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Red Rock Resorts’ deficient board diversity claims [updated 7.28.22]

Update 7.28.22: Red Rock Resorts Inc. disclosed a revised diversity policy on April 26, 2022. Based on those changes, Red Rock Resorts removed its commitment to being open to recruiting well-qualified diverse candidates. See those revisions here and the 2022 policy here. We originally published the content below on January 31, 2022.

Red Rock is the only one of the nine publicly traded Nevada-based casino gaming companies with zero women on its board of directors. Its five-person board has been the same white men since its 2015 IPO and its justification to shareholders for its board composition relies on deficient claims.

See our letter to the SEC about Red Rock’s deficient board diversity claims here here.

In the Corporate Governance – Diversity section in its 2020 and 2021 proxy filings, Red Rock tells investors that it considers gender among its diversity characteristics and then explains that:

“Gaming regulatory agencies in certain of the jurisdictions in which we operate may require our directors to maintain licenses. The licensing process is onerous, invasive, time consuming and expensive. Because of this, it is difficult to identify well-qualified candidates willing to subject themselves, as well as their families, to the rigorous and intrusive process necessary to obtain a gaming license. As a result of the limited pool of potential directors and the strong qualifications of our present Board, we believe that the current composition of our Board is in the best interest of the Company. We remain continuously open to recruiting well-qualified diverse candidates to our Board.”

There isn’t a limited pool of potential directors for Nevada-based gaming companies

There are several indicators that suggest there is not a limited pool of potential directors for Nevada-based gaming companies. Every publicly traded Nevada-based casino gaming company except Red Rock has at least one woman serving as a director, amounting to 20 out of 76 directors, or 26%, with half of them joining these boards since 2018 [1].

Nationally, women now make up 30% of all directors in the S&P 500, which is up from 28% last year and 16% a decade ago. And in the Russell 3000 index, women of all races account for 27 percent of all directors, up from 24 percent.

The pool of female directors for Nevada casino gaming companies appears to be no smaller than national averages so it is concerning Red Rock justifies its board composition through the problematic idea that if only there were a larger pool of candidates then the Board might look different.

[CHART JANUARY 27, 2022]

A gaming license is not a justifiable obstacle to board diversity

Red Rock’s claims about board diversity also rely on the problematic assumption that the pool of potential directors is too small because of the gaming license process. The gaming license process is not a justifiable obstacle to board diversity, as evidenced by the presence of women on the boards of every publicly traded Nevada-based gaming company except Red Rock.

In fact, at least in Nevada, the licensing process should present no obstacle. Nevada gaming regulation 16.415 does not require licensing of every director of a publicly traded corporation, only of directors who are actively and directly engaged in the administration or supervision of gaming activities. The regulation identifies the board chair and chair of the audit committee as among the directors who must normally be licensed.

Meaning Red Rock can elevate directors to the Board without their undergoing the rigors of the licensing process where they do not require licensing.

Red Rock has an obligation to assess the effectiveness of its diversity policy

Red Rock shareholders deserve to know whether the Company’s diversity policy is effective or not. SEC rule 229.407(c)(2)(vi) states that “if the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy.”

So, what does Red Rock mean when it states in its diversity policy that “we remain continuously open to recruiting well-qualified diverse candidates to our Board”?

Red Rock’s three independent directors, Mr. Robert Cashell Jr., Mr. Robert Lewis, and Mr. James Nave, have been on the Red Rock board since its IPO, comprise the Nominating and Corporate Governance Committee, and were board members of Red Rock’s predecessor company since 2011.

What can the Company disclose to back up the claim that the recruitment of diverse candidates is active and ongoing?

