Red Rock Resorts, the parent company of Station Casinos, reported its highest first quarter EBITDA in nine years Thursday afternoon despite continued disruption at its flagship property Palace Station.
Adjusted EBITDA grew 2 percent to $136 million from $133 million in the prior year quarter, while net revenues jumped 16 percent to $417 million – marking 16 consecutive quarters of revenue growth. Net income was down from $60 million to $45 million due to an income tax provision.
“During the first quarter, we continued to see solid results in our Las Vegas operations with same-store revenues up 3 percent, demonstrating the underlying strength of our core business,” said Marc J. Falcone, executive vice President, chief financial officer and treasurer of Red Rock Resorts.
“We believe these results are directly correlated to the ongoing expansion of the Las Vegas economy, which continues to see strong population growth, robust employment numbers, increasing wages, an improving housing market, and a large pipeline of planned and under construction development projects, all of which attract new residents and businesses to the Las Vegas market,” Falcone continued.
Las Vegas revenues, including the newly-acquired Palms Casino Resort, were up 17 percent year-over-year to $386 million, and adjusted EBITDA grew by 1 percent to $121 million.
A drop of 470 basis points in adjusted EBITDA margin for the segment, however, was noted by analysts.
“As we’ve mentioned in the past, we believe RRR runs arguably the best Regional Gaming business with the best Regional Gaming margins,” said Chad Beynon of Macquarie. “The 470 basis point margin decline for the market leader is concerning and as a result, we have significantly reduced our 2017 Las Vegas EBITDA growth (projections).”
“We remain positive on the name because we expect these negative trends to reverse in 2018/19, returning EBITDA growth to double digits,” Beynon continued.
Steven M. Wieczynski of Stifel reckoned that the margin drop could create a nice buy-in opportunity for investors eyeing the long-term.
“Although the “noise” resulting from the ongoing Palace renovation and Palms integration was well telegraphed, we do not expect the deeper than anticipated margin impact to sit well with short-term focused investors,” he wrote in a note.
“If our projection holds true, longer-term oriented investors could be presented with an attractive opportunity to begin building positions in the name,” he continued.
Others shrugged off the decline, particularly as the company had well-communicated the factors putting downward pressure on EBITDA margins ahead of time.
“Red Rock Resorts’ first quarter adjusted EBITDA ($136 million) was 2 percent above our estimate, but 2 percent below consensus,” wrote Cameron McKnight of Wells Fargo Securities. “The quarter was impacted by, 1) Palace Station construction, 2) Palms integration costs, and 3) increased food and beverage expenses. Our estimates had already accounted for these items, which had been telegraphed.”
Elsewhere in the company, Red Rock’s Native American segment also generated adjusted EBITDA of $23 million, up from $20 million for the prior year period, with strong showings at both Graton Resort & Casino and Gun Lake Casino.
At the end of the first quarter, Red Rock’s balance sheet held $119 million in cash against $2.4 billion in outstanding debt with a 4.5 times debt-to-adjusted EBITDA ratio.
“Over the past few months, we have entered into several balance sheet transactions to opportunistically improve our financial position,” said Falcone. “The net effect has resulted in significantly lower borrowing costs and increased flexibility in our overall capital structure.”
Red Rock also announced a $0.10 dividend that will be paid out to Class A shareholders on May 30.
