☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37754
RED ROCK RESORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
47-5081182
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1505 South Pavilion Center Drive, Las Vegas, Nevada
(Address of principal executive offices)
89135
(Zip Code)
(702) 495-3000
Registrant’s telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common Stock, $.01 par value
RRR
NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Property and equipment, net of accumulated depreciation of $1,147,196 and $1,224,081 at September 30, 2021 and December 31, 2020, respectively
1,995,977
2,857,973
Goodwill
195,676
195,676
Intangible assets, net of accumulated amortization of $16,722 and $19,520 at September 30, 2021 and December 31, 2020, respectively
87,578
100,817
Land held for development
262,693
258,042
Investments in joint ventures
6,147
8,162
Native American development costs
29,942
22,149
Other assets, net
74,303
72,478
Total assets
$
3,502,009
$
3,739,954
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
20,474
$
11,208
Accrued interest payable
11,235
20,128
Other accrued liabilities
166,247
146,077
Liabilities related to assets held for sale
3,091
—
Current portion of long-term debt
25,910
22,844
Total current liabilities
226,957
200,257
Long-term debt, less current portion
2,617,009
2,879,163
Other long-term liabilities
39,153
28,499
Payable pursuant to tax receivable agreement
28,035
27,394
Total liabilities
2,911,154
3,135,313
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 100,000,000 shares authorized; none issued and outstanding
—
—
Class A common stock, par value $0.01 per share, 500,000,000 shares authorized; 68,696,282 and 71,228,168 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
687
712
Class B common stock, par value $0.00001 per share, 100,000,000 shares authorized; 45,985,804 and 46,085,804 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
1
1
Additional paid-in capital
286,360
385,579
Retained earnings (accumulated deficit)
60,119
(33,071)
Accumulated other comprehensive loss
(568)
(623)
Total Red Rock Resorts, Inc. stockholders’ equity
346,599
352,598
Noncontrolling interest
244,256
252,043
Total stockholders’ equity
590,855
604,641
Total liabilities and stockholders’ equity
$
3,502,009
$
3,739,954
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization, Basis of Presentation and Significant Accounting Policies
Organization
Red Rock Resorts, Inc. (“Red Rock,” or the “Company”) was formed as a Delaware corporation in 2015 to own an indirect equity interest in and manage Station Casinos LLC (“Station LLC”), a Nevada limited liability company. Station LLC is a gaming, development and management company established in 1976 that owns and operates ten major gaming and entertainment facilities and ten smaller casino properties (three of which are 50% owned) in the Las Vegas regional market.
The Company owns all of the outstanding voting interests in Station LLC and has an indirect equity interest in Station LLC through its ownership of limited liability interests in Station Holdco LLC (“Station Holdco,” and such interests, “LLC Units”), which owns all of the economic interests in Station LLC. At September 30, 2021, the Company held 61% of the economic interests and 100% of the voting power in Station Holdco, subject to certain limited exceptions, and is designated as the sole managing member of both Station Holdco and Station LLC. The Company controls and operates all of the business and affairs of Station Holdco and Station LLC, and conducts all of its operations through these entities.
While the COVID-19 pandemic is ongoing, many of the state-mandated occupancy and other operational restrictions that were first imposed in March 2020 were lifted as of June 1, 2021. Certain operational restrictions have continued, including a rule added in late July 2021 requiring all employees and guests to wear face coverings while indoors in public spaces. At September 30, 2021, the Texas Station, Fiesta Henderson, Fiesta Rancho and Palms Casino Resort (“Palms”) properties have not reopened. The Company will continue to assess the performance of its open properties, as well as the recovery of the Las Vegas market and the economy as a whole, before considering whether to reopen some or all of the remaining properties. The Company has no plans to reopen any of these properties in 2021. In May 2021, the Company entered into an agreement to sell Palms. See Note 2for additional information. As a result of the pandemic, the temporary closure of all of the Company’s properties from March 17, 2020 through June 3, 2020 and the ongoing closure of four of its properties, the Company’s operating results for the nine months ended September 30, 2021 are not comparable with those of the prior period presented.
A subsidiary of Station LLC managed Graton Resort, a casino in northern California, on behalf of a Native American tribe through February 5, 2021. The property was temporarily closed from March 17, 2020 through June 17, 2020 as a result of the COVID-19 pandemic. The management agreement was originally expected to expire in November 2020 but was extended as a result of the pandemic through February 5, 2021, when the tribe terminated the Company’s management role at the facility. Whether the management agreement provides for an additional extension beyond that date is in dispute.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair presentation of the results for the interim periods have been made, and such adjustments were of a normal recurring nature. The interim results reflected in these condensed consolidated financial statements are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Certain amounts in the condensed consolidated financial statements for the prior year have been reclassified to be consistent with the current year presentation.
Principles of Consolidation
Station Holdco and Station LLC are variable interest entities, of which the Company is the primary beneficiary. Accordingly, the Company consolidates the financial position and results of operations of Station LLC and its consolidated subsidiaries and Station Holdco, and presents the interest in Station Holdco not owned by Red Rock within noncontrolling interest in the condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated.
The Company has investments in three50% owned smaller casino properties which are joint ventures accounted for using the equity method.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported and disclosed. Actual results could differ from those estimates.
Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10-K for the year ended December 31, 2020.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board issued amended accounting guidance to simplify the accounting for income taxes. The amendment eliminates certain exceptions related to the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also simplifies other aspects of the accounting for income taxes. The Company adopted this guidance on January 1, 2021. The adoption did not have a material impact on the Company’s financial position or results of operations.
2. Assets Held for Sale
The Company classifies assets as held for sale when a sale is probable of completion within one year and the asset or asset group meets all of the accounting requirements to be classified as held for sale. Assets held for sale and any related liabilities are presented as single asset and liability amounts on the balance sheet with a valuation allowance, if necessary, to reduce the carrying amount of the net assets to the lower of carrying amount or estimated fair value less cost to sell. Estimates are required to determine the fair value and the related disposal costs. The estimated fair value is generally based on market comparables, solicited offers or a discounted cash flow model. In subsequent periods, the valuation allowance may be adjusted based on changes in management’s estimate of fair value less cost to sell. Depreciation and amortization of long-lived assets are not recorded during the period in which such assets are classified as held for sale.
On May 3, 2021, the Company entered into an agreement to sell the equity interests in the entity that holds Palms to a third-party buyer for aggregate consideration of $650.0 million. The sale is anticipated to close in the fourth quarter of 2021. Accordingly, the net assets of Palms that are expected to be disposed were reclassified to held for sale, and the Company recorded an asset impairment charge of $167.8 million to reduce the carrying amount of the disposal group to its estimated fair value less cost to sell.
The carrying amounts of the assets and liabilities held for sale related to Palms are presented below (amounts in thousands):
September 30, 2021
Assets
Cash and cash equivalents
$
22
Restricted cash
4,844
Other current assets
54
Property and equipment
779,705
Intangible assets, net
11,784
Other assets, net
14,717
Valuation allowance on assets held for sale
(167,098)
Assets held for sale
$
644,028
Liabilities
Current liabilities
$
957
Other long-term liabilities
2,134
Liabilities related to assets held for sale
$
3,091
For the three and nine months ended September 30, 2021, Palms generated net revenues of $5.2 million and $14.8 million, respectively, and pretax losses of $3.1 million and $192.3 million, respectively, which included the $167.8 million
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
asset impairment charge. For the three and nine months ended September 30, 2020, Palms generated net revenues of $4.5 million and $52.6 million, respectively, and pretax losses of $19.4 million and $74.1 million, respectively.
In addition to the net assets of Palms presented above, assets held for sale also included an undeveloped land parcel that is expected to be sold within one year, with a carrying amount of $12.6 million at September 30, 2021 and December 31, 2020. In the second quarter of 2021, management determined that the held for sale criteria were no longer met for two parcels of land that were previously classified as held for sale, and the carrying amount of $24.3 million was reclassified to Land held for development at December 31, 2020.
3. Noncontrolling Interest in Station Holdco
As discussed in Note 1, Red Rock holds a controlling interest in and consolidates the financial position and results of operations of Station LLC and its subsidiaries and Station Holdco, and the interests in Station Holdco not owned by Red Rock are presented within noncontrolling interest in the condensed consolidated financial statements. In February 2021, a noncontrolling interest holder unaffiliated with Red Rock exchanged 100,000 LLC Units, together with an equal number of Class B common shares, for cash at the election of the Company, which increased Red Rock’s percentage ownership in Station Holdco. For the nine months ended September 30, 2020, noncontrolling interest holders exchanged approximately 741,000 LLC Units, together with an equal number of Class B common shares, for Class A common shares. No Class B common shares and LLC Units were exchanged during the three months ended September 30, 2021 or 2020.
The ownership of the LLC Units is summarized as follows:
September 30, 2021
December 31, 2020
Units
Ownership %
Units
Ownership %
Red Rock
70,451,465
60.5
%
71,228,168
60.7
%
Noncontrolling interest holders
45,985,804
39.5
%
46,085,804
39.3
%
Total
116,437,269
100.0
%
117,313,972
100.0
%
The Company uses monthly weighted-average LLC Unit ownership to calculate the pretax income or loss and other comprehensive income or loss of Station Holdco attributable to Red Rock and the noncontrolling interest holders. Station Holdco equity attributable to Red Rock and the noncontrolling interest holders is rebalanced, as needed, to reflect LLC Unit ownership at period end.
