Long-term debt consisted of the following indebtedness of Station LLC (amounts in thousands):
|
| | | | | | | |
| | March 31,
2020 | | December 31, 2019 |
| Term Loan B Facility due February 7, 2027, interest at a margin above LIBOR or base rate (3.24% at March 31, 2020), net of unamortized discount and deferred issuance costs of $33.3 million at March 31, 2020 | $ | 1,488,890 |
| | $ | — |
|
| Term Loan B Facility due June 8, 2023, interest at a margin above LIBOR or base rate (4.30% at December 31, 2019), net of unamortized discount and deferred issuance costs of $33.7 million at December 31, 2019 | — |
| | 1,766,757 |
|
| Term Loan A Facility due February 7, 2025, interest at a margin above LIBOR or base rate (2.74% at March 31, 2020), net of unamortized discount and deferred issuance costs of $2.6 million at March 31, 2020 | 186,368 |
| | — |
|
| Term Loan A Facility due March 8, 2023, interest at a margin above LIBOR or base rate (3.55% at December 31, 2019), net of unamortized discount and deferred issuance costs of $2.5 million at December 31, 2019 | — |
| | 186,394 |
|
| Term Loan A Facility due June 8, 2022, interest at a margin above LIBOR or base rate (3.80% at December 31, 2019), net of unamortized discount and deferred issuance costs of $0.6 million at December 31, 2019 | — |
| | 52,289 |
|
| Revolving Credit Facility due February 7, 2025, interest at a margin above LIBOR or base rate (2.56% weighted average at March 31, 2020) | 997,500 |
| | — |
|
| Revolving Credit Facility due March 8, 2023, interest at a margin above LIBOR or base rate (3.54% weighted average at December 31, 2019) | — |
| | 440,000 |
|
| 4.50% Senior Notes due February 15, 2028, net of unamortized discount and deferred issuance costs of $8.7 million at March 31, 2020 | 741,302 |
| | — |
|
| 5.00% Senior Notes due October 1, 2025, net of unamortized deferred issuance costs of $4.8 million and $5.0 million at March 31, 2020 and December 31, 2019, respectively | 545,199 |
| | 545,011 |
|
| Other long-term debt, weighted-average interest of 3.83% at March 31, 2020 and December 31, 2019, net of unamortized discount and deferred issuance costs of $0.4 million at March 31, 2020 and December 31, 2019 | 42,600 |
| | 42,840 |
|
| Total long-term debt | 4,001,859 |
| | 3,033,291 |
|
| Current portion of long-term debt | (26,647 | ) | | (33,989 | ) |
| Total long-term debt, net | $ | 3,975,212 |
| | $ | 2,999,302 |
|
18
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Credit Facility
On February 7, 2020, Station LLC amended its existing credit facility agreement (the “Credit Facility”) to, among other things, (a) extend the maturity date under each of the Term Loan A Facility and the Revolving Credit Facility to February 7, 2025 and extend the maturity date under the Term Loan B Facility to February 7, 2027; (b) increase the outstanding borrowing availability under the Revolving Credit Facility to approximately $1.03 billion; (c) (i) reduce the applicable margin under the Term Loan B Facility to 2.25%, (ii) reduce the LIBOR “floor” under the Term Loan B Facility to 0.25% and (iii) provide for benchmark replacement mechanics in respect of the discontinuation of LIBOR; (d) increase the consolidated total leverage ratios at which the applicable margin under the Term Loan A Facility and the Revolving Credit Facility steps down to 4.00 to 1.00; (e) set the consolidated total leverage ratios for the Term Loan B Facility excess cash flow prepayment step-down to 5.00 to 1.00 for the reduction to 25% and to 4.50 to 1.00 for the reduction to 0%; (f) adjust the application, availability, calculation and sizing of certain covenants; and (g) modify the requirement that the Company maintain a maximum consolidated total leverage ratio of not more than 6.50 to 1.00 through the fiscal quarter ending December 31, 2021, which incrementally reduces to 5.25 to 1.00 for the fiscal quarter ending December 31, 2023 and each fiscal quarter thereafter.
