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Best of Liz Benston

Gaming Guru

Liz Benston

Station's Econ 101

9 January 2006

If you want to track the explosive growth of Las Vegas, talk to the U.S. Census Bureau. If you want to understand what it means -- how it fires the valley's robust economic engine -- talk to the Fertittas, Lorenzo and Frank III, the brothers who run the Station Casinos chain.

The Fertittas run the largest number of neighborhood casinos in Las Vegas and control most of the casino-zoned land in the valley. To a large extent, where the Fertittas go, so goes Las Vegas beyond the Strip.

So here's where the Fertittas are headed, along with a peek at their two basic calculations, as described by them in an interview last week:

1. More than $15 billion in new casinos, hotels and retail will be added to the Strip over the next few years, creating jobs that will help lure as many as a half-million more residents to the Las Vegas Valley by 2010.

2. Station Casinos, Boyd Gaming and other off-Strip casino chains lifted a staggering $2.4 billion from the wallets of gamblers in 2004, most of it from residents. By the Fertittas' calculations, that breaks down to $1,348 for each and every one of us living in the valley -- a number they expect to rise to $1,518 by 2010.

Based on those numbers, the Fertittas think the valley can support as many as six new Station Casino properties over the next decade.

In their view, it's a simple business strategy that is summed up in the company's textbook-like annual report from 2004, coyly titled "Econ 101." Demand for neighborhood casinos will outpace supply -- so they build.

"It's one business, in one city," said Frank Fertitta, Station's chairman and chief executive.

"It's a simple story -- it's real easy," said Lorenzo Fertitta, Station's president.

But it's never that simple. The Fertittas come to their calculation with numbers that might raise eyebrows among Las Vegans. For instance, a recent survey by the investment firm Bear, Stearns & Co. found that 43 percent of the visitors to local casinos go to them more than once a week.

Findings such as those are the reason Station has aggressively bought up prime real estate and continues to invest most of its resources close to home. Most top gaming companies strive to diversify their holdings by building casinos across the United States and abroad.

The Fertittas, however, have continued to follow the Las Vegas-first strategy of their father, Station founder Frank Fertitta Jr.

The company owned a couple of casinos in Missouri but sold them five years ago after its lawyer in that state got the company into regulatory hot water. The company still operates a lucrative tribal casino near Sacramento and has deals to manage others in California and Michigan.

One other thing the Fertittas do -- they don't do the Strip. Boyd Gaming, Station's biggest competitor in the locals market, announced plans Tuesday to demolish the Stardust to make way for a $4 billion resort, hotel and convention complex known as Echelon Place.

Station applauds the news (see equation above). The Venetian, Mandalay Bay and Wynn Las Vegas have shown that more luxurious hotels can create new demand, bringing in more tourists without stealing much business from the competition.

Frank Fertitta III praised the Boyd project, calling it "well thought out" and a reflection of where Las Vegas resorts are headed.

"I like the fact that they are building it all at once," he said. "They are appealing to different market segments. This is really where the future of Las Vegas is going to be."

But the Fertittas -- sought-after business partners for Strip operators and small companies alike -- say they aren't suffering from Strip envy. Don't expect to see them setting up shop there anytime soon.

Rather, in their eyes, Boyd's new project on the Strip solidifies Station's status as the purest investment in the lucrative locals market.

While historically, the Gaughan family's Coast Casinos chain - acquired by Boyd in 2004 -- gambled on a few choice pieces of land off the Strip, Station was far more aggressive. The Fertittas purchased several sites and resold others to real estate developers after removing gaming entitlements, preventing competitors from building casinos nearby.

After going public in 1993, Station took heat from investors wanting to know why the company was behaving more like a real estate speculator than a casino operator. Accumulating land on the books doesn't make money, the moneymen complained. They also worried the company was putting all of its eggs in one basket in Las Vegas rather than spreading its risk around the nation.

When Station invested hundreds of millions of dollars in multiple casinos, investors wanted to know why the company was spending so much money on fancy buildings at the fringes of town.

But today, Station's record of predictable earnings growth has investors who once criticized the company praising its single-minded strategy. The company's stock has risen 21 percent over the past year and 46 percent over two years.

"We're about concentration, not diversification," Lorenzo Fertitta said. For a company such as Station, "you could make the case that diversification actually can hurt your business," he said.

Yet skeptics continue to question how Station can add more casinos without cannibalizing existing business or running out of customers. A majority on Wall Street side with Station, saying the company can't build them fast enough.

Wall Street analysts polled by Reuters expect both Station's revenue and operating cash flow -- an indicator of how profitable casinos are -- to grow by about 20 percent next year.

Add to that the promise of at least six more casinos in the next decade, including the redevelopment of the Wild Wild West on Tropicana Avenue and Aliante Station, opening in North Las Vegas by 2008.

Station spends close to $50 million each year to maintain its properties compared with the hundreds of millions spent by its Strip counterparts -- a competitive advantage that translates into higher profit margins, executives say.

But the company's spending on new casinos rivals the Strip. Station has at least $1.3 billion worth of projects under way, including expansions at three properties and the upcoming debut of Red Rock Resort.

"That number keeps going up and up," Station Chief Financial Officer Glenn Christenson said.

At the same time, Station continues to wave off most investment opportunities that are beyond the twinkle of Vegas lights. Those include deals to build in slot-parlor states such as Pennsylvania and Florida, where high tax rates and restrictive rules have derailed interest from other casino operators.

Still, the company says it might bite at the right opportunity. The company recently bought land in Reno after deciding that the region's growing suburban population was ready for larger-scale neighborhood casinos. The first of those casinos could open by 2007.

In a few weeks, the company will open its $925 million Red Rock Resort, its 14th casino. Station bosses say the Summerlin property will be an improvement over every Station casino that has come before, offering a wider array of restaurants, more convenient parking and a resort-caliber outdoor recreation area.

"We're not building this for the first year," Lorenzo Fertitta said. "We're building this for the next five to seven years."

And after that? Expect Station to grow as Las Vegas spreads closer to California, Arizona and Utah borders, expanding into new bedroom communities now only a glimmer in a landowner's eye.

Christenson calls it a "propensity to grow."

"We obviously believe in the quality of this market," he said. "We want to own as much of the market as we can."

Station's Econ 101 is republished from