4. Native American Development
The Company has development and management agreements with the North Fork Rancheria of Mono Indians (the “Mono”), a federally recognized Native American tribe located near Fresno, California, which were originally entered into in 2003. In August 2014, the Mono and the Company entered into the Second Amended and Restated Development Agreement (the “Development Agreement”) and the Second Amended and Restated Management Agreement. Pursuant to those agreements, the Company will assist the Mono in developing and operating a gaming and entertainment facility (the “North Fork Project”) to be located in Madera County, California. The Company purchased a 305-acre parcel of land adjacent to Highway 99 north of the city of Madera (the “North Fork Site”), which was taken into trust for the benefit of the Mono by the Department of the Interior (“DOI”) in February 2013.
As currently contemplated, the North Fork Project is expected to include approximately 2,000 Class III slot machines, approximately 40 table games and several restaurants, and future development costs of the project are expected to be between $350 million and $400 million. Development of the North Fork Project is subject to certain governmental and regulatory approvals, including, without limitation, approval of the management agreement by the Chairman of the National Indian Gaming Commission (“NIGC”).
Under the terms of the Development Agreement, the Company has agreed to arrange the financing for the ongoing development costs and construction of the facility, and has contributed significant financial support to the North Fork Project. Through September 30, 2021, the Company has paid approximately $45.0 million of reimbursable advances to the Mono, primarily to complete the environmental impact study, purchase the North Fork Site and pay the costs of litigation. The advances are expected to be repaid from the proceeds of the project’s financing or from the Mono’s cash flows from the North Fork Project’s operations; however, there can be no assurance that the advances will be repaid. The carrying amount of the advances was reduced to fair value upon the Company’s adoption of fresh-start reporting in 2011. At September 30, 2021, the
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
carrying amount of the advances was $29.9 million. In accordance with the Company’s accounting policy, accrued interest on the advances will not be recognized in income until the carrying amount of the advances has been recovered.
The Company will receive a development fee of 4% of the costs of construction (as defined in the Development Agreement) for its development services, which will be paid upon the commencement of gaming operations at the facility. In March 2018, the Mono submitted a proposed Third Amended and Restated Management Agreement (the “Management Agreement”) to the NIGC. The Management Agreement allows the Company to receive a management fee of 30% of the North Fork Project’s net income. The Management Agreement and the Development Agreement have a term of seven years from the opening of the North Fork Project. The Management Agreement includes termination provisions whereby either party may terminate the agreement for cause, and the Management Agreement may also be terminated at any time upon agreement of the parties. There is no provision in the Management Agreement allowing the tribe to buy-out the agreement prior to its expiration. The Management Agreement provides that the Company will train the Mono tribal members such that they may assume responsibility for managing the North Fork Project upon the expiration of the agreement.
Upon termination or expiration of the Management Agreement and Development Agreement, the Mono will continue to be obligated to repay any unpaid principal and interest on the advances from the Company, as well as certain other amounts that may be due, such as management fees. Amounts due to the Company under the Development Agreement and Management Agreement are secured by substantially all of the assets of the North Fork Project except the North Fork Site. In addition, the Development Agreement and Management Agreement contain waivers of the Mono’s sovereign immunity from suit for the purpose of enforcing the agreements or permitting or compelling arbitration and other remedies.
The timing of this type of project is difficult to predict and is dependent upon the receipt of the necessary governmental and regulatory approvals. There can be no assurance as to when, or if, these approvals will be obtained. The Company currently estimates that construction of the North Fork Project may begin in the next three months and estimates that the North Fork Project would be completed and opened for business approximately 15 to 18 months after construction begins. There can be no assurance, however, that the North Fork Project will be completed and opened within this time frame or at all. The Company expects to assist the Mono in obtaining financing for the North Fork Project once all necessary regulatory approvals have been received and prior to commencement of construction; however, there can be no assurance that the Company will be able to obtain such financing for the North Fork Project on acceptable terms or at all.
The Company has evaluated the likelihood that the North Fork Project will be successfully completed and opened, and has concluded that the likelihood of successful completion is in the range of 75% to 85% at September 30, 2021. The Company’s evaluation is based on its consideration of all available positive and negative evidence about the status of the North Fork Project, including, but not limited to, the status of required regulatory approvals, as well as the progress being made toward the achievement of all milestones and the successful resolution of all litigation and contingencies. There can be no assurance that the North Fork Project will be successfully completed or that future events and circumstances will not change the Company’s estimates of the timing, scope, and potential for successful completion or that any such changes will not be material. In addition, there can be no assurance that the Company will recover all of its investment in the North Fork Project even if it is successfully completed and opened for business.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table summarizes the Company’s evaluation at September 30, 2021 of each of the critical milestones necessary to complete the North Fork Project.
Federally recognized as an Indian tribe by the Bureau of Indian Affairs (“BIA”)
Yes
Date of recognition
Federal recognition was terminated in 1966 and restored in 1983.
Tribe has possession of or access to usable land upon which the project is to be built
The DOI accepted approximately 305 acres of land for the project into trust for the benefit of the Mono in February 2013.
Status of obtaining regulatory and governmental approvals:
Tribal-state compact
A compact was negotiated and signed by the Governor of California and the Mono in August 2012. The California State Assembly and Senate passed Assembly Bill 277 (“AB 277”) which ratified the Compact in May 2013 and June 2013, respectively. Opponents of the North Fork Project qualified a referendum, “Proposition 48,” for a state-wide ballot challenging the legislature’s ratification of the Compact. In November 2014, Proposition 48 failed. The State took the position that the failure of Proposition 48 nullified the ratification of the Compact and, therefore, the Compact did not take effect under California law. In March 2015, the Mono filed suit against the State to obtain a compact with the State or procedures from the Secretary of the Interior under which Class III gaming may be conducted on the North Fork Site. In July 2016, the DOI issued Secretarial procedures (the “Secretarial Procedures”) pursuant to which the Mono may conduct Class III gaming on the North Fork Site.
Approval of gaming compact by DOI
The Compact was submitted to the DOI in July 2013. In October 2013, notice of the Compact taking effect was published in the Federal Register. The Secretarial Procedures supersede and replace the Compact.
Record of decision regarding environmental impact published by BIA
In November 2012, the record of decision for the Environmental Impact Statement for the North Fork Project was issued by the BIA. In December 2012, the Notice of Intent to take land into trust was published in the Federal Register.
BIA accepting usable land into trust on behalf of the tribe
The North Fork Site was accepted into trust in February 2013.
Approval of management agreement by NIGC
In December 2015, the Mono submitted a Second Amended and Restated Management Agreement, and certain related documents, to the NIGC. In July 2016, the Mono received a deficiency letter from the NIGC seeking additional information concerning the Second Amended and Restated Management Agreement. In March 2018, the Mono submitted the Management Agreement and certain related documents to the NIGC. In June 2018, the Mono received a deficiency letter from the NIGC seeking additional information concerning the Management Agreement. In April 2021, the Mono received an issues letter from the NIGC identifying issues to be addressed prior to approval of the Management Agreement. Approval of the Management Agreement by the NIGC is expected to occur following the Mono’s response to the issues letter. The Company believes the Management Agreement will be approved because the terms and conditions thereof are consistent with the provisions of the Indian Gaming Regulatory Act (“IGRA”).
Gaming licenses:
Type
The North Fork Project will include the operation of Class II and Class III gaming, which are allowed pursuant to the terms of the Secretarial Procedures and IGRA, following approval of the Management Agreement by the NIGC.
Number of gaming devices allowed
The Secretarial Procedures allow for the operation of a maximum of 2,000 Class III slot machines at the facility during the first two years of operation and thereafter up to 2,500 Class III slot machines. There is no limit on the number of Class II gaming devices that the Mono can offer.
Agreements with local authorities
The Mono has entered into memoranda of understanding with the City of Madera, the County of Madera and the Madera Irrigation District under which the Mono agreed to pay one-time and recurring mitigation contributions, subject to certain contingencies. The memoranda of understanding have all been amended to restructure the timing of certain payments due to delays in the development of the North Fork Project.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Following is a discussion of certain unresolved legal matters related to the North Fork Project.
Stand Up for California! v. Brown. In March 2013, Stand Up for California! and Barbara Leach, a local resident (collectively, the “Stand Up” plaintiffs), filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against California Governor Edmund G. Brown, Jr., alleging that Governor Brown violated the California constitutional separation-of-powers doctrine when he concurred in the Secretary of the Interior’s determination that gaming on the North Fork Site would be in the best interest of the Mono and not detrimental to the surrounding community (the “North Fork Determination”). The complaint sought to vacate and set aside the Governor’s concurrence. Plaintiffs’ complaint was subsequently amended to include a challenge to the constitutionality of AB 277. The Mono intervened as a defendant in the lawsuit. In March 2014, the court dismissed plaintiffs’ amended complaint, which dismissal was appealed by plaintiffs. In December 2016, the California Court of Appeal, Fifth Appellate District (the “Fifth District Court of Appeal”) ruled in favor of the Stand Up plaintiffs concluding that Governor Brown exceeded his authority in concurring in the North Fork Determination. The Mono and the State filed petitions in the Supreme Court of California seeking review of the Fifth District Court of Appeal’s decision, which petitions for review were granted in March 2017. The Supreme Court of California deferred additional briefing or other action in this matter pending consideration and disposition of a similar issue in United Auburn Indian Community of Auburn Rancheria v. Brown. On August 31, 2020 the Supreme Court of California announced its decision in the United Auburn case, concluding that Governor Brown’s concurrence in that case did not exceed his authority. On October 14, 2020, the Supreme Court of California transferred the Stand Up case back to the Fifth District Court of Appeal with directions to vacate its December 2016 decision against the Mono and the State and to reconsider the matter in light of the United Auburn decision. The Fifth District Court of Appeal permitted supplemental briefing in connection with its reconsideration of the matter, which briefing was completed on February 10, 2021. In May 2021, the Fifth District Court of Appeal ruled in favor of the Stand Up plaintiffs, concluding that the referendum which rejected the California legislature’s ratification of the North Fork compact also impliedly and retroactively annulled Governor Brown’s concurrence in the North Fork Determination. In June 2021, the Mono and the State filed petitions in the Supreme Court of California seeking review of the Fifth District Court of Appeal’s decision. In September 2021, the Supreme Court of California denied the Mono’s and the State’s petition for review.