As a result of the amendment, the Revolving Credit Facility and the Term Loan A Facility no longer have multiple tranches. Amounts outstanding under the Revolving Credit Facility and the Term Loan A Facility bear interest at either LIBOR or base rate, at Station LLC’s option, plus a spread that is dependent on Station LLC’s consolidated total leverage ratio as shown below:
| | | | | | | | | | | | | | |
| Consolidated Total Leverage Ratio | | Revolving Credit Facility and Term Loan A Facility due February 7, 2025 |
|
| LIBOR | | Base Rate |
| Greater than 4.00 to 1.00 | | 1.75 | % | | 0.75 | % |
| Less than or equal to 4.00 to 1.00 | | 1.50 | % | | 0.50 | % |
The Company evaluated the Credit Facility amendment on a lender-by-lender basis and accounted for the majority of the amendment as a debt modification. The Company capitalized $4.6$5.1 million in new costs, primarily lender fees, and recognized a loss on debt extinguishment and modification of $11.7$12.5 million, comprised of $8.0$8.8 million in new third-party costs incurred and $3.7 million of previously deferred costs. In March 2020, the Company repurchased $1.0 million in aggregate principal amount of its Term Loan B Facility. This early debt repurchase resulted in a $0.3 million gain on extinguishment, which included a purchase rate discount as well as unamortized discount and deferred issuance costs on the retired principal amount. The loss on the Credit Facility amendment and gain on early debt repurchase were recorded in Loss on extinguishment/modification of debt, net in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.
The Credit Facility contains a number of customary covenants, including requirements that 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 March 31,September 30, 2020 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 March 31,September 30, 2020. The Company expects to remain in compliance with its debt covenants; however, if the currentCompany’s results of operations and ability to comply with its debt covenants may be impacted in the future by COVID-19 and economic downturn persists, the Company may seek waivers or amendmentsconditions resulting from the lenders in order to avoid a potential covenant violation. A covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenantsCOVID-19 and other available lender protections that would be applicable. There can be no assurance that the Company would be able to obtain waivers or amendments with acceptable terms or in a timely manner. Without such waivers or the ability to repay the outstanding borrowings, an event of default or acceleration of principal amounts due could occur, which would have a material adverse effect on the Company.factors.
Revolving Credit Facility
At March 31,September 30, 2020, Station LLC’s borrowing availability under its Revolving Credit Facility, subject to continued compliance with the terms of the Credit Facility, was $29.8$918.5 million, which was net of $997.5$80.0 million in outstanding borrowings and $3.8$32.6 million in outstanding letters of credit.credit and similar obligations.
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
4.50% Senior Notes
On February 7, 2020, Station LLC issued $750.0 million in aggregate principal amount of 4.50% Senior Notessenior notes due 2028 (“4.50% Senior Notes”) pursuant to an indenture dated as of February 7, 2020, among Station LLC, the guarantors party thereto and Wells Fargo Bank, National Association, as Trustee. The net proceeds of the sale of the 4.50% Senior Notes were used (i) to repay a portion of the amounts outstanding under the Credit Facility, (ii) to pay fees and costs associated with the offering and (iii) for general corporate purposes. Interest on the 4.50% Senior Notes will beis paid every six months in arrears on February 15 and August 15, commencing on August 15, 2020.15.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The indenture governing the 4.50% Senior notesNotes contains a number of customary covenants that, among other things and subject to certain exceptions, restrict the ability of Station LLC and its restricted subsidiaries to incur or guarantee additional indebtedness; issue disqualified stock or create subordinated indebtedness that is not subordinated to the 4.50% Senior Notes; create liens; engage in mergers, consolidations or asset dispositions; enter into certain transactions with affiliates; engage in lines of business other than its core business and related businesses; or make investments or pay distributions (other than customary tax distributions). These covenants are subject to a number of exceptions and qualifications as set forth in the indenture. The indenture governing the 4.50% Senior Notes also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on such 4.50% Senior Notes to be declared due and payable.
During the three and nine months ended September 30, 2020, the Company repurchased $5.5 million and $59.2 million, respectively, in aggregate principal amount of its 4.50% Senior Notes and repurchased $5.0 million and $16.7 million, respectively, in aggregate principal amount of its 5.00% senior notes due 2025. These early debt repurchases resulted in gains on extinguishment of $0.3 million and $12.3 million for the three and nine months ended September 30, 2020, respectively, which included purchase rate discounts as well as the write-off of unamortized discount and deferred issuance costs on the retired principal amounts. 8. Derivative Instruments
The Company’s objective in using derivative instruments is to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as a primary part of its cash flow hedging strategy. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company’s hedging strategy includes the use of forward-starting interest rate swaps that are not designated in cash flow hedging relationships. The interest rate swap agreements allow Station LLC to receive variable-rate payments in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Station LLC’s interest rate swaps each have one-year terms that run consecutively through July 2021, with predetermined fixed pay rates that increase with each new term to more closely align with the one-month LIBOR forward curve as of the trade date of the interest rate swap. At March 31, 2020, the weighted-average fixed pay rate for Station LLC’s interest rate swaps was 1.73%, which will increase to 1.94% over the exposure period. At March 31,September 30, 2020, Station LLC’s interest rate swaps effective for the current one-year term had a weighted-average fixed pay rate of 1.94%, a combined notional amount of $1.4$1.3 billion and effectively converted $1.4$1.3 billion of Station LLC’s variable interest rate debt to a fixed rate of 3.77%4.09%. The interest rate swaps will expire July 8, 2021.