NOTE 1:

COMPANY DIRECTOR YEAR JOINED
Full House Resorts Inc. 1 Kathleen M. Marshall 2007
Golden Entertainment Inc. 2 Ann N. Dozier 2019
Monarch Casino & Resort Inc. 3 Yvette Landau 2010
Las Vegas Sands Corp. 4 Micheline Chau 2014
5 Nora M. Jordan 2021
6 Yibling Mao 2021
Caesars Entertainment Inc. 7 Bonnie Biumi 2020
8 Jan Jones Blackhurst 2019
9 Sandra Douglass Morgan 2021
Boyd Gaming Corp. 10 Marianne Boyd Johnson 1990
11 Christine J. Spadafor 2009
12 Veronica Wilson 2003
MGM Resorts International 13 Mary Chris Jammet 2014
14 Alexis M. Herman 2002
15 Rose McKinney-James 2005
16 Jan Swartz 2018
Wynn Resorts Ltd. 17 Betsy S. Atkins 2018
18 Patricia Mulroy 2015
19 Margaret J. “Dee Dee” Myers 2018
20 Winifred “Wendy” Webb 2018

Three Reasons to Eliminate Red Rock’s Dual-class Voting Structure

Lagging Performance

Since Red Rock Resorts went public 5 years ago, its Class A share price has underperformed its peers and the market.

As of 5/26/21, RRR’s Class A shares have gained 116.61% over a 5-year period. Over the same timeframe, the share prices of other regional gaming operators Golden Entertainment, Inc. (GDEN), Boyd Gaming Corp. (BYD), Monarch Casino & Resort, Inc. (MCRI), and Penn National Gaming, Inc. (PENN) share prices went up 231.16%, 243.55%, 241.32%, and 463.43%, respectively. The NASDAQ also went up 180.27.91% over the same period.

Doing away with the dual-class share structure would be a good first step toward maximizing the value of Class A shares of Red Rock Resorts. In the words of a recent Wall Street analyst report: “RRR’s dual-class share structure is suboptimal for most investors and has historically been an impediment to valuation optimization.” (1)

An Entrenched Board

Two years ago, CalPERS raised the issue of board diversity with Red Rock. See Red Rock’s All-White, All-Male Board Draws Calpers’ Attention (Bloomberg, June 2019). At the time, Red Rock said “because the casino business requires an extensive licensing process for board members,” it is “difficult to find qualified candidates.”

Two years later, Red Rock continues to nominate the same five white men to its board and again blames the gaming licensing process for making it difficult to find diverse candidates in this year’s proxy. The company, however, fails to mention that other public-traded Nevada gaming companies have all somehow managed to seat women on their boards.

Doing away with the dual-class share structure is a smart step toward reforming an entrenched, all-white, all-male board at Red Rock Resorts.

Greater Transparency

Family office investments and share pledging by Red Rock’s controlling insiders raise questions about potential conflicts of interest.

Red Rock’s chairman and vice-chair, Frank and Lorenzo Fertitta, have dual roles at Fertitta Capital, their family office founded in 2017 that has overlapping business interests with Red Rock in gaming, sports, betting, leisure, wellness, and food and beverage.

In 2019, Fertitta Capital led a $17.5 million funding round for a sports betting media company, The Action Network.  It remains unclear if Red Rock’s board vetted the deal and whether the family firm receives opportunities owed to shareholders and now competes with Red Rock.

Also, Frank and Lorenzo Fertitta pledged six million or 13% of Class B shares in Red Rock in September 2018 for a margin loan worth up to an estimated $155 million from UBS AG, a bank that was a lender to Red Rock but stopped doing so. The loan pledges appear no longer to be in effect.

To date, Red Rock has not made any disclosures about Fertitta Capital, nor has it explained why UBS started lending to company insiders and stopped lending to the company.

Doing away with the dual-class share structure is a smart step toward transparency and fully protecting Red Rock from potential conflicts of interest.

(1) J.P. Morgan, “Red Rock Resorts: Takeaways from Investor Meetings. Story Still Has Legs. Reaffirm Overweight. PT to $48 (+$1),” North America Equity Research, p. 6 (May 14, 2021).

Why did UBS start lending to Fertittas and stop lending to Red Rock? [updated 4.28.21]

Note: On 3/10/21, we published the following update: “Since publishing this article on February 8, 2021, we discovered the financing statement for the UBS loan to the Fertittas was terminated on March 23, 2020. Notwithstanding, the pledge and margin loan were still identified as in effect in Red Rock’s April 22, 2020 Form DEF 14A.” Now we can report that there is no pledge and margin loan identified as in effect in Red Rock’s April 22, 2021 Form DEF 14A. We have updated the report to reflect this new information. 4/28/2021.

