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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

Should You Pay Someone Else’s Income Taxes?

Would you like someone else to pay $40 million in income taxes for you? How would you like to pay some else’s income taxes with $40 million of cash?

Tax returns, or the lack thereof, have been in the news these past several months. While there are many ways people can manage their income tax obligations, one of the more interesting tactics appears to be what owners of Station Casinos LLC set up when they took it out of Chapter 11 bankruptcy in 2011. The company became party to a “tax distribution agreement” that requires cash payments to cover each LLC member’s share of the LLC’s income tax. That is, the LLC members get cash from the company to pay their share of the income tax bill based on the company’s profits.

This arrangement has persisted after Station Casinos became a subsidiary of Red Rock Resorts, Inc., which currently owns approximately 57% of the economic interest in Station Casinos. As described in Red Rock’s recently filed 10-K for the year 2016:

Tax Distributions

Station Holdco [which is partially owned by Red Rock Resorts and owns 100% of the economic interest in Station Casinos LLC] is treated as a pass-through partnership for income tax reporting purposes. Federal, state and local taxes resulting from the passthrough taxable income of Station Holdco are obligations of its members. Net profits and losses are generally allocated to the members of Station Holdco (including [Red Rock Resorts]) in accordance with the number of Holdco Units held by each member for tax reporting. The amended and restated operating agreement of Station Holdco provides for cash distributions to assist members (including [Red Rock Resorts]) in paying their income tax liabilities. 

None of this has been a secret. The term sheet for the company’s reorganization filed in bankruptcy court back in October, 2010, called for “the making of distributions to equityholders of amounts estimated to be necessary to pay taxes (including estimated taxes) on taxable income allocated to them by New Propco Holdco from time to time”. A “Holding Company Tax Distribution Agreement,” dated June 16, 2011, has been referenced in several of the company’s debt agreements going back to August, 2012, even though this tax distribution agreement itself was never publicly disclosed. During the Red Rock IPO last year, the LLC agreement of Station Holdco LLC filed with the SEC describes how the firm should fulfill its obligations to make these tax distributions in cash every quarter. In fact, over the year Station Casinos has taken to describing such payments to cover its owners’ income tax expenses simply as “customary tax distributions” in its public filings.

What has not been disclosed until now is how much Station Casinos has actually spent on these tax distributions. Thanks to Station Casinos’ most recent 10-K filing (separate from Red Rock Resorts’ 10-K filing), we now know how much in cash the company paid out to its owners for their LLC income tax bills in 2016.

During [the year ended December 31, 2016], cash distributions totaled $153.9 million, consisting of $142.8 million paid to members of Station Holdco and Fertitta Entertainment, of which $43.6 million represented tax distributions, and $11.1 million paid by MPM to its noncontrolling interest holders [emphasis added].

In other words, Station Casinos spent approximately 9% of the company’s adjusted EBITDA ($484 million), 12% of its cash flows from operations ($346 million), or 27% of its net income ($164 million) in 2016 to cover some of the federal income tax obligations of the Fertitta family and other owners.

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?

 

Fidelity Would Have Valued Station Casinos at $9.19 at the End of January

If Fidelity bond funds valued Station Casinos at an estimated $9.19 per share at the end of January, what will Fidelity equity funds value the company at if they decide to participate in the upcoming Red Rock Resorts IPO?

As a result of Station Casinos’ Chapter 11 bankruptcy reorganization in 2011, Fidelity owns approximately 8.7% economic interest in the gaming company in the form of Station Holdco LLC units held by several of its bond funds. These funds disclose the value of their Station Holdco holdings regularly.

Most recently, 22,418,968 Hold LLC units in the Fidelity Capital and Income Fund (FAGIX) were given a value of $78.018 million as of 1/31/16 in a 3/30/16 N-Q filing.

Using the same methodology as before, we estimate that this implies a valuation of Station Casinos’ equity at approximately $1.06 billion, which would translate to about $9.19 per share based on the fully-diluted number of shares outstanding of Red Rock. That is, Fidelity would have valued Red Rock at $9.19 at the end of January.

What valuation will Fidelity give Red Rock if the mutual fund giant decides to participate in the IPO, which has an offering price range of $18 to $21 per share? Will Fidelity ask itself, internally, how Station Casinos could have doubled in value in less than three months?

Deutsche Bank Would Have Valued Red Rock at $5.39 Per Share a Year Ago

Prospective investors in Red Rock Resorts should ask Deutsche Bank how, in its opinion, the value of Station Casinos could have more than tripled in little over a year.

