Red Rock Resorts, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Red Rock consolidates Station Casinos LLC and Station Holdco; at quarter-end it held approximately 60% of Station Holdco’s economic interests, with the remainder presented as noncontrolling interest. Operations comprise Las Vegas-area gaming and entertainment properties and Native American resort management.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / prior balance |
|---|---|---|
| Net revenue | $447.0 million | $421.0 million; up 6.2% |
| Operating income | $66.1 million | $107.8 million; down 38.7% |
| Operating margin | 14.8% | 25.6% |
| Net income | $20.3 million | $82.1 million |
| Net income attributable to Red Rock | $11.3 million; basic and diluted EPS $0.16 | $51.2 million; basic EPS $0.74, diluted EPS $0.65 |
| Adjusted EBITDA | $145.1 million | $140.1 million; up 3.6% |
| Cash from operating activities | $54.6 million | $106.0 million |
| Capital expenditures | $160.0 million | $137.7 million |
| Cash and restricted cash | $113.0 million | $118.3 million at December 31, 2018 |
| Total debt, including current portion | $2.966 billion | $2.855 billion at December 31, 2018 |
Net cash used in investing was $157.2 million; financing provided $97.3 million, including net revolving-credit borrowings. Current assets were $278.9 million and current liabilities $322.5 million at March 31, 2019. Revolving-credit availability was $497.6 million, net of $361.3 million drawn and $37.1 million in letters of credit and similar obligations. Interest expense rose to $37.4 million from $31.1 million. The company reported compliance with debt covenants; its interest coverage ratio was 4.30x and consolidated total leverage ratio was 5.10x.
Revenue growth reflected stronger Las Vegas operations. Casino revenue rose 3.7%; slot handle increased 2.4%, table-game drop 11.3%, and race-and-sports write 12.0%. Food and beverage revenue increased 15.4%, including contributions from new Palms and Palace Station offerings. Room revenue rose 3.1%; ADR increased 4.6%, while occupancy declined to 87.7% from 90.0%. Management-fee revenue fell 6.2%, primarily following the February 2018 expiration of the Gun Lake agreement.
Material changes and notable items
- Operating income declined amid Palms redevelopment costs, higher depreciation, and a prior-year tax receivable agreement (TRA) liability adjustment. Write-downs and other charges were $23.7 million versus $3.8 million, including Palms-related amounts of $20.6 million versus $2.6 million.
- Q1 2018 included $16.9 million of nontaxable income from a TRA liability reduction. Derivative results also swung from a $15.8 million gain in Q1 2018 to a $6.6 million loss in Q1 2019. These items, together with higher interest expense and depreciation, contributed to lower GAAP earnings; Adjusted EBITDA increased modestly.
- Palms redevelopment is a $690 million project. Phase one opened in May 2018; most of phases two and three were complete by the filing, with the spa and salon expected by end-Q2 2019 and one restaurant by end-Q3. Management said the project remained on schedule and within budget. Palace Station’s $191 million redevelopment was completed in December 2018.
- On February 8, 2019, Station LLC amended its credit facility, increasing revolving capacity by $115 million to $896 million, extending certain tranches’ maturities by about a year, and reducing their interest rates by 25 basis points. The company borrowed a net $116.3 million under the revolver during Q1.
- The company adopted the new lease standard on January 1, 2019 and recognized $17.3 million of operating lease right-of-use assets and liabilities at adoption; management reported no material impact on income or cash flows.
Liquidity, outlook, and risks
Management estimated remaining-2019 uses of cash to include $175–$225 million for maintenance and investment capital expenditures, $25.6 million of required debt principal, $103.5 million of interest, $57.3 million to purchase the leased land under Wild Wild West, and dividends and noncontrolling-interest distributions, including approximately $11.7 million due in June. The board authorized up to $150 million of Class A share repurchases in February; none had been made under the program through March 31. The company paid a $0.10-per-share dividend during Q1 and announced another $0.10 dividend for June 28, 2019.
Management believed operating cash flow, available credit, other financing and cash on hand would cover anticipated needs for the next 12 months, while cautioning that financing and cash generation are not assured. Important risks include substantial indebtedness and interest-rate exposure, construction disruption and cost overruns, economic and consumer-spending changes, competition, regulation and gaming taxes, and litigation. The North Fork tribal casino project remains contingent on regulatory approvals, financing and legal outcomes. The filing estimated a 65%–75% likelihood of successful completion and opening; construction might begin in 18–30 months, but timing and recovery of the company’s investment are uncertain. The company had advanced approximately $33.4 million, with a $18.3 million carrying value, and repayment is not assured. The 2016 federal tax year was under audit. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether the Palms project meets its stated completion schedule and $690 million budget, and whether operating results improve as disruption and pre-opening costs subside.
- Whether revenue growth converts into stronger operating cash flow after the elevated capital spending; Q1 operating cash flow was well below the prior-year quarter.
- Debt, covenant headroom, refinancing needs and variable-rate exposure; $1.5 billion of debt was effectively fixed through swaps at 3.96% at quarter-end.
- Whether North Fork obtains required NIGC management-agreement approval, resolves ongoing litigation and secures third-party financing on acceptable terms.
- TRA payment timing and amounts, dividend and repurchase decisions, and the sensitivity of earnings to derivative fair-value changes and other noncash or unusual items.
Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings, operating cash flow or liquidity.