Red Rock Resorts, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Red Rock is a holding company whose operations are conducted through Station Casinos LLC. The company held 60.1% of Station Holdco’s economic interests and operated gaming properties concentrated in the Las Vegas region; it also managed Graton Resort in California.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net revenue | $1.857 billion | $1.681 billion | +10.4% |
| Operating income | $186.0 million | $372.2 million | -50.0% |
| Net income (loss) | $(6.7) million | $219.5 million | Turned to loss |
| Net income (loss) attributable to Red Rock | $(3.4) million | $157.5 million | Turned to loss |
| Adjusted EBITDA | $509.0 million | $509.0 million | Approximately flat |
| Cash from operating activities | $316.6 million | $346.0 million | Down $29.4 million |
| Capital expenditures | $353.3 million | $579.3 million | Down $226.0 million |
Revenue growth was led by Las Vegas operations, particularly Palms, following its redevelopment. Casino revenue rose 4.7% to $984.3 million. Food and beverage revenue increased 26.3% to $481.6 million, while related expenses rose 36.8%; the department margin fell to 3.3% from 10.8%. Room revenue grew 12.6% to $192.3 million; occupancy was 88.1%, ADR was $128.51 and RevPAR was $113.15.
Adjusted EBITDA, a non-GAAP measure, was essentially unchanged despite higher revenue. Its limitations matter: it excludes items including depreciation, financing costs and specified charges, and is not a substitute for GAAP earnings or cash flow.
Cash and cash equivalents were $128.8 million at year-end, versus $114.6 million in 2018. Total debt on the balance sheet was $3.033 billion; the filing cites approximately $3.08 billion of principal indebtedness. Current assets were $281.6 million and current liabilities were $276.0 million. Revolver availability at year-end was $422.5 million, net of borrowings and letters of credit.
Material changes and unusual items
- Palms completed a $690 million redevelopment in September 2019. Related depreciation, redevelopment and preopening costs weighed on operating results.
- FY2019 write-downs and other charges totaled $82.1 million, including $39.8 million for termination of Palms nightclub and dayclub artist agreements and $25.9 million of Palms redevelopment and preopening expenses. The nightclub and dayclub were closed.
- Depreciation and amortization increased 23.3% to $222.2 million, primarily reflecting completed Palms and Palace Station projects.
- Interest expense rose 9.5% to $156.7 million, largely due to higher debt. The company also recorded a $19.9 million debt extinguishment/modification loss, principally related to purchasing its corporate office building, and a $19.5 million loss from changes in interest-rate swap fair value.
- FY2018 included $90.4 million of income from a reduction in the tax receivable agreement liability; this unusually favorable comparison contributed to the year-over-year decline in 2019 reported earnings.
- Investing cash outflow was $405.1 million, including $353.3 million of capital expenditures and $57.4 million for land held for development. Financing cash inflow was $103.2 million, including net revolver borrowings used primarily to fund capital spending.
Fourth-quarter context: 2019 Q4 revenue was $460.8 million, operating income $60.1 million, net income $6.8 million, and net income attributable to Red Rock $4.8 million; diluted EPS was $0.05. In 2018 Q4, revenue was $431.5 million, operating income $72.0 million, net income $13.2 million, and diluted EPS $0.11. The 2019 quarter included the $19.6 million office-building debt extinguishment loss.
Liquidity, debt, outlook and risks
In February 2020, after the fiscal year-end, Station LLC amended its credit facility: revolving availability increased to approximately $1.03 billion, term-loan and revolver maturities were extended (to 2025 for Term Loan A and the revolver, and 2027 for Term Loan B), and the Term Loan B margin was reduced by 25 basis points. The company said operating cash flow, available borrowings, other financing and cash were expected to cover anticipated capital needs for the next 12 months. Its stated 2020 uses included $90–$110 million of maintenance and investment capital expenditures, approximately $20.4 million of required principal payments, and approximately $122.8 million of interest payments. This is management’s expectation, not a guarantee.
At December 31, 2019, Station LLC reported an interest coverage ratio of 4.37x and total leverage ratio of 4.96x under its credit agreement and stated it was in covenant compliance. Approximately 35% of borrowings were variable-rate after swaps; a 1 percentage-point rate increase was estimated to raise annual debt service by about $10.8 million before the February 2020 refinancing, versus about $3.5 million after it.
No formal revenue or earnings guidance is provided in the supplied filing text. Management cited favorable Las Vegas employment, retail sales and housing trends, while cautioning that local economic conditions may not persist. Significant risks include geographic concentration in Las Vegas, competition and expansion of sports and internet gaming, substantial debt and refinancing needs, gaming regulation, unionization and potential labor-cost increases, and the expected November 2020 expiration of the Graton management agreement. North Fork development remains subject to regulatory approvals, litigation and financing; the company reported $18.7 million of carrying value in project advances and no assurance of repayment or completion. Routine litigation was disclosed, with no matter believed to have a material financial impact. The Palms long-lived-asset impairment review identified potential indicators, but no impairment was recorded based on expected undiscounted cash flows.
Red Rock paid $0.40 per Class A share in dividends in 2019 and 2018; a $0.10-per-share dividend was declared for payment in March 2020. Future dividends remain discretionary and subject to debt restrictions and available distributions. The Fertitta Family Entities held 86.7% of combined voting power at year-end. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile revenue growth and flat Adjusted EBITDA with the sharp decline in GAAP operating income and net income; assess the persistence of Palms-related costs and its post-redevelopment performance.
- Review debt maturities, covenant headroom, cash interest requirements and the terms and completed effects of the February 2020 refinancing.
- Assess whether the closure of the Palms nightclub and dayclub, food-and-beverage cost trends and Palms impairment assumptions affect future returns on the redevelopment.
- Verify the timing and potential financial impact of Graton’s November 2020 management-agreement expiration and the status of North Fork approvals, legal challenges and financing.
- Consider union negotiations and elections, possible labor-cost increases, and the effect of Fertitta voting control and tax receivable agreement obligations on minority shareholders.