Picayune Rancheria of Chukchansi Indians v. Brown. In March 2016, Picayune Rancheria of Chukchansi Indians (“Picayune”) filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against Governor Edmund G. Brown, Jr., alleging that the referendum that invalidated the Compact also invalidated Governor Brown’s concurrence with the North Fork Determination. The complaint seeks to vacate and set aside the Governor’s concurrence. In July 2016, the court granted the Mono’s application to intervene and the Mono filed a demurrer seeking to dismiss the case. In November 2016, the district court dismissed Picayune’s complaint, but the court subsequently vacated its ruling and stayed further proceedings based on the December 2016 decision by the Fifth District Court of Appeal in Stand Up for California! v. Brown. In September 2021, the stay of this case which had been in effect since December 2016 ended as a result of the Supreme Court of California’s denial of the Mono’s and the State’s petition for review in Stand Up for California! v. Brown.
Stand Up for California! et. al. v. United States Department of the Interior. In November 2016, Stand Up for California! and other plaintiffs filed a complaint in the United States District Court for the Eastern District of California (the “District Court”) alleging that the DOI’s issuance of Secretarial Procedures for the Mono was subject to the National Environmental Policies Act (“NEPA”) and the Clean Air Act (the “CAA”), and violate the Johnson Act. The complaint further alleges violations of the Freedom of Information Act and the Administrative Procedures Act. The DOI filed its answer to the complaint in February 2017 denying plaintiffs’ claims and asserting certain affirmative defenses. A motion to intervene filed by the Mono was granted in March 2017. Plaintiffs subsequently filed a motion to stay the proceedings in May 2017. Briefing on the contested stay request concluded in July 2017 and briefing on cross-motions for summary judgment was concluded in September 2017. On July 18, 2018, the court denied plaintiffs’ motion to stay the proceedings and granted the summary judgment motions of the Mono and the federal defendants. On September 11, 2018, plaintiffs filed a notice of appeal of the District Court decision with the United States Court of Appeals for the Ninth Circuit. The briefing of the issues on appeal was completed on June 13, 2019. The Ninth Circuit heard oral argument on February 11, 2020 and in May 2020 rendered a decision affirming the grant of summary judgment on the Johnson Act issues and reversing and remanding for further proceedings the portion of the summary judgment decision relating to NEPA and the CAA. The briefing on the portion of the case that was reversed and remanded was completed in January 2021 and on August 5, 2021, the District Court denied plaintiffs’ renewed motion for summary judgment and granted the Mono’s renewed motions for summary judgment. The deadline to appeal the District Court’s grant of summary judgment in favor of the Mono has passed without a notice of appeal having been filed.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
5. Other Accrued Liabilities
Other accrued liabilities consisted of the following (amounts in thousands):
September 30, 2021
December 31, 2020
Contract and customer-related liabilities:
Rewards Program liability
$
13,729
$
17,465
Advance deposits and future wagers
17,984
11,854
Unpaid wagers, outstanding chips and other customer-related liabilities
21,043
18,248
Other accrued liabilities:
Accrued payroll and related
49,057
41,026
Accrued gaming and related
23,371
20,316
Construction payables and equipment purchase accruals
13,512
3,710
Operating lease liabilities, current portion
3,176
2,936
Interest rate swaps
—
11,758
Other
24,375
18,764
$
166,247
$
146,077
6. Long-term Debt
Long-term debt consisted of the following indebtedness of Station LLC (amounts in thousands):
September 30, 2021
December 31, 2020
Term Loan B Facility due February 7, 2027, interest at a margin above LIBOR or base rate (2.50% at September 30, 2021 and December 31, 2020), net of unamortized discount and deferred issuance costs of $26.1 million and $29.5 million at September 30, 2021 and December 31, 2020, respectively
$
1,466,392
$
1,470,944
Term Loan A Facility due February 7, 2025, interest at a margin above LIBOR or base rate (1.59% and 1.90% at September 30, 2021 and December 31, 2020, respectively), net of unamortized discount and deferred issuance costs of $1.7 million and $2.2 million at September 30, 2021 and December 31, 2020, respectively
173,043
179,712
Revolving Credit Facility due February 7, 2025, interest at a margin above LIBOR or base rate
—
—
4.50% Senior Notes due February 15, 2028, net of unamortized discount and deferred issuance costs of $6.9 million and $7.6 million at September 30, 2021 and December 31, 2020, respectively
683,937
683,257
5.00% Senior Notes due October 1, 2025, net of unamortized deferred issuance costs of $1.8 million and $4.1 million at September 30, 2021 and December 31, 2020, respectively
278,486
526,260
Other long-term debt, weighted-average interest of 3.82% and 3.83% at September 30, 2021 and December 31, 2020, respectively, net of unamortized discount and deferred issuance costs of $0.3 million and $0.4 million at September 30, 2021 and December 31, 2020, respectively
41,061
41,834
Total long-term debt
2,642,919
2,902,007
Current portion of long-term debt
(25,910)
(22,844)
Total long-term debt, net
$
2,617,009
$
2,879,163
Credit Facility
Station LLC’s credit facility consists of the Term Loan B Facility, the Term Loan A Facility and the Revolving Credit Facility (collectively, the “Credit Facility”). As last amended in February 2020, the Term Loan B Facility bears interest at a rate per annum, at Station LLC’s option, equal to either LIBOR plus 2.25% or base rate plus 1.25%, and the Term Loan A Facility and Revolving Credit Facility bear interest at a rate per annum, at Station LLC’s option, equal to either LIBOR plus an amount ranging from 1.50% to 1.75% or base rate plus an amount ranging from 0.50% to 0.75%, depending on Station LLC’s consolidated total leverage ratio. The Credit Facility contains a number of customary covenants, including requirements that
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Station LLC maintain throughout the term of the Credit Facility and measured as of the end of each quarter, an interest coverage ratio of not less than 2.50 to 1.00 and a maximum consolidated total leverage ratio, with step-downs over the term of the Credit Facility, ranging from 6.50 to 1.00 at September 30, 2021 to 5.25 to 1.00 at December 31, 2023 and thereafter. A breach of the financial ratio covenants shall only become an event of default under the Term Loan B Facility if the lenders within the Term Loan A Facility and the Revolving Credit Facility take certain affirmative actions after the occurrence of a default of such financial ratio covenants. Management believes the Company was in compliance with all applicable covenants at September 30, 2021.
Revolving Credit Facility
At September 30, 2021, Station LLC’s borrowing availability under its Revolving Credit Facility, subject to continued compliance with the terms of the Credit Facility, was $1.0 billion, which was net of $29.4 million in outstanding letters of credit and similar obligations.
Senior Notes
On February 22, 2021, Station LLC redeemed $250.0 million in aggregate principal amount of its 5.00% Senior Notes at a redemption price equal to 102.50% of the principal amount of such notes. Following the redemption, $280.3 million in aggregate principal amount of 5.00% Senior Notes remained outstanding. The partial redemption was funded using borrowings under the Revolving Credit Facility and cash on hand. Station LLC recognized an $8.1 million loss on debt extinguishment related to the 5.00% Senior Notes redemption, comprising a write-off of $1.8 million in unamortized deferred issuance costs related to the extinguished debt and a redemption premium of $6.3 million.
On October 29, 2021, Station LLC redeemed the remaining $280.3 million in aggregate principal amount of its 5.00% Senior Notes at a redemption price equal to 101.25% of the principal amount of such notes. The redemption was funded using borrowings under the Revolving Credit Facility and cash on hand. Station LLC will recognize a $5.3 million loss on debt extinguishment related to the 5.00% Senior Notes redemption, comprising a write-off of $1.8 million in unamortized deferred issuance costs related to the extinguished debt and a redemption premium of $3.5 million.
7. Derivative Instruments
The Company’s objective when using derivative instruments is to manage its exposure to interest rate movements. To accomplish this objective, the Company may use interest rate swaps as a part of its cash flow hedging strategy. The Company does not designate derivative financial instruments in cash flow hedging relationships nor use them for trading or speculative purposes.
Station LLC was party to interest rate swap agreements under which it received variable-rate payments in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying notional amount, until such agreements expired on July 8, 2021.
Derivative instruments are presented at fair value, exclusive of accrued interest, in Other accrued liabilities on the Condensed Consolidated Balance Sheet as of December 31, 2020, and the Company does not offset derivative asset and liability positions when interest rate swap agreements are held with the same counterparty. Changes in the fair values of derivative instruments not designated in hedge accounting relationships and the related pretax gains and losses are presented in Change in fair value of derivative instruments in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the period in which the change occurs.
Certain of Station LLC’s interest rate swaps were previously designated in cash flow hedging relationships until their dedesignation in June 2017. Accordingly, associated cumulative deferred net gains, which were previously recognized in accumulated other comprehensive loss, were amortized as a reduction of interest expense through July 2020 as the hedged interest payments occurred. During the three and nine months ended September 30, 2020, $0.1 million and $1.4 million, respectively, in deferred net gains were reclassified from accumulated other comprehensive loss to Interest expense, net in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
8. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Information about the Company’s assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, is presented below (amounts in thousands):
September 30, 2021
December 31, 2020
Level of Fair Value Hierarchy
Liabilities
Interest rate swaps
$
—
$
11,758
Level 2 - Significant unobservable inputs
The fair values of Station LLC’s interest rate swaps were determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the interest rate swaps. This analysis reflected the contractual terms of the interest rate swaps, including the period to maturity, and used observable market-based inputs, including forward interest rate curves. Station LLC incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the counterparty’s nonperformance risk in the fair value measurement. The Company had no financial assets measured at fair value on a recurring basis at September 30, 2021 or December 31, 2020.