According to a 2/17/15 analyst report by Deutsche Bank gaming high-yield analyst Andrew Zarnett, Station Casinos LLC, as of 12/31/2014, was estimated to have an enterprise value to be $2.59 billion, which would have implied an equity valuation of $624.6 million after subtracting net debt of $1.97 billion. That equity valuation would have translated to about $5.39 per share with the fully-diluted number of shares outstanding of 115.9 million found in Red Rock’s 4/15/16 S-1/A filing

Red Rock’s 4/15/16 S-1/A filing shows an IPO price range of $18.0 to $21.0 per share. Using the mid-point of $19.5 per share and the fully diluted shares outstanding figure of 115.85 million, the company and its underwriters, one of whom is Deutsche Bank, are offering an equity valuation of $2.26 billion and, adding net debt of $2.04 billion, an enterprise value of $4.30 billion for Station Casinos LLC.

Station Casinos Valuation Jump

12/31/14 4/15/16
Enterprise value $2,590 million $4,298 million
Net debt $1,965 million $2,039 million
Equity $625 million $2,259 million
Implied per share price on 115.85 million shares outstanding $5.29 $19.5

From 12/31/14 to 4/15/16, the share prices of four publicly-traded regional gaming operators (BYD, PENN, PNK, ISLE) rose by an average of 61%.

Investors should ask Deutsche Bank how, in its opinion, the value of Station Casinos could have more than tripled in little over a year.

(See also our earlier piece on the estimated valuation Station Casinos equity as implied by SEC filings by Fidelity, a current minority owner.)


Dividends on Your Second-Class Red Rock Shares? Don’t Count on It

Red Rock Resorts says they “intend to pay quarterly cash dividends” to Class A shareholders “initially equal to $0.10 per share” starting in 3Q16. For an investor buying second-class shares in a company facing stagnant growth and market contraction, dividends are perhaps the only upside. But how likely is it that Red Rock will pay dividends at the promised level? Will it have enough free cash flow to pay dividends? We take a closer look.

Red Rock has a number of obligations that must be met before it can pay dividends to Class A shareholders. The first obligation stems from the indebtedness of Red Rock’s affiliate, Station Casinos LLC. According to Red Rock’s S-1/A filing on April 15, 2016:

The existing debt agreements of Station LLC limit the ability of Station LLC to make distributions to Station Holdco, which effectively restricts the ability of Station Holdco to distribute sufficient funds to permit Red Rock to pay dividends to its stockholders.

On a consolidated basis, Red Rock had total long-term debt of $2.16 billion as of December 31, 2015. The company estimates that in 2016, following the public offering, it will be required to pay $209 million in principal and interest payments on this indebtedness.

The company will also have to spend a significant amount of cash flow on maintenance capital expenditures every year. For 2016, Station Casinos expects to spend “approximately $100 million to $125 million” on capex. From 2013 to 2015, capital expenditures consisted “primarily of various renovation projects at our properties, information technology equipment purchases and slot machine purchases.”

After debt obligations and maintenance capex, Station Casinos or its direct parent Station Holdco can make distributions to its members. We remind you again that Red Rock will have only one-third economic interest in Station Casinos, so any distributions upstream made will primarily go to pre-IPO owners who stay on after the IPO. And these LLC distributions will include payments to cover LLC members’ income taxes.

In addition, after Red Rock receives its one-third distributions from Station Casinos, it is required to make payments under the tax receivable agreement (TRA) to pre-IPO owners equal to 85% of its tax benefits. The company estimates it will owe a maximum aggregate payment of $28.1 to $59.0 million under the TRA, although we have seen how TRA liabilities can dramatically increase after an IPO.

For some historical perspective, let’s take a look at Station Casinos’ dividends the last time it was a public company. The following table compares Station Casinos’ historic dividends with Red Rock’s proposed dividends.

Station Casinos, Inc. Dividends vs. Red Rock Resorts Proposed Dividends

Year Annual Dividends Prior Year EBITDA

(millions)

Total Dividend Payments (millions) Total Dividend Payments/Prior Year EBITDA
2004 $0.69 295.2 $44.3 15.0%
2005 $0.92 385.4 $62.6 16.2%
2006 $1.08 480.9 $65.4 13.6%
Red Rock (proposed) $0.40 $451.4 (2015) $15.4 3.4%

*Station Casinos paid no dividends from 1993-2002 and only two quarterly dividends in 2003.

Red Rock’s proposed 10 cent quarterly dividend at the midpoint of its pricing range ($19.50) equates to around a 2% dividend yield. For those looking for a dividend play, there are plenty of companies with higher dividend yields. Furthermore, Red Rock’s dividend as a percentage of EBITDA is significantly lower than what Station Casinos used to pay out before. Red Rock’s proposed dividend is only 3.4% of 2015 EBITDA, whereas Station Casinos paid an average 15.0% of prior-year EBITDA in dividends from 2004 to 2006.

With questionable prospects for growth and poor corporate governance, investors in the Red Rock IPO might want to look to dividends for a reason to invest in Red Rock. But, as a result of its other obligations, there is no certainty the company will be able to pay dividends at a level that satisfies public shareholders.


