Share-Based Compensation

The Red Rock Resorts, Inc. 2016 Equity Incentive Plan (the “Equity Incentive Plan”) is designed to attract, retain and motivate employees and to align the interests of those individuals with the interests of the Company. A total of 11,585,479 shares of Class A common stock are reserved for issuance under the plan.

In connection with the IPO, Red Rock granted equity incentive awards to each of the Company’s executive officers (other than the Company’s Chairman and Chief Executive Officer) and certain other employees. The awards consisted of (i) options to acquire 1,687,205 shares of Red Rock's Class A common stock (the “Class A common stock”) and 166,492 restricted shares of Class A common stock. The options will vest in four annual installments of 25%, and the exercise price of the options is equal to the fair market value of the Class A common stock on the date of grant. The options will expire seven years from the grant date. The restricted shares generally will vest in installments of 50% in each of the third and fourth years following the grant date. In addition, concurrently with the IPO, Red Rock issued 1,832,884 restricted shares of Class A common stock to the holders of Station Holdco profit units in substitution for such profit units, of which 180,632 shares were unvested at the date of substitution. Prior to the IPO, the Company had three share-based compensation plans which were terminated in connection with the IPO. The terminated plans are described in more detail below.

The following table presents information about stock option awards under the Equity Incentive Plan:



	Shares		Weighted-average exercise price		Weighted-average remaining contractual life (years)	Aggregate intrinsic value (amounts in thousands)
Outstanding at January 1, 2016	—		$	—
Granted	1,789,362		19.69
Exercised	—		—
Forfeited	(152,333	)	19.50
Outstanding at December 31, 2016	1,637,029		$	19.71	6.3	$	5,698
Expected to vest at December 31, 2016	1,637,029		$	19.71	6.3	$	5,698

The weighted average grant date fair value of stock options granted during the year ended December 31, 2016 was $6.05 per share. As of December 31, 2016, none of the outstanding stock options were exercisable.

The Company estimates the grant date fair value of stock option awards using the Black-Scholes option pricing model. The weighted average assumptions utilized in estimating the fair values of stock option awards for the year ended December 31, 2016 were as follows:



Expected stock price volatility	41.26	%
Expected term (in years)	4.75
Risk-free interest rate	1.35	%
Expected dividend yield	1.99	%

Expected stock price volatility is based on the historical volatility of comparable public companies. Expected term represents the period of time that the options are expected to be outstanding. The Company uses the simplified method to estimate the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for a period equal to the expected term.

The following table presents information about nonvested restricted stock awards under the Equity Incentive Plan:



	Shares		Weighted-average grant date fair value
Outstanding at January 1, 2016	—		$	—
Issued in substitution for unvested Station Holdco profit units	180,632		6.83
New awards	194,212		19.99
Vested	(129,468	)	9.80
Forfeited	(45,965	)	17.47
Outstanding at December 31, 2016	199,411		$	15.26

The fair value of restricted stock awards that vested during the year ended December 31, 2016 was $2.8 million.

The Company recognized share-based compensation expense of $6.6 million for the year ended December 31, 2016, which included $3.1 million recognized subsequent to the IPO for awards issued under the Equity Incentive Plan. For the pre-IPO period from January 1, 2016 through May 1, 2016, the Company recognized share-based compensation expense of $3.5 million for awards issued under the three terminated plans described below. Share-based compensation expense was $19.7 million and $12.8 million for the years ended December 31, 2015 and 2014, respectively. At December 31, 2016, unrecognized share-based compensation cost was $10.5 million which is expected to be recognized over a weighted-average period of 3.3 years.

Share-based compensation is classified in the same financial statement line items as cash compensation. The following table presents the location of share-based compensation expense in the accompanying Consolidated Statements of Income (amounts in thousands):



	Year Ended December 31,
	2016		2015		2014
Operating costs and expenses:
Casino	$	340	$	128	$	125
Food and beverage	21		—		—
Room	75		62		62
Selling, general and administrative	6,154		19,536		12,570
Total share-based compensation expense	$	6,590	$	19,726	$	12,757

Following is a description of the three share-based compensation plans that were terminated in connection with the IPO.

