For the first time since 1991, Palace Station will be seeing its first major rebranding as Red Rock Resorts – the parent company of Station Casinos – continues to expand its reach in a growing Las Vegas locals market.
The company unveiled the $76 million dollar renovation Tuesday afternoon in its second quarter earnings call. The plan calls for the addition of luxury movie theaters, new restaurants, a resort pool, a new race and sports book and renovations to the poker room and casino floor.
The move comes on the heels of a previously announced $115 million expansion to the property that includes a new bingo room, a porte-cochere, a new buffet, improved parking and other improvements to the property’s exterior – a portion of which has been completed.
“Due to receiving very positive feedback from our guests on the enhancements made to date, we have decided to increase our investment in the project by $76 million,” said Stephen Cootey, Red Rock’s chief financial officer, on the company’s second quarter earnings call. “The project, as expanded, is expected to be completed in phases through late-2018.”
“There is offense in this plan at Palace Station,” said Frank Fertitta, chief executive of Station Casinos, in response to an analyst question as to whether the goal of the project is to acquire or defend market share.
“We’re very bullish on our Palace Station location,” he continued. “That’s where we started. It’s right in the middle of town. We see all these new things happening in Las Vegas with the expansion of the convention center and NFL football coming to Las Vegas as reasons to invest now.”
Red Rock also announced $146 million in capital improvements to its recently acquired Palms property that is scheduled to be completed in the second quarter of 2018.
The Palms project will include complete renovations of the casino floor and convention space, a new café, two new restaurants, upgraded luxury movie theaters and upgrades to the exterior façade and guest reception areas.
“While investors were expecting some form of Palms capital expenditure announcement, Palace’s $76 million comes as a surprise,” said Chad Beynon of Macquarie Research.
Red Rock also reported second quarter net revenues of $403.5 million – in line with consensus estimates and a nearly 15 percent year-over-year increase, due in part to the acquisition of the Palms. Same-store revenues grew by 2.7 percent.
Adjusted EBITDA checked in at $119.5 million, up slightly from the prior year quarter but $5 million below consensus, also primarily due to the Palms weighing down margins. Net loss for the quarter was $25.9 million.
“Red Rock investors will need to wait until 2019, and potentially second half of 2019 until Red Rock’s true EBITDA and margin potential is fully realized. While there is little doubt these initiatives will help the operator gain share of both Las Vegas Locals and Strip spill-over, in the near term these projects will be a headwind to both free cash flow and EBITDA,” said Beynon, who remained bullish on the company’s positioning.
“As Las Vegas continues to add attractions (convention space, pro sports) and visitation grows, Red Rock offers a Las Vegas Strip experience at a much more reasonable price point,” he said.
Other analysts concurred that short-term noise of the construction would weigh on earnings and margins in the short but would be worth the effort.
“We expect investors to get hung up on the incremental $76 million Palace Station reinvestment, which will effectively keep Palace and Palms subject to construction-related disruptions through the end of 2018,” said Steven M. Wieczynski, an analyst with Stifel. “Although we are believers in both projects over the longer term, we can’t fault investors for growing a little impatient, as the first “clean” quarter has now been pushed out to 2019.”
“That said, we view the near-term headaches as a small price to pay to strengthen the company’s ability to outperform over the longer term,” he continued.
The company also reported strong growth in its Native American segment, growing adjusted EBITDA nearly 13 percent to $22.7 million from its operations in Graton and Gun Lake.
As of June 30, Red Rock had $125.3 million in cash on its balance sheet against total debt $2.57 billion, and a debt to adjusted EBITDA ratio of 4.96 times.
