Red Rock breaks ground on Durango Station in southwest Las Vegas, achieves record earnings despite ‘headwinds’ in Q4

February 3, 2022 2:00 AM
  • Buck Wargo, CDC Gaming Reports
February 3, 2022 2:00 AM
  • Buck Wargo, CDC Gaming Reports

Red Rock Resorts has obtained permits from Clark County and started construction on its Durango Station casino and hotel project in southwest Las Vegas budgeted at $750 million.

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Red Rock CFO Steve Cooley made the announcement as he told Wall Street analysts Wednesday during a fourth-quarter earnings call that the gaming company faced “some headwinds” in the back half of the fourth quarter. Despite that, it still achieved record-high adjusted earnings and adjusted margins to return more than $700 million to shareholders during the quarter.

“The government’s mask mandate across the state of Nevada remained in place and we definitely felt the effects, along with increased inflationary pressure on ordinary goods and services,” Cooley said. “These factors were an offset to fourth-quarter seasonality that resulted in a quarter-over-quarter reduction in visitation. Despite these factors, we experienced increased time on devices and strong spend-per-visit throughout our entire portfolio. Consistent with our earlier experience in the pandemic, the mask mandate and recent resurgence of the omicron variant most notably impacted our older guest segment.”

Barry Jonas, an analyst with Truist Securities, said the omicron impact has continued into the first quarter, “though it appears to be improving.”

J.P. Morgan analyst Joseph Greff said Red Rock’s fourth- quarter top-line and property-level margins were “much better than anticipated.”

Cooley said it was the most profitable fourth quarter in the company’s history for rooms, food, and beverage. Group business and catering continue to be slow to recover due to the new surge in the pandemic. The lead pipeline is growing for group business that has been pushed back to the second half of 2022 and into 2023, he said.

“Red Rock indicated that fourth-quarter strength came from the 21- to 25-year-old age segment, which saw a 60% increase in visitation versus fourth quarter of 2019,” Greff said. “This upside was delivered despite omicron’s impact on visitation and spending in December (which was not quantified, but it impacted a seasonally important part of the fourth quarter – the week of Christmas through New Year’s Eve).”

Cooley said Red Rock spent $26.4 million on capital expenditures during the fourth quarter and $61.3 million for all of 2021. For 2022, the company expects to spend between $75 million and $100 million in maintenance capital and an additional $300 million to $400 million in growth capital, including of its Durango project that will sit on a 71-acre site at the 215 Beltway and Durango Drive, which 166,000 cars pass daily.

“We’re extremely excited about this project,” Cooley said. “The project is located in the fastest-growing area of the Las Vegas valley with a very favorable demographic profile. It’s a five-minute drive to approximately 125,000 people and no unrestricted gaming competitors within a five-mile radius of the project site.”

Red Rock received its permits in January and has since broken ground, Cooley said. It will take 18 to 24 months to complete the project that will include more than 70,000 square feet of casino space with more than 2,000 slot machines and 46 table games. There will be more than 200 hotel rooms and suites, four full-service food and beverage outlets, a state-of-the-art race and sportsbook, a resort-style pool, and 20,000 square feet of meeting space.

Cooley said the $750 million includes all design costs, construction expenses, pre-opening expenses, and financial costs. “We entered into a guaranteed-maximum-price (GMP) contract for the early phases of this project with the expectation that 70% of the total project cost will be GMP within the next couple of quarters. The company expects a return profile of this project to be consistent with the past greenfield projects within the portfolio.”

To help fund the project, Red Rock plans to sell about 23 acres behind the Durango site for $24 million to developers looking to build apartments, which casino executives said will provide even more customers.

Management expects to attain a mid-teens-plus return on the project, Greff said.

At the end of the fourth quarter, Red Rock Resorts closed on its sale of the Palms and Palms Place condominiums for $650 million to the San Manuel Band of Mission Indians.

The North Fork Rancheria of Mono Indians has resolved in its favor all of its federal litigation and settled its California state litigation, which leaves one pending case in the state courts, Cooley said.

Red Rock executives said they don’t believe any decision by the state court could deprive North Fork of its ability to run a casino on its federal trust land.

The tribe has an agreement with Las Vegas-based Red Rock Resorts subsidiary Station Casinos to develop and manage the $350 million to $400 million off-reservation gaming project.

“We continue to progress with our efforts for this very attractive project, including development and design and initial costs with lending partners,” Cooley said.

Greff said Red Rock continues to be well positioned with a healthy locals’ market and a city that lures people to relocate from California. “We see this attractive same-store growth further complemented by Red Rock’s Durango development (that opens in 2024),” Greff said.

Jonas noted that Red Rock has eight development opportunities in its land bank, while it recently sold 89 acres for $32.6 million.

“With our best-in-class assets and locations and unparalleled distribution and scale and our development pipeline of eight strategically located gaming properties, we believe we’re uniquely positioned to capitalize on the very favorable long-term demographic trends and high barrier to entry that characterize the Las Vegas locals’ market,” Cooley said.