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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

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?