Derivative instruments are presented at fair value on the Condensed Consolidated Balance Sheets, 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 reflectedpresented in Change in fair value of derivative instruments in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Income in the period in which the change occurs.
Station LLC has not posted any collateral related to its interest rate swap agreements; however, Station LLC’s obligations under the interest rate swap agreements are subject to the security and guarantee arrangements applicable to the Credit Facility. The interest rate swap agreements contain a cross-default provision under which Station LLC could be declared in default on its obligation under such agreements if certain conditions of default exist on the Credit Facility. At March 31,September 30, 2020, the termination value of Station LLC’s interest rate swaps, including accrued interest, was a net liability of $26.0$18.9 million. Had Station LLC been in breach of the provisions of its swap agreements, it could have been required to pay the termination value to settle the obligations.
The fair values of Station LLC’s interest rate swaps, exclusive of accrued interest, as well as their classification on the Condensed Consolidated Balance Sheets, are presented below (amounts in thousands): |
| | | | | | | |
| | March 31,
2020 | | December 31, 2019 |
| Interest rate swaps not designated in hedge accounting relationships: | | | |
| Other accrued liabilities | $ | 3,471 |
| | $ | 440 |
|
| Other long-term liabilities | 21,489 |
| | 5,227 |
|
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Information about pretax gains and losses on derivative financial instruments is presented below (amounts in thousands):
|
| | | | | | | | | | |
| Derivatives Not Designated in Hedge Accounting Relationships | | Location of Loss on Derivatives Recognized in Income | | Amount of Loss on Derivatives Recognized in Income |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Interest rate swaps | | Change in fair value of derivative instruments | | $ | (20,010 | ) | | $ | (6,638 | ) |
| | | | | | | | | | | |
| September 30,
2020 | | December 31, 2019 |
| Interest rate swaps not designated in hedge accounting relationships: | | | |
| Other accrued liabilities | $ | 17,298 | | | $ | 440 | |
| Other long-term liabilities | 0 | | | 5,227 | |
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, and totaled $0.7 million at March 31, 2020, are beingwere amortized as a reduction of interest expense through July 2020 as the hedged interest payments occur.occurred. During the three months ended March 31,September 30, 2020 and 2019, $0.1 million and $0.7 million, respectively, in deferred net gains were reclassified from accumulated other comprehensive loss to Interest expense, net in the
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Income.. During the nine months ended September 30, 2020 and 2019, $1.4 million and $2.2 million, respectively, in deferred net gains were similarly reclassified.
9. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Information about the Company’s financial 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):
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Measurement at Reporting Date Using |
| | Balance at March 31, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Liabilities | | | | | | | |
| Interest rate swaps | $ | 24,960 |
| | $ | — |
| | $ | 24,960 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Measurement at Reporting Date Using |
| | Balance at December 31, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Liabilities | | | | | | | |
| Interest rate swaps | $ | 5,667 |
| | $ | — |
| | $ | 5,667 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | |
| September 30,
2020 | | December 31, 2019 | | Level of Fair Value Hierarchy |
| Liabilities | | | | | |
| Interest rate swaps | $ | 17,298 | | | $ | 5,667 | | | 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 reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. Station LLC incorporatedincorporates 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 no0 financial assets measured at fair value on a recurring basis at March 31,September 30, 2020 or December 31, 2019.
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): |
| | | | | | | |
| | March 31,
2020 | | December 31, 2019 |
| Aggregate fair value | $ | 3,197 |
| | $ | 3,109 |
|
| Aggregate carrying amount | 4,002 |
| | 3,033 |
|
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| | | | | | | | | | | |
| September 30,
2020 | | December 31, 2019 |
| Aggregate fair value | $ | 2,916 | | | $ | 3,109 | |
| Aggregate carrying amount | 3,002 | | | 3,033 | |
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.
10. Stockholders’ Equity
During the three months ended March 31, 2020 and 2019, the Company declared and paid cash dividends of $0.10 per share of Class A common stock. On May 19, 2020, the Company announced that its Board of Directors had suspended the dividendpayment of dividends for the balanceremainder of 2020.
