Red Rock Resorts, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Red Rock is a holding company that operates through Station Casinos LLC; it owned approximately 59.3% of Station Holdco at year-end. Operations are concentrated in the Las Vegas market, with a Native American management segment.
Key financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net revenue | $1.616 billion | $1.452 billion | +11.2% |
| Operating income | $330.4 million | $309.4 million | +6.8% |
| Net income | $63.0 million | $155.8 million | −59.5% |
| Net income attributable to Red Rock | $35.2 million | $92.0 million | −61.8% |
| Adjusted EBITDA (non-GAAP) | $496.4 million | $484.4 million | +2.5% |
| Cash from operating activities | $289.1 million | $346.2 million | −16.5% |
2017 diluted EPS was $0.42, compared with $1.03 in 2016. Fourth-quarter 2017 net revenue was $394.0 million, operating income $212.8 million, net income $46.0 million, and diluted EPS $0.35; the unusually high quarterly operating income included the tax-receivable-agreement adjustment.
At year-end, cash and cash equivalents were $231.5 million, total assets $3.620 billion, and total equity $637.3 million. Balance-sheet debt was $2.618 billion net of discounts and issuance costs; contractual principal outstanding was approximately $2.683 billion. Revolver availability was $747.0 million after letters of credit. The company reported a 4.99x consolidated total leverage ratio and 4.53x interest coverage ratio and stated it was in compliance with applicable covenants.
Performance and changes from prior year
- Net revenue growth primarily reflected a full year of Palms operations following its October 2016 acquisition. Same-store net revenue increased 3.5% in 2017.
- Same-store casino revenue rose 3.9%, supported by higher slot handle, table-game drop, and sports wagering volume. Casino operating margin declined to 60.2% from 61.6%.
- Hotel revenue benefited from higher average daily rates, but occupancy declined to 90.0% from 92.8%. Room margin decreased to 59.1% from 61.5%; approximately 400 Palace Station rooms were permanently removed during redevelopment.
- Food and beverage revenue increased, but its margin fell to 29.3% from 31.6%, reflecting higher expenses and product and service enhancements.
- Management fees rose to $118.5 million from $111.5 million, including $46.1 million from Gun Lake. The Gun Lake agreement expired in February 2018.
- Operating cash flow declined despite revenue growth. Capital expenditures were $248.4 million, versus $162.4 million in 2016. Investing cash outflow was $281.7 million; financing cash inflow was $90.3 million.
Unusual items, capital structure, and outlook
- Results included a $139.3 million benefit from reducing the tax receivable agreement liability following the federal corporate tax-rate reduction, and a $100.3 million charge for terminating related-party ground leases through a $120.0 million land acquisition. These items materially affect comparisons of reported operating income and net income.
- Income-tax expense was $134.8 million, versus $8.2 million in 2016, primarily reflecting remeasurement of deferred tax balances under the Tax Cuts and Jobs Act. The company said its tax-reform accounting was provisional and subject to refinement.
- During 2017 Station LLC issued $550 million of 5.00% senior notes due 2025, redeemed all $500 million of 7.50% senior notes, repaid the Restructured Land Loan, and amended and repriced credit facilities. Approximately 78% of borrowings were variable-rate; a 1 percentage-point rate increase was estimated to raise annual debt service by about $5.2 million after swaps.
- Management expected 2018 debt principal and interest payments of approximately $30.1 million and $113.5 million, respectively, and capital expenditures of $650–700 million, including Palms redevelopment and Palace Station expansion. It believed operating cash flow, available borrowing capacity, other financing, and cash would cover anticipated needs for the next 12 months, while cautioning that financing and operating outcomes are uncertain.
- The Palms redevelopment budget was approximately $620 million, with phased completion expected through the end of 2019. Palace Station’s approximately $191 million upgrade and expansion was expected to be completed in phases through 2018.
- The North Fork project in California remained subject to regulatory approvals, litigation, and financing. The company estimated a 65%–75% likelihood of successful completion at year-end 2017; construction timing and recovery of its advances were uncertain.
- Management cited improving Las Vegas employment, retail sales, and housing trends, but cautioned that favorable local economic conditions may not persist. Key risks include regional concentration, competition, regulation, labor organization, construction cost and schedule risks, and substantial debt. The Gun Lake contract expiration removes a material source of management fees; Graton’s agreement runs through November 2020.
- Red Rock paid $0.40 per Class A share in 2017 dividends. Future dividends remain at the board’s discretion and are subject to debt, legal, tax, and liquidity constraints.
Most important facts for investors to verify
- Underlying operating momentum: compare same-store results and segment margins with reported growth, including the effect of Palms and property construction disruptions.
- Cash generation versus the planned $650–700 million of 2018 capital spending, debt service, and distributions.
- Debt principal, revolver availability, covenant headroom, variable-rate exposure, and the effect of interest-rate changes.
- Palms and Palace Station project budgets, completion dates, and remaining contractual commitments.
- Post-expiration Gun Lake fee impact, Graton agreement duration, and North Fork approvals, litigation, financing, and recoverability of advances.
- Tax-reform accounting and the $141.9 million year-end tax receivable agreement liability, including potential payment timing and acceleration triggers.
- Governance and control: Fertitta Family Entities held 86.5% of combined voting power, and the company qualified as a NASDAQ controlled company.
The auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2017.