Red Rock Resorts, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2016. Red Rock Resorts had not begun operations before its May 2016 IPO; the reported operating results are Station Holdco LLC’s combined predecessor financial statements. Station LLC operates nine major and ten smaller Las Vegas-area casinos and manages two tribal casinos. After the IPO and reorganization, Red Rock held 100% of Station LLC’s voting interest but approximately 36% of its economic interest; the remaining interest is reported as noncontrolling interest.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $359.2 million | $342.8 million | +4.8% |
| Operating income | $94.0 million | $81.8 million | +14.9% |
| Net income | $59.5 million | $45.6 million | +30.6% |
| Net income attributable to Station Holdco | $57.6 million | $44.1 million | +30.7% |
| Adjusted EBITDA | $133.2 million | $119.8 million | +11.2% |
| Cash from operating activities | $96.1 million | $79.7 million | +20.5% |
| Capital expenditures | $31.3 million | $23.7 million | Higher |
Revenue and margins. Casino revenue rose 2.4%, on 3.9% higher slot handle and 9.8% higher table-game drop; casino margin was 63.5%, versus 63.7%. Room revenue increased 9.5%, with occupancy of 93.5% versus 92.9% and ADR of $90.05 versus $83.08; room margin improved to 64.0% from 62.4%. Food and beverage revenue rose 2.1%, while its margin declined to 36.2% from 36.6%. Management fees increased 33.6% to $26.6 million, reflecting improved results at Graton Resort and Gun Lake.
SG&A fell 4.2% to $75.1 million. Depreciation and amortization rose 12.0% to $39.4 million, primarily due to accelerated depreciation on remodeling projects. Net interest expense declined 3.8% to $35.1 million. The filing reports no corporate income tax provision in the predecessor combined statements, as the entities were pass-through entities.
Financial position and liquidity
At March 31, Station Holdco had cash of $122.6 million, current assets of $221.8 million, current liabilities of $218.3 million, and total assets of $2.94 billion. Total debt was $2.12 billion, including $55.1 million classified as current; members’ equity totaled $625.1 million. Cash interest paid during Q1 was $39.1 million.
Operating cash flow was $96.1 million; investing activities used $32.4 million and financing activities used $57.7 million. At March 31, revolver availability was $286.8 million, net of $30.0 million borrowed and $33.2 million of letters of credit and similar obligations. The company reported covenant compliance; its defined total leverage and interest coverage ratios were 4.14x and 4.23x, respectively.
In June 2016, Station LLC refinanced the prior facilities with a $225 million Term A loan, a $1.5 billion Term B loan, and a $685 million revolver, undrawn at closing. The Term A and revolver mature in 2021 and the Term B in 2023. In June, the company also requested a one-year extension of the restructured land loan, to June 2027? The filing states the requested extension was from June 17, 2016 to June 17, 2017.
Material changes, outlook and notable items
- IPO and reorganization: In May, the IPO priced at $19.50 per share and generated approximately $541.0 million of net proceeds. Proceeds supported purchases of Holdco Units and the acquisition of Fertitta Entertainment. Red Rock entered a tax receivable agreement requiring payment to certain holders of 85% of specified realized tax benefits; the initially estimated liability was approximately $45.0 million.
- Fertitta Entertainment acquisition: Station LLC acquired the company for $460.0 million in cash, subject to specified debt repayment and liabilities, and funded the balance partly with $41.7 million of revolver borrowings. The transaction was accounted for as a common-control transaction; most of the purchase price was treated as a deemed distribution.
- Palms acquisition: In May, Station LLC agreed to acquire Palms Casino Resort for $312.5 million, subject to adjustments and customary approvals. It expected to fund the purchase with additional debt and anticipated closing in Q3 2016.
- Cash needs and outlook: For the remainder of 2016, management anticipated approximately $45.1 million of principal payments, $84.3 million of interest payments, and $90–$110 million of capital expenditures, excluding the IPO, Fertitta Entertainment and Palms transactions. Management believed operating cash flow, available borrowings and cash balances would meet anticipated needs for the next 12 months, while cautioning that financing and cash generation are subject to risks.
- North Fork development: The project remained dependent on regulatory and legal outcomes, including obtaining a path to Class III gaming and NIGC management-agreement approval. The State did not consent to the mediator-selected compact, which was submitted to the Secretary of the Interior in April 2016. The company estimated a 65%–75% likelihood of successful completion, but gave no assurance of approvals, financing, repayment of advances, or project completion. Approximately $27.3 million of advances had been made; the carrying amount was $12.2 million.
- Other risk and governance points: The business depends substantially on Las Vegas-area customers and gaming revenue, and carries significant debt. Certain Fertitta family affiliates held all high-vote Class B shares and controlled stockholder actions after the IPO. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm post-refinancing debt balances, borrowing availability, interest costs and covenant headroom, as Q1 debt and liquidity figures predate the June refinancing.
- Track the Palms transaction’s approvals, final purchase-price adjustments, debt funding and integration plans.
- Monitor North Fork litigation, compact and gaming approvals, financing prospects, and recoverability of the development advances.
- Review the effect of the 85% tax receivable agreement, future Holdco Unit exchanges, noncontrolling interests and dual-class voting control on cash flows and public shareholders.
- Assess whether Q1 operating gains persist; interim results are not necessarily indicative of full-year performance, and Adjusted EBITDA is a non-GAAP measure that excludes capital expenditures and is not a liquidity measure.