Changes in Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive loss, net of tax and noncontrolling interest, by component for Accordingly, during the three months ended March 31,September 30, 2020, (amounts in thousands):the Company paid 0 dividend. During the nine months ended September 30, 2020, the Company declared and paid a cash dividend of $0.10 per share of Class A common stock. During the three and nine months ended September 30, 2019, the Company declared and paid cash dividends of $0.10 and $0.30 per share of Class A common stock, respectively.
|
| | | | | | | | | | | |
| | Accumulated Other Comprehensive Loss |
| | Unrealized gains on interest rate swaps, net of tax | | Unrecognized pension liability, net of tax | | Total |
| Balances, December 31, 2019 | $ | (174 | ) | | $ | (467 | ) | | $ | (641 | ) |
| Amounts reclassified into income | (401 | ) | | — |
| | (401 | ) |
| Net current-period other comprehensive loss | (401 | ) | | — |
| | (401 | ) |
| Exchanges of noncontrolling interests for Class A common stock | 1 |
| | — |
| | 1 |
|
| Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco | 1 |
| | — |
| | 1 |
|
| Balances, March 31, 2020 | $ | (573 | ) | | $ | (467 | ) | | $ | (1,040 | ) |
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Net Income (Loss) Income 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) income and transfers from (to) noncontrolling interests (amounts in thousands):
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Net (loss) income attributable to Red Rock Resorts, Inc. | $ | (152,199 | ) | | $ | 11,323 |
|
| Transfers from (to) noncontrolling interests: | | | |
| Exchanges of noncontrolling interests for Class A common stock | 4,013 |
| | — |
|
| Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco | (1,745 | ) | | (2,554 | ) |
| Net transfers from (to) noncontrolling interests | 2,268 |
| | (2,554 | ) |
| Change from net (loss) income attributable to Red Rock Resorts, Inc. and net transfers from (to) noncontrolling interests | $ | (149,931 | ) | | $ | 8,769 |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net income (loss) attributable to Red Rock Resorts, Inc. | $ | 43,634 | | | $ | (15,657) | | | $ | (180,107) | | | $ | (8,180) | |
| Transfers from (to) noncontrolling interests: | | | | | | | |
| Exchanges of noncontrolling interests for Class A common stock | 0 | | | 369 | | | 4,412 | | | 369 | |
| Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco | 219 | | | (1,734) | | | (2,891) | | | (6,081) | |
| Net transfers from (to) noncontrolling interests | 219 | | | (1,365) | | | 1,521 | | | (5,712) | |
| Change from net income (loss) attributable to Red Rock Resorts, Inc. and net transfers from (to) noncontrolling interests | $ | 43,853 | | | $ | (17,022) | | | $ | (178,586) | | | $ | (13,892) | |
| | | | | | | |
11. Share-based Compensation
The Company maintains an equity incentive plan which is designed to attract, retain and motivate employees and to 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 12.513.0 million shares were available for issuance at March 31,September 30, 2020.
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table presents information about the Company’s share-based compensation awards: |
| | | | | | | | | | | | | |
| | Restricted Class A Common Stock | | Stock Options |
| | Shares | | Weighted-average grant date fair value | | Shares | | Weighted-average exercise price |
| Outstanding at January 1, 2020 | 712,447 |
| | $ | 26.75 |
| | 7,396,507 |
| | $ | 25.79 |
|
| Activity during the period: | | | | | | | |
| Granted | 19,290 |
| | 27.22 |
| | — |
| | — |
|
| Vested/exercised | (64,740 | ) | | 23.73 |
| | (24,022 | ) | | 20.19 |
|
| Forfeited | (2,983 | ) | | 27.24 |
| | (150,086 | ) | | 27.21 |
|
| Outstanding at March 31, 2020 | 664,014 |
| | $ | 27.05 |
| | 7,222,399 |
| | $ | 25.77 |
|
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Class A
Common Stock | | Stock Options |
| Shares | | Weighted-average grant date fair value | | Shares | | Weighted-average exercise price |
| Outstanding at January 1, 2020 | 712,447 | | | $ | 26.75 | | | 7,396,507 | | | $ | 25.79 | |
| Activity during the period: | | | | | | | |
| Granted | 19,290 | | | 27.22 | | | 0 | | | 0 | |
| Vested/exercised | (333,592) | | | 26.15 | | | (24,022) | | | 20.19 | |
| Forfeited/expired | (26,843) | | | 28.41 | | | (781,932) | | | 26.70 | |
| Outstanding at September 30, 2020 | 371,302 | | | $ | 27.19 | | | 6,590,553 | | | $ | 25.70 | |
| | | | | | | |
The Company recognized share-based compensation expense of $4.1$0.6 million and $3.9$8.3 million for the three and nine months ended March 31,September 30, 2020, respectively, and $4.5 million and $12.8 million for the three and nine months ended September 30, 2019, respectively. At March 31,September 30, 2020, unrecognized share-based compensation cost was $38.2$19.5 million, which is expected to be recognized over a weighted-average period of 2.62.2 years.
