Station restructuring could fuel further growth in Southern Nevada

Gary Thompson

Tuesday, Dec. 9, 1997 | 9:58 a.m.

Station Casinos Inc. said Monday it plans to become a real estate investment trust, hoping a REIT's tax advantages may help the company sell stock to cut debt and fuel growth by acquiring or developing more casino properties.

Station would become the first gaming company to convert to a REIT on its own, although the Starwood Lodging REIT's planned acquisition of ITT Corp. would precede such a change if it's consummated before Station's planned March conversion date.

Mindful of the high multiples investors afford REITs, several other gaming companies have studied converting. Several have concluded tax consequences out weigh tax benefits, especially for older companies with higher retained earnings subject to taxes.

But Station, a relatively young company, is expected to be able to distribute net income to shareholders without incurring the massive tax liabilities older companies might face on such retained earnings.

To qualify as a REIT, a company must distribute at least 95 percent of its net taxable income to shareholders as it's earned.

REITs are favored by pension funds and qualified retirement plans, because the distributions aren't taxable when they're received. But individual shareholders generally must pay any state and federal income taxes due on the distributions.

Station plans to raise about $350 million through an offering of new stock in the REIT, about $105 million from refinancing of intermediate notes and $10 million from sale of preferred stock in a new operating company.

It would use about $409 million to pay off debt, including a $216.4 million bank loan, and retain about $56 million cash, less offering costs. It also expects to negotiate a new $500 million bank credit facility to fuel its growth strategy.

The stock sales would follow a restructuring of Station into two companies, one a real estate owner, the second a management company.

Station Entertainment Properties Inc. would assume ownership of six Station casinos -- four in Las Vegas and one each in Kansas City and St. Charles, Mo.

It would spin off to current shareholders the stock of a newly formed company that would lease the properties from Station Entertainment and manage them for a fee.

Shares of both companies -- the REIT and the management company -- would be traded separately, thus allowing investors to own portions of the REIT, the operating entity or both. Paired-share REITs such as Starwood don't provide that flexibility to investors.

In conjunction with the spinoff, Station Entertainment would sell at least 29 million and up to 34.7 million shares of new stock, effectively doubling the number currently outstanding.

In addition, company insiders -- including three Fertitta siblings and a spouse -- plan to sell about 2 million shares of the new Station REIT. They would use the proceeds primarily to pay retained-earnings taxes associated with the conversion. The company said the spinoff shouldn't be taxable to most of the other shareholders.

The insiders -- Frank Fertitta III, his brother Lorenzo, sister Delise and her husband Blake Sartini -- would still own about 13.3 million shares, or about 20.6 percent of the new REIT's outstanding shares.

Station said the new structure would allow it to pursue a three-part growth strategy that includes continued development of current holdings, acquisition and development of new properties in Las Vegas and buying or building casinos outside Southern Nevada.

The company plans to spend about $80 million on capital improvements to its Nevada properties, which are expected to generate about 82 percent of the restructured entity's base lease revenue, in 1998.

A company executive contacted late Monday said Station would disclose further details in a prospectus expected to clear Securities and Exchange Commission review in February.

The announcement was made after the close of trading Monday. Station stock closed at $7.75, up 50 cents.