Fair Value of Long-term Debt
The estimated fair value of Station LLC’s long-term debt compared with its carrying amount is presented below (amounts in millions):
September 30, 2021
December 31, 2020
Aggregate fair value
$
2,682
$
2,936
Aggregate carrying amount
2,643
2,902
The estimated fair value of Station LLC’s long-term debt is based on quoted market prices from various banks for similar instruments, which is considered a Level 2 input under the fair value measurement hierarchy.
9. Stockholders’ Equity
Net Income (Loss) Attributable to Red Rock Resorts, Inc. and Transfers from (to) Noncontrolling Interests
The table below presents the effect on Red Rock Resorts, Inc. stockholders’ equity from net income (loss) and transfers from (to) noncontrolling interests (amounts in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Net income (loss) attributable to Red Rock Resorts, Inc.
$
71,248
$
43,634
$
93,184
$
(180,107)
Transfers from (to) noncontrolling interests:
Exchanges of noncontrolling interests
—
—
598
4,412
Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco
22,243
219
19,706
(2,891)
Net transfers from noncontrolling interests
22,243
219
20,304
1,521
Change from net income (loss) attributable to Red Rock Resorts, Inc. and net transfers from noncontrolling interests
$
93,491
$
43,853
$
113,488
$
(178,586)
Dividends
During the three and nine months ended September 30, 2021 and the three months ended September 30, 2020, the Company paid no dividends. In May 2020, the Company announced that its board of directors had suspended the payment of dividends for the remainder of 2020, and the suspension of dividend payments will continue until further notice. In the first quarter of 2020, the Company declared and paid a cash dividend of $0.10 per share of Class A common stock.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Equity Repurchase Program
In February 2019, the Company’s board of directors approved an equity repurchase program authorizing the repurchase of up to an aggregate of $150 million of its Class A common stock. In February 2021, the Company’s board of directors extended its approval of the equity repurchase program through December 31, 2022. In September 2021, the board of directors approved an increase in the aggregate amount authorized under the equity repurchase program to $300 million. During the three and nine months ended September 30, 2021, the Company repurchased 2,062,681 and 3,127,711 shares, respectively, of its Class A common stock for an aggregate of $85.5 million and $123.3 million, respectively, and a weighted average price per share of $41.44 and $39.42, respectively, in open market transactions. At September 30, 2021, the remaining amount authorized for repurchases under the program was $173.9 million.
10. Share-based Compensation
The Company maintains an equity incentive plan designed to attract, retain and motivate employees and align the interests of those individuals with the interests of the Company. A total of 23.2 million shares of Class A common stock are reserved for issuance under the plan, of which approximately 13.0 million shares were available for issuance at September 30, 2021.
The following table presents information about the Company’s share-based compensation awards:
(a)Stock options exercised included 632,493 options that were not converted into shares due to net share settlements to cover the aggregate exercise price and employee withholding taxes.
The Company recognized share-based compensation expense of $3.3 million and $9.4 million for the three and nine months ended September 30, 2021, respectively, and $0.6 million and $8.3 million for the three and nine months ended September 30, 2020, respectively. At September 30, 2021, unrecognized share-based compensation cost was $26.8 million, which is expected to be recognized over a weighted-average period of 2.7 years.
11. Income Taxes
Red Rock is a corporation and pays corporate federal, state and local taxes on its income, primarily pass-through income from Station Holdco based upon Red Rock’s economic interest held in Station Holdco. Station Holdco is a partnership for income tax reporting purposes. Station Holdco’s members, including the Company, are liable for federal, state and local income taxes based on their respective share of Station Holdco’s pass-through taxable income.
The Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates the estimate of the annual effective tax rate and makes necessary cumulative adjustments to the total tax provision or benefit. The current taxes are estimated for the period and the balance sheet is adjusted to reflect such taxes currently payable or receivable. The remaining tax provision or benefit is recorded as deferred taxes.
The Company’s effective tax rate for the three and nine months ended September 30, 2021 was 0.3% and 0.7%, respectively, including discrete items, as compared to 0.0% and (102.0)% for the three and nine months ended September 30, 2020, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2021 as compared to the 21% statutory rate was primarily impacted by a full valuation allowance established against the deferred tax assets (“DTAs”). Other items impacting the effective tax rate include a rate benefit attributable to the fact that Station Holdco operates
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
as a limited liability company which is not subject to federal income tax. Accordingly, the Company is not taxed on the portion of Station Holdco’s income attributable to noncontrolling interests. In addition, state income taxes do not have a significant impact on the Company's effective rate. Station Holdco operates in Nevada and California. Nevada does not impose a state income tax and the Company's activities in California result in minimal state income tax.
As a result of the Company’s 2016 initial public offering (“IPO”) and certain reorganization transactions, the Company recorded a net deferred tax asset resulting from the outside basis difference of its interest in Station Holdco. The Company also recorded a DTA for its liability related to payments to be made pursuant to the tax receivable agreement (“TRA”) representing 85% of the tax savings the Company expects to realize from the amortization deductions associated with the step up in the basis of depreciable assets under Section 754 of the Internal Revenue Code. In addition, the Company has recorded DTAs related to tax attributes including net operating losses, interest limitations and tax credits.
The Company considers both positive and negative evidence when measuring the need for a valuation allowance. A valuation allowance is not required to the extent that, in management’s judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not that the Company’s deferred tax assets will be realized. As a result of the economic downturn and uncertainty caused by the COVID-19 pandemic on its current operating results and the considerable uncertainty that remains in the future, the Company determined it was more likely than not that the deferred tax assets will not be realized.
Historically, the Company recorded a full valuation allowance on the DTA related only to the LLC Units issued in the IPO and reorganization transactions as the DTA relating to those units is not expected to be realized unless the Company disposes of its investment in Station Holdco. The Company recognizes changes to the valuation allowance through the provision for income tax or other comprehensive income, as applicable, and at September 30, 2021 and December 31, 2020, the valuation allowance was $147.3 million and $160.5 million, respectively.
The Company recorded $2.0 million of unrecognized tax benefits (“UTB”) as of September 30, 2021 and no UTB-related interest and penalty expense due to net operating losses. Further, the Company does not believe that it has any tax positions for which it is reasonably possible that it will be required to record a significant liability for UTBs within the next twelve months.
The Company files annual income tax returns for Red Rock and Station Holdco in the U.S. federal jurisdiction and California. The Internal Revenue Service (“IRS”) has concluded its examination of Red Rock for the 2016 tax year. Station Holdco has also concluded examination for the 2016 tax year and is currently under examination by the IRS for the 2017 tax year. The Company regularly assesses the likelihood of adverse outcomes resulting from any examinations to determine the adequacy of the Company’s provision for income taxes. The results of the 2016 audit adjustments were reflected as a reduction in carryforward net operating loss, deferred tax asset and corresponding valuation allowance for the three months ended September 30, 2021.
Tax Receivable Agreement
In connection with the IPO, the Company entered into the TRA with certain owners who held LLC Units prior to the IPO. In the event that such parties exchange any or all of their LLC Units for Class A common stock or cash, at the election of the Company, the TRA requires the Company to make payments to such holders for 85% of the tax benefits realized by the Company as a result of such exchange. The Company expects to realize these tax benefits based on current projections of taxable income. The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such benefits.
At September 30, 2021 and December 31, 2020, the Company’s liability under the TRA was $28.0 million and $27.4 million, respectively, of which $9.0 million was payable to entities related to Frank J. Fertitta III, the Company’s Chairman of the Board and Chief Executive Officer, and Lorenzo J. Fertitta, Vice Chairman of the Board and a vice president of the Company. For the nine months ended September 30, 2021 and 2020, exchanges of LLC Units resulted in increases in the amount payable under the TRA liability of $0.6 million and $2.3 million, respectively, which were recorded through stockholders’ equity. No LLC Units were exchanged during the three months ended September 30, 2021 or 2020.
The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Company generates each year and the tax rate then applicable. The payment obligations under the TRA are Red Rock’s obligations and are not obligations of Station Holdco or Station LLC. Payments are generally due within a specified period of time following the filing of the Company’s annual tax return and interest on such payments will accrue from the original due date (without extensions) of the income tax return until the date paid. Payments not
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
made within the required period after the filing of the income tax return generally accrue interest at a rate of LIBOR plus 5.00%.
The TRA will remain in effect until all such tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA. The TRA will also terminate if the Company breaches its obligations under the TRA or upon certain mergers, asset sales or other forms of business combinations, or other changes of control. If the Company exercises its right to terminate the TRA, or if the TRA is terminated early in accordance with its terms, the Company’s payment obligations would be accelerated based upon certain assumptions, including the assumption that the Company would have sufficient future taxable income to utilize such tax benefits, and may substantially exceed the actual benefits, if any, the Company realizes in respect of the tax attributes subject to the TRA.