12. Write-downs and Other Charges, Net
Write-downs and other charges, net include various charges related to non-routine transactions, such as net losses on asset disposals, redevelopment and preopening expenses, severance, business innovation and technology enhancements.
For the three and nine months ended March 31,September 30, 2020, write-downs and other charges, net were $8.8$1.4 million and $25.7 million, respectively, which included net losses on asset disposals, severance, and contract termination costs and other expenses related to various technology projects, as well as severance.projects. For the three and nine months ended March 31,September 30, 2019, write-downs and other charges, net were $23.7$34.1 million whichand $66.7 million, respectively. These amounts included $20.6$28.2 million in artist performance agreement termination costs and severance payments at Palms’ nightclub and dayclub during the three months ended September 30, 2019. In addition, for the three and nine months ended September 30, 2019, write-downs and other charges, net included $0.6 million and $25.9 million, respectively, in Palms redevelopment and preopening expenses at Palms Casino Resort,costs, comprising
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
various costsexpenses associated with the brand repositioning campaign and grand reopening, as well as preopening related to new restaurants, nightclubs, bars and other amenities.
13. 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. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws, some of which were enacted under the Tax Cuts and Jobs Act of 2017. 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 March 31,September 30, 2020 was (175.17)0.0% and (102.0)%, respectively, including discrete items, as compared to 8.64%3.1% and (0.9)% for the three and nine months ended March 31,September 30, 2019. The Company’s effective tax rate for this quarterthe three and nine months ended September 30, 2020 as compared to the 21% statutory rate was primarily impacted by a discrete charge of $113.2 million related to the establishment of a full valuation allowance onestablished against the deferred tax assets (“DTA”DTAs”). Other items impacting the effective tax rate include a rate detriment attributable to the fact that Station Holdco operates as a limited liability company which is not subject to federal income tax. Accordingly, the Company does not benefit from the portion of Station Holdco’s losses 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
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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. The Company had cumulative positive profitability in the three-year period ended December 31, 2019; however, negative evidence of reduced profitability asAs a result of the economic downtowndownturn and uncertainty caused by the COVID-19 pandemic on its current operating results and property closures was consideredthe considerable uncertainty that remains in the Company’s assessment of its ability to realize its net DTAs. Whilefuture, the property closures are currently expected toCompany determined it was more likely than not that the deferred tax assets will not be temporary, there is considerable uncertainty around the extent and duration of the property closures.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 deferred tax asset relating to those units is not expected to be realized unless the Company disposes of its investment in Station Holdco. Due to the negative evidence of reduced profitability, the Company expects to have cumulative losses in the three-year period ending December 31, 2020. As a result, the Company recorded a valuation allowance on its remaining DTAs at March 31, 2020. The Company recognizes changes to the valuation allowance through the provision for income tax or other comprehensive income, as applicable, and at March 31,September 30, 2020 and December 31, 2019, the valuation allowance was $162.9$168.9 million and $39.9 million, respectively.
The Company recorded $1.1$5.9 million of unrecognized tax benefits as of March 31,September 30, 2020. The Company does not currently record interest and penalties for unrecognized tax benefits as any recognition would result in a reduction of its net operating loss or other tax attributes and would not result in an underpayment of tax. 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 unrecognized tax benefits within the next twelve months.
The Company files income tax returns in federal and state jurisdictions. The Company is under federal audit for the 2016 tax year and received notification on April 13, 2020 that the 2017 tax year is open for examination.years. 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.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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, 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 March 31,September 30, 2020 and December 31, 2019, the Company’s liability under the TRA was $27.1$27.4 million and $25.1 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 threenine months ended March 31,September 30, 2020, exchanges of LLC Units resulted in an increase in the amount payable under the TRA liability of $2.0$2.3 million, which was recorded through stockholders’ equity. NoNaN LLC Units were exchanged during the three months ended March 31, 2019.September 30, 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 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.
