The economic downturn in 2007 hit the gaming industry hard, and didn’t spare companies based in Las Vegas. Whether the casinos were based on the Strip or were considered locals casinos based in the community, the financial turmoil didn’t discriminate.
Station Casinos, strictly a locals operator, was hit even harder than most companies because all of its properties and cash flow are located in the Las Vegas market, which was among the hardest hit areas in the country during the economic collapse. To make matters worse, the collapse occurred just after Station Casinos was bought by an investment group led by Colony Capital. So, when the falling revenues hit quickly, Station declared bankruptcy in 2009 in order to restructure its debts.
Two years later, Station emerged from bankruptcy with the company primarily intact with its original owners—Frank and Lorenzo Fertitta—as the largest shareholders, with an ownership stake of 45 percent. Today, the brothers own the majority of the company with 58 percent of the equity. Deutsche Bank owns 25 percent and former Station bondholders own 15 percent. The company owns nine large casino hotels and seven other smaller casino-only facilities with bars and restaurants.
The company also has three management contracts with tribes in California and Michigan, as well as a burgeoning interest in online gaming with majority ownership in Ultimate Gaming, a B2C company that has been licensed to operate in Nevada (see sidebar on page 30).
Oh, and by the way, the Fertittas are also the majority owners of the Ultimate Fighting Championship, the largest MMA organization, which is presumably now valued at more than Station Casinos.
Humble Beginnings
Station Casinos’ locals roots began when Frank Fertitta Jr., the brothers’ father, opened Bingo Palace on Sahara just west of the Strip in 1976. Now Palace Station, the casino began the empire that is today Station Casinos.
The company made its reputation on being “the place where everyone knows your name.” The casinos quickly achieved a reputation for valuing their local customers, and were so familiar with them that it bragged a players club wasn’t necessary. But when the company grew so large that a players club was required, Station developed the Boarding Pass, which quickly became the state-of-the-art loyalty card program for Las Vegas locals casinos.
Kevin Kelley, chief operating officer of Station Casinos, explains that this attention to the customers remains today, and was a chief reason that the company survived through the recession.
“It was a very challenging time,” he says. “We did the best we could in terms of informing our team members and guests about the process, as a restructuring is complex and oftentimes confusing, especially since our operations ran no differently than they always had during this challenging time period. Once our new structure was negotiated and approved by the court, and it became clear Station Casinos would remain mainly intact, we recognized the importance of needing to do a lot in order to erase the tarnish of bankruptcy from the company.”
Kelley says the company went back to basics.
“We launched the ‘We Love Locals’ campaign early in 2011,” he explains. “That was our commitment to the community. We were going back to the core values of Station Casinos, and promising that the guest experience for our local Las Vegas customers was going to be excellent, then going out and delivering it every single day. It was very well received. It got our team members re-energized, it got our guests refocused, and business started coming back through the door.”
But that wasn’t enough, says Kelley. It took one more step.
“We knew that over the course of the restructuring period we had to make some significant modifications to our rewards program,” he says. “The environment had become very, very competitive. All of our competitors were trying to buy visits, and we recognized that there were some issues inside our rewards program that needed to be modified in order to make us competitive. And so in September 2011, we launched our new rewards program, where $1 of coin-in gets you three points and cash back. That made a significant impact as well as we’ve gone forward. And so, those two key elements really helped us get from where we were in the dark days, back to the traction and momentum that we expect on a year-over-year basis going forward.”
Market Conditions
Marc Falcone, a former Wall Street gaming analyst, joined Station during the dark days of restructuring. He says the locals market has been slowly crawling back, and there have been some significant recent developments that give the company confidence that pace will quicken.
“We’re seeing a lot of very positive directional trends in the business,” he says. “And I think if you take a three- to five-year outlook, we see very positive inflection points for a more robust locals economy here in Las Vegas, clearly one of the hardest-hit economies in the United States. But it’s setting up very well now for a sustainable recovery.
“First, you’ve got ongoing and sustained improvements on the Las Vegas Strip, whether it’s peak visitation or peak in the level of occupied rooms; you see continued improvements in group bookings, non-gaming trends and gaming revenues. So the Strip metrics are a good foundation for what we expect will be recovery in our revenue environment here in the Las Vegas locals market.
“The No. 2 driving factor for us is we continue to see a more favorable jobs environment. We saw about 15,700 jobs added in 2012. We are encouraged right now by the fact that we could have $10 billion to $12 billion of capital being invested in the market in the next several years. Notably, we’re extremely excited about Genting’s purchase of the Echelon site and their commitment to building a multibillion-dollar project, as well as the announcement about AEG and MGM building a new arena.
“So when you take the collective capital dollars, where there is both new added construction jobs, and also permanent jobs, then we should benefit along with everyone here in this economy. We haven’t seen this amount of dollars committed to the Las Vegas community since prior to 2008, which we think is an encouraging factor.”
