A Wall Street analyst Monday called Red Rock Resorts’ decision to demolish its three shuttered Las Vegas properties “a big positive for sustainably higher margins,” while casino consultants also applauded the strategic move.
The land beneath Texas Station and Fiesta Rancho in North Las Vegas and Fiesta Henderson in Henderson will be sold without allowing casinos to be built in their place, analysts said. Funds from those sales could help defray the $750 million Durango Station casino project in the southwest valley and other future Red Rock projects.
“While the news was somewhat expected, we believe most are overlooking the impact these permanent closures will have on the margin floor for Red Rock Resorts moving forward, as well as the benefit to margins these closures have had on the balance of the locals portfolio,” according to Carlo Santarelli of Deutsche Bank. “Importantly, we expect the gaming entitlements to be removed from the land, prior to Red Rock Resorts likely selling the land to a non-gaming entity.”
Andrew Klebanow, a principal at C3 Gaming, said last week’s announcement by Red Rock Resorts didn’t come as a surprise. It’s the culmination of both the North Las Vegas and Henderson markets having had too much gaming capacity, he added.
“The pandemic and the temporary closure of those three properties allowed Red Rock Resorts an opportunity to seriously evaluate the need for those casinos, given that they already had a number of more attractive properties in close proximity,” Klebanow said. “Were they to reopen those properties, operating margins at Santa Fe Station, Green Valley Ranch, and Sunset Station would have gone down, as they would have had to compete again with those three casinos. Economically, it just didn’t make sense.”
Station Casinos, Red Rock Resorts’ predecessor company, had a strategy whereby they locked out potential gaming competition, either by buying up existing gaming assets, as in the case of the Fiesta acquisition, or selling land zoned for casino gaming with the caveat that those parcels could no longer be developed as casinos, Klebanow said.
That was the case when it acquired land in Henderson as part of its deal for Santa Fe Resorts, Klebanow said. That purchase included the Santa Fe Casino and land across from Sunset Station that was in the early planning stages for a new casino resort.
Station Casinos sold that land to a commercial developer with a restriction on the deed that the land would never be developed as a casino. It is now a big-box retail development.
“One can expect similar deed restrictions as Red Rock Resorts markets the Texas Station and Fiesta land parcels to commercial or residential developers,” Klebanow said. “Those three parcels will never again have gaming on them.”
Casino consultant Josh Swissman, founder of The Strategy Organization, said Red Rock Resorts “has one iron in the fire with their Durango Station” and future development opportunities in North Las Vegas, possibly near Aliante Station that Red Rock sold to Boyd Gaming, he said.
“That will free up some cash to put toward those projects,” Swissman said.
The three closed casinos “weren’t (as) accretive to the overall portfolio” as some of the other properties Red Rock Resorts own, Swissman said. They learned they could do a good job of moving those patrons to other properties through database marketing.
“Once they saw they could do that and have no meaningful loss of customer visitation and volume, it became an easy decision to divest of those properties,” Swissman said.
In citing how the closures should lead to “meaningfully higher margins,” Santarelli said in 2019, excluding the $278 million of net revenue and the $28 million of EBITDA loss at the Palms, Red Rock generated $1.48 billion and $487 million of net revenue and property EBITDA from is Las Vegas locals portfolio.
“Excluding the Palms’ losses, the 2019 property EBITDA margin was 32.9%, which compares to the 49.4% (over the last 12 months) margin through the first quarter of 2022,” Santarelli said.
On the first-quarter 2020 earnings call, management noted that the open assets generated 80% of 2019 net revenue, excluding Palms, and 90% of 2019 EBITDA, excluding Palms, Santarelli said.
As such, one can back into the net revenue of (about) $296 million and EBITDA of $49 million of the three closed assets,” Santarelli said. “These results imply that, in 2019, the closed assets generated a 16.4% margin, while the current asset base produced 37.0% margins.”
Assuming all the revenue from the closed assets was lost, the closures added about 400 basis points to the asset-base margin profile, Santarelli said.
Also on the Q1 2022 earnings call, management noted that it had recaptured 92%-94% of the revenue from the closed properties. Assuming 93% of the 2019 revenue was recaptured by the open Red Rock’s portfolio, it implies that legacy customers from the closed assets are currently providing about $275 million of revenue to the portfolio.
Santarelli said that over the last 12 months, given the revenue strength in the locals market, Red Rock Resorts’ margins are running at 49.4%. While revenue levels will dictate future margin fluctuations, “We believe the floor, given the legacy impact of the now-closed assets, is considerably higher than most believe.”
Red Rock Resorts will talk about the closures at its second-quarter earnings call on August 9.
