Wall Street analysts predicted Red Rock Resorts could begin expansion on its newly opened $780 million Durango Casino & Resort as early as a year from now as they touted its initial success.
Company executives hosted several analysts Monday at Durango in southwest Las Vegas. Among them was Carlo Santarelli of Deutsche Bank, who talked about management expecting the property to be profitable from its opening on Dec. 5.
Given what appears to be a successful opening, Santarelli said that points to management moving ahead with Durango’s second phase as quickly as possible, with a groundbreaking during the fourth quarter of 2024 at the earliest.
Santarelli said he expects the 200-room hotel to expand to 600 rooms at a minimum, with a potential for 800 if it’s allowed under the Clark County permitting process. Red Rock executives hope that the completion of the Fontainebleau Las Vegas and Durango in recent weeks will bring more favorable pricing from contractors.
“We believe this phase would also include a doubling of the convention space, additional casino square footage, and more entertainment venues — bowling alleys, movie theaters, and a country-western dance hall,” Santarelli said.
Before that happens, however, the property needs to expand parking.
“The property could use more parking spaces, given strong food and beverage demand, and probably could support more hotel rooms and suites,” said Joseph Greff of J.P. Morgan. “We could see commencement of a phase-two expansion at Durango at the end of 2024, which is probably the earliest anything could get done in any event.”
Red Rock management has been surprised by the younger demographic at Durango, with the 25-35 group showing up on both the casino floor and in the food and beverage outlets, Santarelli said.
Santarelli said another surprise, although somewhat related to demographics, has been the late-night demand at the property, specifically for the food and beverage. As Strip workers head home from shifts, they’re looking for a meal closer to their own neighborhoods.
Given the demographics in and around Durango, with its high mix of Asian residents, table play has been a heavier portion of the gaming-revenue mix relative to most locals properties, Santarelli said.
“About 30% of the nearby adult population is Asian, the segment that is performing well,” Greff noted.
Red Rock Resorts had expected Durango to cannibalize the balance of the portfolio by about 10%. That implies about $80 million of annual Durango EBITDA would come from other Red Rock properties, with Red Rock taking the brunt of the hit, Santarelli said.
“Given the previously noted aggregate return from the project, which management noted to be high teens, over time the implication is that Durango on a standalone basis is targeted to do about $220 million of property EBITDA on the current $780 million investment when fully stabilized,” Santarelli said. “We would not expect this run rate to be achieved until 2025 at the earliest.”
The cannibalization has been in line with management expectations of about 10%, though executives also said that the database is showing incremental visits from Red Rock customers, Santarelli said. “We believe this is fairly positive, given trial early on tends to be heavier.”
David Katz, an analyst with Jefferies Equities Research, said the new resort supports their bullish view on the property and shares of Red Rock Resorts with their buy rating.
“We come away comfortable with our estimates for Durango, based on management’s apparent focus on its detailed positioning and optimistic for the long-term growth trajectory around the Las Vegas locals market for the company,” Katz said.
Management notes its medium-term ROI target is 20%, while profitability should be immediate with a rapid ramp to double-digit returns, Katz said. “In this context, we believe our estimates, which include about $65 million of EBITDA growth in 2024 primarily from Durango and $80 million in 2025 (versus 2023 pre-Durango), are appropriate given the investment.”
Management spent a lot of time discussing its approach to positioning the new property and its high-end food-and- beverage offerings. It has four full-service restaurants, in addition to the 10-outlet food hall.
Management has been surprised by the amount of traffic at the food and beverage venues, most notably the food hall and its 25,000 square-foot area, Santarelli said.
“Red Rock noted that the popularity of the food hall has created parking-lot congestion and a need for expanded parking facilities, a likely requirement prior to moving ahead with a phase-two development,” Santarelli said. “Durango food and beverage outlets are primarily leased, and as such, the ramp period for the restaurants should not weigh on property margins.”
Despite a modest promotional push from a locals-casino competitor prior to the Durango opening, management said it’s too early to tell whether competitors will ramp up promotions in the future, Santarelli said.
The common strategy from competitors is to see what the fallout from the trial at the new competitor looks like before adjusting the promotional strategy, if necessary, Santarelli said. “We believe most competitors, at this stage, are allowing the trial period to play out and evaluating options as to how they want to respond, if at all.”
Barry Jonas with Truist Securities said Durango is “looking like an early slam dunk.” He said it’s faring better than expectations and any cannibalization of existing Red Rock properties could be less than feared. Management reiterated confidence around new housing developments around Summerlin backfilling Red Rock property demand over time, he added.
“Durango’s early success could signal it’s growing the market,” Jonas said. “The property is seeing incremental trips from existing Red Rock Resorts loyalty customers as well as strong card sign-ups from new customers. Management consequently believes that the property is growing the market. Additionally, management now believes Durango could be margin enhancing in the near-term. They previously expected it to be margin dilutive near-term before they would tweak the cost structure post-opening.”
Beyond development beyond the second phase of Durango, Katz said management didn’t share anything new in terms of timing, but remained upbeat about the population and income demographics of the valley.
“Our sense is that of its 441 acres among six sites earmarked for potential development, Inspirada (in west Henderson) is next,” Katz said.
Santarelli that management won’t do multiple projects at the same time, but would instead play it out over an extended period. He also suggested Inspirada near the Anthem residential master plan near the M Resort would be next, one of the highest-net-worth neighborhoods in Las Vegas.
