Two Wall Street analysts issued notes this week expressing bullishness for Red Rock Resorts, given the strong performance of the recently opened Durango Casino & Resort, the stability of the Las Vegas locals casino market, and the company’s bank of land for future development.
The notes from Carlo Santarelli of Deutsche Bank and Joseph Greff of J.P. Morgan were issued in the aftermath of Nevada’s releasing its February gaming revenue numbers last Thursday. The notes build on the glowing reports analysts have heaped on Red Rock this year.
Thus far in the first quarter, locals-based casinos reported a 4.2% increase in gaming revenue compared to the first two months of 2023, Santarelli said. He’s comfortable with the marketing disciplines displayed by Red Rock Resorts and Boyd Gaming, “above-expectation performance at Durango” and lower-than-expected cannibalization from both casino companies’ portfolios. Red Rock Resorts closed at $61.30 on Monday.
“We’ve raised our forecasts for Red Rock Resorts for 2024 and 2025, as well as our price target,” Santarelli wrote. “We continue to view Red Rock as the best organic growth story within our coverage universe. … We see valuation as reasonable when adjusted for the non-EBITDA producing assets within the company and we remain convinced in our buy rating. Given our favorable revisions, our price target goes to $70 from $62.”
Greff wrote they believe their prior and current consensus estimates were too conservative and base this reassessment on recent Las Vegas market visits, Red Rock’s Las Vegas locals competitors’ commentary, and gaming peers’ comments and observations. His price target is $69.
In reaffirming its rating, Greff said Red Rock’s sole market, Las Vegas locals, is attractive, with continued population growth, an improving mix of higher-income earners, and development land with Beltway access in high-population-growth and high-income communities with limited or no gaming competition. Clark County’s population has grown 46% from 2002 to 2022, or about 4.6 people per hour. Personal incomes have grown at 5.3% over this time frame as well, he added.
“To date, Las Vegas gross gaming through February is up 4% year over year,” Greff said. “We wouldn’t rule out a stabilized high-teens to 20% EBITDA return on investment on its $790 million Durango project capex in year one, which would be among the strongest U.S. casino new build EBITDA ROI for the industry in quite some time, whether it’s year one or stabilized after a few years of being opened.”
Santarelli wrote that the locals’ trends “remain broadly unchanged,” with carded-player spending remaining strong. Through February, market-wide locals’ gaming revenue is up 2.5% on a per-day basis.
“Importantly, the balance of the Clark County segment within which Durango resides is up 9.3% through February, or 7.4% on a per-day basis,” Santarelli said. “We believe March has firmed up fairly well, despite a less-than-stellar March Madness-related sports-betting hold. We also note that March should benefit from having five full weekends in the calendar quarter, though we would caution that the month-end timing (3/31 was a Sunday) is likely to hamper the gross gaming revenue reported by the Nevada Gaming Commission.”
Greff wrote that they’re raising their full-year 2024 and 2025 estimates on stronger than previously modeled Durango property estimates. They now project first-quarter Las Vegas-locals property-level EBITDA of $242 million versus the fourth-quarter’s $221 million, which assumes a $38 million contribution from Durango and a 6% same-store EBITDA decline. Consensus first-quarter EBITDA is $221 million, which means they’re looking for “a nice upside” from Red Rock Resorts in the first quarter.
For full-year 2024 and 2025, Greff projects property-level EBITDA of $919 million and $942 million versus consensus $883 million and $926 million, respectively.
“We don’t think our new estimates are the best-case scenarios, so there could be additional upside,” Greff said. ”We think Red Rock’s current momentum also speaks to the strength of the Las Vegas locals market—migration from southern California and related positive income mix shift, as well as a favorable near- and longer-term market-wide supply-demand dynamic.”
Greff continues to like “the risk-reward” in Red Rock Resorts and expects its first-quarter outlook “to shine versus peers” when it reports earnings sometime next month.
“We think Red Rock’s first-quarter and outlook commentary will likely be more positive than peers, given peers’ mixed regional results related to harsh January/February weather, uneven Las Vegas Strip results, and Las Vegas table-game win and online sports betting hold volatility,” Greff said.
Santarelli believes promotional activity in the locals’ market “remains tame.” As evidenced by the strength in the balance of Clark County segment in the first quarter so far, Durango has grown the market and that cannibalization, while it exists, “has been less than anticipated as articulated by Red Rock and Boyd.”
Santarelli said in that in fourth-quarter 2023, despite Durango being open for 27 days, the property generated adjusted property-level EBITDA in the mid-teens and that strength has continued in the first quarter. Property margins are believed to be in the high 40s.
Management previously indicated that it anticipated a first-year cash-on-cash return from Durango in the high-single-digit to 10%-range net of cannibalization, Santarelli said. At the high end, this would imply a $75 million to $80 million boost to Las Vegas segment property EBITDA.
“We believe cannibalization has remained consistent with management expectations on a dollar basis, though we believe Durango on a stand-alone basis has outpaced expectations. As such, 2024 results are likely to be better than previously expected.”
Santarelli said while Red Rock’s tribal management contract, which could begin contributing to cash flow in 2026, the land bank remains a core aspect of its favorable view.
“We believe this is more so the case at present, given the success of Durango and the additional credence it provides around the value of future project developments.”
After the sale of the real estate of Texas Station and Fiesta Rancho, the total land bank in Nevada stands at 489 acres, or which 441 are ready for development and are gaming entitled, Santarelli said. Some 48 are being actively marketed for sale.
“Given comparable real estate for commercial purposes in the Las Vegas Valley, we believe the broader portfolio is worth about $1.1 million per acre, while we value the Wild Wild West land at $3 million per acre, given Strip-adjacent comparables,” Santarelli said. “As such, our price target includes about $7 of value for the land parcels.”
Durango, however, has shown and is likely to continue to show the per-acre valuation to be conservative relative to the value created by development, Santarelli said. The expansion of the Durango parking lot and potential 400-room hotel expansion are the likely uses of capital.
“Post Durango, we believe management is likely to embark on a development of the Inspirada site (in west Henderson near the M Resort), with Skye Canyon (in northwest Las Vegas) likely third in the pipeline at present.”
Greff said that of its 441 acres in six sites earmarked for potential development, Inspirada is next at 60% of Durango scope and cost, followed by Skye Canyon at 40%, then Las Vegas Boulevard south of Cactus Avenue near the South Point Casino in what’s like to be a Red Rock type of scope and capital expenditures.
“Each of these three sites has meaningful residential development planned and possesses ideal freeway access,” Greff said. “Red Rock estimates that more than 70% of future Clark County population growth is located within three miles of a Red Rock property or one of its six development sites.”
One of Red Rock Resorts’s properties, Palace Station, continues to face headwinds given the nearby roadwork, though Santarelli doesn’t believe this situation has worsened compared to prior commentary from management. The disruption is expected to be completed mid-year, he said.