The controlling owners of Red Rock Resorts Inc. (NASDAQ: RRR), Frank Fertitta III and Lorenzo Fertitta, pledged six million or 13% of Class B Red Rock shares to UBS AG in September 2018 for a margin loan worth up to an estimated $155 million.

In February 2019, Red Rock disclosed the termination of a $50 million UBS commitment that had been identified as in effect in its Form 10-Q for the quarter ending September 30, 2017.  In February 2020, it disclosed the termination of an $18.5 million commitment that had been identified as in effect in an amended credit agreement dated February 8, 2019.

On March 23, 2020, the financing statement for the UBS loan to the Fertittas was terminated. But the pledge and the margin loan were identified as in effect in Red Rock’s April 22, 2020 Form DEF 14A. No pledge and margin loan are identified as in effect in Red Rock’s April 22, 2021 Form DEF 14A.

Why did UBS end up by lending to the Fertittas personally but not to the public-traded company they controlled? And what caused the Fertittas to take on the margin loan in the first place? Why did UBS terminate the financing statement for the margin loan on March 23, 2020?

[See our letter to the SEC and Nasdaq requesting a closer look at pledged shares at Red Rock here.]

Red Rock has not explained what prompted the changed relationship with UBS. And why the Fertittas secured liquidity through a margin loan is also of potential interest to public shareholders given the Fertitta’s control of Red Rock.

On one hand there appears to be cash, lots of it. The Fertittas reportedly cleared $870 million each in the 2016 sale of the Ultimate Fighting Championship, and in August 2020 spent $74 million to purchase five million Red Rock shares (see here, here, here, here and here).

On the other hand, they have borrowed money—$64 million from a related party to buy Red Rock shares in August 2019—and, between one or the other of them, they have acquired a number of luxury assets:  two superyachts, a support yacht, and a penthouse near Manhattan’s Central Park.

Two Fertitta yachts have been delivered since 2018, with a third delivered in 2021: the 285-foot Lonian ($160 million estimated); the 217-foot Hodor support yacht ($55 million estimated); and the 308-foot Viva ($175 million estimated).

Two helicopters share the initials of Frank and Lorenzo Fertitta and the Las Vegas area code (N702FF, N702LF) and are owned by entities that share the superyacht names (Viva Eagle LLC, Lonian Raven LLC).

Hodor Holdings Limited is named as a secured party in an August 2017 financing statement related to the construction of an “equipped submersible” by Seamagine Hydroscape Corporation. Hodor Holdings, Ltd.’s address is identified as the same Las Vegas address as Fertittas Enterprises, Inc.

UBS promotes its securities-backed loans as useful for purchasing yachts, among other things.  But as it stands, Red Rock investors have no basis to know what the loan proceeds were used for.

Red Rock’s securities pledging policy, a summary of which was first disclosed in April 2020, does not appear to cap pledging even though it requires certain insiders to “pre-clear” transactions in company securities.

Moreover, it is not clear which persons would review and approve such “pre-clearances.” And Red Rock has not disclosed whether the 2018 margin loan transaction was subject to the current policy.

Investors are in the dark about the details of pledged shares at Red Rock. They deserve sufficient information to decide whether such pledges benefit the company.

Fertitta Capital’s sports betting deal highlights disclosure dilemma at Red Rock Resorts

Investors in Red Rock Resorts (NASDAQ: RRR) lack the necessary information to know if they lost a business opportunity to Fertitta Capital, the investment firm founded in 2017 and run by Red Rock Resorts controlling owners, according to letters sent by the Culinary Union to the U.S. Securities Exchange Commission (SEC) and NASDAQ Stock Market.

See press release here.

In the letters to regulators (available here), the Culinary Union asks for a determination if potential conflicts of interest for those with dual roles at Red Rock Resorts’ and Fertitta Capital should be disclosed to investors, and questions whether Fertitta Capital’s investment in The Action Network, a sports betting media company, means the family firm receives opportunities owed to shareholders and now competes with Red Rock Resorts’ sports betting business.

