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Best of Liz Benston

Gaming Guru

Liz Benston

Station: Demand For Locals Casino Remains Strong

19 May 2005

LAS VEGAS -- After its Red Rock Station hotel and casino opens in late March, Station Casinos Inc. could begin developing casinos on any one of four parcels of land the company owns around town, executives told shareholders at the company's annual meeting Wednesday.

"We think Durango Station could open tomorrow. The same for Wild Wild West and Cactus Avenue and the Strip," Station President Lorenzo Fertitta said in an interview following the meeting, referencing the company's plans to redevelop the Wild Wild West casino and motel at Tropicana Road and Interstate 15 and vacant land it owns south of Mandalay Bay on Las Vegas Boulevard.

The company also owns vacant land at Durango Drive and the Las Vegas Beltway, vacant land near Tropicana Avenue and the Beltway and the defunct Castaways property on Fremont Street, which would be torn down and redeveloped. Officials had originally said the Wild Wild West redevelopment would be built first. That was before witnessing the surprising demand for casinos across the valley, Station officials said.

Decisions on what gets built first will be made before the end of the year after executives have hashed out factors like financing and conducted market research, they said. Future casinos might be built concurrently with others or they might not, they said.

"It's a very difficult job and it's a good problem to have," Chief Financial Officer Glenn Christenson said. "Most companies don't have that. They have to go out and find a good growth opportunity."

At the annual meeting, Station executives touted the company's impressive growth in 2004 and said the company's profit margin and return on investment beat other major casino operators.

"In 2004 we really started to feel the power of our strategy," Fertitta said.

The gambling market for locals in Las Vegas is expected to grow to about $3.2 billion in 2010 from $2.4 billion in 2004, executives said. That's more than any single region in the country outside of Atlantic City and the Las Vegas Strip. The company based those estimates on population growth estimates of 2.1 million people by 2010, or a minimum of 5,000 or so people moving to Las Vegas each month, they said.

Station's operating cash flow -- a key profit indicator -- is expected to rise more than 16 percent this year and by around 18 percent the following year, which would include results from Red Rock but before future casinos come online, executives said.

Officials also trumpeted the company's stellar stock price appreciation, including last year's 43 percent gain and a 222 percent gain since the 2000 annual meeting. Shareholders who kept their shares since 1995 would have seen their stock rise 697 percent, a 23 percent compound annual rate of return, executives said.

"Feel free to clap if you'd like," Fertitta said to thunderous applause.

Station refinanced its debt last year, doing three bond deals and obtaining a billion-dollar bank credit facility, Christenson said.

The company's average cost of capital is around 6 percent -- among the lowest in the casino business, he said. None of the company's debt is due until the end of 2009, a comfortable position from which to pursue growth, he said.

Stockholders voted to reappoint an independent auditor and some board members in addition to approving an executive compensation plan.

The results of three dissident shareholder proposals submitted by the Culinary Workers Union Local 226 would not be in for a few days, executives said.

Those included revising the company's two-thirds voting requirement to a simple majority, replacing staggered, three-year terms for directors with one-year terms and letting shareholders decide whether to keep the company's "poison pill" anti-takeover measure.

A "poison pill" is a corporate device that makes an acquisition more expensive and can reduce earnings per share in the event of a hostile takeover.

More than one million shares were voted Wednesday morning, which will take time to tabulate, Christenson said. Also, the union's proposals were distributed to shareholders on a separate proxy statement from Station's voting form, meaning both will need to be cross-referenced to make sure shareholders' votes weren't contradictory, he said.

The Culinary Union owns 252 shares but its union umbrella organization, the AFL-CIO, owns about 200,000 shares through union pension funds.

Station executives have said the union has unfairly singled out the company, which is nonunion, and hasn't pressured other casino companies that have similar governance standards.

Station has long been an organizing target of the Culinary Union, which has failed to convince employees that they need a union, officials say. They say the union is presenting the proposals as part of a campaign to harass management.

Culinary Union Research Manager Chris Bohner told shareholders the union is acting in their best interest and said governance standards at local market leader MGM Mirage include all three of the union's proposals. The union has similarly pressured other union and nonunion companies in years past, including Harrah's Entertainment Inc., he said.

"We don't think there's a double standard here," he said.

New York investment company Baron Capital Management, one of the largest outside shareholders of Station Casinos stock with about 1.8 million shares, voted for all three of the union's proposals, Bohner said.

In 2003 the union formally opposed a stock option plan for Station executives that was nevertheless voted in by shareholders.

The plan has diluted per-share earnings for outside shareholders by boosting the number of company shares by about 10 million over that time, Bohner said Wednesday.

Before the close of the meeting, executives reminded shareholders of this year's recognition as one of Fortune magazine's 100 Best Companies to Work For.

Station, ranked 12th in the large company category, was the first Nevada company and the first gaming company to make the list.

In a report issued to investors last week, Bear Stearns & Co. stock analyst Joe Greff said the company remains "the best growth story" in the casino industry and said operating cash flow is expected to grow at a compounded annual rate of 20 percent through 2010.

Las Vegas is expected to witness a minimum of $25 billion in resort and condominium development over the next five years, which will help the locals gambling market by attracting jobs and otherwise boosting the economy, said Greff, who has an "outperform" rating on Station shares.

Station: Demand For Locals Casino Remains Strong is republished from