Investment adviser boosts rating for Station Casinos

Station Casinos received a vote of confidence last week from Wall Street.

It's not like the company needed the endorsement.

Times are good for Station Casinos, which reported its 17th straight quarter of cash flow growth in August.

The company, which operates 19 large and small casinos throughout the Las Vegas Valley, has benefited from an improving Southern Nevada economy. Las Vegas employment numbers are on the upswing, Clark County taxable sales saw their 57th straight monthly increase in June, and housing prices have grown 82 percent in the last 42 months.

The numbers are good news for a casino company whose business relies on consumer spending by the locals market.

"The continued improvement in these areas should bode well for further upside in our business," Station Casinos Chief Financial Officer Marc Falcone said on Aug. 11.

Standard & Poor's Ratings Service was listening.

The high-yield bond advisory firm told investors that it now has a "positive outlook" in its ratings for Station Casinos continued ability to service its $2 billion of long-term debt. Before, Standard & Poor's offered a "stable" outlook toward the company.

"The revision ... reflects our expectation that Station Casinos credit measures will continue to improve through 2016, as a result of continued good operating performance coupled with debt repayment." Standard & Poor's analyst Stephen Pagano wrote in a report to company bond holders.

Pagano is bullish on the Las Vegas locals gaming market continuing to grow over the next several quarters. Last year, Station Casinos undertook a $55 million capital improvement effort at its flagship Red Rock Resort and Green Valley Ranch Resort to upgrade various nongaming aspects of the properties, such as restaurants. Nongaming spending by customers is a much larger slice of the revenue pie.

Falcone said the company's capital expenditures this year will total between $105 million and $120 million. The budget covers normal maintenance, slot machines and technology upgrades, and improving restaurants and other amenities at several area properties.

Pagano said the one concern the firm has is another downturn hitting the Las Vegas economy. However, he wrote that Station Casinos' "leadership in the market" and quarterly cash flows "higher than those of its commercial gaming peers" give him comfort the company could weather rough waters.

Station Casinos has another revenue producing division that impressed Standard & Poor's: its management contracts with American Indian casinos in California and Michigan.

Falcone said management fees from the two properties in the quarter that ended June 30 increased 33 percent from a year ago. The Gun Lake Casino, located between Grand Rapids and Kalamazoo, Mich., had strong operating results in the quarter. Station Casinos has operated the casino for the Gun Lake Tribe of Pottawatomi Indians since 2011.

At the Graton Resort & Casino in Northern California's Sonoma County, Station Casinos expects its fees for operating the facility to increase by $5 million annually. The company and the Federated Indians of Graton Rancheria refinanced the loans cover the facility that cost $800 million to build. The casino opened nearly two years ago.

Meanwhile, Station Casinos and the tribe will break ground Wednesday on a 200-room, $175 million hotel tower expansion to give the stand-alone casino much needed lodging capabilities.

"We view Station Casinos' current and future management contracts with Native American casinos as a positive factor, as this helps to diversify its revenue stream, with little incremental cost," Pagano said.

Station Casinos is 58 percent owned by company founders Frank Fertitta III and Lorenzo Fertitta with publicly owned debt.

As he has done on previous quarterly earnings conference calls, Falcone addressed questions about the company's corporate growth opportunities. He said the company's management "continues to consider" different opportunities, such as real estate investment trust spinoff and even a possible initial public offering.

Station Casinos has traveled a long road in more than four years since emerging from a 24-month bankruptcy reorganization. The investment community has zero concerns about the company's prospects.

Falcone credited steady improvements in the Las Vegas economy and the casino company's "disciplined and focused approach on operations."

Pagano hinted Standard & Poor's would consider raising the rating "one-notch higher" if the Station Casinos sustains the current debt-to-cash flow ratios.

Howard Stutz's Inside Gaming column appears Wednesdays and Sundays. He can be reached at hstutz@reviewjournal.com or 702-477-3871. Find on Twitter: @howardstutz