Red Rock Resorts, Inc. quarterly report, Q3 FY2016

Red Rock Resorts, Inc. — Q3 2016 Form 10-Q

Reporting period: Three and nine months ended September 30, 2016; unaudited. Red Rock manages and owns an indirect interest in Station Casinos LLC, whose casino operations are concentrated in the Las Vegas region, with Native American casino management agreements. The May 2016 IPO and related reorganization changed the company’s ownership and tax structure; Station Holdco’s results are consolidated, including the portion owned by noncontrolling interests.

Financial results and liquidity

Metric	Q3 2016	Q3 2015	First nine months 2016	First nine months 2015
Net revenues	$347.1 million	$323.6 million	$1,057.9 million	$1,004.2 million
Operating income	$73.3 million	$56.8 million	$237.2 million	$202.9 million
Adjusted EBITDA	$109.0 million	$95.9 million	$359.7 million	$325.6 million
Net income	$33.4 million	$21.0 million	$114.7 million	$94.7 million
Net income attributable to Red Rock	$8.3 million	$19.1 million	$71.6 million	$89.0 million
Class A earnings per share, basic and diluted	$0.20	$0.21	$0.55	$0.99

Q3 net revenue rose 7.3% and operating income rose 29.1%; for the nine-month period, they increased 5.3% and 16.9%, respectively. Adjusted EBITDA increased 13.7% in Q3 and 10.5% year to date.
Q3 revenue growth reflected higher casino, food and beverage, room, and management-fee revenue. Casino revenue increased 5.8%; room revenue rose 8.5%, supported by an 11.0% increase in average daily rate. Food and beverage revenue increased 6.8%, while related expenses rose faster, reducing that department’s margin to 29.4% from 33.7%.
Q3 operating margin was approximately 21.1%, versus 17.6% a year earlier. Management-fee revenue increased 21.9% in Q3 and 28.4% for the first nine months, reflecting improved results at Graton Resort and Gun Lake.
Interest expense, net, was $35.3 million in Q3 and $104.4 million for the first nine months, down 2.2% and 4.2%, respectively, year over year. Lower rates after refinancing were partly offset by higher borrowings. The nine-month period included a $7.3 million debt extinguishment/modification loss, mainly related to the refinancing.
Net income attributable to Red Rock and EPS are affected by the IPO, the resulting noncontrolling interest and the different weighted-average share count. Red Rock held approximately 35.6% of Station Holdco at quarter-end; consolidated net income and Red Rock-attributable income should not be treated as interchangeable measures.
Cash from operations was $239.1 million for the first nine months, compared with $250.7 million in 2015. Capital expenditures were $119.5 million, versus $103.9 million. Investing cash outflow was $409.5 million, including $314.2 million funded for the Palms acquisition before its October 1 closing.
At September 30, cash was $96.3 million and total debt carrying value was $2.44 billion, compared with $2.16 billion at December 31, 2015. Revolver borrowing availability was $521.8 million, net of $130.0 million borrowed and $33.2 million of letters of credit and similar obligations. Current assets were $193.9 million and current liabilities $214.2 million.
Station LLC reported a 4.92-to-1 total leverage ratio and 4.50-to-1 interest coverage ratio, against covenant limits of 6.50-to-1 maximum leverage and 2.50-to-1 minimum interest coverage at September 30; management said it was in compliance.

Material changes and notable items

The May IPO generated approximately $541 million in net proceeds before offering costs. The related reorganization made Red Rock a taxable corporation and left it with an approximately 36% economic interest in Station Holdco at the time of the transaction; noncontrolling interests held approximately 64% at September 30.
Station LLC acquired Fertitta Entertainment in May for $460.0 million, a transaction accounted for at historical cost as an acquisition under common control. It recorded a deemed distribution of approximately $389.6 million to equity holders.
In June, Station LLC refinanced its prior credit facilities with a $225 million Term A facility, a $1.5 billion Term B facility and a $685 million revolver. Term A and the revolver mature in 2021; Term B matures in 2023. The Term B facility carries a 1% prepayment premium for prepayments before June 8, 2017.
Station LLC completed the Palms acquisition on October 1, 2016, after quarter-end, for a purchase price reported as $316.7 million, subject to final working-capital adjustment. Approximately $314.2 million had been funded by September 30, including about $130 million in revolver borrowings.
The company recorded a $44.5 million liability under its related-party Tax Receivable Agreement, which generally requires payment to certain pre-IPO owners of 85% of specified realized tax benefits. No payments were expected within the next twelve months.
The board declared a quarterly dividend of $0.10 per Class A share, first paid in 2016. Future dividends are discretionary and may be constrained by subsidiary debt covenants and other restrictions.

Outlook, risks and contingencies

Management stated that operating cash flow, available revolver borrowings and existing cash should cover anticipated capital needs for the next twelve months. Expected remaining-2016 uses included approximately $45–$55 million of capital expenditures, $7.5 million of principal payments and $29.4 million of interest payments, as well as distributions and dividends.
No formal earnings or revenue guidance is provided. Management cited improving Las Vegas employment, retail sales and home prices as supportive trends, but cautioned that favorable local conditions may not persist.
The North Fork casino project remains dependent on regulatory approvals, financing and litigation outcomes. The company estimated a 65%–75% likelihood of successful completion, with construction potentially beginning in 36–48 months and opening approximately 18 months thereafter. Repayment of approximately $28.8 million in advances is not assured. NIGC approval of the management agreement remained pending.
North Fork-related legal challenges remained active, including state and federal proceedings. The filing also describes routine litigation without an estimate of potential loss.
Union activity is a stated risk: Boulder Station non-gaming employees had a certified bargaining representative, while bargaining had not begun; Palms slot technicians were represented and negotiations had not produced an agreement. Further organizing, labor disputes or work stoppages could raise costs or disrupt operations.
Other identified risks include substantial indebtedness, competition, economic and consumer-spending conditions, gaming regulation and taxation, construction and integration risks, and interest-rate exposure. Interest-rate swaps fixed the rate on approximately $1.1 billion of variable-rate debt at 3.85% as of quarter-end.
Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.

Most important facts for investors to verify

How Palms performs after its October 1, 2016 acquisition, including integration costs, financing and any realized operating benefits.
Debt levels, revolver availability, covenant headroom, interest-rate exposure and the company’s ability to fund capital spending and distributions.
Comparable operating trends in Las Vegas and at the Native American managed properties, including department-level margins and management-fee drivers.
The timing, conditions and cash consequences of Tax Receivable Agreement payments, and the constraints on future dividends.
North Fork approval, litigation, financing and advance-recovery developments, as well as labor negotiations and organizing activity.
The effect of the IPO ownership structure and noncontrolling interests when comparing Red Rock-attributable earnings and EPS across periods.