12. Earnings (Loss) Per Share
Basic earnings or loss per share is calculated by dividing net income or loss attributable to Red Rock by the weighted-average number of shares of Class A common stock outstanding during the period. The calculation of diluted earnings or loss per share gives effect to all potentially dilutive shares, including shares issuable pursuant to outstanding stock options and nonvested restricted shares of Class A common stock, based on the application of the treasury stock method, and outstanding Class B common stock that is exchangeable, along with an equal number of LLC Units, for Class A common stock, based on the application of the if-converted method. Dilutive shares included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2021 and the three months ended September 30, 2020 represent outstanding shares of Class B common stock, nonvested restricted shares of Class A common stock and outstanding stock options. All other potentially dilutive securities have been excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive. For the nine months ended September 30, 2020, the Company incurred a net loss. As a result, all potentially dilutive securities were excluded from the calculation of diluted loss per share for those periods because their inclusion would have been antidilutive.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings (loss) per share is presented below (amounts in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Net income (loss)
$
117,936
$
72,044
$
154,723
$
(224,173)
Less: net (income) loss attributable to noncontrolling interests
(46,688)
(28,410)
(61,539)
44,066
Net income (loss) attributable to Red Rock, basic
71,248
43,634
93,184
(180,107)
Effect of dilutive securities
36,882
22,439
48,614
—
Net income (loss) attributable to Red Rock, diluted
$
108,130
$
66,073
$
141,798
$
(180,107)
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Weighted average shares of Class A common stock outstanding, basic
69,042
70,824
69,988
70,436
Effect of dilutive securities
47,394
46,220
47,244
—
Weighted average shares of Class A common stock outstanding, diluted
116,436
117,044
117,232
70,436
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The calculation of diluted earnings (loss) per share of Class A common stock excluded the following potentially dilutive shares that were outstanding at September 30, 2021 and 2020, respectively, because their inclusion would have been antidilutive (amounts in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Shares of Class B common stock and LLC Units exchangeable for Class A shares
—
—
—
46,086
Stock options
—
6,591
1,496
6,591
Unvested restricted shares of Class A common stock
—
156
—
371
Shares of Class B common stock are not entitled to share in the earnings of the Company and are not participating securities. Accordingly, earnings per share of Class B common stock under the two-class method has not been presented.
13. Commitments and Contingencies
The Company and its subsidiaries are defendants in various lawsuits relating to routine matters incidental to their business. No assurance can be provided as to the outcome of any legal matters and litigation inherently involves significant risks. In the opinion of management, such litigation is not expected to have a material effect on the Company's financial condition, results of operations and cash flows.
14. Segments
The Company views each of its Las Vegas casino properties and each of its Native American management arrangements as individual operating segments. The Company aggregates all of its Las Vegas operating segments into one reportable segment because all of its Las Vegas properties offer similar products, cater to the same customer base, have the same regulatory and tax structure, share the same marketing techniques, are directed by a centralized management structure and have similar economic characteristics. The Company also aggregates its Native American management arrangements into one reportable segment.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The Company utilizes Adjusted EBITDA as its primary performance measure. The Company’s segment information and a reconciliation of net income (loss) to Adjusted EBITDA are presented below (amounts in thousands).
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Net revenues
Las Vegas operations:
Casino
$
288,983
$
239,866
$
853,133
$
523,741
Food and beverage
64,794
45,855
176,551
149,171
Room
39,519
22,068
100,613
67,635
Other (a)
19,200
12,792
50,935
37,376
Management fees
198
184
689
327
Las Vegas operations net revenues
412,694
320,765
1,181,921
778,250
Native American management:
Management fees
205
30,718
8,292
55,872
Reportable segment net revenues
412,899
351,483
1,190,213
834,122
Corporate and other
1,870
1,695
5,332
4,914
Net revenues
$
414,769
$
353,178
$
1,195,545
$
839,036
Net income (loss)
$
117,936
$
72,044
$
154,723
$
(224,173)
Adjustments
Depreciation and amortization
34,025
57,297
124,440
173,755
Share-based compensation
3,325
633
9,439
8,275
Write-downs and other charges, net
463
1,400
2,158
25,673
Asset impairment
—
—
167,777
—
Losses from assets held for sale
2,990
—
4,431
—
Interest expense, net
25,311
29,798
78,192
99,836
(Gain) loss on extinguishment/modification of debt, net
(a)Includes tenant lease revenue of $4.7 million and $11.4 million for the three and nine months ended September 30, 2021, respectively, and $2.9 million and $10.4 million for the three and nine months ended September 30, 2020, respectively. Revenue from tenant leases is accounted for under the lease accounting guidance and included in Other revenues in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
(b)Adjusted EBITDA includes net income (loss) plus depreciation and amortization, share-based compensation, write-downs and other charges, net, asset impairment, losses from assets held for sale, interest expense, net, (gain) loss on extinguishment/modification of debt, net, change in fair value of derivative instruments, provision for income tax and other.
The following discussion and analysis of the financial condition and results of operations of Red Rock Resorts, Inc. (“we,” “our,” “us,” “Red Rock” or the “Company”) should be read in conjunction with our condensed consolidated financial statements and related notes (the “Condensed Consolidated Financial Statements”) included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
Red Rock was formed as a Delaware corporation in 2015 to own an indirect equity interest in, and manage, Station Casinos LLC (“Station LLC”), a Nevada limited liability company. Station LLC is a gaming, development and management company established in 1976 that owns and operates ten major gaming and entertainment facilities and ten smaller casino properties (three of which are 50% owned) in the Las Vegas regional market. Four of our major properties had not reopened as of September 30, 2021, as discussed within Impact of COVID-19 below. A subsidiary of Station LLC managed Graton Resort in northern California on behalf of a Native American tribe through February 5, 2021.
We own all of the outstanding voting interests in Station LLC and have an indirect equity interest in Station LLC through our ownership of limited liability company interests in Station Holdco LLC (“Station Holdco,” and such interests, “LLC Units”), which owns all of the economic interests in Station LLC. At September 30, 2021, we held 61% of the economic interests and 100% of the voting power in Station Holdco, subject to certain limited exceptions, and we are designated as the sole managing member of both Station Holdco and Station LLC. We control and operate all of the business and affairs of Station Holdco and Station LLC, and conduct all of our operations through these entities. Our only material assets are our ownership interests in Station LLC and Station Holdco, other than tax-related assets and liabilities.
Our Condensed Consolidated Financial Statements reflect the consolidation of Station LLC and its consolidated subsidiaries, and Station Holdco. The financial position and results of operations attributable to LLC Units we do not own are reported separately as noncontrolling interest.
Our principal source of revenue and operating income is gaming, and our non-gaming offerings include restaurants, hotels and other entertainment amenities. Approximately 80% to 85% of our casino revenue is generated from slot play. The majority of our revenue is cash-based and as a result, fluctuations in our revenues have a direct impact on our cash flows from operations. Because our business is capital intensive, we rely heavily on the ability of our properties to generate operating cash flow to repay debt financing and fund capital expenditures.
Information about our results of operations is included herein and in the notes to our Condensed Consolidated Financial Statements.
Impact of COVID-19
During 2020, our business was negatively impacted by the COVID-19 pandemic, including the temporary state-mandated closure of all of our properties from March 17, 2020 through June 3, 2020. Although the pandemic is ongoing, on June 1, 2021, many of the state-mandated occupancy and other operational restrictions were lifted. Certain operational restrictions have continued, including a rule added in late July 2021 requiring all employees and guests to wear face coverings while indoors in public spaces.
At September 30, 2021, our Texas Station, Fiesta Rancho, Fiesta Henderson and Palms Casino Resort (“Palms”) properties had not reopened. We will continue to assess the performance of the reopened properties, as well as the recovery of the Las Vegas market and the economy as a whole, before considering whether to reopen some or all of the remaining properties. In May 2021, we entered into an agreement to sell Palms for $650 million. See Note 2 to the Condensed Consolidated Financial Statements for additional information.
In addition, Graton Resort, located in Northern California, which we previously managed, was temporarily closed from March 17, 2020 through June 17, 2020 as a result of the COVID-19 pandemic. The Graton Resort management agreement was originally expected to expire in November 2020 but was extended as a result of the pandemic through February 5, 2021, when the tribe terminated the Company’s management role at the facility.
Subsequent to the reopening of most of our properties in June 2020, we have seen favorable customer trends which continued throughout the third quarter of 2021, including strong and consistent visitation from our younger demographic, increased spend per visit, more time spent on gaming devices and the continued return of our core customers. These positive trends, in combination with business optimization and cost reduction measures implemented in the second quarter of 2020, continue to drive strong operating results since our reopening. However, we cannot predict whether these trends will continue, nor can we predict the extent to which the impacts of the COVID-19 pandemic on the United States and Las Vegas economies may affect our business in the future.
The United States economy and the economy in the Las Vegas metropolitan area have been negatively affected by the unprecedented impacts of the COVID-19 pandemic. A significant portion of our business is dependent upon customers who live and/or work in the Las Vegas metropolitan area. In September 2021, the unemployment rate in the Las Vegas metropolitan area was 7.4%, down from a high of 34% in April 2020. Statewide, the unemployment rate declined to 7.5% in September 2021, as compared to 30% in April 2020. Despite the economic impacts of the COVID-19 pandemic, the median price of an existing single-family home in Las Vegas was up 20.5% for September 2021 as compared to the prior year. This continues a trend of significant improvement in home values in Las Vegas since 2012, with the median home price reaching another all-time high of $406,500 in September 2021 according to the Las Vegas Realtors®. In addition, Las Vegas remains one of the fastest growing metropolitan areas in the United States, posting a 1.5% growth rate in 2020. Due to uncertainties surrounding the ongoing pandemic, we cannot predict whether the recovery in unemployment and the positive trends in housing prices and population growth in the Las Vegas area will continue.
As a result of the COVID-19 pandemic, the mandatory closure of all of our properties from March 17, 2020 through June 3, 2020, and the ongoing closure of four of our properties, our operating results for the nine months ended September 30, 2021 and those of the prior year period are not comparable.
Key Performance Indicators
We use certain key indicators to measure our performance.
Gaming revenue measures:
•Slot handle and table game drop are measures of volume. Slot handle represents the dollar amount wagered in slot machines, and table game drop represents the total amount of cash and net markers issued that are deposited in table game drop boxes.
•Win represents the amount of wagers retained by us.
•Hold represents win as a percentage of slot handle or table game drop.
As our customers are primarily Las Vegas residents, our hold percentages are generally consistent from period to period. Notwithstanding the impact of the COVID-19 pandemic, fluctuations in our casino revenue are primarily due to the volume and spending levels of customers at our properties.