To date, Red Rock Resorts has not informed investors that its principals, brothers Frank and Lorenzo Fertitta, and its Senior Vice President of Government Relations, Michael Britt, have dual roles at a firm whose business interests are similar to Red Rock Resorts, including in gaming, sports betting, leisure, live events, wellness, and food and beverage. The company’s proxy statement, released this week on April 29, makes no mention of Fertitta Capital at all.

Who’s on the Hook for the Palms?

Red Rock Resorts has set a big ROI target for its Palms Casino Resort. What started as a $312.5 million acquisition with $35 million of EBITDA expected in the first full year of RRR ownership, has now become a $1 billion project, with a capex budget that has increased to $690 million over the past year-and-a-half.

Can they get there?

Investors should ask management to set clear markers: who will be held accountable if the post-renovation Palms doesn’t generate the kind of ROI management has projected?

Read out report: Who’s on the Hook for the Palms?

Withhold the Vote 2018: Failure to Sunset Perpetual Dual-Class Stock

We encourage Red Rock Resorts shareholders to withhold authority to vote on their proxy card for the company’s board of directors – Frank J. Fertitta III, Lorenzo J. Fertitta, Robert A. Cashell, Jr., Robert E. Lewis, and James E. Nave, D.V.M. – at the upcoming annual stockholders meeting on June 14.

The many problems arising from the company’s perpetual dual-class stock make it necessary for outside shareholders to withhold their votes, especially after the company has made no attempt to address the significant shareholder discontent expressed at last year’s annual meeting.

Perpetual dual-class shares trade at a significant discount, risk index exclusion, and are opposed by major shareholder advocacy groups.

Read our report, Withhold the Vote 2018: Failure to Sunset Perpetual Dual-Class Stock

Selected Results: 2017 Corporate Governance Survey of Red Rock Shareholders

Following shareholder discontent at Red Rock’s annual meeting this July, in which 9% to 16% of equity holders withheld from the directors, we decided to survey Red Rock investors about their corporate governance issues. The survey this year measured shareholder sentiment toward Red Rock’s takeover defenses and features of its board of directors. We believe these topics are particularly important following another year of strong M&A activity in the gaming industry.

Despite the dissatisfaction expressed by shareholders and the negative voting recommendations from Institutional Shareholder Services for Red Rock’s entire board of directors surrounding the 2017 annual meeting, the company has not announced plans to remove, sunset, or put to a vote its takeover defenses. Nor has the company done anything to resolve its problematic board structure, which ISS gave its highest governance risk rating of 10 (as of June 19, 2017).[i]

The results of our survey reveal shareholder respondents expressed consensus for a hybrid format for the annual general meeting, took issue with the dual-class capital structure and other takeover defenses, and shared their preference for a more diverse board, an independent board chair, and their doubt regarding shareholder representation on the board.

See the selected results of the corporate governance survey below:

supervoting

preferred-stock tra supermajority written-consent special-meetings agms board-diversity independent-chair shareholder-representation

Notes

[i] Institutional Shareholder Services, “Proxy Alert: Red Rock Resorts, Inc.,” June 19, 2017, original publication date June 16, 2017, p. 1.

Baron’s Sunk Cost Trap: Red Rock Resorts

Over the past year, Baron has been building a position in Red Rock Resorts, Inc. (NASDAQ: RRR) and is now the second largest outside investor, owning just over 10% of the publicly listed Class A shares of RRR. Red Rock’s shares have underperformed both the market and its peers, year-to-date. Baron’s efforts to double down on Red Rock’s stagnant stock suggest its stock pickers have fallen into a sunk cost trap, unwilling to recognize the opportunity cost they’ve incurred by putting millions more of their clients’ money in RRR over the past year.

Sunken Costs
Baron filed a 13G on October 10, 2017, announcing its 10.42% ownership of Red Rock Resorts, Inc.’s Class A shares outstanding.[i] Baron began developing its position in Red Rock following the latter’s IPO in April 2016. As early as June 30, 2016, Baron reported owning 3,605,258 (or approximately 8.7% at the time) of Red Rock’s Class A shares outstanding.[ii]

Baron’s stock pickers slowly increased the firm’s holdings in Red Rock through late 2016 and early 2017, with significant increases both in the 2Q17 (29% increase in number of shares since previous 13F) and in a 13G filed on October 10th, 2017 (28% increase) (Chart 1).[iii],[iv],[v] What value do Baron’s stock pickers see in a stagnant, underperforming security such as Red Rock?

