Las Vegas Sun

April 19, 2019

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Station on the rebound after a tough summer

After two years of hard knocks, Station Casinos appears to be turning things around.

The company is making money. Analysts are upgrading its stock. Investors are buying its stock. And a vital Missouri ballot initiative went Station's way.

Station has faced criticism for expensive expansions and new property openings, a failed merger and an abandoned plan to change its corporate structure. After all that, the turnaround is a breath of fresh air for the Las Vegas casino operator.

"Last year, there were a number of issues facing the company," said Frank Fertitta III, Station's chairman and chief executive officer, in a recent interview. "Those issues have all been resolved."

For starters, Station has decided to put its aggressive growth plans on hold for a while and focus on operations.

"We want to take some time, digest the growth," said Glenn Christenson, Station's chief financial officer. "We want to focus on operations, not develop new properties."

Station wants to simplify what has turned into a rather complicated picture.

"Our story now is a lot more simple," said Christenson.

While Station's properties have been held up by analysts as examples of some of the finest casinos around, the company's operations have come under merciless scrutiny.

When Station's planned acquisition by real estate income trust Crescent Real Estate Equities collapsed in August, the criticism reached a new crescendo. Several analysts worried aloud about the $1 billion debt load the company has amassed to fund its expansions, and openly questioned Station's viability as a going concern.

"Based on what I see of their capital structure, this would be a challenge for the best of managements," Dave Ehlers, chairman of Las Vegas Investment Advisors, said in August. "The company's balance sheet is precariously leveraged."

"It's an unfortunate situation for Station," CIBC Oppenheimer analyst David Wolfe said at the same time.

Analysts were similarly critical of operations at Station's Kansas City casino after it opened in January 1997, charging expenses were too high, win-per-passenger was too low and the company had over-hired.

"It's been a dog," Anthony Socci, an analyst at Dreyfus Corp., told Bloomberg News at the time.

As Christenson put it: "We got our butts handed to us a year ago."

But many of Station's critics have had to retreat from their harsh criticisms.

In the quarter that ended Sept. 30, Station reported higher cash flows, profits and revenues. Net income was $1 million, or 3 cents per share, up from $546,000, or 2 cents per share, in the 1997 quarter. Revenues increased from $207.8 million to $229.6 million.

More impressive were the company's earnings before interest, taxes, depreciation and amortization (EBITDA) -- or cash flows -- which increased 19 percent from $42.2 million to $50 million.

"That was the best earnings release that we've ever had," said Christenson.

While results from Station's four Las Vegas properties were strong -- EBITDA at Sunset, Boulder, Texas and Palace Stations increased from $33 million to $38.9 million -- the company was particularly pleased with the performance of its Kansas City resort.

Gaming revenue at Station Casino Kansas City increased 23 percent from the 1997 quarter, driven by increased market share and a 15 percent increase in win-per-admission. Net revenue in Kansas City increased to $46.4 million for the quarter, and EBITDA more than doubled to $11.1 million.

Overall Missouri results were depressed by a 2 percent decline in revenues from Station's St. Louis-area resort, where EBITDA fell to $4.6 million. Still, Missouri posted increases in profits and sales, and overall Missouri EBITDA jumped from $11.8 million to $15.6 million.

The results prompted some of Station's harsher critics to change their tune.

"They appear to be making some progress after years and years of financial nonsense," said Ehlers.

"I think the results are really strong," said Wolfe.

And the Kansas City results are particularly impressive, Wolfe said.

"They are to be commended. When it started off, the expenses were just way out of control relative to the market."

In fact, in the weeks since the announcement, Station stock has trended sharply up. The stock had fallen from historic highs in the low $20 range in early 1994 to around $7.50 late last year. On speculation an acquisition was in the works, the stock rose sharply from late December to early January, when Station announced the $1.7 billion Crescent acquisition.

The stock hung around the $15 range for six months. When the Crescent deal collapsed in August, it plummeted, hitting $4 in October. Since the Oct. 13 earnings announcement, it has again risen and closed Friday at $7.50.

Several analysts, including Wolfe, Bear Stearns' Jason Ader, BT Alex. Brown and Credit Suisse First Boston have recently upgraded the company's shares.

In a report explaining his upgrade, Ader cited Missouri's approval of the "boats-in-moats" ballot initiative -- which confirms that Station's Kansas City resort is operating legally -- and the stable Las Vegas locals market. But he also said the new attitude of Station's management is a positive factor.

"Station's management team appears to be focused following the break-up of the Crescent Real Estate merger in August, with a renewed commitment to developing the company's assets and maximizing shareholder value," wrote Ader.

Indeed, Station's managers are committed to keeping things simple. For a while, at least.

"We're not going to start any new projects for all 1999," said Fertitta.

Station's goal for the next year, said Fertitta, is to pay down its debt. From a debt-to-cash-flow ratio of 5.8 right now, Station's plan is to reduce that ratio to 4.92 by the end of September.

At Sept. 30, Station was carrying long-term debt of $753.8 million, a reduction from the previous year's $802.3 million. But the current portion of long-term debt rose from $97.9 million at March 31 to $155 million. That increase drove total liabilities to $1.024 billion from $1.013 billion. Station recently announced a new $425 million credit facility that will be used to refinance existing debt.

