Red Rock Resorts, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. Red Rock consolidates Station Casinos and operates gaming and entertainment properties in the Las Vegas region, as well as managing Native American casinos. It held approximately 59.8% of Station Holdco’s economic interests at quarter-end.
Financial performance
- Revenue: Q2 net revenue was $416.2 million, up 1.5% year over year; first-half revenue was $837.2 million, up 0.2%. Casino revenue grew 6.2% in Q2 and 5.9% for the half, while management-fee revenue fell 31.0% and 24.7%, respectively, primarily because the Gun Lake agreement expired in February.
- Profit: Q2 net income was $99.1 million, including $82.7 million attributable to Red Rock, versus a $50.2 million net loss in Q2 2017. First-half net income was $181.2 million, including $133.9 million attributable to Red Rock, versus a $4.8 million net loss. Q2 diluted EPS was $0.82; first-half diluted EPS was $1.46.
- Important earnings context: Results included a $73.5 million Q2 gain from reducing the tax receivable agreement (TRA) liability; the first-half gain was $90.4 million. The prior-year comparison included a $98.4 million related-party lease-termination charge. These items materially affect reported operating results and comparisons.
- Adjusted EBITDA: Q2 was $124.6 million, up from $119.9 million; first-half was $264.7 million, up from $256.1 million. This is a non-GAAP measure and excludes or adjusts for significant items; it is not a measure of cash flow or liquidity.
- Operating trends and margins: Casino margin was 65.5% in Q2 and 66.0% for the first half, compared with 64.6% and 65.2%. Food and beverage margin was 10.1% and 11.0%; room margin was 54.5% and 55.8%. Room revenue declined amid construction disruption and lower occupancy, partly offset by higher average daily rates.
- Cash flow and investment: First-half operating cash flow was $191.0 million versus $103.0 million; investing cash outflow was $251.6 million, including $257.7 million of capital expenditures. Financing cash outflow was $62.3 million. Cash and cash equivalents were $108.4 million at June 30.
- Debt and liquidity: Long-term debt had a $2.611 billion carrying amount, including $34.9 million current; the revolving facility had no borrowings. Available revolver capacity was $743.9 million, net of $37.1 million in letters of credit and similar obligations. Station LLC reported a 5.07x consolidated leverage ratio and 4.60x interest coverage ratio and stated it was in covenant compliance.
Changes, outlook and risks
- Management attributed casino growth to higher gaming volume. Palms redevelopment and Palace Station expansion disrupted operations; the first Palms phase opened in May 2018. Remaining Palms phases were expected through Q3 2019, and Palace Station work was expected to finish in phases by year-end 2018.
- For the rest of 2018, management anticipated approximately $315–$365 million of maintenance and investment capital expenditures, including the two projects. It expected to fund near-term needs with operating cash flow, existing cash and available borrowing capacity, while cautioning that financing and cash generation are subject to risks. No formal earnings guidance was provided.
- Management identified expected remaining-2018 principal and interest payments of approximately $17.4 million and $60.1 million, respectively, and approximately $11.7 million of September distributions and dividends. The TRA liability was $25.2 million at June 30; timing and amount of future payments may vary.
- Interest-rate exposure remains relevant: swaps effectively fixed the rate on $1.5 billion of variable-rate debt at 3.75%. Swaps are not designated for hedge accounting, so fair-value changes affect reported earnings.
- The North Fork tribal casino project remains dependent on regulatory approvals, financing and litigation. The NIGC requested additional information on the proposed management agreement; the company estimated a 65%–75% likelihood of successful completion, with no assurance of approval, repayment of advances or completion on schedule. The company had advanced approximately $32.7 million, carried at $17.6 million. A U.S. Supreme Court certiorari petition was filed by project opponents in July 2018.
- Other risks include substantial debt, local economic and competitive conditions, construction disruption and cost overruns, gaming regulation and taxation, and litigation. The company reported no material changes to previously disclosed risk factors. It adopted the new revenue standard retrospectively in 2018; the presentation changed, but management reported no significant net-income impact.
Important facts for investors to verify
- Separate operating performance from the TRA gain and the prior-year lease-termination charge; review the company’s non-GAAP EBITDA reconciliation.
- Track Palms and Palace Station completion, costs, operating disruption and the stated remaining-year capital spending range.
- Monitor debt, covenant headroom, interest-rate exposure and actual revolver availability.
- Check progress on North Fork approvals, litigation, financing and recovery of the company’s advances.
- Assess the effects of Gun Lake’s expired management agreement and continuing Las Vegas operating trends on revenue and cash generation.