On the eve of Global Gaming Expo in Las Vegas, Deutsche Bank hosted an investor dinner for Station Casinos’s top management. Analyst Carlo Santarelli recapitulated the highlights in an October 8 investor note.
Looking at the Las Vegas locals-casino market as a whole, Santarelli discerned a 3.3 percent growth rate, which he thought a reasonable proxy for Station itself. The bulk of that growth he attributed to Station’s new Durango Resort, now approaching its first anniversary.
“Broadly speaking, we believe the higher end continues to drive the market growth, which bodes well for [Station], while the lower end remains consistent, but weaker than the high end with respect to the growth trajectory,” Santarelli wrote. He said he was comfortable with his earlier projections for Station, but noted that they were toward the lower end of Wall Street’s expectations for the company.
Looking ahead to the fourth quarter, the analyst predicted a softening during the hard-fought election cycle, “as history has indicated presidential election years have negatively impacted seasonality.” In non-election years, seasonal fluctuations in gaming revenue have averaged eight-tenths of a percent of positive swing. In election years, that pivots to minus one percent.
“Anecdotally, we believe the ‘no tax on tips’ policy, should it ultimately become reality, would help [Station] both from a revenue perspective, given the incremental discretionary spend potential of gaming customers in Las Vegas and the exposure to the service industry,” opined Santarelli. He added that it would save Station $3 million annually in payroll taxes.
Station has also shifted its development priorities, moving Skye Canyon onto a back burner and bringing its Cactus Lane project (adjacent to the South Point casino-resort at the far south end of Las Vegas Blvd.) to the forefront. “We believe the primary drivers of the pecking order relate to population growth in the local zones around the development, as well as, to a lesser extent, the experience from Durango related to the cannibalization circles,” Santarelli explained.
The new sequence of Station projects is the 128-acre Cactus Lane site, followed by Phase II of Durango Resort. After that would come Inspirada in Henderson, targeted at the high-income Anthem neighborhood. “While we view Cactus and Durango Phase II as a tossup at this stage, with respect to what is next, we believe Cactus has moved ahead of Inspirada in terms of management’s thinking.”
Currently, Station is said to be focused on expanding Durango Resort’s casino floor and adding a parking garage. Then will come a hotel-room remodel of Green Valley Ranch.
“For longer-term-oriented investors, we would note that this valuation methodology understates the equity value inherent in the likely development returns,” Santarelli explained. He continued by saying that he expected Station’s stock valuation to improve as the development schedule comes further into focus.
In California, the Station-overseen construction of the North Fork Rancheria casino was reported to be in preliminary stages, with ground broken and building commenced. Santarelli felt that the management fees from North Fork would nicely supplement Durango Resort’s income as the latter begins to taper off somewhat.
The initial phase of North Fork, near Fresno, is planned to have 2,500 slot machines and as many as 50 table games. No hotel is contemplated for the first phase.
“We expect [Station] to begin the construction financing process in the coming weeks, with financing potentially secured in the November time frame,” Santarelli reported. He reminded readers that Station has already advanced the Rancheria $60 million and that more would probably be on the way, making for a $120 million payback at current interest rates.
Station’s deal with the Rancheria is structured to permit 30 percent of net revenue as a management fee, as well as four percent more in the form of a development fee. Santarelli calculated that this would be equivalent to 40 percent of North Fork’s eventual cash flow.
Red RockLooking at the demographics of the Fresno/Madera area and similar management-fee accords, Santarelli postulated that Station would realize $40 million to $50 million annually from North Fork. He also expected the company’s debt burden to fall below four times cash flow by the end of the year.
