reno) (8 acres).

Two of these sites caught our eye, because they are actually on the market. There is no guarantee that IPO investors will be able to participate in any potential growth tied to these parcels, if they are soon sold off.

The large Mt. Rose site in Reno has been on the market since at least November 3 last year, less than a month after the company made its initial IPO filing on Oct 13.

A 25.5-acre portion of the company’s 30-acre Boulder Highway site in Las Vegas has also been on the market for a while. The parcel for sale is not itself entitled for gaming development, leaving a 5-acre rump for a future casino. The earliest listing we saw was from October 28.

It is unclear why Red Rock does not disclose in its prospectus that these two parcels are currently listed for sale. This lack of disclosure is all the more puzzling given that the company does say that another gaming-entitled parcel in its land bank is for sale – immediately after it lists off the seven parcels mentioned above: “We also own an additional development site in Las Vegas that is zoned for casino gaming and other commercial uses and which is currently for sale.”

This likely refers to what one might call the “Cactus/I-15 site”, which is located off the new Cactus Avenue ramp of I-15 south of the Las Vegas Strip. This parcel has also been on the market since at least October 28, and it is being sold “with a deed restriction precluding any gaming on entire site.” (Station Casinos had announced a “Cactus Station” project at this location back in November, 2008, before the highway exchange was built.)

Gaming-entitled land has been a scarce commodity since Nevada State Senate Bill 208 (“SB 208”) was enacted in 1997 to significantly limit the construction in large urban communities such as Las Vegas/Clark County and Reno/Washoe County. As Red Rock tells prospectus investors, one example of the ability of its “highly-experienced management team, led by the Fertitta family,” to create value has been their “capitalizing on the opportunity created by Nevada’s passage of SB 208 through a series of strategic acquisitions and new developments” (S-1/A, 3/15/16, p. 4). Furthermore, the company believes that “the development of new casino facilities will continue to be limited due to SB 208, which limited casino gaming in the Las Vegas valley to specified gaming districts and established more restrictive criteria for the creation of new gaming districts” (S-1/A, 3/15/16, p. 8). One would thus expect any large, gaming-entitled parcels – such as the ones the company has put on the market – to continue to be quite valuable.

Investors should ask Red Rock Resorts/Station Casinos and its IPO underwriters:

  • Why is the company selling valuable casino sites?
  • Where will growth come from if the company is selling off future casino sites?
  • Does the Fertitta-led management team not see value in these parcels?
  • Do they not see growth opportunities that can be realized by developing these sites?
  • Do the Fertittas and other executives of Red Rock have confidence in the company’s core Las Vegas locals business?

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

Selling Growth While Cashing Out

Read our updated report, “Selling Growth While Cashing Out”.

Is the Las Vegas locals market in decline? Data from the Nevada State Gaming Control Board show a continuing decline in the number of slot machines in the Las Vegas locals market since 2009. This is accompanied by a similar decline in the total amount wagered by customers in the locals market. Both total slot units and amounts wagered have declined to 2003 levels. Station Casinos derives “approximately 80% to 85%” of its gaming revenue coming from slot play.

Why is Red Rock Resorts selling hard-to-come-by casino sites? Historically, Station Casinos built its leading position in the Las Vegas locals gaming market by acquiring a portfolio of competing locals casinos and undeveloped land shielded from competition thanks to Nevada’s SB 208 legislation. The company touts its gaming-entitled land holdings in its IPO prospectus, but it has not disclosed that some of its casino sites are now on the market or explained why it is ceding some of its “highly desirable” and “strategically located” gaming-entitled locations in Las Vegas.

When will Red Rock Resorts grow again? Station Casinos has seen little growth in its core Las Vegas business over the last several years. Casino revenues from its properties in Las Vegas barely increased from 2009 to 2014, with a compound annual growth rate of only 0.07%. A significant portion of the company’s EBITDA growth over the past three years has come from its tribal casino management agreements, but the company has not signed a new tribal casino development agreement in over a decade.

Investors deserve better analysis of Las Vegas economic conditions. We reviewed how the company in its IPO filings describes certain of its own key metrics for understanding the Las Vegas economy and the potential for growth in the Las Vegas locals gaming market (e.g. average weekly wages and home value appreciation). When Station Casinos says that it believes the Las Vegas locals gaming market is one of the most attractive in the U.S. because of, among other things, “its strong economic and demographic fundamentals,” what is the company talking about? How confident is the company in its claims?