Flagship Focus
While Station Casinos has a collection of hotel casinos across the Las Vegas Valley, two stand out as true “resort” destinations that draw from the same customer pool as the Las Vegas Strip.
Green Valley Ranch, located to the east of the Strip not far from the airport, was Station’s first foray into the resort-style property. With an attached shopping and dining area, the District (not owned by the company), and an over-the-top pool and spa area with magnificent views of the Strip, Green Valley Ranch was opened in 2001 and led to the planning of a second resort-style casino in the city’s Summerlin area, Red Rock Casino Resort and Spa.
These two flagship properties are important to Station. Kelley uses a UFC metaphor to describe them.
“When you look at the luxury portfolio, as we call it, they punch above their weight, for sure,” he says. “They’re blessed with great locations in two of the most robust communities in the valley, and then when you look at the assets themselves and all the different components that they make up, we have a good competitive advantage, especially when compared to the competition in both of those regions.
“So, when you look across our whole portfolio, clearly Red Rock and Green Valley Ranch are what we would say ‘performing above index,’ which is very good. We see a recovery in these areas, and then as the rest of the valley recovers, we expect to see the same kind of indexing going forward.”
Falcone agrees.
“Clearly those two properties will be the real significant engines of growth for our company within the broader portfolio we have,” he says.
It’s not only the flagship properties that appeal to gamblers and non-gamblers alike; Station properties have built a reputation on amenities such as bowling, cinemas and reasonably priced food. Kelley says that’s part of the strategy to offer something for everyone.
“Because we have such a diverse portfolio, we have multiple different entertainment opportunities for people, ranging from simple cafés all the way up to very sophisticated fine dining; bowling centers to luxury spas. There’s a consistent standard that runs through everything we do. We want to be the best in class in everything that we do, so we spend a lot of time thinking about and executing towards making sure that we have the best food quality, the best service, and most important in this environment today, across every single aspect of our portfolio, great value.
“Consumers are still really value-conscious. So if you’re a wealthy, affluent person who lives in Summerlin and you want to come to a spa, we know you’re looking for a deal. If you’re somebody who is a casual gamer and you want a quick burger in one of our Wild Burger cafés, you’re looking for a deal. So it’s very competitive out there, and making sure that we execute at the highest levels and have that price value that really differentiates us from the competition is what we focus on every single day.”
Show of Shows
Entertainment has always been a centerpiece of the Station experience as well. Some of the venues at various Station properties around town—Railhead at Boulder Station, Revolver at Santa Fe, Rocks Lounge at Red Rock, just to name a few—are legendary when it comes to local and national acts.
So it was surprising to see the company shut down Ovation at Green Valley Ranch and the amphitheater at Red Rock, which has hosted such stars as Toby Keith, the Beach Boys and Mötley Crüe. Kelley says the company is evaluating its entertainment policy.
Kelley says the company plans to focus on smaller shows at the Red Rock pool area, and utilization of the arena-sized amphitheater will be re-evaluated later this year.
“These things are cyclical,” he says, “and I think we’re looking at the general entertainment landscape and how we can be effective in that. At Ovation, we felt like there was a better opportunity for that space. We’re going to be launching bingo at Green Valley Ranch, which is something that we never have had there, and that Ovation space made a very attractive location for a bingo hall, because we have two other live entertainment venues.
“As it relates to the amphitheater at Red Rock, the entertainment environment is very competitive when you think about competing against the Mandalay Bays and the MGMs of the world, at MGM Grand Garden. And while we had a very successful run, we felt that as you looked at the ongoing competitive nature of the business, it really isn’t core to our business. So, will it come back? Can it come back? We’re still going do some shows out there at the Red Rock pool this year. It won’t be the multiple thousand-seat arena that we had built in the back, but at the end of the day we think we can come up with some great shows that are going to entice and more than satisfy the consumer.”
Kelley explains that the entertainment is traditionally used by Station to introduce new people to the properties, but there’s more to it than that.
“Candidly, we’re a bit disappointed with the gaming associated with an event at the amphitheater, on the night of the event. And that gave us pause in terms of how we looked at entertainment on a go-forward basis. On the other hand, when you looked at how the amphitheater performed out there, it was very well received from the local population. They loved it. But in the end, it’s not key to the long-term strategies of what we wanted our company to do, and so as time goes by, as things continue to grow and improve, we may wind up re-integrating it back into our entertainment lineup.”
Tribal Talent
Station Casinos has been very deliberate when entering the tribal gaming management market. The company’s first venture into the field was a home run when it developed the Thunder Valley Casino for the United Auburn tribe near Sacramento, California. Now that its seven-year contract has expired and management turned over to the tribe, Kelley says it was a very rewarding experience.