Red Rock Resorts is a Second-Class Gaming IPO

Download our unauthorized roadshow presentation and presentation notes here.

Investors who buy Red Rock’s second-class shares on offer will gain a minority (33%) stake in the once-bankrupt Las Vegas casino and tavern operator, Station Casinos. The terms of the offering beg questions about company insiders’ confidence in its long-term prospects.

Prospective investors should ask management the following questions:

Should new shareholders expect significant dilution soon after the IPO thanks to Deutsche Bank’s expected exit? After the IPO, Deutsche Bank owns 16.2-18% of the company after selling very few shares in the current offering. The German lender, which is also an underwriter of this IPO, has been selling off its non-core assets at a loss, including a Las Vegas Strip resort and a New Jersey port operator as it continues to deal with its capital and regulatory challenges. Will it sell off its large Station Casinos/Red Rock stake immediately after the 180-day lock-up period, which may even be waived by Deutsche Bank and J.P. Morgan as underwriters?

Why is Red Rock paying $460 million in cash to insiders to internalize management with the Fertitta Entertainment acquisition? Red Rock’s prospectus does not present any specific potential benefits of this proposed transaction, yet the price represents (1) 20% of the $2.3-billion IPO valuation of Station Casinos’ equity at the mid-point of its offering price range; (2) 8.7x TTM management fees instead of the 1x TTM management fees for a potential termination of the Fertitta Entertainment management agreements covering at least 13 of 19 casinos; and (3) 31x our estimate of Fertitta Entertainment’s 2015 pro forma EBITDA of about $14.8 million. Even though it did not complete a $300-million dividend recapitalization last spring, Station Casinos has paid out over $477 million to its existing owners from 2013 through April 2016, before consummating this pricy acquisition.

How confident is management in Red Rock’s growth prospects? The Las Vegas locals market, which made up over 90% of Red Rock’s total EBITDA in 2015, has been contracting in terms of total amount wagered and number of slot units, and gaming revenue at the company’s Las Vegas operations grew at an annual compounded rate of only 1.4% from 2012 to 2015. The company has even listed hard-to-come-by potential casino sites in Nevada for sale. As for its tribal business, the company has not signed any new tribal gaming development or management agreements since 2004. Its two current contracts are due to expire in 2018 and 2020, with only one more project in development.

If the Fertitta family is cashing out, why should investors buy Red Rock’s second-class shares with uncertain prospects for dividends? The Fertitta family’s Class B Red Rock shares with 10:1 voting power make the Class A Red Rock shares second-class shares in more ways than one. Furthermore, a lopsided tax receivable agreement without a hard cap on future payments to pre-IPO owners will lead to uncertainty about Red Rock’s future free cash flow and its ability to pay dividends to Red Rock’s second-class shareholders.

It is alarming that potential investors in Red Rock’s second-class IPO are being asked to buy out an insider management company at a high, $460-million valuation, instead of paying down company debt or funding new growth initiatives. Data on the ground in Las Vegas show tepid growth in Red Rock’s core business, underscoring the contrast between an IPO that strengthens a gaming company’s finances and one that drains funds to buy a related-party management company, like Red Rock.


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

 

 

Questions about the Audited Financial Statements of Red Rock Resorts

Last week, we wrote to the SEC with questions concerning the audited financial statements of Red Rock Resorts. In our letter, we ask two specific questions:

  1. Did Fertitta Entertainment, which will be acquired by Red Rock for $460 million, provide audited financial statements with an unqualified opinion by its auditor – also Ernst & Young – after it agreed to be acquired by Red Rock?
  2. If Fertitta Entertainment did not provide audited financial statements, how did Ernst & Young handle the inclusion of Fertitta Entertainment when it produced the audited consolidated financial statements of the Station Holdco holding company?

Our questions were based on this disclosure from the Fertitta Entertainment purchase agreement:

With respect to [Fertitta Entertainment LLC’s] consolidated financial statements for the years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015, the Company did not record share-based compensation expense associated with equity incentives issued to current and former executives of the Company from FI Station Investor LLC.  FI Station Investor LLC is an entity that is owned by the parent entities of the Company.  Pursuant to GAAP, this non-cash share-based compensation is required to be recorded as a component of the Company’s statement of operations since these executives were employees of the Company and FI Station Investor LLC is a common-controlled entity of the Company’s equity holders.  The Company’s auditor, Ernst & Young LLP, has determined that each of the foregoing financial statements would require to be restated and has withdrawn its opinions for each audit period that are dated March 25, 2015, May 14, 2014, April 16, 2013 and May 15, 2012, respectively.

This disclosure makes one question how the unnamed financial advisor to the special committee of Red Rock was able to provide a fairness opinion on the Fertitta Entertainment acquisition, if the target company’s auditor had withdrawn its opinion on its financial statements.