Food and beverage revenue measures:
•Average guest check is a measure of food sales volume and product offerings at our restaurants, and represents the average amount spent per customer visit.
•Number of guests served is an indicator of volume.
Room revenue measures:
•Occupancy is calculated by dividing occupied rooms, including complimentary rooms, by rooms available.
•Average daily rate (“ADR”) is calculated by dividing room revenue, which includes the retail value of complimentary rooms, by rooms occupied, including complimentary rooms.
•Revenue per available room is calculated by dividing room revenue by rooms available.
We view each of our Las Vegas casino properties as an individual operating segment. We aggregate all of our Las Vegas operating segments into one reportable segment because all of our Las Vegas properties offer similar products, cater to
the same customer base, have the same regulatory and tax structure, share the same marketing programs, are directed by a centralized management structure and have similar economic characteristics. We also aggregate our Native American management arrangements into one reportable segment. The results of operations for our Native American management segment are discussed in the section entitled “Management Fee Revenue” below and the results of our Las Vegas operations are discussed in the remaining sections below.
Net Revenues. Net revenues for the three and nine months ended September 30, 2021 were higher than the comparable prior year periods as we continued to recover from the negative effects of the COVID-19 pandemic. As described above, all of our properties were closed from March 17, 2020 through June 3, 2020. Net revenues were higher across all revenue categories except management fee revenue, despite the continuation of the pandemic and the ongoing closure of four of our properties.
Operating Income. For the three and nine months ended September 30, 2021, our operating income was $142.9 million and $240.3 million, respectively. Our strong performance and the overall customer trends for the current year periods are consistent with the trends we have seen since our reopening in June 2020. For the nine months ended September 30, 2021, our operating income was negatively impacted by a $167.8 million asset impairment charge associated with the pending sale of Palms, which is expected to be completed before the end of 2021. For the three and nine months ended September 30, 2020, our operating income was $100.9 million and $10.0 million, respectively, as all of our properties were closed from March 17, 2020 through June 3, 2020 and subject to state-mandated occupancy, social distancing and other restrictions thereafter. Additional information about factors impacting our operating income is discussed below.
Casino. Casino revenue increased by 20.5% and casino expense increased by 23.1% for the three months ended September 30, 2021 as compared to the prior year period due to increased volume across all major categories of casino operations. Slot handle increased by 18.6%, table games drop increased by 9.0%, and race and sports write increased by 9.3%. The increase in casino expense for the three months ended September 30, 2021 was commensurate with the increased casino volume and included higher gaming taxes, employee costs and promotions.
For the nine months ended September 30, 2021, casino revenue and casino expense were higher than the comparable prior year period, as all of our properties were closed for part of the first quarter of 2020 and most of the second quarter of 2020. Subsequent to reopening on June 4, 2020, the higher revenue and volume we have experienced across all categories of casino operations was a result of strong and consistent visitation from our younger demographic and the continued return of our core customers. Slot handle increased by 51.6%, table games drop increased by 34.2%, and race and sports write increased by 80.3%. Casino expenses for the nine months ended September 30, 2021 were higher than the prior year period commensurate with the higher revenues, primarily due to gaming taxes.
Food and Beverage. Food and beverage includes revenue and expenses from our restaurants, bars and catering. For the three months ended September 30, 2021, food and beverage revenue increased by 41.3% and food and beverage expense increased by 28.6%, as compared to the prior year period, primarily due to the easing of state-mandated occupancy and other operational restrictions, which has had a positive impact on our food and beverage operations. The number of restaurant guests served increased by 29.2% and the average guest check increased by 11.5%.
For the nine months ended September 30, 2021, food and beverage revenue was higher than the prior year period, as all of our properties were closed for part of the first quarter of 2020 and most of the second quarter of 2020. Since June 4, 2020, all of our restaurants at our open properties are operating, with the exception of the buffets, which we expect to remain closed. Food and beverage expenses decreased during the nine months ended September 30, 2021 as compared to the prior year period, resulting from the absence of buffet expenses and related employee costs. The number of restaurant guests served increased by 42.7% and the average guest check increased by 6.7%, excluding the buffets.
Room. Information about our hotel operations is presented below:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Occupancy
81.1
%
61.1
%
74.5
%
70.4
%
Average daily rate
$
153.61
$
105.86
$
143.27
$
120.55
Revenue per available room
$
124.50
$
64.67
$
106.66
$
84.86
For the three months ended September 30, 2021, room revenue increased by 79.1% and room expense increased by 35.7%, as compared to the prior year period. Our room revenue has been increasing as domestic travel and demand recovers from the effects of the pandemic. Our ADR increased by 45.1% and our occupancy rate increased by 20.0 percentage points.
Room expense increased commensurate with the increased occupancy. For the nine months ended September 30, 2021, room revenue and room expense were higher than the prior year period due to the temporary closure of all of our properties for part of the first quarter of 2020 and most of the second quarter of 2020.
Other. Other primarily represents revenues from tenant leases, retail outlets, bowling, spas, and entertainment, and their corresponding expenses. For the three and nine months ended September 30, 2021, other revenues and other expenses were higher as compared to the prior year periods. The increases in the current year periods were primarily due to the easing of state-mandated occupancy, social distancing and other restrictions, which increased our ability to offer non-gaming amenities at our reopened properties, and the closure of all of our properties for part of the first quarter of 2020 and most of the second quarter of 2020.
Management Fee Revenue. Management fee revenue primarily represents fees earned from our agreement with a Native American tribe to manage Graton Resort. For the three and nine months ended September 30, 2021, management fee revenue was lower as compared to the prior year periods due to the termination of the Graton Resort management agreement by the tribe on February 5, 2021.
Selling, General and Administrative (“SG&A”). For the three and nine months ended September 30, 2021, SG&A expenses increased by $13.1 million and $9.6 million, respectively, as compared to the prior year periods. As a percentage of net revenue, SG&A expenses decreased by 0.2% and 7.9% for the three and nine months ended September 30, 2021, respectively, as compared to the prior year periods. The increases in SG&A expenses as compared to the prior year periods were primarily due to higher employee costs. In addition, SG&A expenses were lower for the nine months ended September 30, 2020 because all of our properties were closed for part of the first quarter of 2020 and most of the second quarter of 2020.
Depreciation and Amortization. For the three and nine months ended September 30, 2021, depreciation and amortization expense decreased by 40.6% and 28.4%, respectively, as compared to the prior year periods. As a result of the pending disposal of Palms, we ceased recognizing depreciation and amortization expense for the property as of April 1, 2021. Depreciation expense also decreased due to certain assets becoming fully depreciated. Amortization expense decreased primarily due to the Graton Resort management agreement becoming fully amortized in the fourth quarter of 2020.
Write-downs and Other Charges, net. Write-downs and other charges, net include asset disposals, severance, preopening and redevelopment, business innovation and technology enhancements and non-routine expenses. For the three and nine months ended September 30, 2021, write-downs and other charges, net totaled $0.5 million and $2.2 million, respectively. For the three and nine months ended September 30, 2020, write-downs and other charges, net totaled $1.4 million and $25.7 million, respectively, included severance, net losses on asset disposals, and contract termination costs and other expenses related to various technology projects.
Asset Impairment. For the nine months ended September 30, 2021, we recorded an asset impairment charge of $167.8 million to reduce the carrying amount of Palms to its estimated fair value less cost to sell as a result of entering into a purchase agreement to sell the property at a price less than its carrying amount. See Note 2 to the Condensed Consolidated Financial Statements for additional information.
Interest Expense, net. Interest expense, net decreased to $25.3 million and $78.2 million for the three and nine months ended September 30, 2021, respectively, as compared to $29.8 million and $99.8 million, respectively, for the same periods in 2020. For the three months ended September 30, 2021, the decrease was primarily due to lower outstanding indebtedness. For the nine-month period, the decrease was due to lower outstanding indebtedness as well as lower variable interest rates applicable to our credit facility. Beginning in February 2020, the variable interest rates applicable to our credit facility have declined and remained very low through September 30, 2021 in response to economic and growth uncertainty in the financial markets due to the COVID-19 pandemic. Additional information about long-term debt is included in Note 6 to the Condensed Consolidated Financial Statements.
Gain (Loss) on Extinguishment/Modification of Debt, net. For the nine months ended September 30, 2021, we recognized a loss of $8.1 million as a result of the partial redemption of the 5.00% Senior Notes. See Note 6 for additional information. For the three months ended September 30, 2020, we recognized a gain of $0.5 million as a result of repurchases of $15.5 million of our outstanding indebtedness, primarily our 4.50% and 5.00% Senior Notes. For the nine months ended September 30, 2020, we recognized a net gain of $0.2 million comprising a $12.7 million gain on repurchases of $81.9 million of our outstanding indebtedness, partially offset by a loss of $12.5 million on amendments to our credit facility in February 2020.
Change in Fair Value of Derivative Instruments. During the nine months ended September 30, 2021, we recognized a net loss of $0.2 million in the fair value of our interest rate swaps, as compared to net losses of $0.1 million and $21.4 million for the three and nine months ended September 30, 2020, respectively. Losses in the prior periods were primarily due to downward movements in the forward interest rate curve. Our interest rate swaps expired in July 2021.
Provision for Income Tax. For the three and nine months ended September 30, 2021, we recognized income tax expense of $0.4 million and $1.2 million, respectively. Station Holdco is treated as a partnership for income tax reporting purposes and Station Holdco’s members are liable for federal, state and local income taxes based on their share of Station Holdco’s taxable income. We are not liable for income tax on the noncontrolling interests’ share of Station Holdco’s taxable income or benefit from a taxable loss. Due to these factors, our effective tax rates of 0.3% and 0.7% for the three and nine months ended September 30, 2021, respectively, were less than the statutory rate. We recognized income tax expense of $113.2 million for the nine months ended September 30, 2020, primarily related to the establishment of a full valuation allowance on our deferred tax assets due to the uncertainty of realizing the tax benefits.
