Red Rock Resorts, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unless noted otherwise, amounts are in U.S. dollars. Red Rock consolidates Station Casinos LLC; at quarter-end it held 60% of Station Holdco’s economic interests, with the remaining 40% reported as noncontrolling interest.
Business context and results
The company operates casino and entertainment properties primarily in the Las Vegas region and manages Graton Resort in California. Results reflected the completion and opening of most of the $690 million Palms redevelopment in April 2019; one restaurant remained under construction and was expected to be completed by the end of Q3.
- Q2 revenue: $482.9 million, up 16.0% year over year. Casino revenue rose 5.4%, food and beverage 45.6%, room 15.4%, and management fees 11.5%.
- Q2 earnings: Operating income was $45.5 million versus $137.8 million; net loss attributable to Red Rock was $3.8 million, compared with net income of $82.7 million. Diluted loss per Class A share was $0.06 versus earnings of $0.82.
- Q2 Adjusted EBITDA: $115.2 million versus $124.6 million, down approximately 7.6%. Las Vegas operations contributed $101.7 million, down from $112.6 million; Native American management contributed $22.0 million, up from $19.8 million.
- First half: Revenue was $929.9 million, up 11.1%; operating income was $111.6 million versus $245.6 million; net income attributable to Red Rock was $7.5 million versus $133.9 million. Adjusted EBITDA was $260.3 million versus $264.7 million.
Margins, cash flow and liquidity
- Q2 casino margin was 64.2%, compared with 65.5%. Food and beverage margin was negative 1.7%, versus positive 10.1%; management attributed this to opening-related costs and one-time Palms grand reopening expenses. Room margin improved to 58.3% from 54.5%.
- For the six months, operating cash flow was $143.1 million, down from $191.0 million. Capital expenditures were $271.6 million, principally for Palms redevelopment; investing cash use was $268.6 million.
- Cash and cash equivalents were $100.2 million at June 30, 2019, versus $114.6 million at year-end 2018. Current assets were $263.5 million and current liabilities were $297.3 million.
- Total debt was $3.00 billion, up from $2.86 billion at year-end. Interest expense, net, increased 29.7% in Q2 to $41.0 million, principally because of higher debt, higher variable rates and lower capitalized interest. The company reported $462.8 million of revolver availability, net of borrowings and letters of credit.
- Station LLC reported a 5.61-to-1.00 consolidated total leverage ratio and a 4.05-to-1.00 interest coverage ratio at quarter-end and said it was in compliance with debt covenants. Interest-rate swaps had a $1.5 billion notional amount and effectively fixed that amount of variable-rate debt at 3.95%.
Material changes and unusual items
- Revenue growth was driven mainly by increased Las Vegas activity at Palms and Palace Station and by expanded food, beverage and room offerings following redevelopment work. Q2 slot handle rose 5.0% and table-game drop rose 21.3% year over year.
- Prior-year operating income and net income benefited from $73.5 million of income from a tax receivable agreement (TRA) transaction; first-half 2018 included $90.4 million. No comparable TRA liability adjustment was recorded in 2019. This makes reported earnings comparisons materially less representative of ongoing operating performance.
- Q2 write-downs and other charges were $8.8 million, including $4.7 million related to Palms; first-half charges were $32.6 million, including $25.3 million for Palms. Q2 depreciation and amortization increased 21.4% to $55.8 million as redevelopment assets entered service.
- The February 2019 credit facility amendment increased revolving borrowing availability by $115 million to $896 million, extended certain tranches’ maturities by about one year, and reduced certain interest spreads by 25 basis points. Net revolving borrowings increased $151.1 million during the first half.
- The company adopted the new lease standard on January 1, 2019, recognizing $17.3 million of operating lease right-of-use assets and liabilities at adoption. It reported no material effect on income or cash flows.
Outlook, risks and contingencies
- Management said cash from operations, available revolver borrowings and existing cash should cover anticipated needs for the next 12 months, while cautioning that operating performance and access to financing are subject to economic, market and other risks.
- For the remainder of 2019, anticipated cash uses included $80–$105 million of maintenance and investment capital expenditures, $16.7 million of scheduled principal payments, $72.2 million of interest, and approximately $11.7 million of dividends and noncontrolling-interest distributions. The company also cited $81.7 million for the Wild Wild West land purchase and adjacent parcels.
- On July 1, 2019, the company purchased the 20-acre Wild Wild West parcel for $57.3 million, funded with revolver borrowings. The filing does not clearly explain how this purchase relates to the separately cited $81.7 million anticipated land-purchase amount.
- No earnings or revenue guidance was provided. The company noted that Las Vegas economic conditions had been favorable but that their duration and effect on results were uncertain. It also cited substantial indebtedness, competition, consumer and economic conditions, construction execution, regulatory changes and litigation as risks.
- The North Fork casino project in California remains subject to regulatory approvals and litigation. Red Rock had advanced approximately $33.7 million to the tribe, carried at $18.6 million, and stated that repayment is not assured. Management estimated a 65%–75% likelihood of successful completion, but said timing, financing, approvals and recovery of its investment remain uncertain.
- The company had $24.9 million of TRA liabilities, including $9.0 million payable to entities related to its chairman/CEO and a board member. It also disclosed routine litigation and an ongoing federal tax audit for 2016; outcomes are uncertain.
Key facts for investors to verify
- Whether Palms’ newly opened facilities achieve sustainable revenue and margins after reopening and preopening costs subside.
- How operating cash generation compares with redevelopment, maintenance, debt service and dividend requirements, and whether leverage and covenant headroom remain adequate.
- The details and funding of the Wild Wild West land acquisition, including reconciliation of the $57.3 million purchase price with the $81.7 million anticipated cash-use estimate.
- Developments in North Fork regulatory approvals, litigation, third-party financing and prospects for repayment of Red Rock’s advances.
- The timing and cash impact of TRA payments, and the potential effects of interest rates on unhedged debt and derivative valuations.