It is possible that, since last October, when the purchase agreement was signed and the above disclosure was made, Fertitta Entertainment restated its financial statements for the named periods and Ernst & Young has since audited and provide an unqualified opinion on its restated financial statements. But if that is what has transpired and new financial statements acceptable to the auditors are available now from Fertitta Entertainment, should the $460-million agreement signed last October be revisited to ensure the deal is still fair to Station Casinos and its current and future investors?

See our full letter to the SEC here.


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

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:

“Too-Big-To-Regulate”

We recently sent a letter to Nevada Governor Brian Sandoval  to provide the governor with “specific examples of problems related to the approval of the Station Casinos/Red Rock Resorts IPO by the Nevada Gaming Commission on January 21, 2016 in order to illustrate the challenges Nevada faces in regulating a ‘too-big-to-regulate’ significant owner of one of the major gaming companies in Las Vegas.”

The entire letter can be viewed here.

In the letter, we discuss the rushed nature of the approval of the IPO by the Gaming Control Board and Nevada Gaming Commission, Deutsche Bank’s accountability as the parent company and affiliate of a felon, federal regulators’ reactions to the bank’s misconduct, and the relationship between the bank and its designated director at Station Casinos, Mr. Robert A. Cashell, Jr. We also ask whether Nevada’s gaming regulators are too permissive toward “too-big-to-regulator” investors.

Our letter concludes with the following:

We cannot help but worry that Nevada gaming regulators appear unwilling to confront head-on the admittedly complex issues related to a “too-big-to-regulate” investor like Deutsche Bank, which is affiliated with a felon. We are fearful that this apparent unwillingness on the part of our state regulators might invite unwelcome scrutiny from federal officials, especially as federal regulators and investigators continue to work to hold Deutsche Bank accountable for its actions. Some might even begin to question whether Nevada is capable of upholding the “gold standard” of gaming industry regulation when our regulators continue to look the other way and refuse to ask hard questions about why the affiliate of a felon continues to own and profit from casinos in our state.

The entire letter can be viewed here.


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

The $460-Million Fertitta Entertainment “Internalization Fee”

See our follow-up post, “More Questions about the $460-Million Valuation of Fertitta Entertainment”.


Based on the company’s presentation at the Nevada gaming regulators’ meeting on Jan. 21, Red Rock Resorts’ acquisition of Fertitta Entertainment is to be understood as the internalization of an external manager. How does the $460-million Fertitta Entertainment “internalization fee” compare to those commonly found in REIT internalization transactions?

REIT internalization fee from 1997 to 2013Fertitta Entertainment internalization fee
As % of acquirer equity2.7% – 10%43.0%
As % of acquirer’s invested capital0.9% – 6.0%14.4%
As multiple of manager’s TTM EBITDA2.9x – 14.0xNA

The historical REIT internalization fee figures in the table above are from a September 2014, study of REIT internalization fees by Sherry Cefali and Nick Tarditti of Duff & Phelps, which shows the range of REIT external manager valuations from 1997 to 2013.

The $460-million Fertitta Entertainment internalization fee is much higher compared to these figures:

Three more observations:

  1. The internalization fee will be paid entirely in cash instead of equity or a combination of cash and equity. Red Rock will pay the $460 million “internalization fee” entirely in cash instead of equity or a combination of equity and cash as has been done in the REIT sector. For example, common shares were used in January 2016 to finalize the internalization of management of Starwood Waypoint Residential Trust, merging them with Colony American Homes inside the larger company known Colony Starwood Homes.
  1. Some REITs have internalized external managers with no fee. The Duff & Phelps study excludes transactions with no internalization fees. While some REITs have been criticized for large internalization fees, some “have stopped paying their management companies any money to bring them in-house.” In 2008, Healthcare Trust of America was one of the first to “transition into a self-managed company without an internalization fee” and many have followed suit. Philips Edison – ARC Shopping Center REIT waived the internalization fee of its external managers in 2010, and Chamber Street Properties “internalized its management structure, with no separate fee paid” in 2012 before announcing its IPO in 2013.
  1. The non-insider cost for acquiring Fertitta Entertainment should be closer to $50 million, not $460 million, based on termination provisions in the casino management agreements. The $460 price tag is 8.9x the $51.7 million trailing-twelve-month management fee Fertitta Entertainment received from Station Casinos as of September 30, 2015. According to the Fertitta Entertainment management agreement covering 13 of the 19 Station Casinos properties, termination of the agreement upon sale of the managed properties to a third party would only cost Station Casinos a fee equal to the trailing-twelve-month management fee. See Exhibit “D” Financial Terms of this management agreement, which can be found as Exhibit 10.21 of Station Casinos LLC’s 10-K, filed 3/10/15.

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