“Would we have loved to have had an extension?” he asks. “Of course. But at the end of the day, it’s something that we’re very proud of. It validated us as a first-class developer in the tribal gaming space. It gave us a great calling card when we go out to other tribes throughout the country, and they can see the realities of what we helped that tribe create, so it’s been very beneficial for us.”
Falcone says the company has learned much during the development of Thunder Valley and now Gun Lake, giving them a unique perspective in the industry.
“We’ve come with a level of patience to successfully work with these tribes and develop these successful facilities and operate them, I think, better than any other gaming company in the industry,” he says.
Following the success at Thunder Valley, the Gun Lake Tribe of Michigan and the Federated Indians of Graton Rancheria in California reached agreements with Station. Gun Lake opened last year to great success, with a total investment of $165 million.
“The tribe has already been able to go back and refinance their financial structure at a very, very low cost to capital, creating more incremental revenue to them, and to us,” says Falcone.
Kelley is particularly excited about the Graton Resort & Casino, which will be the closest casino to San Francisco when it opens late this year. The facility will include 3,000 slot machines, 144 table games, four restaurants, a food court and plenty of spaces to park some of the 150,000 vehicles that pass by each day on the 101.
That’s just the beginning, says Kelley.
“The tribe is very excited about ultimately fulfilling their overall master plan, and that includes hotel rooms, spa, meeting space. But they’ve taken a very responsible and conservative approach to this. They realize that this is a big, expensive project, and their No. 1 focus is paying down debt, and then once they get to a comfortable place they can use their free cash flow and the power of their balance sheet to continue to expand.”
The Graton Rancheria has limited competition in this market.
“But when you look at the scale and quality and the offerings that we have there, we believe that we’re going to have more than our fair share of the market with this opportunity,” says Kelley.
Falcone says the demographics work well for the company too.
“We get to benefit from a deep Asian population, and approximately 33 percent of the San Francisco population is of Asian decent,” he says. “We have targeted plans to capture a significant amount of that population into our specialty Asian areas in the casino that we’re developing.”
One final tribal casino will be built for the North Fork Mono Rancheria, in North Fork, California, near Fresno, where the company hopes to break ground in 2014.
Culture Club
Despite the recent financial turmoil, Station Casinos is still a family-owned enterprise, and as such, values a special relationship with its employees. Kelley says it all comes from the top.
“It comes back to valuing people,” he says. “It started a long time ago with Frank’s dad, who developed a philosophy that you treat everybody with dignity and respect. And that has been handed down to Frank and Lorenzo, and those guys live it every single day. We’re a very competitive company, we’re a very driven company, we’re a very focused company. But at the end of the day, there’s an underlying respect where we value people’s contributions, we recognize them for what they do, we appreciate them, which is different from many other companies in this industry.”
Falcone agrees.
“We are a family-owned and operated business, that stemmed that culture from its founding in 1976, from day one, and that continues today,” he says. “Frank and Lorenzo bring that commitment from the top all the way down, and create the precedent of the culture that the employees and the executives embrace here.”
Kelly says there is a certain mission that the company tries to communicate to its employees.
“People feel like they are a part of something bigger here than just a regular job,” he says. “When your opinion matters and you’re asked for it, and you’re encouraged to contribute, I think that creates a buy-in and a connectivity and a differentiation from many other companies in the industry.”
More proof of the value of employees is the return of executives who leave for other opportunities. Kelley himself left to become CEO of Hard Rock Hotel in Las Vegas, and later joined Las Vegas Sands, with responsibilities for its Macau project. President Steve Cavallaro returned recently after an absence of several years. Add that talent to an innovative core of general managers at the various properties and Station has a very deep bench.
“One of the things that we try to do and work hard at is alignment and clarity, and making sure people understand what our mission is and how they fit into that overall mission,” says Kelley. “That’s one of our strongest features, I think, alignment. But it takes guys like our general managers who have the leadership skills and the business savvy, to be able to clearly direct a large team of people to reach the objectives that we need.”
Unlike most other casino companies in Las Vegas, Station runs a non-union shop, a fact that has been harshly criticized by the Culinary Union. But Kelley says Station is not preventing employees from unionizing, if that is their desire.
“We’ve given the union every opportunity to have a secret ballot election to protect the rights of our team members,” he says, “and they’ve always run from that opportunity. So our employees will tell us when they want to have a union. And if and when they do, it’s something that we respect, it’s their right, it’s their legal right, and we’re not going stand in the way. But we’re not going be bullied by the heavy-handed tactics of the culinary union trying to twist the arms of our team members in some sort of way that is not within the boundaries of good legal structure.”
Kelley says employees are happy at Station.
“More than half our employees have been with us more than five years,” he says. “That tells us that they like working for us. We work very hard to try and provide the best benefits and the best pay for our competitive set.”
