Red Rock Resorts, the parent company of Station Casinos, reported mixed fourth quarter earnings as it absorbed the cost a new acquisition, but executives and analysts reckon that all systems are go for a strong performance in the expanding southern Nevada economy over the coming years.
Net revenues grew 13 percent year-over-year to $364 million, but were offset by an increase operating expenses grew 22 percent to $322 million largely due to costs associated with the acquisition of the Palms Casino resort – a deal first announced in May 2016 and closed in October.
Adjusted EBITDA for the quarter was down from the prior year quarter by 4 percent to $106 million – missing the consensus estimate by $11 million.
“Despite the negative impact of certain factors in the fourth quarter, the overall core fundamentals of the operating business remain very solid,” said Marc Falcone, executive vice president and chief financial officer. “Same-store gaming revenues, excluding sports, were up 2.2% and non-gaming revenues were up 3.1%, driven by hotel and food and beverage performance.”
Falcone also noted that construction disruption at Palace Station, unusually low sportsbook hold and an unfavorable holiday calendar also factored into the abnormal quarter.
Analysts on Wall Street agreed and are pinning 2017 as Red Rock’s transition year into a strong 2018 and beyond.
“RRR runs arguably the best Regional Gaming business with the best Regional Gaming margins,” wrote Chad Beynon, a gaming analyst with Macquarie. “
“With the addition of Palms, we remain constructive on RRR’s non-gaming business, especially with LV’s 2017 convention slate driving occupancy/(room rates) higher and pushing visitors into RRR’s high quality, off-strip properties such as The Palms, Red Rocks Resort & Spa and Green Valley Ranch,” he continued.
In particular, they note that the region’s strong and diverse labor force, infrastructure and regulatory climate give it an advantage over peer markets and that investors would be wise to overlook the “noise” in the earnings report.
“Although we believe the disruptions could create some additional headaches in the near term, we view them as a small price to pay to strengthen the company’s ability to outperform over the longer term,” said Steven M. Wiecyznski of Stifel. “Along those lines, we expect the hybrid destination/locals appeal of the Palms and soon-to-be-overhauled Palace Station to accelerate EBITDA growth in the out years.”
Falcone was also bullish that Red Rock properties in the Las Vegas locals market will be prime beneficiaries of continued growth in the southern Nevada economy, but tempered expectations by noting that some disruption will likely carry over well into 2017.
“Going forward, we would expect that Palace Station disruption, as well as the margin impact from our food and beverage enhancements will continue to have a negative impact over the next several quarters,” said Falcone on a conference call with investors. “Nonetheless, the core fundamentals in our business remain very solid.”
Red Rock also reported growth from its tribal casino management contracts during the quarter – posting adjusted EBITDA of $25.1 million, up from $21.3 million in the prior year quarter. This was driven in part by a $185 million expansion project at Graton Resort & Casino in November. A similar expansion at Gun Lake Casino is expected to be completed this year.
For the full year 2016, Red Rock’s net revenues grew 7.4 percent to $1.45 billion – marking the sixth consecutive year of revenue growth. Consolidated net income grew 8.7 percent to $156 million, while adjusted EBITDA jumped 7.3 percent to $484 million.
“2016 was a transformational year for Red Rock Resorts, as we successfully re-entered the public markets, completed a refinancing of our credit facility, acquired the Palms Casino Resort and embarked upon a number of operational and capital initiatives to position our business for future growth,” Falcone said.
