Red Rock Resorts, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Red Rock operates through Station Casinos LLC, with casinos concentrated in the Las Vegas market and management agreements with Native American tribes. Results include Palms Casino Resort, acquired in October 2016. Red Rock held approximately 57% of Station Holdco’s economic interests and consolidated the business, with the remainder reported as noncontrolling interest.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net revenue | $417.7 million | $359.2 million | Up 16.3%; same-store net revenue rose 3.8% |
| Operating income | $92.4 million | $94.0 million | Down 1.7%; same-store operating income fell 6.6% |
| Net income | $45.2 million | $59.5 million | Consolidated net income |
| Net income attributable to Red Rock | $19.8 million | $57.6 million | Not directly comparable: the 2016 period preceded the IPO and had no Station Holdco noncontrolling interest |
| Class A diluted EPS | $0.30 | $0.64 | 2016 EPS uses a retrospective, hypothetical IPO share and income allocation |
| Adjusted EBITDA | $135.9 million | $133.2 million | Up 2.0%; non-GAAP measure |
| Operating cash flow | $94.7 million | $96.1 million | Down modestly |
| Capital expenditures | $41.3 million | $31.3 million | Primarily renovations, Palace Station expansion, and gaming equipment |
| Cash and cash equivalents | $119.4 million | $133.8 million at Dec. 31, 2016 | Quarter-end balance |
| Total debt, carrying value | $2.370 billion | $2.422 billion at Dec. 31, 2016 | Includes $45.4 million current portion |
Net cash used in investing activities was $42.0 million and net cash used in financing activities was $67.1 million; cash declined $14.4 million during the quarter. Quarter-end revolving-credit availability was $616.8 million, net of $35.0 million borrowings and $33.2 million of letters of credit and similar obligations. The credit facility required minimum interest coverage of 2.50:1 and a maximum leverage ratio that was 6.50:1 at March 31, 2017; reported ratios were 4.58:1 and 4.57:1, respectively. The company said it was in covenant compliance.
Material changes and management commentary
- Revenue growth was primarily attributable to Palms. Same-store net revenue increased 3.8%, despite construction disruption at Palace Station. Same-store casino revenue rose 2.2%; same-store room revenue rose 6.7%.
- Higher revenue was accompanied by faster growth in several costs: casino expenses rose 16.3%, food and beverage expenses 29.4%, and SG&A 25.7%. SG&A was 22.6% of net revenue versus 20.9% a year earlier. Operating income declined despite higher sales.
- Hotel occupancy was 92.2%, compared with 93.5%; average daily rate increased to $102.12 from $90.05, and revenue per available room to $94.12 from $84.22.
- In January, Station LLC increased and repriced its Term Loan B by $125 million, reducing applicable margins by 50 basis points; the transaction generated a $2.0 million debt-modification/extinguishment loss. The March land-loan settlement produced a deferred $14.9 million gain expected to be recognized in June, subject to contingencies.
- After quarter-end, the company amended credit facilities and redeemed $250 million of 7.50% Senior Notes. Management expected these debt transactions to reduce annual interest payments by approximately $22.8 million. These subsequent transactions are not reflected in the March 31 debt balances.
- On April 27, the company acquired, for $120 million, land and related property interests underlying Texas Station and Boulder Station from a related-party lessor, funded with revolver borrowings. It expects a charge that will materially affect Q2 2017 net income and EPS, while annual rent expense is expected to fall by approximately $7.1 million.
Outlook, risks, and contingencies
- Management anticipated 2017 cash uses of approximately $41.0 million for principal payments, $83.2 million for interest, and $135 million to $160 million for capital expenditures, including the Palace Station project. It believed operating cash flow, available credit, and cash on hand would cover anticipated needs for the next 12 months, while cautioning that financing and operating conditions could change.
- The North Fork tribal casino project remains subject to regulatory approvals, financing, litigation, and other contingencies. The company had advanced approximately $30.6 million, with a $15.5 million carrying value, and stated that repayment is not assured. Its estimated likelihood of successful completion and opening was 65%–75%; construction might begin in 36–48 months, with opening estimated about 18 months after construction begins, but neither timing nor completion is assured.
- North Fork faces ongoing legal challenges, including appeals and pending matters concerning the land-into-trust determination and Secretarial Procedures. The filing states that legal outcomes and required approvals are uncertain.
- The $258.5 million tax receivable agreement liability requires payments to certain pre-IPO owners for 85% of specified tax benefits realized. The filing says payment timing varies and is generally limited to one payment per year.
- The Gun Lake management agreement expires in February 2018. Part of its expansion opened in May 2017, with the remainder expected in September 2017.
- Management cited exposure to substantial indebtedness, competition, local and national economic conditions, regulatory and tax changes, construction disruption and cost overruns, and litigation. It reported no material change in previously disclosed risk factors and said disclosure controls were effective.
Key facts investors should verify
- Separate Palms’ acquisition contribution from same-store performance, and track whether operating margins recover as revenue grows.
- Reconcile attributable earnings and EPS across periods in light of the IPO, changing noncontrolling interests, and the retrospective 2016 EPS presentation.
- Confirm the effects of the May debt amendments and note redemption on debt, interest expense, liquidity, and covenant headroom.
- Assess the final accounting charge from the Texas Station and Boulder Station related-party acquisition, including valuation and its Q2 impact.
- Monitor capital spending, construction disruption at Palace Station, North Fork approvals and litigation, and recoverability of North Fork advances.
- Track cash requirements related to debt service, dividends and distributions, capital expenditures, and the tax receivable agreement.