Red Rock Resorts, Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Red Rock consolidates Station Casinos and held approximately 59.2% of Station Holdco’s economic interests. Its business includes Las Vegas casinos and Native American casino management.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $400.4 million | $347.1 million | $1,221.6 million | $1,057.9 million |
| Operating income | $56.5 million | $73.3 million | $117.6 million | $237.2 million |
| Net income | $22.3 million | $33.4 million | $17.0 million | $114.7 million |
| Net income attributable to Red Rock | $11.8 million | $8.3 million | $5.6 million | $71.6 million |
| Adjusted EBITDA | $118.3 million | $109.0 million | $373.7 million | $359.7 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $178.9 million | $239.1 million |
All dollar amounts are in U.S. dollars. Adjusted EBITDA is a non-GAAP measure; the company cautions it is not a substitute for net income or cash flow and does not reflect capital expenditures.
- Revenue and operations: Q3 net revenue rose 15.3%; nine-month revenue rose 15.5%, primarily reflecting the Palms acquisition. Same-store net revenue increased 4.4% in Q3 and 3.9% year to date. Q3 casino revenue increased 13.1%; room revenue increased 33.9%. Q3 department margins were 60.1% for casino, 28.1% for food and beverage, and 59.5% for rooms, each lower than the prior-year period.
- Profitability: Operating income fell 23.0% in Q3 and 50.4% year to date. The nine-month comparison includes a $100.3 million related-party lease termination charge. Q3 net income declined, while income attributable to Red Rock rose; changes in noncontrolling interests affect the attribution. The nine-month attributable-income comparison is also affected by the post-IPO ownership structure and should be interpreted with that change in mind.
- Cash flow and investment: Nine-month operating cash flow was $178.9 million, down from $239.1 million. Investing activities used $199.4 million, including $168.0 million of capital expenditures and $23.4 million paid for land associated with Boulder Station and Texas Station. Cash and cash equivalents were $222.4 million at September 30.
- Debt and liquidity: Long-term debt carrying value was $2.865 billion, including $278.0 million classified as current. Restricted cash of $264.4 million was primarily set aside to redeem the remaining $250 million of 7.50% Senior Notes, plus premium and accrued interest; that redemption occurred October 9, 2017. Revolver availability was $747.0 million, net of letters of credit. The company reported a 5.00x leverage ratio and 4.58x interest coverage ratio and said it was in covenant compliance.
- Dividends: $0.10 per share was declared for Q3. A further $0.10 per share dividend, totaling approximately $6.9 million, was announced for payment November 30, 2017.
Material changes versus prior period
- Palms, acquired in October 2016, contributed to higher reported revenue and expenses; same-store growth was more modest.
- The April 2017 purchase of land and residual interests at Boulder Station and Texas Station for $120 million ended related-party ground leases. The company recorded a $100.3 million charge, while stating the transaction reduces annual rent by approximately $7.1 million and rent over the maximum lease terms by approximately $300 million.
- Station LLC issued $550 million of 5.00% Senior Notes due 2025 and used proceeds in part to refinance debt, including the October redemption of the remaining 7.50% Senior Notes. Earlier in 2017 it also repriced and increased term loans, repaid a land loan, and extended the Term Loan A and revolver maturities to 2022.
- Capital spending increased to support the Palace Station upgrade and expansion and reinvestment at Palms. Approximately 400 Palace Station rooms were permanently removed from service during Q3 as part of the project.
Outlook, risks and unusual items
- Management expected $82–$107 million of capital expenditures for the remainder of 2017, including Palace Station and Palms projects, and estimated remaining-2017 principal and interest payments of approximately $4.0 million and $20.4 million, respectively. It believed operating cash flow, cash on hand and available revolver borrowings would cover anticipated needs for the next 12 months, while cautioning financing and cash flow remain subject to external factors.
- The North Fork tribal casino project remains subject to regulatory approvals, litigation and financing. Red Rock estimated a 65%–75% likelihood of successful completion; construction was then estimated to possibly begin in 36–48 months, with opening approximately 18 months after construction begins. The company had advanced about $32.1 million, with a $17.0 million carrying value, and repayment is not assured.
- The Gun Lake management agreement expires in February 2018. The filing provides no clear estimate of the financial impact if it is not renewed.
- Interest-rate exposure is material: about $2.1 billion of credit-facility borrowings were variable rate, partly offset by swaps that fixed the economics on approximately $1.6 billion. A 1 percentage-point increase in variable rates was estimated to raise annual interest cost by approximately $5.2 million after swaps. Ending hedge accounting may create earnings volatility from derivative fair-value changes.
- Other notable items include $25.0 million of nine-month write-downs and other charges, a $1.8 million land impairment, and an additional $13.4 million debt-extinguishment loss expected in Q4 from the October note redemption. The filing reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Underlying same-store performance and margins, separating Palms’ contribution from organic growth and project disruption.
- Debt balances, refinancing costs, covenant headroom, restricted-cash use and remaining revolver availability after the October note redemption.
- Cash generation relative to the planned capital program, dividends and debt service.
- Whether the North Fork project secures approvals, resolves litigation and obtains financing, and whether advances are recoverable.
- Renewal or expiry of the Gun Lake management agreement and the continuing effect of the 2017 property investments and unusual charges.