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
14. Earnings (Loss) Earnings Per Share
Basic earnings (loss) earnings per share is calculated by dividing net income (loss) income 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 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 inFor the calculation of diluted earnings per share fornine months ended September 30, 2020 and the three and nine months ended March 31,September 30, 2019, 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 three months ended March 31, 2020, the Company incurred a net loss. As a result, all potentially dilutive securities have been excluded from the calculation of diluted loss per share because their inclusion would have been antidilutive. Dilutive shares included in the calculation of diluted earnings per share for the three months ended September 30, 2020 represented outstanding shares of Class B common stock and nonvested restricted shares of Class A common stock.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings (loss) earnings per share is presented below (amounts in thousands):
|
| | | | | | | | |
| | | Three Months Ended
March 31, |
| | | 2020 | | 2019 |
| Net (loss) income | | $ | (177,800 | ) | | $ | 20,284 |
|
| Less: net loss (income) attributable to noncontrolling interests | | 25,601 |
| | (8,961 | ) |
| Net (loss) income attributable to Red Rock, basic | | (152,199 | ) | | 11,323 |
|
| Effect of dilutive securities | | — |
| | 7,077 |
|
| Net (loss) income attributable to Red Rock, diluted | | $ | (152,199 | ) | | $ | 18,400 |
|
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net income (loss) | $ | 72,044 | | | $ | (26,798) | | | $ | (224,173) | | | $ | (13,581) | |
| Less: net (income) loss attributable to noncontrolling interests | (28,410) | | | 11,141 | | | 44,066 | | | 5,401 | |
| Net income (loss) attributable to Red Rock, basic | 43,634 | | | (15,657) | | | (180,107) | | | (8,180) | |
| Effect of dilutive securities | 22,439 | | | 0 | | | 0 | | | 0 | |
| Net income (loss) attributable to Red Rock, diluted | $ | 66,073 | | | $ | (15,657) | | | $ | (180,107) | | | $ | (8,180) | |
| | | | | | | |
|
| | | | | | |
| | | Three Months Ended
March 31, |
| | | 2020 | | 2019 |
| Weighted-average shares of Class A common stock outstanding, basic | | 69,962 |
| | 69,397 |
|
| Effect of dilutive securities | | — |
| | 47,296 |
|
| Weighted-average shares of Class A common stock outstanding, diluted | | 69,962 |
| | 116,693 |
|
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Weighted-average shares of Class A common stock outstanding, basic | 70,824 | | | 69,618 | | | 70,436 | | | 69,525 | |
| Effect of dilutive securities | 46,220 | | | 0 | | | 0 | | | 0 | |
| Weighted-average shares of Class A common stock outstanding, diluted | 117,044 | | | 69,618 | | | 70,436 | | | 69,525 | |
| | | | | | | |
The calculation of diluted earnings (loss) earnings per share of Class A common stock excluded the following potentially dilutive shares that were outstanding at March 31,September 30, 2020 and 2019, respectively, because their inclusion would have been antidilutive (amounts in thousands):
|
| | | | | | |
| | | As of March 31, |
| | | 2020 | | 2019 |
| Shares issuable in exchange for Class B common stock and LLC Units | | 46,186 |
| | — |
|
| Shares issuable upon exercise of stock options | | 7,222 |
| | 5,849 |
|
| Shares issuable upon vesting of restricted stock | | 664 |
| | 506 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Shares issuable in exchange for Class B common stock and LLC Units | 0 | | | 46,827 | | | 46,086 | | | 46,827 | |
| Shares issuable upon exercise of stock options | 6,591 | | | 7,706 | | | 6,591 | | | 7,706 | |
| Shares issuable upon vesting of restricted stock | 156 | | | 680 | | | 371 | | | 680 | |
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.
