Red Rock Resorts, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Red Rock consolidates Station Casinos LLC, which operates gaming and entertainment properties in the Las Vegas region and manages Native American casinos. Red Rock owned approximately 59.7% of Station Holdco’s economic interests at quarter-end.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net revenue | $421.0 million | $425.7 million |
| Operating income | $107.8 million | $92.7 million |
| Net income | $82.1 million | $45.4 million |
| Net income attributable to Red Rock | $51.2 million | $19.9 million |
| Diluted EPS, Class A | $0.65 | $0.30 |
| Adjusted EBITDA | $140.1 million | $136.2 million |
| Operating cash flow | $106.0 million | $94.9 million |
Operating margin was approximately 25.6%, compared with 21.8% a year earlier. Casino revenue rose 5.7% to $236.2 million, with casino margin increasing to 66.6% from 65.8%. Food and beverage revenue fell 7.7% to $90.9 million and its margin declined to 11.9% from 13.9%. Room revenue fell 8.1% to $46.6 million; occupancy was 90.0% versus 92.2%, while average daily rate increased to $125.60 from $118.91.
Reported earnings included a $16.9 million gain from reducing a tax receivable agreement (TRA) liability and a $15.8 million gain from changes in derivative fair value. These items materially affected reported results and are not equivalent to recurring operating performance. The company’s non-GAAP Adjusted EBITDA rose about 2.9%.
At March 31, cash and cash equivalents were $179.2 million; current assets were $286.4 million and current liabilities $263.4 million. Long-term debt was $2.617 billion, including $34.8 million current; the revolving facility had $743.9 million of available borrowing capacity, net of letters of credit. Interest coverage was 4.60x and consolidated leverage 5.05x under credit-facility definitions; the company reported covenant compliance. Operating cash flow was more than offset by $137.7 million of capital expenditures and $21.1 million of net financing outflows; cash, cash equivalents and restricted cash declined $52.2 million during the quarter.
Changes versus prior year
- Revenue decreased 1.1%, principally due to construction disruption at Palms and Palace Station and the expiration of the Gun Lake management agreement in February 2018.
- Las Vegas casino activity strengthened: slot handle increased 3.7%, table-game drop 7.5% and race-and-sports write 16.0% year over year. Las Vegas operations Adjusted EBITDA increased to $125.9 million from $120.9 million.
- Management-fee revenue declined 18.4% to $24.7 million as Gun Lake fees fell; Graton Resort fees increased 9.7%, partly offsetting the decline.
- Investing cash outflow increased substantially, primarily reflecting capital spending of $137.7 million versus $41.3 million in Q1 2017.
- Red Rock adopted the new revenue-recognition standard retrospectively. It changed the presentation of complimentary goods and loyalty rewards, among other items, but management said adoption did not significantly affect net income. Prior-period revenue figures shown here are adjusted for adoption.
Outlook, commentary and risks
- Management expected the Palms redevelopment to be completed in phases through Q4 2019 and the Palace Station upgrade and expansion to be completed by year-end 2018. Both projects were disrupting operations during the quarter.
- Anticipated remaining-2018 uses included approximately $510–$560 million for maintenance and investment capital expenditures, including these projects; approximately $26.1 million of principal and $87.6 million of interest payments; and a $23.9 million TRA-related payment. Management believed cash, operating cash flows and available financing would be sufficient for anticipated needs over the next 12 months, while cautioning that financing and operating results are uncertain.
- No numerical earnings or revenue guidance was provided. The company declared a $0.10-per-share dividend for June 2018.
- North Fork development remained subject to regulatory approvals, litigation and third-party financing. The company had advanced approximately $32.6 million, with a $17.5 million carrying amount, and estimated a 65%–75% likelihood of successful completion and opening. It cautioned that repayment and project completion are not assured.
- Key risks include substantial indebtedness, interest-rate exposure, competition, economic conditions, construction cost or schedule overruns, gaming regulation and taxation, and legal outcomes. The filing reported no material change in previously disclosed risk factors and no material change in market-risk disclosures.
Investor verification priorities
- Assess how much reported earnings depended on the TRA liability gain and derivative fair-value gain, and compare with recurring operating performance.
- Track construction spending, disruption and completion milestones at Palms and Palace Station against the remaining-year capital-spending estimate.
- Monitor debt, floating-rate exposure, covenant headroom and actual use of the revolving facility.
- Verify the effect of the Gun Lake agreement’s expiration and performance of Graton management fees on subsequent results.
- Follow North Fork regulatory, litigation and financing developments, including recoverability of advances.