Business context and reporting period
Red Rock Resorts, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. Through Station Casinos LLC, it operates gaming and entertainment properties in the Las Vegas region and manages Native American casinos. Red Rock held approximately 59.8% of Station Holdco’s economic interests at quarter-end and consolidates Station Holdco and Station LLC.
Financial results and liquidity
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenue | $412.3, up 1.6% from $405.9 | $1,249.6, up 0.6% from $1,241.8 |
| Operating income | $54.6, down from $56.6 | $300.3, up from $118.4 |
| Net income | $25.1, versus $22.3 | $206.3, versus $17.6 |
| Net income attributable to Red Rock | $14.7, versus $11.8 | $148.6, versus $6.0 |
| Adjusted EBITDA | $109.1, versus $118.4 | $373.8, versus $374.5 |
| Operating cash flow | Not provided for the quarter | $261.0, versus $181.6 |
| Capital expenditures | Not provided for the quarter | $407.6, versus $168.0 |
Third-quarter casino revenue rose 4.0%, while room revenue fell 9.5% and management fee revenue fell 28.2%. Casino margin was 64.1% versus 65.0%; food and beverage margin was 8.0% versus 8.4%; room margin was 50.1% versus 53.8%. For the nine months, the corresponding margins were 65.4% versus 65.1%, 10.0% versus 10.7%, and 54.0% versus 55.2%.
At September 30, cash and cash equivalents were $110.6 million, down from $231.5 million at year-end 2017; cash, cash equivalents and restricted cash totaled $114.2 million. Current assets were $243.8 million and current liabilities $339.3 million. Long-term debt totaled $2.710 billion, including $34.9 million current; total debt was up from $2.618 billion at December 31, 2017. Revolver availability was $642.0 million, net of $105.0 million drawn and $34.0 million of letters of credit and similar obligations.
Operating cash flow was $261.0 million, investing cash flow was a $404.4 million outflow, and financing cash flow was $22.9 million. The investing outflow chiefly reflected construction and redevelopment spending. Nine-month cash flow from operations benefited from the absence of the prior-year $97.2 million payment associated with a related-party lease termination.
Material changes versus the prior comparable period
- Revenue increased modestly, but reported nine-month operating income and net income rose sharply largely because of a $90.4 million non-taxable gain from reducing the tax receivable agreement liability and a $100.3 million related-party lease termination charge in the 2017 comparison period.
- Nine-month Adjusted EBITDA was nearly flat; third-quarter Adjusted EBITDA declined, primarily reflecting lower Native American management fees and construction disruption at Palms and Palace Station.
- Management fee revenue declined after the Gun Lake Casino management agreement expired on February 6, 2018. Graton Resort fees increased, supported by improved operating performance and a higher management fee percentage.
- Capital expenditures increased substantially, primarily for the Palms redevelopment and Palace Station project. The company also drew $105.0 million on its revolving facility during the nine-month period.
- Revenue recognition guidance was adopted retrospectively in 2018, changing presentation of complimentary goods and services and certain fees. The filing says adoption did not significantly affect net income.
Outlook, commentary, risks and unusual items
- No formal earnings guidance is provided. Management expected $140–$165 million of capital expenditures for the remainder of 2018, including Palms and Palace Station spending, and approximately $8.7 million of principal and $31.1 million of interest payments. Management believed operating cash flow, available revolver capacity and existing cash would cover anticipated needs for the next 12 months.
- The Palms redevelopment budget was increased to approximately $690 million, mainly due to construction and material cost inflation. Its first phase opened in May 2018; remaining phases were expected through the third quarter of 2019. Palace Station’s expansion grand reopening was held in the third quarter, with the remaining theater work expected by year-end 2018.
- Management cited construction disruption as a drag on operating results, particularly hotel occupancy and room revenue. It also noted that favorable Las Vegas economic conditions may not persist.
- Station LLC reported a 5.15x consolidated leverage ratio against a 6.50x covenant limit at September 30, and a 4.41x interest coverage ratio against a 2.50x minimum. Management stated the company was in compliance with applicable covenants.
- Interest rate swaps had a combined notional amount of $1.5 billion and effectively fixed the rate on that portion of variable-rate debt at 4.08%. The filing reports a $27.4 million nine-month fair-value gain on derivatives, affecting reported earnings.
- The North Fork casino project remained contingent on regulatory approvals and litigation. The management agreement was under review by the National Indian Gaming Commission; related appeals included a petition for certiorari filed with the U.S. Supreme Court. Red Rock had advanced approximately $32.8 million, carried at $17.7 million, and warned repayment and project completion were not assured. Management estimated a 65%–75% likelihood of successful completion as of quarter-end.
- Other disclosed risks include substantial indebtedness, competition, economic conditions, construction cost and schedule uncertainty, gaming regulation, tax changes, and litigation. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether Palms construction costs and schedule remain consistent with the increased $690 million budget and expected 2019 completion.
- Whether cash generation and revolver availability can support high capital spending, debt service, dividends and other obligations.
- How much of the reported nine-month earnings increase is attributable to the $90.4 million tax receivable agreement gain and other nonrecurring items, versus underlying operations.
- Whether Las Vegas operating trends improve as construction disruption eases, especially hotel occupancy and room revenue.
- Progress on North Fork regulatory approvals and litigation, and the recoverability of development advances.
- Debt covenant headroom, interest-rate exposure and the continuing effect of derivative fair-value movements.