Chart 1: RRR Share Price and Baron’s RRR Class A Ownership
171109_chart-1_bamco-rrr-ownership

Red Rock’s share price has underperformed the markets year-to-date. As of the closing prices on November 8, 2017, the NASDAQ composite index is up 24.0% and the S&P 500 is up 14.3%, while Red Rock’s share price has increased by 11.0%. On the other hand, Red Rock’s peers have significantly outperformed the markets year-to-date (Chart 2).

Chart 2: Share Price Performance of RRR and Industry Peers (YTD)
171108_yahoofinance_rrrpeers

Opportunity Cost
What would it look like if instead of sinking more money into Red Rock, Baron’s portfolio managers had chosen to invest in one of its peers? Baron’s reported ownership of 3,900,959 of Red Rock’s Class A shares as of December 31, 2016.[vi] The value of this number of shares at the start of 2017 was approximately $91 million.[vii] Baron’s decision to stay invested in Red Rock came with a significant opportunity cost (Table 1). If Baron had bought shares in any of these other gaming companies instead of Red Rock Resorts, it would have seen a sizable YTD gain instead of a negligible return from RRR Class A shares.

Table 1: Market Appreciation and Opportunity Cost YTD (through 11/8/17)

Company Share Price
YTD % change (through 11/8/17)
Potential Value
(as of 11/8/17)
Opportunity Cost
Eldorado Resorts 67.3% $152 mm $51 mm
Boyd Gaming 42.4% $130 mm $29 mm
Golden Entertainment 154.4% $232 mm $130 mm
Pinnacle Entertainment 81.6% $165 mm $64 mm
Penn National 91.1% $173 mm $73 mm

What makes Baron’s position in RRR even more interesting is that the firm has nearly doubled (82% increase) its ownership of Red Rock’s Class A shares from the beginning of the year until its latest filing on October 10, 2017.[viii],[ix]  Given the opportunity cost of its RRR investment, Baron’s stake will need to generate a much greater return than what can be expected from RRR’s current 12-month consensus price target of $28.50 for the firm’s position to make financial sense.[x] Whatever Baron’s internal price target for RRR might be, the firm must assume that RRR will greatly outpace its gaming peers over a reasonable investment period.

Baron’s fund managers should not be satisfied with seeing RRR reach $28.50 by the end of 2018, considering the much bigger returns it could have gotten if it had invested in one of its peers.

Notes
[i] BAMCO, Inc., SEC Form 13G, filed on October 10, 2017.
[ii] BAMCO, Inc., SEC Form 13F, Information Table, filed on August 14, 2016, as of June 30, 2016.
[iii] BAMCO, Inc., SEC Form 13F, Information Table, filed on May 15, 2017, as of March 31, 2017.
[iv] BAMCO, Inc., SEC Form 13F, Information Table, filed on August 14, 2017, as of June 30, 2017.
[v] BAMCO, Inc., SEC Form 13G, filed on October 10, 2017.
[vi] BAMCO, Inc., SEC Form 13F, Information Table, filed on February 14, 2017, as of December 31, 2016.
[vii] Red Rock’s opening share price on January 3, 2017 was $23.36.
Yahoo Finance, “Red Rock Resorts,” Historical Data, website, accessed on October 3, 2017. https://finance.yahoo.com/quote/RRR/history?p=RRR
[viii] BAMCO, Inc., SEC Form 13F, Information Table, filed on February 14, 2017, as of December 31, 2016.
[ix] BAMCO, Inc., SEC Form 13G, filed on October 10, 2017.
[x] Consensus Price Target as reported by NASDAQ’s website. Accessed on November 9, 2017. http://www.nasdaq.com/symbol/rrr/analyst-research