15. Leases
Lessee
The components of lease expense were as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Operating lease cost | $ | 1,259 | | | $ | 1,298 | | | $ | 3,900 | | | $ | 3,862 | |
| Short-term lease cost | 460 | | | 1,627 | | | 1,595 | | | 5,528 | |
| Variable lease cost | 4,914 | | | 7,242 | | | 12,324 | | | 21,049 | |
| Total lease expense | $ | 6,633 | | | $ | 10,167 | | | $ | 17,819 | | | $ | 30,439 | |
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
15. Leases
Lessee
The components of lease expense were as follows (amounts in thousands): |
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Operating lease cost | $ | 1,323 |
| | $ | 1,282 |
|
| Short-term lease cost | 650 |
| | 1,814 |
|
| Variable lease cost | 5,964 |
| | 6,784 |
|
| Total lease expense | $ | 7,937 |
| | $ | 9,880 |
|
Supplemental balance sheet information related to leases under which the Company is the lessee was as follows (amounts in thousands): |
| | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Operating lease right-of-use assets | $ | 11,966 |
| | $ | 13,099 |
|
| | | | |
| Operating lease liabilities: | | | |
| Current portion | $ | 3,160 |
| | $ | 3,646 |
|
| Noncurrent portion | 10,534 |
| | 10,675 |
|
| Total operating lease liabilities | $ | 13,694 |
| | $ | 14,321 |
|
|
| | | | | |
| Weighted-average remaining lease term - operating leases | 35.0 years |
| | 33.5 years |
|
| Weighted-average discount rate - operating leases | 5.41 | % | | 5.40 | % |
| | | | | | | | | | | |
| September 30,
2020 | | December 31, 2019 |
| Operating lease right-of-use assets | $ | 12,418 | | | $ | 13,099 | |
| | | |
| Operating lease liabilities: | | | |
| Current portion | $ | 3,098 | | | $ | 3,646 | |
| Noncurrent portion | 11,723 | | | 10,675 | |
| Total operating lease liabilities | $ | 14,821 | | | $ | 14,321 | |
| | | | | | | | | | | |
| Weighted-average remaining lease term – operating leases | 33.8 years | | 33.5 years |
| Weighted-average discount rate – operating leases | 5.30 | % | | 5.40 | % |
Supplemental cash flow information related to leases under which the Company is the lessee was as follows (amounts in thousands):
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 806 |
| | $ | 2,418 |
|
| | | | | | | | | | | |
| Nine Months Ended
September 30, |
| 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 3,249 | | | $ | 4,493 | |
| Right-of-use assets obtained in exchange for new lease liabilities: | | | |
| Operating leases | $ | 1,290 | | | $ | 0 | |
Future minimum lease payments required under all operating leases with initial or remaining non-cancelable lease terms in excess of one year as of March 31,September 30, 2020 are as follows (amounts in thousands):
| | | Year Ending December 31, | | Year Ending December 31, | |
| 2020 (a) | $ | 3,480 |
| 2020 (a) | $ | 2,013 | |
| 2021 | 2,313 |
| 2021 | 3,197 | |
| 2022 | 892 |
| 2022 | 1,667 | |
| 2023 | 473 |
| 2023 | 872 | |
| 2024 | 462 |
| 2024 | 736 | |
| Thereafter | 43,141 |
| Thereafter | 43,207 | |
| Total future lease payments | 50,761 |
| Total future lease payments | 51,692 | |
| Less imputed interest | (37,067 | ) | Less imputed interest | (36,871) | |
| Total operating lease liabilities | $ | 13,694 |
| Total operating lease liabilities | $ | 14,821 | |
____________________________________ | |
(a) | (a) Amount represents minimum lease payments for the remainder of the year. |
RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Lessor
For the three and nine months ended March 31,September 30, 2020, revenue from tenant leases was $2.9 million and $10.4 million, respectively. For the three and nine months ended September 30, 2019, revenue from tenant leases was $5.1$6.1 million and $5.7$18.2 million, respectively. Revenue from tenant leases is included in Other revenues in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Income.. At March 31,September 30, 2020, the Company’s tenant leases had remaining lease terms ranging from less than one year to approximately 1920 years.
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table presents undiscounted future minimum rentals to be received under operating leases as of March 31,September 30, 2020 (amounts in thousands):
| | | Year Ending December 31, | | Year Ending December 31, | |
| 2020 (a) | $ | 7,088 |
| 2020 (a) | $ | 1,863 | |
| 2021 | 8,438 |
| 2021 | 7,506 | |
| 2022 | 5,823 |
| 2022 | 5,080 | |
| 2023 | 4,485 |
| 2023 | 3,696 | |
| 2024 | 3,416 |
| 2024 | 2,783 | |
| Thereafter | 10,132 |
| Thereafter | 5,246 | |
| | $ | 39,382 |
| | $ | 26,174 | |
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.
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 1 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 1 reportable segment.
27
RED ROCK RESORTS, INC.