Net Income (Loss) Attributable to Noncontrolling Interests. Net income (loss) attributable to noncontrolling interests for the three and nine months ended September 30, 2021 and 2020 represented the portion of net income (loss) attributable to the ownership interest in Station Holdco not held by us.
Adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020 for our two reportable segments and a reconciliation of net income (loss) to Adjusted EBITDA are presented below (amounts in thousands). The Las Vegas operations segment includes all of our Las Vegas area casino properties and the Native American management segment includes our Native American management arrangement.
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Net revenues
Las Vegas operations
$
412,694
$
320,765
$
1,181,921
$
778,250
Native American management
205
30,718
8,292
55,872
Reportable segment net revenues
412,899
351,483
1,190,213
834,122
Corporate and other
1,870
1,695
5,332
4,914
Net revenues
$
414,769
$
353,178
$
1,195,545
$
839,036
Net income (loss)
$
117,936
$
72,044
$
154,723
$
(224,173)
Adjustments
Depreciation and amortization
34,025
57,297
124,440
173,755
Share-based compensation
3,325
633
9,439
8,275
Write-downs and other charges, net
463
1,400
2,158
25,673
Asset impairment
—
—
167,777
—
Losses from assets held for sale
2,990
—
4,431
—
Interest expense, net
25,311
29,798
78,192
99,836
(Gain) loss on extinguishment/modification of debt, net
—
(482)
8,140
(235)
Change in fair value of derivative instruments
1
108
215
21,368
Provision for income tax
354
—
1,152
113,185
Other
118
99
662
262
Adjusted EBITDA
$
184,523
$
160,897
$
551,329
$
217,946
Adjusted EBITDA
Las Vegas operations
$
197,905
$
141,670
$
581,174
$
198,060
Native American management
205
29,826
7,809
52,634
Corporate and other
(13,587)
(10,599)
(37,654)
(32,748)
Adjusted EBITDA
$
184,523
$
160,897
$
551,329
$
217,946
The year-over-year changes in Adjusted EBITDA were due to the factors described within Results of Operations above.
Adjusted EBITDA is a non-GAAP measure that is presented solely as a supplemental disclosure. We believe that Adjusted EBITDA is a widely used measure of operating performance in our industry and is a principal basis for valuation of gaming companies. We believe that in addition to net income (loss), Adjusted EBITDA is a useful financial performance measurement for assessing our operating performance because it provides information about the performance of our ongoing core operations. Adjusted EBITDA includes net income (loss) plus depreciation and amortization, share-based compensation, write-downs and other charges, net, asset impairment, losses from assets held for sale, interest expense, net, (gain) loss on extinguishment/modification of debt, net, change in fair value of derivative instruments, provision for income tax and other.
To evaluate Adjusted EBITDA and the trends it depicts, the components should be considered. Each of these components can significantly affect our results of operations and should be considered in evaluating our operating performance, and the impact of these components cannot be determined from Adjusted EBITDA. Further, Adjusted EBITDA does not represent net income or cash flows from operating, investing or financing activities as defined by GAAP and should not be considered as an alternative to net income as an indicator of our operating performance. Additionally, Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. In addition, it should be noted that not all gaming companies that report EBITDA or adjustments to this measure may calculate
EBITDA or such adjustments in the same manner as we do, and therefore, our measure of Adjusted EBITDA may not be comparable to similarly titled measures used by other gaming companies.
Holding Company Financial Information
The indenture governing the 4.50% Senior Notes contains certain covenants that require Station LLC to furnish to the holders of the notes certain annual and quarterly financial information relating to Station LLC and its subsidiaries. The obligation to furnish such information may be satisfied by providing consolidated financial information of the Company along with additional disclosure explaining the differences between such information and the financial information of Station LLC and its subsidiaries on a standalone basis. The following financial information about the Company and its consolidated subsidiaries, exclusive of Station LLC and its subsidiaries (the “Holding Company”), is furnished to explain the differences between the financial information of the Holding Company and the financial information of Station LLC and its subsidiaries for the periods presented in this report. The primary differences between the financial information of the Holding Company and that of Station LLC relate to income taxes of the Holding Company and the liability relating to the tax receivable agreement (“TRA”).
At September 30, 2021, the difference between the balance sheet for Station LLC and its consolidated subsidiaries and the balance sheet for the Holding Company is that the Holding Company had cash of $1.8 million and income tax receivable of $1.4 million that are solely assets of the Holding Company, as well as liabilities that are solely the Holding Company’s, consisting of a $28.0 million noncurrent liability under the TRA and $0.6 million of other current liabilities. At December 31, 2020, the Holding Company had a $27.4 million noncurrent liability under the TRA and $0.6 million of other net current liabilities.
For the three and nine months ended September 30, 2021, the Holding Company recognized net losses of $0.3 million and $1.2 million, respectively, due to provision for income tax. For the three months ended September 30, 2020, the Holding Company recognized no net income or loss, and for the nine months ended September 30, 2020, the Holding Company recognized a net loss of $113.3 million, primarily due to a provision for income tax to establish a full valuation allowance against its deferred tax assets.
Liquidity and Capital Resources
The following liquidity and capital resources discussion contains certain forward-looking statements with respect to our business, financial condition, results of operations, dispositions, acquisitions, investments and subsidiaries, which involve risks and uncertainties that cannot be predicted or quantified, and consequently, actual results may differ materially from those expressed or implied herein. Such risks and uncertainties include, but are not limited to, the risks described in Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020.
At September 30, 2021, we had $89.9 million in cash and cash equivalents. Station LLC maintains its borrowing availability under its revolving credit facility, subject to continued compliance with the terms of the credit facility. At September 30, 2021, Station LLC’s borrowing availability was $1.0 billion, which was net of $29.4 million in outstanding letters of credit and similar obligations.
Our primary capital requirements for the near term are expected to be related to the operation and maintenance of our properties and debt service payments. Our anticipated uses of cash for the remainder of 2021 include required principal and interest payments on Station LLC’s indebtedness totaling $6.5 million and $22.7 million, respectively, and approximately $30.0 million to $40.0 million for maintenance and investment capital expenditures. In October 2021, we redeemed the remaining $280.3 million in outstanding principal on Station LLC’s 5.00% Senior Notes and paid a redemption premium of $3.5 million. In addition, we anticipate making additional cash distributions, which we refer to as “tax distributions” to the holders of LLC Units. We anticipate that these tax distributions will continue to be made quarterly and in amounts that may vary from quarter to quarter. Other payment obligations include salaries, wages and employee benefits, service contracts, property taxes, insurance and other obligations. In May 2020, we suspended the payment of dividends until further notice.
We are currently developing a new casino resort to be called Durango, a Station Casinos Resort, on our development site on Durango Drive in the southwest Las Vegas valley. We expect to spend approximately $750 million for the project, which will be funded using a combination of available cash, cash flow from operations, the sale of a portion of the site for approximately $24 million and borrowings under our revolving credit facility. We expect to start construction in the first quarter of 2022, and we anticipate completion approximately 18 to 24 months after construction begins.
In February 2019, our board of directors approved an equity repurchase program authorizing the repurchase of up to an aggregate of $150 million of our Class A common stock. In February 2021, our board of directors approved an extension of the
equity repurchase program through December 31, 2022. In September 2021, our board of directors approved an increase in the aggregate amount authorized under the equity repurchase program to $300 million. We are not obligated to repurchase any shares under the program. Subject to applicable laws and the provisions of any agreements restricting our ability to do so, repurchases may be made at our discretion from time to time through open market purchases, negotiated transactions or tender offers, depending on market conditions and other factors. During the nine months ended September 30, 2021, we repurchased 3,127,711 shares of our Class A common stock in open market transactions at a weighted-average price of $39.42 per share, and we have $173.9 million of remaining repurchases authorized under the program. From time to time, we may also seek to repurchase our outstanding indebtedness. Any such purchases may be funded by existing cash balances or the incurrence of debt, including borrowings under our credit facility. The amount and timing of any repurchase will be based on business and market conditions, capital availability, compliance with debt covenants and other considerations.
We expect that cash on hand, cash generated from operations and, to the extent necessary, borrowings available under the credit facility, will be sufficient to fund our operations and capital requirements and service our outstanding indebtedness for the next twelve months. We regularly assess our projected capital requirements for capital expenditures, repayment of debt obligations, and payment of other general corporate and operational needs. In the long term, we expect that we will fund our capital requirements with a combination of cash generated from operations, borrowings under the credit facility and the issuance of debt or equity as market conditions may permit. However, our cash flow and ability to obtain debt or equity financing on terms that are satisfactory to us, or at all, may be affected by a variety of factors, including competition, general economic and business conditions and financial markets, all of which may be adversely impacted by the ongoing COVID-19 pandemic. As a result, we cannot provide any assurance that we will generate sufficient income and liquidity to meet all of our liquidity requirements or other obligations.
Following is a summary of our cash flow information (amounts in thousands):
Nine Months Ended September 30,
2021
2020
Net cash provided by (used in):
Operating activities
$
476,823
$
85,553
Investing activities
(58,104)
(56,998)
Financing activities
(449,633)
(48,233)
Cash Flows from Operations
Our operating cash flows primarily consist of operating income or loss generated by our properties (excluding depreciation and other non-cash charges), interest paid and changes in working capital accounts such as inventories, prepaid expenses, receivables and payables. The majority of our revenue is generated from our slot machine and table game play, which is conducted primarily on a cash basis. Our food and beverage, room and other revenues are also primarily cash-based. As a result, fluctuations in our revenues have a direct impact on our cash flow from operations.