Opportunity Cost: The Case of Cohen & Steers’ Investment in Red Rock Resorts

Cohen & Steers, Inc. (NYSE: CNS) filed a Schedule 13G on December 12, 2016, announcing its beneficial ownership (at the time 15.94% of Class A shares) in Red Rock Resorts. This was an interesting move by Cohen & Steers, which is often praised as the “king of REITs”[i],[ii] and self-described as “pioneers in REIT investing.”[iii] The company has no other investments in the gaming industry besides the REIT Gaming and Leisure Properties.[iv] However, since Red Rock is not a REIT and has not announced any plans to convert its assets into a REIT, why did CNS take such a large stake in Red Rock and continue to hold on to it? Red Rock’s stock (the publicly-traded Class A shares) has struggled year-to-date compared to the market and its regional gaming peers. CNS investors should ask how long the firm is willing to wait for its bet on Red Rock to pay off.

Red Rock’s share price has underperformed the markets year-to-date. As of the closing prices on September 29, 2017, the NASDAQ composite index is up 19.7%, the S&P 500 is up 11.9%, and the Russell 2000 is up 9.8%, while Red Rock’s share price has declined by 0.86%. On the other hand, Red Rock’s peers have significantly outperformed the markets year-to-date (Table 1).

Table 1: Share Price % Change YTD (through 9/29/17)

Company or Index

Share price (1/3/17, open)

Share price (9/29/2017, close)

Year-to-date % change

Red Rock Resorts

$23.36

$23.16

-0.86%

Eldorado Resorts

$17.10

$25.65

50.0%

Boyd Gaming

$20.40

$26.05

27.7%

Golden Entertainment

$12.24

$24.38

99.2%

Pinnacle Entertainment

$14.65

$21.31

45.5%

Penn National

$13.90

$23.39

68.3%

Gaming and Leisure Prop (REIT)

$30.77

$36.89

19.9%

MGM Growth Properties (REIT)

$25.31

$30.21

19.4%

NASDAQ composite index

$5,425.62

$6,495.96

19.7%

Dow Jones Industrial Average

$19,872.86

$22,405.03

12.7%

S&P 500

$2,251.57

$2,519.36

11.9%

Russell 2000

$1,357.99

$1490.86

9.78%

Source: Yahoo Finance

Cohen & Steers’ 13G filed on December 12, 2016, shows the company owned 9,739,009 of Red Rock’s Class A shares. At the start of 2017, the value of these shares was approximately $228 million.[v] Red Rock’s share price has not appreciated year-to-date (through 3Q17). If Cohen & Steers had put this $228 million investment in nearly any other gaming company, including the two actual gaming REITs, it would have generated sizable returns for its investors and clients (Table 2). Holding onto Red Rock’s Class A shares had a significant opportunity cost for Cohen & Steers.

Table 2: Market Appreciation and Opportunity Cost YTD (through 9/29/17)

Company

Share Price
YTD % change (9/29/17)

Potential Value
(9/29/17)

Opportunity Costs

Eldorado Resorts

50.0%

$342 mm

$116 mm

Boyd Gaming

27.7%

$291 mm

$65 mm

Golden Entertainment

99.2%

$454 mm

$228 mm

Pinnacle Entertainment

45.5%

$332 mm

$106 mm

Penn National

68.3%

$384 mm

$158 mm

Gaming and Leisure Prop (REIT)

19.9%

$273 mm

$47 mm

MGM Growth Properties (REIT)

19.4%

$272 mm

$46 mm

Red Rock’s investment risks are very clear, such as its limited geography diversity, dependence on Las Vegas macro fundamentals, and its long-held but vacant land holdings with few shovel-ready development plans. In its S-1 filed on October 26, 2016, Red Rock states:

We depend on the Las Vegas locals and repeat visitor markets as our key markets, which subjects us to greater risks than a gaming company with more diverse operations.

Except for fees from its set-to-expire management contracts at Gun Lake and Graton ($111 million in 2016)[vi], Red Rock relies on the Las Vegas valley for all of its revenues. In 2016, 92% of the company’s consolidated net revenues were from its Las Vegas operations.[vii] This should be a red flag for investors skeptical about the Las Vegas locals market recovery. (A notable economist and gaming analyst recently cast doubt on the strong growth narrative surrounding the Las Vegas economy.[viii],[ix]) By comparison, Red Rock’s peers are much more geographically diverse (Table 3).

