Red Rock Resorts, Inc. — 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018, including unaudited fourth-quarter results. Red Rock is a holding company whose operations are conducted through Station Casinos LLC. Its portfolio focuses on the Las Vegas regional market, with Native American casino management operations, including Graton Resort in California. Red Rock held approximately 59.8% of Station Holdco’s economic interests at year-end and consolidates its results.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $1.681 billion | $1.642 billion |
| Operating income | $372.2 million | $331.3 million |
| Net income | $219.5 million | $63.5 million |
| Net income attributable to Red Rock | $157.5 million | $35.4 million |
| Adjusted EBITDA (non-GAAP) | $509.0 million | $497.2 million |
| Cash provided by operating activities | $346.0 million | $290.0 million |
| Capital expenditures | $579.3 million | $248.4 million |
| Cash and cash equivalents at year-end | $114.6 million | $231.5 million |
| Total debt, carrying amount | $2.855 billion | $2.618 billion |
FY 2018 revenue increased 2.4%. Casino revenue rose 6.1% to $940.5 million, while management-fee revenue fell 26.0% to $87.6 million following the February 2018 expiration of the Gun Lake agreement. Room revenue declined 4.6% to $170.8 million; occupancy fell to 87.7% from 90.0%, partly offset by higher average daily rates. Departmental margins were 65.2% for casino, 10.8% for food and beverage, and 54.1% for rooms.
Net income benefited materially from a $90.4 million non-taxable gain related to acquiring two former owners’ tax receivable agreement rights and from lower income-tax expense. FY 2017 included a $100.3 million related-party lease termination charge and a $134.8 million income-tax provision, including the impact of federal tax reform. Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for cash flow or net income.
Fourth quarter: Revenue was $431.5 million, operating income $72.0 million, net income $13.2 million, and net income attributable to Red Rock $8.9 million. Basic and diluted EPS were $0.13 and $0.11, respectively. In Q4 2017, revenue was $400.3 million, operating income $212.9 million, net income $46.0 million, and attributable net income $29.5 million. The comparison is distorted by significant unusual items, including the 2017 tax-reform-related effects and a 2018 interest-expense adjustment.
Investing cash outflow was $606.7 million, primarily reflecting redevelopment and other capital spending. Financing cash flow was $144.2 million; the company drew $245.0 million net under its revolving facility and paid $27.7 million in Class A dividends. Reported principal debt was approximately $2.91 billion, with roughly 80% of borrowings at variable rates. Year-end revolving availability was $498.9 million, net of borrowings and letters of credit; a February 2019 amendment increased stated facility capacity and availability. The company reported covenant compliance at year-end, with a 5.00x consolidated leverage ratio against a maximum of 6.50x.
Material changes, outlook, and key risks
- Projects: The $191 million Palace Station redevelopment was completed on schedule and on budget in December 2018. The $690 million Palms redevelopment remained on schedule and within budget; remaining phases were expected to finish in Q2 and Q3 2019.
- 2019 plans: Management estimated $350–$400 million of maintenance and investment capital expenditures, including Palms spending; approximately $33.9 million of scheduled principal and $134.9 million of interest payments; and $57.3 million to purchase the Wild Wild West site. The board authorized up to $150 million of Class A share repurchases in February 2019, but the company is not required to repurchase shares. A $0.10-per-share dividend was declared for March 2019.
- Liquidity and rates: Management stated that operating cash flow, available borrowings, other financing, and cash were expected to cover anticipated needs over the next 12 months, while cautioning that financing and operating conditions could change. A 1 percentage-point increase in variable rates was estimated to add about $7.9 million to annual interest costs after swaps.
- Other unusual item: A $9.3 million out-of-period adjustment increased 2018 interest expense and reduced net income by $8.6 million, or $0.07 per basic and diluted share. Management and the auditor considered it immaterial to prior and 2018 financial statements.
- Principal risks: Heavy reliance on the Las Vegas market; intense competition, including expanded sports betting and online gaming; substantial debt and variable-rate exposure; unionization and labor-cost risks; extensive gaming regulation; and potential construction delays or cost overruns. The North Fork tribal casino project remains subject to regulatory approvals, litigation, financing, and execution risk; Red Rock had advanced approximately $33.1 million and carried the advances at $18.0 million.
- Governance and contingencies: Fertitta family entities held 86.4% of combined voting power. The tax receivable agreement generally requires payment of 85% of realized tax benefits and can accelerate payments upon certain termination or change-of-control events. The filing reports routine litigation and no assurance of outcomes. The audit opinion on the financial statements and internal controls was unqualified.
Investor verification priorities
- Separate recurring operating performance from the $90.4 million TRA gain, 2017 tax and lease items, and the 2018 interest-expense adjustment.
- Confirm the actual cost, completion timing, and operating contribution of the Palms redevelopment and the post-opening results at Palace Station.
- Review debt maturities, covenant headroom, revolver availability after the February 2019 amendment, and sensitivity to interest rates.
- Assess the effect of Gun Lake’s expiration and Graton’s November 2020 contract expiration on management-fee earnings.
- Track North Fork litigation and approvals, potential additional funding, and recovery of existing advances.
- Evaluate labor negotiations and certification challenges, and the implications of concentrated voting control and TRA obligations for public shareholders.