For the nine months ended September 30, 2021, net cash provided by operating activities was $476.8 million as compared to $85.6 million for the prior year period. For the current year period, an increase in gaming revenues, favorable customer trends and cost reduction measures implemented in the second quarter of 2020 continue to drive strong operating results. For the nine months ended September 30, 2020, operating cash flows were negatively impacted by the onset of the COVID-19 pandemic, including the mandatory temporary closure of all of our properties from March 17, 2020 through June 3, 2020.
Cash Flows from Investing Activities
For the nine months ended September 30, 2021 and 2020, cash paid for capital expenditures totaled $34.9 million and $53.4 million, respectively.
Cash Flows from Financing Activities
During the nine months ended September 30, 2021, we redeemed $250.0 million in outstanding principal amount of the 5.00% Senior Notes and paid a redemption premium of $6.3 million. In addition, we paid $124.0 million to repurchase shares of our Class A common stock, and we paid cash tax distributions of $49.1 million to the noncontrolling interest holders of Station Holdco during the period.
During the nine months ended September 30, 2020, we reduced our net borrowings under the revolving credit facility by $360.0 million and we issued $750.0 million in principal amount of 4.50% Senior Notes. In addition, we repaid $334.9 million of outstanding borrowings under our term loans and we paid $68.2 million to repurchase $81.9 million in principal amount of our outstanding indebtedness, primarily our senior notes. We also paid $7.3 million in dividends to Class A common shareholders and $4.6 million in cash distributions to the noncontrolling interest holders of Station Holdco, as well as $22.9 million in fees and costs related to the February 2020 amendment of the credit facility and the issuance of the 4.50% Senior Notes.
Restrictive Covenants
The agreements governing our credit facility and the indenture governing our senior notes impose significant operating and financial restrictions on us, including certain limitations on our and our subsidiaries’ ability to, among other things, obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements. In addition, our credit agreement contains certain financial covenants, including maintenance of a minimum interest coverage ratio and adherence to a maximum total leverage ratio. During the nine months ended September 30, 2021, there were no changes made to the covenants included in the credit facility or the indenture governing the senior notes as described in Financial Condition, Capital Resources and Liquidity in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020. We believe that as of September 30, 2021, Station LLC was in compliance with the covenants contained in the credit facility and the indentures governing the senior notes. However, the ongoing impacts of the COVID-19 pandemic on our business, operations and results of operations may negatively impact our ability to remain in compliance with such covenants.
As a result of these covenants and restrictions, we are limited in how we conduct our business and we may be unable to raise additional debt or equity financing to provide liquidity if the COVID-19 pandemic, measures implemented to curtail its spread, changes in the economy, discretionary spending and consumer confidence have a protracted negative effect on our business. In addition, such covenants and restrictions may limit our ability to compete effectively or to take advantage of new business opportunities. Further, our ability to comply with covenants and restrictions contained in the agreements governing our indebtedness may be adversely affected by general economic conditions and industry conditions resulting from COVID-19 related preventative or protective actions.
Failure to satisfy the covenants contained in the credit agreements, indentures or other agreements governing our indebtedness would require us to seek waivers or amendments of such covenants. There can be no assurance that we would be able to obtain required waivers or amendments, as such matters depend, in part, on factors outside of our control. If we fail to satisfy our covenants and are unable to obtain such waivers or amendments, our creditors could exercise remedies under the applicable documents governing such indebtedness, including acceleration of such indebtedness.
Off-Balance Sheet Arrangements
At September 30, 2021, we had no variable interests in unconsolidated entities that provide off-balance sheet financing, liquidity, market risk or credit risk support, or that engage in leasing, hedging or research and development arrangements with us, nor did we have retained or contingent interests in assets transferred to an unconsolidated entity. Our derivative instruments expired in July 2021 as described in Note 7 to the Condensed Consolidated Financial Statements. At September 30, 2021, we had outstanding letters of credit and similar obligations totaling $29.4 million.
Native American Development
We have development and management agreements with the North Fork Rancheria of Mono Indians, a federally recognized Native American tribe located near Fresno, California, pursuant to which we will assist the tribe in developing and operating a gaming and entertainment facility to be located on Highway 99 north of the city of Madera, California. See Note 4 to the Condensed Consolidated Financial Statements for information about this project.
Regulation and Taxes
We are subject to extensive regulation by Nevada gaming authorities as well as the National Indian Gaming Commission and the California Gambling Control Commission. In addition, we will be subject to regulation, which may or may not be similar to that in Nevada, by any other jurisdiction in which we may conduct gaming activities in the future.
The gaming industry represents a significant source of tax revenue, particularly to the State of Nevada and its counties and municipalities. From time to time, various state and federal legislators and officials have proposed changes in tax law, or in the administration of such law, affecting the gaming industry. The Nevada legislature meets every two years for 120 days and when special sessions are called by the Governor. The most recent legislative session ended on June 1, 2021. There are
currently no specific legislative proposals to increase taxes on gaming revenue, but there are no assurances that an increase in taxes on gaming or other revenue will not be proposed and passed by the Nevada legislature in the future.
In January 2020, the Clark County Education Association (“CCEA”) filed a ballot initiative to increase the Nevada gaming tax by three percentage points, from 6.75 percent to 9.75 percent. Although CCEA subsequently withdrew the petition and no longer supports it, it is not clear that the petition can be withdrawn from the ballot following signature qualification. CCEA is now considering a legal challenge against the Secretary of State to withdraw the initiative. If the initiative is not withdrawn, it will be voted on during the November 8, 2022, general election. If the voters approve the ballot initiative, the gaming tax increase would become effective on January 1, 2023.
Description of Certain Indebtedness
A description of our indebtedness is included in Note 7 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 and Note 6 to the Condensed Consolidated Financial Statements. Other than the redemption of our 5.00% Senior Notes as described therein, there were no material changes to the terms of our indebtedness during the nine months ended September 30, 2021.
Derivative and Hedging Activities
Our derivative instruments expired in July 2021. A description of our derivative and hedging activities prior to such expiration is included in Note 7 to the Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
A description of our critical accounting policies and estimates is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020. There were no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2021.
Forward-looking Statements
The outbreak of COVID-19 resulted in the closure of all of our casino properties and all other casino properties located in Nevada from March 17, 2020 through June 3, 2020. We reopened the majority of our properties on June 4, 2020, but certain of our properties will remain closed until we determine when and if to reopen them based on our analysis of a number of factors, including the health of the economy as a whole, the health of the Las Vegas economy, customer demand and expense of operating the properties. Although restrictions on operations to implement social distancing and other health and safety protocols were progressively lifted through June 1, 2021, certain restrictions remain or have since been reimposed, and there is no guarantee that additional measures will not be re-implemented in the future. The outbreak of COVID-19 and measures to reduce its spread have caused, and will likely continue to cause, widespread unemployment and significant disruptions in the United States economy generally and the Las Vegas economy in particular, which could adversely impact our business.
When used in this report and elsewhere by management from time to time, the words “may,” “might,” “could,” “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements with respect to our financial condition, results of operations and our business including our expansions, development and acquisition projects, legal proceedings and employee matters. Certain important factors, including but not limited to, financial market risks, could cause our actual results to differ materially from those expressed in our forward-looking statements. Potential factors which could affect our financial condition, results of operations and business includes, without limitation, our ability to consummate the sale of Palms on the timeline and terms described herein; the extent and duration of the impact of the COVID-19 pandemic on our business, financial results and liquidity; the duration of the closure of our properties that we have not reopened; the impact of actions that we have undertaken to reduce costs and improve efficiencies to mitigate losses as a result of the COVID-19 pandemic; the impact of our substantial indebtedness; the effects of local and national economic, credit and capital market conditions on consumer spending and the economy in general, and on the gaming and hotel industries in particular; the effects of competition, including locations of competitors and operating and market competition; changes in laws, including increased tax rates, regulations or accounting standards, third-party relations and approvals, and decisions of courts, regulators and governmental bodies; risks associated with construction projects, including disruption of our operations, shortages of materials or labor, unexpected costs, unforeseen permitting or regulatory issues and weather; litigation outcomes and judicial actions, including gaming legislative action, referenda and taxation; acts of war or terrorist incidents, natural disasters or civil unrest; risks associated with the collection and retention of data about our customers, employees, suppliers and business partners; and other risks described in our filings with the Securities and Exchange Commission. All forward-looking statements are based on our current expectations and projections about future events. Readers are cautioned not to place undue reliance on
any forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. There have been no material changes in our market risks from those disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 4. Controls and Procedures
The Company’s management conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2021. In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of September 30, 2021, the Company’s disclosure controls and procedures were effective, at the reasonable assurance level, and are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in various lawsuits relating to routine matters incidental to their business. No assurance can be provided as to the outcome of such matters and litigation inherently involves significant risks.
Item 1A. Risk Factors
There have been no material changes in the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table presents Class A share repurchases, including those we have made pursuant to our equity repurchase program as well as those withheld in satisfaction of tax withholding obligations on vested restricted stock. The Class A shares were retired upon repurchase.
For the Month Ended
Total Number of Shares Purchased
Average Price Paid per Share (1)
Total Number of Shares Purchased as Part of a Publicly Announced Program (2)
Approximate Dollar Value That May Yet Be Purchased Under the Program (2)
(2) In February 2019, our board of directors approved an equity repurchase program authorizing the repurchase of up to an aggregate of $150 million of our Class A common stock. In February 2021, our board of directors extended its approval of the equity repurchase program through December 31, 2022. In September 2021, our board of directors approved an increase in the aggregate amount authorized under the equity repurchase program to $300 million.
No. 101.INS—XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RED ROCK RESORTS, INC., Registrant
Date:
November 5, 2021
/s/ STEPHEN L. COOTEY
Stephen L. Cootey
Executive Vice President, Chief Financial Officer and Treasurer