Station has borrowed heavily to fund new projects like Station Casino Kansas City and expansions at Sunset and Texas Stations in Las Vegas.

"The absolute amount of debt is going up," said Wolfe.

But, Wolfe adds, if Station sticks to its plan and holds off on further expansions, its debt reduction goals are realistic. With continued strong cash flows, the company could cut debt by $60 million to $80 million annually, Wolfe said.

"If they can keep this up, they might be able to succeed," agreed Ehlers.

While focused on paying down debt, Station is not resting on its laurels. The company has no plans to give up its dominance of the Las Vegas locals market, or its desire to be a growth company.

Despite dropping out of the running for Arizona Charlie's during that resort's protracted bankruptcy process this past summer, Station has ambitious growth plans.

The company is planning a Wild Wild West hotel-casino across from Sam's Town on the Boulder Highway. Station recently received Clark County Planning Commission approval for that project -- filed under the aegis of Boulder Station. It would include a 273,000-square-foot casino and a 504-room hotel.

But despite that approval, Station has not announced when construction will start on the Wild Wild West and maintains its commitment not to start any new projects until 2000.

Earlier this year, Station took over the former King 8 Hotel and Gambling Hall on Tropicana near I-15, converting it into a Wild Wild West hotel-casino. But a plan to build a resort at Lake Mead Drive and Eastern Avenue in Henderson was dropped after the company ran into stiff resistance from area residents. Boyd Gaming has also dropped plans for a resort at that site.

Station is keeping its options open. When asked whether the company was looking at a Summerlin-area expansion, Fertitta simply responded that Station has "a handle" on potential expansion sites.

In a recent interview, Fertitta spoke for the first time about the unraveling of what would have been a perfect west-side fit: Station's bid for Arizona Charlie's. When that property entered bankruptcy, both Station and billionaire Carl Icahn made runs for Arizona Charlie's in bankruptcy court. Both owned Arizona Charlie's debt and proposed competing reorganization plans.

When it appeared Arizona Charlie's owner Becker Gaming would retain control of the property, Station reached an agreement with Icahn to buy Icahn's back-up position. After that $31.6 million deal was announced, Icahn appeared to be out of the running for Arizona Charlie's.

Then Station abruptly dropped its offer.

Later, a loan Becker had relied on to refinance Arizona Charlie's debt fell through, Becker was unable to meet an agreement to repay creditors, and Icahn took over. If not for Station's 11th-hour balk, the company would own the Decatur Avenue resort.

"That was very much related to our merger with Crescent," said Fertitta.

As the Crescent deal came apart, Station was simply no longer in a position to pay creditors $61 million for control of Arizona Charlie's, the executives said.

"The timing was bad," said Christenson.

The executives also spoke for the first time recently about the failed Crescent merger. Crescent, a real estate investment trust (REIT), backed out of the deal in August shortly after Station canceled a special shareholder meeting that had been called to approve the merger.

The companies have sued each other, with Crescent claiming it is owed a $54 million breakup fee, and Station claiming Crescent should keep its commitment to buy $115 million in Station preferred stock.

"We really don't know what the issue was," said Fertitta of the break-up. Station put in a request for Crescent to buy the preferred stock, "and they terminated the deal."

Fertitta concedes that Crescent investors, familiar with the real estate industry, were at first somewhat taken aback by the company's foray into the highly volatile gaming industry. But by August, those issues had been resolved, he said. By then, Crescent investors and analysts realized that Station's stable locals market is far different from the tourist-driven resort casino industry.

Fertitta and Christenson say the failure of the Crescent merger has far more to do with Crescent's changing plans than with Station's operations. They note that Crescent has pulled out of several high-profile deals this year.

Crescent recently canceled its announced $734 million joint purchase of Tower Realty Trust, a New York office building REIT. The company also recently dropped a planned $250 million acquisition of a group of San Diego office buildings, and a $450 million acquisition of several Los Angeles-area office buildings.

Crescent officials did not return calls for comment.

Christenson says Station is not looking for another merger partner.

"The company wasn't really for sale at the time we sat down with Crescent," said Christenson. "The company's not for sale today."

When Station "sat down" with Crescent, the company was exploring the possibility of becoming a REIT itself. The merger ended that exploration.

With its growing cash flows and commitment to delay new expansions, there is no reason the company cannot go it alone, Christenson said. Station dominates the Las Vegas locals market. The company estimates it has 42 percent of the market, beating second-place Coast Resorts by 20 percentage points.

Because Station makes its money from slot machines, rather than hotel rooms, it is not affected by the same trends depressing prospects for tourist-drive Las Vegas Strip resorts.

"Our customer base is completely different, because we cater to the locals," said Fertitta.

Some analysts disagree with that assessment. Locals casinos are not immune to the effects of a slowdown in visitor growth which, combined with an increase in room capacity, is widely expected to hurt many Strip resorts, said Wolfe. Consider the fact that many of the locals who gamble at Station's properties work in Strip resorts, he said. Any slowdown which impacts Strip employment will affect their spending patterns at locals properties, argues Wolfe.

"It hurts everybody indirectly," said Wolfe.

But Station's managers see nothing but rosy times ahead.

"It's the right company in the right market at the right time," said Christenson.

Don't try to tell them things might slow down.

"Our business is getting better and better and better," said Fertitta. "Don't paint us with the same brush (as the Strip resorts). Business is very good for us."