Red Rock Resorts, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company operates through Station Casinos LLC, with casino properties in the Las Vegas region and management agreements with Native American tribes. The May IPO and related reorganization changed the company’s ownership and tax structure; Station Holdco results are consolidated, including the 64.4% economic interest held by noncontrolling owners at quarter-end. Prior-period comparisons therefore require care.
Key financial results
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $351.5 | $337.8 | $710.7 | $680.6 |
| Operating income | $69.9 | $64.3 | $163.8 | $146.1 |
| Adjusted EBITDA | $117.4 | $109.9 | $250.6 | $229.7 |
| Income before tax | $29.2 | $28.1 | $88.7 | $73.8 |
| Consolidated net income | $21.7 | $28.1 | $81.2 | $73.7 |
| Net income attributable to Red Rock Resorts in statements | $5.7 | $25.8 | $63.3 | $69.9 |
| Basic and diluted EPS | $0.01 | $0.29 | $0.33 | $0.77 |
- Q2 net revenue rose 4.0%, operating income 8.6%, and Adjusted EBITDA 6.8%. For the first half, those measures increased 4.4%, 12.1%, and 9.1%, respectively.
- Q2 casino revenue increased 1.8%; slot handle rose 3.7%. Food and beverage revenue grew 5.6%, while its margin declined to 33.0% from 35.8%, reflecting higher labor and sales costs at new restaurants. Room revenue rose 5.5%, supported by higher average daily rates; occupancy was 95.0% versus 95.5%.
- Management fee revenue increased 30.6% in Q2 to $27.5 million, reflecting improved results at Graton Resort and Gun Lake.
- Q2 interest expense fell 6.7% to $34.1 million, but the company recorded a $7.1 million debt extinguishment/modification loss and $7.5 million income-tax expense. The prior-year quarter included a $2.0 million impairment charge; the current quarter included $11.0 million of write-downs and other charges.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $251.4 million, versus $116.4 million at December 31, 2015. Current assets were $350.2 million and current liabilities $244.0 million.
- Six-month operating cash flow was $166.0 million, down from $178.2 million. Investing activities used $82.8 million, including $87.6 million of capital expenditures and a $20.0 million Palms acquisition escrow deposit. Financing activities provided $51.6 million, including IPO proceeds and refinancing activity.
- Long-term debt carrying value was $2.311 billion, including $62.6 million current; cash less debt implies approximately $2.060 billion of net debt. The new revolving facility had $651.8 million available, net of letters of credit and similar obligations.
- In June, Station LLC refinanced its prior credit facilities with a $1.5 billion Term B loan, a $225 million Term A loan and a $685 million revolver. The new Term B loan’s stated rate was 3.75% at quarter-end. The facilities carry leverage and interest-coverage covenants; management reported compliance at June 30.
Material changes, outlook and risks
- The May IPO raised approximately $541 million net. Proceeds funded purchases of Holdco Units and the $460 million Fertitta Entertainment acquisition, a related-party transaction accounted for as a common-control combination. The acquisition and IPO materially changed ownership, financing, tax accounting and the allocation of earnings. The statements report $5.7 million of Q2 income attributable to Red Rock Resorts, while the EPS note uses a retrospective allocation of $0.3 million for the quarter; investors should reconcile these presentations before relying on EPS comparisons.
- Station LLC agreed to acquire Palms Casino Resort for $312.5 million, subject to adjustments and regulatory and other closing conditions. The filing anticipated a closing by the end of Q3 2016, with approximately $150 million expected to come from cash and the remainder from revolver borrowings. Completion and timing were not assured.
- Management expected cash, operating cash flow and available credit to meet anticipated needs for the next 12 months. Planned remaining-2016 uses included $80–90 million of capital expenditures, approximately $15 million of principal and $56.7 million of interest payments, the Palms acquisition, and distributions/dividends. No formal earnings guidance is provided.
- The company planned an initial quarterly Class A dividend of $0.10 per share, declared in July for payment in August 2016. Payments depend on board discretion, available funds and restrictions on subsidiary distributions under debt agreements. A $44.5 million Tax Receivable Agreement liability was recorded; the agreement generally requires payment of 85% of specified realized tax benefits.
- North Fork casino development remains contingent on regulatory approvals, financing and litigation. The DOI issued Secretarial Procedures on July 29, 2016, after quarter-end; the NIGC had requested additional information on the management agreement. The company estimated a 65–75% likelihood of project completion, but stated there was no assurance of approvals, financing, repayment of its advances or completion on its projected timeline.
- Key risks include substantial debt and covenant limits, exposure to variable interest rates, competition and changes in local economic conditions, gaming regulation and taxation, acquisition execution, litigation, and development and financing contingencies. Management noted that favorable Las Vegas economic trends may not persist.
Important facts for investors to verify
- Reconcile the income attributable to Red Rock Resorts in the statements with the substantially different retrospective EPS allocation described in the EPS note, and assess how the post-IPO ownership structure affects comparability.
- Confirm Palms acquisition closing, final purchase price, funding mix, regulatory approvals and any subsequent integration or synergy disclosures.
- Monitor leverage, covenant headroom, floating-rate exposure, refinancing terms and actual cash available after planned spending and distributions.
- Track capital expenditures, operating cash conversion, margins—especially food and beverage—and the performance and contribution of Native American management contracts.
- Follow North Fork approvals, court proceedings, required financing and recoverability of the company’s development advances.