Business context and reporting period
Red Rock Resorts, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. Through Station Casinos, it operates casinos primarily in the Las Vegas region and manages Graton Resort in California. Red Rock held 60% of Station Holdco’s economic interests at quarter-end and consolidates its results.
Financial performance and condition
- Revenue: Third-quarter net revenue was $465.9 million, up 13.0% year over year; nine-month revenue was $1.396 billion, up 11.7%. Growth was primarily attributed to Las Vegas operations, particularly Palms, which reopened after redevelopment.
- Profit: Third-quarter operating income fell to $14.2 million from $54.6 million. Red Rock-attributable net loss was $15.7 million, versus income of $14.7 million. For the nine months, operating income was $125.9 million versus $300.3 million, and Red Rock-attributable net loss was $8.2 million versus income of $148.6 million.
- Adjusted EBITDA: Third-quarter Adjusted EBITDA, a non-GAAP measure, was $111.1 million versus $109.1 million. Nine-month Adjusted EBITDA was $371.4 million versus $373.8 million. These measures exclude specified expenses and should not be treated as GAAP profit or liquidity.
- Margins: Third-quarter operating margin was approximately 3.1% of revenue, versus 13.2% a year earlier. Food and beverage margin was negative 0.3%, versus positive 8.0%; casino margin was 62.6%, versus 64.1%. Room margin improved to 57.9% from 50.1%.
- Cash flow and investment: Nine-month operating cash flow was $216.6 million, down from $261.0 million. Investing outflow was $376.8 million, including $324.4 million of capital expenditures and $57.4 million for land at Wild Wild West. Financing provided $152.4 million. Cash, cash equivalents and restricted cash totaled $110.5 million at period-end.
- Debt and liquidity: Long-term debt, including current maturities, was $3.051 billion, up from $2.855 billion at December 31, 2018. Cash and cash equivalents were $106.4 million. Revolving-credit availability was $401.8 million, net of borrowings and letters of credit. The company reported covenant compliance; leverage was 5.48x and interest coverage 4.05x under credit-facility definitions.
- Other metrics: Third-quarter room occupancy was 88.4%, ADR was $126.68, and RevPAR was $111.97. Each was higher than the prior-year quarter. Interest expense rose to $40.5 million for the quarter and $118.9 million for the nine months.
Material changes versus prior periods
- Palms and Palace Station redevelopment completions increased available rooms and contributed to revenue growth, but also increased depreciation and operating costs.
- Palms-related food and beverage revenue rose, but expenses grew faster, reflecting the nightclub and dayclub, new venues, and reopening costs. Casino revenue increased 3.3% in the quarter, with higher gaming volumes.
- Operating income and reported net income were materially lower. The prior-year nine-month comparison included $90.4 million of income from tax receivable agreement transactions with pre-IPO owners; the current period did not.
- Write-downs and other charges increased to $34.1 million for the quarter and $66.7 million for the nine months, versus $6.4 million and $21.1 million. Interest expense and depreciation also increased.
- Operating cash flow declined while debt increased. Net revolving-credit borrowings during the first nine months were $212.1 million, primarily to fund capital expenditures.
Outlook, commentary, risks and unusual items
- Management described Las Vegas employment, retail sales and housing trends as favorable, but cautioned that favorable market conditions may not persist. No formal full-year financial guidance is stated in the provided filing text.
- Management anticipated $16 million to $22 million of similar write-downs and other charges in the fourth quarter of 2019. On November 5, 2019, the company announced that the Palms nightclub and dayclub would close immediately, citing challenging expenses and fixed costs.
- For the remainder of 2019, expected uses included $30 million to $40 million for maintenance and investment capital expenditures, scheduled principal and interest payments, and $11.7 million of dividends and distributions. On October 29, the company also paid $57.0 million for its corporate office building, funded with revolver borrowings.
- Management believed operating cash flow, existing cash and available borrowings would cover anticipated needs for the next twelve months, while noting that economic, market and financing conditions could affect liquidity. LIBOR discontinuation after 2021 presents uncertainty for variable-rate borrowings.
- Interest-rate swaps had a $1.4 billion notional amount and converted that amount of variable-rate debt to a fixed rate of 4.23%. Fair-value changes produced a $21.3 million loss for the nine months.
- The North Fork tribal casino project remains subject to approvals, financing and litigation. The company estimated a 65%–75% likelihood of successful completion at quarter-end; estimated project cost is $250 million to $300 million, with timing uncertain. The company had advanced approximately $33.8 million, carried at $18.7 million, and repayment is not assured.
- Other exposures include routine litigation, a federal tax audit for 2016, regulatory and gaming-tax risks, and substantial debt. Management reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether the Palms closure and associated fourth-quarter charges fall within management’s stated $16 million–$22 million estimate, and the effect on property performance.
- Whether operating cash generation can sustain capital spending, dividends and debt service, especially after the additional $57 million building purchase.
- Debt levels, revolver availability, covenant headroom, and exposure to interest-rate and LIBOR-transition risk.
- Underlying Las Vegas and Graton performance, including whether revenue growth translates into improved margins and Adjusted EBITDA.
- Progress, approvals, litigation outcomes, financing and recoverability of the North Fork advances; also monitor the Graton management agreement, scheduled to expire in November 2020.