Red Rock Resorts, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request references 2016 Q4, this is an annual filing; fourth-quarter figures are noted separately. Amounts are U.S. dollars.
Business context and reporting period
Red Rock is a holding company that controls Station Casinos LLC, operating Las Vegas-area casinos and managing tribal casinos. At year-end, Red Rock held approximately 56.9% of Station Holdco’s economic interests. The consolidated statements include Station LLC, Fertitta Entertainment and Station Holdco; prior-period financial statements are presented retrospectively for the predecessor. Red Rock completed its IPO in May 2016 and acquired Palms Casino Resort on October 1, 2016, so Palms contributes only three months to 2016 results.
Financial and operating metrics
| Metric | FY 2016 | FY 2015 | Change or context |
|---|---|---|---|
| Net revenue | $1,452.4 million | $1,352.1 million | Up 7.4%; same-store revenue accounted for 4.6% of the increase |
| Operating income | $309.4 million | $287.2 million | Up 7.7%; operating margin approximately 21.3% versus 21.2% |
| Consolidated net income | $155.8 million | $143.3 million | Up 8.8% |
| Net income attributable to Red Rock | $92.0 million | $137.7 million | Down 33.2%, primarily reflecting the post-IPO noncontrolling-interest structure |
| Diluted earnings per share | $1.03 | $1.53 | Prior-period EPS and ownership structure are not directly comparable |
| Adjusted EBITDA | $484.4 million | $451.4 million | Up 7.3%; non-GAAP measure |
| Operating cash flow | $346.2 million | $349.4 million | Down slightly |
| Capital expenditures | $162.4 million | $129.9 million | Operating cash flow less capex was approximately $183.8 million, before acquisitions and other investing |
| Cash and cash equivalents | $133.8 million | $116.4 million | At December 31 |
| Debt | $2,482.6 million principal | $2,155.2 million carrying amount | 2016 principal includes a $115.9 million non-recourse land loan; balance-sheet debt carrying amount was $2,422.3 million |
Casino revenue rose 4.2% to $961.0 million; same-store slot handle increased 2.8% and table-game drop increased 4.0%. Casino margin eased to 61.6% from 62.3%. Food and beverage revenue grew 7.7%, but its margin declined to 31.6% from 35.2%, reflecting higher costs and expanded offerings. Room revenue increased 16.3%; occupancy was 92.8% versus 93.5%, while average daily rate rose to $86.52 from $79.11.
Fourth quarter: Revenue was $394.6 million versus $348.0 million in Q4 2015; operating income was $72.3 million versus $84.3 million; net income was $41.1 million versus $48.6 million; and net income attributable to Red Rock was $20.4 million versus $48.7 million. Diluted EPS was $0.37 versus $0.54. Palms was included in Q4 2016.
Investing cash outflow was $444.1 million, including $305.9 million net cash paid for Palms and $162.4 million of capital expenditures. Financing cash flow was positive $115.0 million, reflecting IPO proceeds and refinancing activity, partly offset by acquisition-related and other payments.
Material changes versus the prior comparable period
- Palms was acquired for $316.4 million; it generated $38.5 million of revenue and a $1.3 million pretax loss from October 1 through December 31.
- The June refinancing replaced prior credit facilities with a $225 million Term A loan, $1.5 billion Term B loan and $685 million revolver. Interest expense declined 3.0% to $140.2 million, despite increased borrowings.
- In January 2017, the Term B facility was increased by $125 million and its interest margins were reduced by 50 basis points; proceeds repaid revolver borrowings and paid related fees.
- Native American management fee revenue increased to $111.5 million from $88.9 million, reflecting stronger results at Graton and Gun Lake, including Graton’s November 2016 expansion.
- Write-downs and other charges rose to $24.6 million from $9.5 million, including IPO and acquisition costs, Palms-related development and severance costs, and asset disposals. No asset impairment charge was recorded in 2016.
- Red Rock began paying Class A dividends in 2016, declaring $0.20 per share for the year. The company reported $63.8 million of net income attributable to noncontrolling interests, versus $5.6 million in 2015, reflecting the ownership reorganization.
Outlook, risks, contingencies and unusual items
- Management outlook: The filing gives no specific earnings or revenue guidance. Management expected 2017 cash needs to include approximately $46.1 million of principal payments, $116.9 million of interest, and $175–$200 million of maintenance and investment capital expenditures, including Palace Station work. It stated that operating cash flow, available borrowings and cash were expected to cover anticipated needs for the next 12 months, while cautioning that financing and operating conditions could change.
- Debt and liquidity: At year-end, revolver availability was $531.8 million after $120.0 million of borrowings and $33.2 million of letters of credit and similar obligations. Covenant leverage was 4.66x against a 6.50x maximum; interest coverage was 4.62x against a 2.50x minimum. Approximately 78% of borrowings bore variable rates; a 1 percentage-point rate increase was estimated to add $8.6 million to annual interest costs, after swaps. Substantially all material property and equipment secured debt.
- Tax receivable agreement: The liability was $258.5 million at year-end. Red Rock is generally required to pay certain former owners 85% of specified tax benefits. Early termination or a change of control could accelerate payments based on assumptions about future taxable income.
- Development and litigation: The North Fork tribal casino project remains contingent on approvals, financing and litigation outcomes. Red Rock had advanced approximately $29.9 million, with a $14.8 million carrying amount, and estimated a 65%–75% likelihood of successful completion. A California appellate ruling in December 2016 favored project opponents; petitions for review were pending. Management estimated construction might begin in 36–48 months, but completion is not assured.
- Operating risks: Results depend heavily on the Las Vegas market and local discretionary spending, and the company faces intense gaming competition, extensive gaming regulation, possible labor disruption, construction and integration risks, and potential increases in labor, insurance, energy or water costs. Gun Lake’s management agreement expires in February 2018; Graton’s expires in November 2020.
- Ownership and reporting: Fertitta family entities held 86.6% of combined voting power at year-end. The company is a controlled company and may rely on certain governance exemptions. Management concluded disclosure controls were effective, but the filing did not include management’s internal-control assessment or an auditor attestation because of the newly public company transition period.
- Other items: The 2016 audit opinion was unqualified. The Palms acquisition, IPO/reorganization, refinancing, related-party transactions and the large TRA liability are important context when interpreting reported earnings, debt and equity.
Important facts for investors to verify
- Reconcile the $2.48 billion stated debt principal with the $2.42 billion balance-sheet carrying value, and review maturities, collateral, covenants and the 2017 land-loan repayment or extension status.
- Assess how much revenue and EBITDA growth was organic versus attributable to Palms, managed properties and improved Las Vegas market conditions.
- Review the Q4 operating-income and attributable-earnings declines, including acquisition costs, operating trends and the effects of noncontrolling interests.
- Track North Fork litigation, regulatory approvals, financing, recoverability of advances and any resulting change to project timing or value.
- Evaluate the $258.5 million TRA obligation, potential acceleration terms, related-party interests, and restrictions on distributions and dividends.
- Monitor Palace Station project spending and disruption, Gun Lake contract renewal or transition, union negotiations, and covenant headroom as debt amortizes and operating conditions change.