Business context and reporting period
Red Rock Resorts, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Through Station Casinos LLC, the company operates casinos in the Las Vegas region and manages casinos for Native American tribes. Red Rock held approximately 59% of Station Holdco’s economic interests at quarter-end; results include noncontrolling interests.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $403.5m | $351.5m | $821.2m | $710.7m |
| Operating income (loss) | ($31.2m) | $69.9m | $61.2m | $163.8m |
| Net income (loss) | ($50.5m) | $21.7m | ($5.3m) | $81.2m |
| Net income (loss) attributable to Red Rock | ($25.9m) | $5.7m | ($6.1m) | $63.3m |
| Adjusted EBITDA | $119.5m | $117.4m | $255.4m | $250.6m |
| Operating cash flow | Not separately reported | Not separately reported | $102.5m | $166.0m |
Net revenue rose 14.8% in Q2 and 15.5% for the first half. Adjusted EBITDA, a non-GAAP measure, increased 1.8% and 1.9%, respectively. First-half capital expenditures were $101.9m; investing cash outflow was $132.7m. Cash and cash equivalents were $125.3m at June 30, down from $133.8m at year-end 2016.
Total debt carrying value was $2.50bn, including $71.3m current maturities. The company reported $461.0m available under the revolving credit facility, net of borrowings and letters of credit. Station LLC’s reported leverage ratio was 4.96x and interest coverage ratio 4.58x; management said it was in covenant compliance. The tax receivable agreement liability was $275.3m. A 1 percentage-point increase in variable interest rates was estimated to add approximately $12.5m to annual interest cost after swaps.
Material changes versus the prior period
- Growth was primarily supported by the October 2016 acquisition of Palms. Excluding Palms, same-store net revenue increased 3.5% in Q2 and 3.6% for the first half; Palace Station construction disruption partly offset growth.
- Q2 operating results included a $98.4m charge from terminating related-party ground leases after acquiring land associated with Boulder Station and Texas Station for aggregate consideration of $120m. The transaction generated an estimated $35m tax benefit and is expected to reduce annual rent expense by about $7.1m.
- Station LLC increased and repriced its credit facilities, redeemed $250m of 7.50% senior notes, and repaid the remaining Restructured Land Loan. The company cited expected annual interest savings of approximately $10m from the notes redemption and $3.6m from the land-loan repayment; debt balances nevertheless increased overall from year-end.
- Same-store casino revenue increased, while reported casino margins declined to 60.1% in Q2 from 61.9%. Food and beverage and room margins also fell, to 26.9% from 33.0% and 59.1% from 63.9%, respectively.
Outlook, commentary, and risks
No formal earnings guidance was provided. Management expected $125m–$150m of capital expenditures for the remainder of 2017, approximately $9.8m of principal and $49.9m of interest payments, and continuing distributions and dividends. It said operating cash flow, cash on hand, and available revolver borrowings should meet anticipated needs for the next 12 months, while cautioning that financing and cash generation are not assured.
Management cited improving Las Vegas employment, retail sales, and home values, but noted that favorable local conditions may not persist. Key risks include substantial debt and variable-rate exposure, competition and economic conditions, construction disruption and costs, regulatory and gaming approvals, and litigation. The North Fork tribal casino project remains contingent on approvals and legal proceedings; Red Rock had advanced approximately $31.5m, with a $16.4m carrying value, and estimated a 65%–75% likelihood of successful completion. Management estimated construction could begin in 36–48 months, with opening about 18 months after construction begins, but gave no assurance of timing, completion, financing, or recovery of its investment.
Other notable items: the company discontinued hedge accounting for certain interest-rate swaps, which may cause future earnings volatility despite no expected change to the swaps’ cash-flow economics. Management reported disclosure controls were effective and no material change in internal control over financial reporting; no material changes to previously reported risk factors were identified.
Important facts for investors to verify
- How much of revenue and EBITDA growth reflects Palms versus underlying same-store performance, and whether margins stabilize.
- The final accounting, cash cost, tax effects, and related-party terms of the $120m land acquisition and $98.4m lease-termination charge.
- Debt, refinancing and covenant headroom, interest-rate sensitivity, swap-related earnings volatility, and the timing of tax receivable agreement payments.
- Capital spending and operating disruption at Palace Station and Palms, and whether cash flow supports planned spending and distributions.
- North Fork project litigation, regulatory approvals, financing prospects, and recoverability of development advances.