Table 3: Geographic Diversification of Gaming Companies

Company

U.S. States with Operations

Red Rock Resorts

1

Eldorado Resorts

10

Boyd Gaming

7

Golden Gaming

3

Pinnacle Entertainment

9

Penn National

16

*Management contracts excluded

Source: SEC filings and company websites

Red Rock is also the only company among its peers to have a dual-class capital structure – providing 10-to-1 super voting stock to the Fertitta insiders – as well as numerous other anti-shareholder provisions that have been the subject of governance alerts by Institutional Shareholder Services and the Council of Institutional Investors. Given the abundance of better performing securities in the gaming space, why did Cohen & Steers bet on Red Rock?

The decision by Cohen & Steers fund managers to invest in Red Rock comes at a time when active managers are facing increased pressure to both outperform their passive counterparts and reduce fees. Nearly $500 billion shifted from active to passive funds in the first half of 2017 and Morgan Stanley estimates that global asset managers’ revenue could drop as much as 30% by 2019.[x],[xi]  According to S&P Dow Jones Indices’ SPIVA® scorecard, actively-managed large-cap, mid-cap, and small-cap funds have underperformed their respective indices over the 1-, 3-, 5-, 10- and 15-year periods (Table 4).[xii]

Table 4: Percentage of U.S. Equity Funds Outperformed by Benchmarks

Fund Category Comparison Index

1-year

3-year 5-year 10-year

15-year

All Large-Cap Funds S&P 500

66.00

93.39 88.30 84.60

92.15

All Mid-Cap Funds S&P MidCap 400

89.37

94.21 89.95 96.03

95.40

All Small-Cap Funds S&P SmallCap 600

85.54

95.69 96.57 95.64

93.21

Source: S&P DJI, SPIVA U.S. Year-End 2016 report

 

Notes

[i] Larry Swedroe, “Cohen & Steers: The King Of REITs Poised To Provide Investors 42% Annualized Returns,” Seeking Alpha, May 15, 2014, https://seekingalpha.com/article/2218583-cohen-and-steers-the-king-of-reits-poised-to-provide-investors-42-percent-annualized-returns

[ii] Arturo Neto, “Cohen & Steers: King Of REITs Moving In The Right Direction But It Will Take Patience For The Big Payoff,” Seeking Alpha, September 16, 2014. https://seekingalpha.com/article/2497685-cohen-and-steers-king-of-reits-moving-in-the-right-direction-but-it-will-take-patience-for-the-big-payoff

[iii] Cohen & Steers, Inc., “About Us,” website, accessed on October 5, 2017. https://www.cohenandsteers.com/company

[iv] Cohen & Steers, Inc., SEC Form 13F, Information Table, filed on August 14, 2017. https://www.sec.gov/Archives/edgar/data/1284812/000114036117031503/xslForm13F_X01/form13fInfoTable.xml

[v] Cohen & Steers, Inc., SEC Form SC 13G, filed on December 12, 2016.

[vi] Red Rock Resorts, Inc., SEC Form 10-K, filed on March 13, 2017, p. 21.

[vii] Red Rock Resorts, Inc., SEC Form 10-K, filed on March 13, 2017, p. 48.

[viii] Wade Tyler Millward, “Southern Nevada economy still growing, UNLV economist says,” Las Vegas Review-Journal, June 13, 2017, https://www.reviewjournal.com/business/southern-nevada-economy-still-growing-unlv-economist-says/

[ix] Howard Jay Klein, “Boyd Gaming: Has It Expanded Its Locals Market Base At The Expense Of Bigger Possibilities,” Seeking Alpha, September 18, 2017, https://seekingalpha.com/article/4108010-boyd-gaming-expanded-locals-market-base-expense-bigger-possibilities

[x] Charles Stein, “Active vs. Passive Investing,” Bloomberg, July 6, 2017, https://www.bloomberg.com/quicktake/active-vs-passive-investing

[xi] Sarah Jones, “Asset Manager Revenue May Fall 30% by 2019, Morgan Stanley Says,” Bloomberg, March 17, 2017, https://www.bloomberg.com/news/articles/2017-03-17/asset-manager-revenues-could-slump-30-percent-by-2019-ms-says

[xii] S&P DJI, “SPIVA U.S. Year-End 2016,” report, April 12, 2017, p. 8, http://us.spindices.com/search/?ContentType=SPIVA

Outside Shareholders Dissent at Red Rock Resorts’ Annual Meeting

Outside shareholders of Red Rock Resorts demonstrated their dissatisfaction with the company’s directors at its July 6th meeting of stockholders, with the most opposition shown toward the independent directors.