Station Holdco Profit Units Plan

Under the Station Holdco Amended and Restated Profit Units Plan (the “Profit Units Plan”), profit units in Station Holdco (“Profit Units”) were awarded to certain employees of the Company. The awards were subject to service-based vesting, and holders of vested Profit Units were entitled to participate in Station Holdco's distributions, subject to certain preferred distribution rights of the LLC Unit holders. Restricted shares of Class A common stock were issued to current and former employees of the Company in substitution for all outstanding vested and unvested Profit Units on a value-for-value basis. Unvested restricted shares awarded in substitution for unvested Profit Units continued to vest under the same terms as the related Profit Unit awards.

A summary of the changes in nonvested units outstanding under the Profit Units Plan for the year ended December 31, 2016 is presented below:



	Units (amounts in thousands)		Weighted-average grant date fair value per unit
Nonvested units at January 1, 2016	2,462		$	1.24
Activity during the period:
Vested	(1,465	)	1.25
Substituted	(997	)	1.24
Nonvested units at December 31, 2016	—		$	—

The estimated fair value of Profit Units that vested during the years ended December 31, 2016, 2015 and 2014 was $5.2 million, $7.8 million and $3.1 million, respectively.

Fertitta Entertainment Profit Units Plan

The Fertitta Entertainment profit units plan provided for the issuance of Fertitta Entertainment profit interests (“FE Profit Interests”) to certain key executives of Fertitta Entertainment. The FE Profit Interests vested over requisite service periods of four to five years. Holders of FE Profit Interests were entitled to participate in Fertitta Entertainment's distributions, subject to the return of capital contributions made by the common unit holders and certain other preferred distribution rights. The Company applied liability accounting for certain awards of FE Profit Interests that were subject to cash settlement and remeasured the liability awards at fair value each reporting period. A liability of $15.8 million related to these awards was included in Other long-term liabilities in the accompanying Consolidated Balance Sheet at December 31, 2015. Upon completion of the Fertitta Entertainment Acquisition, all outstanding FE Profit Interests were settled, including the liability awards which were settled for $18.7 million.

A summary of the changes in outstanding nonvested FE Profit Interests for the year ended December 31, 2016 is presented below:



	Equity Awards				Liability Awards
	Units		Weighted-average grant date fair value per unit		Units		Weighted-average grant date fair value per unit
Nonvested units at January 1, 2016	125		$	1,362	625		$	1,362
Activity during the period:
Granted	—		—		—		—
Vested	(125	)	1,362		(625	)	1,362
Canceled or forfeited	—		—		—		—
Nonvested units at December 31, 2016	—		$	—	—		$	—

The estimated fair value of FE Profit Interests that vested during the years ended December 31, 2016, 2015 and 2014 was $3.1 million, $8.9 million and $5.4 million, respectively.

FI Station Investor Profit Units Plan

Certain key executives of Fertitta Entertainment were issued profit interest awards by FI Station Investor LLC (“FI Station Investor”) pursuant to the FI Station Investor Profit Units Plan (the “FI Profit Interests”). FI Station Investor is an affiliate of Frank J. Fertitta III and Lorenzo J. Fertitta. Holders of FI Profit Interests were entitled to participate in FI Station Investor's distributions, subject to the return of capital contributions made by the common unit holders and certain other preferred distribution rights. Immediately prior to the completion of the IPO, FI Station Investor distributed a portion of its LLC Units to holders of vested FI Profit Interests in settlement of such profit interests. There were no outstanding nonvested FI Profit Interests at December 31, 2015.

The estimated fair value of FI Profit Interests that vested during the years ended December 31, 2015 and 2014 was $17.4 million and $4.9 million, respectively.

For share-based compensation awards granted under the terminated plans, the fair value of the awards was measured on the date of grant using an option pricing method, which utilized various key inputs and assumptions that were estimated by management, including total equity value, expected volatility, risk free rate and time to liquidity event. Management estimated the total equity value using a combination of the income approach, which was based on discounted cash flow projections, and the market approach, which was based on observable market indicators of value. Expected volatility was estimated using the historical weekly average stock price volatility for comparable companies, and the discount for post-vesting restrictions was estimated based on an average strike-put option model. For share-based compensation awards that the Company intended to settle partially in cash, the Company applied liability accounting, and compensation expense was measured based on the fair value of the awards, which was remeasured at each reporting period until the liability was settled.