A Wall Street analyst considers Wednesday’s interest rate cut by the Federal Reserve, the first in four years, will be beneficial to the bottom line of casino operators like Red Rock Resorts, though there should be some “overhang” from the presidential election.
Deutsche Bank released a note to investors Wednesday saying Red Rock Resorts may move ahead more quickly with a casino project in the southern Las Vegas valley after the success of the Durango Casino & Resort.
The firm also heaped praise on Red Rock, despite the stock having a choppy third quarter, in which it underperformed its peers.
“There’s optimism around rate cuts and the positive tailwind it could have on housing and continued growth on the geographic periphery of the locals market,” said analyst Carlo Santarelli.
The release of the note followed meetings with Red Rock management. The stock traded below $49 in May, then surged to more than $61 over the summer, before dropping below $50 and back up to $58 in the third quarter. It closed Wednesday at $53.87.
“Post our meetings, we continue to believe the Las Vegas locals market is stable, with high-end outperformance boding well for Red Rock Resorts,” Santarelli said. “The locals promotional environment remains active, though unchanged on a sequential basis. Valuation remains attractive, with RRR offering about a 10% FCF yield on the core operations and the development pipeline is unparalleled within the gaming space.”
Santarelli also called the company’s North Fork project in California, on track for an opening in 2026, “underappreciated in the equity at present. Accordingly, we remain Buy rated and note that our $65 price target offers compelling upside, about 20% from current levels.”
Gaming revenue continues to grow, with July revenue up 13% year over year, fueled in part by the final weekend of June revenue flowing into the July report, Santarelli said. Same-store trends remain flat, with Durango Casino providing the bulk of the growth.
“Broadly speaking, we believe the higher end continues to drive the market growth, which bodes well for Red Rock Resorts,” Santarelli said. “The lower end remains consistent, but weaker than the high end with respect to the growth trajectory.”
Management noted that the database remains stable, with Durango helping to add about 45,000 new customers. They cited solid higher-end trends and strength in the regional and national database, a largely unchanged promotional environment with single-asset and private operators driving the promotional efforts in areas that don’t have an “overly material impact” on Red Rock assets.
That doesn’t mean everything will be rosy when the third-quarter earnings report comes out, Santarelli said.
“We believe seasonality is likely to be more pronounced in the third quarter relative to recent years given a confluence of factors, including more limited stimulus money in the market, the Olympics, the hotter than normal summer months, and the upcoming presidential election. For reference, when looking at the period from 2016-2019, the third-quarter 2024 locals segment EBITDA averaged about an 8% sequential decline, whereas current consensus stands at negative 5%.”
Looking ahead to the fourth quarter, management noted challenged group comparisons related to the rebooking activity post-COVID, Santarelli said. In addition, Deutsche Bank expects “the overhang of the November election to continue to weigh on locals market trends into the fourth quarter, while we also want to remain cognizant of Strip softness in the fourth quarter and its potential impact on the locals market.”
A prominent topic in the meetings, which speaks to the current investor mindset in gaming, was the levers available to Red Rock in an economic downturn.
“We remind investors that we believe margins are far more durable than most speculate, when looking at current margins, relative to the pre-pandemic profile,” Santarelli said. “While we believe margins will continue to face headwinds, largely due to labor, cost of goods increases and softening same-store net revenue, we see downside as far more limited than historical comparisons may indicate.”
Management believes the locals market, given the expansion and diversification of the Las Vegas economy, is likely to be more resilient relative to prior downturns.
“We expect Red Rock to continue to manage the business for margins, with the primary levers to mitigate revenue headwinds being labor and cost of goods,” Santarelli said.
As for future development, Red Rock is prioritizing a development at the south end of Las Vegas Boulevard, south of the South Point Hotel Casino, over one in the northwest valley, Santarelli said.
“We believe the primary drivers of the pecking order relate to population growth in the local zones around the development, as well as, to a lesser extent, the experience from Durango related to the cannibalization circles. At present, we believe Red Rock is weighing development on the 128-acre Cactus land (near South Point), which we believe would be a development akin to Red Rock Resort in scope.”
Red Rock previously announced the expansion of Durango, expected to begin later this year. The project, estimated to cost about $120 million, will add 25,000 square feet of casino space, including a new high-limit slot and bar area, 230 slot machines, with 120 of them in the new high-limit room, and covered parking.
The development of a 49-acre Inspirada site in west Henderson, a smaller-scale development, would cater to the highly affluent Anthem subdivision.
“While we view Cactus and Durango Phase II as a toss up at this stage, with respect to what is next, we believe Cactus has moved ahead of Inspirada in terms of management’s thinking,” Santarelli said. “From a valuation perspective, we continue to value the pipeline from a per-acre real estate value perspective. For longer-term-oriented investors, we would note that this valuation methodology understates the equity value inherent in the likely development returns. As such, as the development pipeline cadence and timeline further crystallize, we would expect valuation to improve, relative to the current real estate embedded value methodology.”
Santarelli said the long discussed North Fork project is progressing, with preliminary construction activity having commenced and a likely opening slated for the first half of 2026.
“We believe the management-fee stream will provide a nice EBITDA growth lever for Red Rock, as the early-stage growth of Durango wanes in 2026,” Santarelli said. “Recall, North Fork is located off Highway 99, between Fresno and Madera. The project is expected to have about 2,500 slots and 40 to 50 table games. Phase I of the project will not have a hotel.
“We expect Red Rock to begin the construction-financing process in the coming weeks, with financing potentially secured in the November time frame,” Santarelli said. “Red Rock has extended about $60 million to the tribe over the years and this amount will likely increase in the coming months. At present, given accrued interest, Red Rock is owed about $120 million, which could be returned upon the receipt of construction financing.”
One of the reasons for the lengthy delay around North Fork was the inability to enter into a compact with the state. Now that the delay is in the rearview mirror, the absence of a negotiated compact serves as a benefit to both the tribe and Red Rock, as the tax implications are favorable for margins.
As it relates to the management contract, Red Rock will receive a 30% fee on net revenue and a 4% development fee. Deutsche believes this translates to a fee that equates to about 40% of property EBITDA, with the property enjoying very high EBITDA margins.
“Given the demographics and similar tribal management agreement fees, we believe Red Rock will generate $40 million to $50 million per year upon stabilization,” Santarelli said. “Accordingly, we believe the present equity value related to the future fees equates to $1 to 2 per share, which is incorporated in our current $65 price target.”
In addition to the development pipeline, Red Rock continues to invest in its current portfolio, with Sunset Station recently completing its upgrades to the sportsbook and casino. The property continues to experience some disruption related to food and beverage work in the third quarter, with a new Yard House restaurant slated to open in November.
In addition to the upgrades at Sunset, Red Rock expects to do a room and suite renovation of 495 rooms at Green Valley Ranch. “The spend related to this project is not explicitly contemplated in our current 2025 capex plans, though we do earmark $75 million for project-related spend in 2025, in addition to our $100 million maintenance capital spend forecast,” Santarelli said.
“Management expects the project to drive low-double-digit EBITDA growth in year one post completion and about 20% growth over time.”
