Despite cost overruns and one-time charges that damaged Red Rock Resorts’ balance sheet for several quarters, company leadership of the much-maligned Palms Casino Resort was starting to turn the corner in early 2020.
“We were actually starting to get some traction at the Palms,” Red Rock Resorts Vice Chairman Lorenzo Fertitta said Tuesday.
COVID-19 halted any progress the Palms was making.
Hours after announcing the company had sold the off-Strip property to the Southern California’s San Manuel Band of Mission Indians for $650 million, Red Rock executives said the transaction allows the Las Vegas-based local casino operator to focus on the operations of its Southern Nevada properties.
The sale also allows the company to add to its portfolio. Red Rock Resorts CEO Frank Fertitta III said the company hopes to break ground next on a new casino resort in what he considers “the most under-served market” in the Las Vegas Valley.
“This will be the most efficient project we have ever done as a company,” Frank Fertitta said.
As opposed to the Palms.
Red Rock Resorts spent more than $1 billion on the 703-room Palms, acquiring the property in 2016 for $321.5 million and then embarking on a $690 million redevelopment effort that became a financial drain on the company.
Much of the cost overruns were due to exorbitant spending on the Kaos Nightclub and Dayclub, a flashy 73,000-square-foot indoor-outdoor venue that took up the pool area. The facility opened to mixed reviews. Red Rock paid some $34 million in one-time charges and payments over several months in 2019 to close the club and buy out the contracts of several high-priced celebrity performers and DJs.
In some of his most candid remarks, Lorenzo Fertitta told analysts on the company’s first-quarter conference call they realized seven months in the nightclub was a mistake.
“We missed that, and we made a decision to shut that down,” he said. “We approached it as if we were going to fail, we were going to fail fast and move on.”
He said the company spent “too much money” on the nightlife and daylife business in a market that greatly overcrowded and wasn’t growing. “We needed to focus on the core parts of our business,” Lorenzo Fertitta said.
Red Rock Chief Financial Officer Stephen Cootey said the San Manual tribe, which operates a casino resort in the San Bernardino County community of Highland, “came forward with a great opportunity.”
The all-cash transaction is not expected to close until the end of the year, pending Nevada regulatory approval and the Palms is expected to remain closed until the tribe takes over. Red Rock’s three other properties – Texas Station and two Fiesta-branded casinos in Henderson and North Las Vegas – that haven’t reopened since the 78-day pandemic-related shutdown of gaming, will also remain sidelined.
Cootey said the company is hopeful the increase in capacity restrictions – casinos are now at 80% capacity although three Strip resorts have been allowed to expand to 100% – will help fuel an increase in business activity.
The company is operating six large casino properties and its smaller Wildfire brands through the phased reopening program.
In the quarter that ended March 31, Red Rock’s net revenues decline 6.6% to $352.6 million, down primarily to the ongoing impact of the COVID-19 pandemic. Red Rock’s net loss for the quarter was $106.6 million. The Las Vegas properties accounted for $342.8 million of the company’s total.
Red Rock’s cash flow from its Native American operations was $7.6 million, a 56.8% decrease due largely to the termination of its management con February for the Graton Resort in Northern California.
Red Rock is moving forward with its project near Fresno, California for the North Fork Rancheria of Mono Indians that is expected to cost between $350 million and $400 million. The company hopes to discuss the financing with lenders and break sometime before the end of June.
Frank Fertitta III said the development for the Durango project in Las Vegas “is a no brainer” for the company at a location in the southern part of the Las Vegas Valley near the Interstate 215 beltway.
“We can build it without affecting the debt levels on our balance sheet,” he said.
Macquarie Securities gaming analyst Chad Beynon said the Palms sale could make the project happen. Much of the investment community had already written off the Palms.
“While the $650 million purchase price is well below book value, we applaud the divesture and believe Red Rock can reallocate proceeds into a higher return project such as Durango,” Beynon said. He added that Red Rock executives had long spoken about the” location and potential” even before the 2016 Palms acquisition.
Red Rock has $117.9 million in cash on its balance sheet at the end of March, along with $2.9 billion in debt.
Shares of Red Rock closed at $37.25 on the Nasdaq Tuesday, up 47 cents or 1.28%
Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at email@example.com. Follow @howardstutz on Twitter.