Assuming all insiders voted their Class A and Class B shares in favor of management’s recommendation, then the total outside Class A shareholder vote “for” the directors was between 59% and 71%.[i] That means between 29% and 41% of outside shareholders did not vote “for” the company’s directors

Outside Class A Shareholder Support for Red Rock’s Directors

Director Outside Class A “For” Outside Class A “For” %
Frank J. Fertitta III 47,606,865 71%
Lorenzo Fertitta 46,912,406 70%
James E. Nave 40,389,581 60%
Robert E. Lewis 40,425,855 60%
Robert A. Cashell, Jr. 39,415,189 59%


Ernst & Young reports
that only 3.8% of Russell 3000 directors received less than 80% support from all shareholders (combined inside and outside) in 2017 (YTD, 5/31/2017). Therefore, a significant number of Red Rock’s outside shareholders expressed discontent with the entire board.

Alternatively, we can look directly at the “withhold” vote. Commenting on a 2012 study commissioned by the Investor Responsibility Research Center Institute, GMI’s Ratings director of research Kimberly Gladman said: “The average level of withheld votes in a director’s election is 5 percent; companies should be concerned when the level in an election exceeds 10 percent.”

To measure shareholder dissatisfaction this way at the recent Red Rock meeting, we reduce the super voting shares held by insiders to a one share, one vote standard. This adjusted votes figure more accurately reflects the desires of all equity holders, not just the Fertitta insiders. If all shareholders of Red Rock had equal voting rights and assuming no Class B shareholders withheld their votes, then the vote results show between 9% and 16% of shareholders withheld from the company’s directors.

Adjusted Votes Withheld from Red Rock’s Directors

Director Adjusted Votes Withheld Adjusted Votes Withheld %
Frank J. Fertitta III 10,593,246 9%
Lorenzo Fertitta 11,287,705 10%
James E. Nave 17,810,530 15%
Robert E. Lewis 17,774,256 15%
Robert A. Cashell, Jr. 18,784,922 16%

Red Rock’s closing share price on July 5th (the day before the annual meeting) was down 3.1% year-to-date compared with NASDAQ Composite Index’s gain of 13.3%. As of May 8th, Class A shareholders held 58.4% of the equity but only controlled 12.9% of the vote.[ii]

Read the letter and report we sent to Red Rock’s public investors, criticizing the company’s independent directors for anti-shareholder corporate governance measures and related-party transactions and encouraging investors to withhold votes from its independent directors.

ISS recommended withholding on all of the company’s directors, which we fully supported.

See table below for how we calculated inside, outside, and adjusted votes.

Inside and Outside Votes

Share Class Number of Shares Votes
Class A Shares Outstanding 67,778,152 67,778,152
Insider Class A Shares 516,326 516,326
Outside Class A Shares 67,261,826 67,261,826
Class B Shares Outstanding 48,327,396 456,799,632
Insider Class B Shares (1 vote per share) 2,941,592 2,941,592
Insider Class B Shares (10 votes per share) 45,385,804 453,858,040
Class A + B Outstanding 116,105,548 524,577,784
*Number of adjusted votes equals the number of Class A + B outstanding

[i] At the July 6th annual meeting, Richard Haskins, President of Red Rock Resorts, said as of record date (May 8, 2017) there were 67,778,152 Class A shares outstanding, 48,327,396 Class B shares outstanding, and 45,385,804 Class B shares with 10 votes per share. These figures were used to calculate the number of Class B shares with one vote per share, the voting power and equity of each class, and to estimate the number of insider and outsider “for” votes. The number of insider Class A shares comes from Red Rock’s DEFR14A, filed on May 26, 2017, p. 47.

[ii] See note i