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) income to Adjusted EBITDA are presented below (amounts in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net revenues | | | | | | | |
| Las Vegas operations: | | | | | | | |
| Casino | $ | 239,866 | | | $ | 238,269 | | | $ | 523,741 | | | $ | 728,470 | |
| Food and beverage | 45,855 | | | 128,016 | | | 149,171 | | | 370,740 | |
| Room | 22,068 | | | 48,169 | | | 67,635 | | | 145,555 | |
| Other (a) | 12,792 | | | 26,113 | | | 37,376 | | | 75,621 | |
| Management fees | 184 | | | 128 | | | 327 | | | 432 | |
| Las Vegas operations net revenues | 320,765 | | | 440,695 | | | 778,250 | | | 1,320,818 | |
| Native American management: | | | | | | | |
| Management fees | 30,718 | | | 23,453 | | | 55,872 | | | 69,901 | |
| Reportable segment net revenues | 351,483 | | | 464,148 | | | 834,122 | | | 1,390,719 | |
| Corporate and other | 1,695 | | | 1,710 | | | 4,914 | | | 5,029 | |
| Net revenues | $ | 353,178 | | | $ | 465,858 | | | $ | 839,036 | | | $ | 1,395,748 | |
| | | | | | | |
| Net income (loss) | $ | 72,044 | | | $ | (26,798) | | | $ | (224,173) | | | $ | (13,581) | |
| Adjustments | | | | | | | |
| Depreciation and amortization | 57,297 | | | 57,925 | | | 173,755 | | | 164,613 | |
| Share-based compensation | 633 | | | 4,464 | | | 8,275 | | | 12,849 | |
| Write-downs and other charges, net | 1,400 | | | 34,094 | | | 25,673 | | | 66,668 | |
| Tax receivable agreement liability adjustment | 0 | | | (97) | | | 0 | | | (97) | |
| Interest expense, net | 29,798 | | | 40,517 | | | 99,836 | | | 118,936 | |
| (Gain) loss on extinguishment/modification of debt, net | (482) | | | 0 | | | (235) | | | 302 | |
| Change in fair value of derivative instruments | 108 | | | 1,739 | | | 21,368 | | | 21,335 | |
| (Benefit) provision for income tax | 0 | | | (842) | | | 113,185 | | | 124 | |
| Other | 99 | | | 82 | | | 262 | | | 234 | |
| Adjusted EBITDA (b) | $ | 160,897 | | | $ | 111,084 | | | $ | 217,946 | | | $ | 371,383 | |
| | | | | | | |
| Adjusted EBITDA | | | | | | | |
| Las Vegas operations | $ | 141,670 | | | $ | 102,226 | | | $ | 198,060 | | | $ | 342,975 | |
| Native American management | 29,826 | | | 22,273 | | | 52,634 | | | 65,699 | |
| Reportable segment Adjusted EBITDA | 171,496 | | | 124,499 | | | 250,694 | | | 408,674 | |
| Corporate and other | (10,599) | | | (13,415) | | | (32,748) | | | (37,291) | |
| Adjusted EBITDA | $ | 160,897 | | | $ | 111,084 | | | $ | 217,946 | | | $ | 371,383 | |
| | | | | | | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Net revenues | | | |
| Las Vegas operations: | | | |
| Casino | $ | 208,267 |
| | $ | 244,933 |
|
| Food and beverage | 88,331 |
| | 104,933 |
|
| Room | 40,076 |
| | 48,075 |
|
| Other (a) | 19,694 |
| | 24,266 |
|
| Management fees | 97 |
| | 163 |
|
| Las Vegas operations net revenues | 356,465 |
| | 422,370 |
|
| Native American management: | | | |
| Management fees | 19,260 |
| | 22,996 |
|
| Reportable segment net revenues | 375,725 |
| | 445,366 |
|
| Corporate and other | 1,663 |
| | 1,656 |
|
| Net revenues | $ | 377,388 |
| | $ | 447,022 |
|
| | | | |
| Net (loss) income | $ | (177,800 | ) | | $ | 20,284 |
|
| Adjustments | | | |
| Depreciation and amortization | 58,534 |
| | 50,853 |
|
| Share-based compensation | 4,053 |
| | 3,853 |
|
| Write-downs and other charges, net | 8,807 |
| | 23,728 |
|
| Interest expense, net | 36,058 |
| | 37,438 |
|
| Loss on extinguishment/modification of debt, net | 11,411 |
| | 302 |
|
| Change in fair value of derivative instruments | 20,010 |
| | 6,638 |
|
| Provision for income tax | 113,185 |
| | 1,919 |
|
| Other | 42 |
| | 69 |
|
| Adjusted EBITDA (b) | $ | 74,300 |
| | $ | 145,084 |
|
| | | | |
| Adjusted EBITDA | | | |
| Las Vegas operations | $ | 68,485 |
| | $ | 134,754 |
|
| Native American management | 17,601 |
| | 21,476 |
|
| Reportable segment Adjusted EBITDA | 86,086 |
| | 156,230 |
|
| Corporate and other | (11,786 | ) | | (11,146 | ) |
| Adjusted EBITDA | $ | 74,300 |
| | $ | 145,084 |
|
| | | | |
_______________________________________________________________(a)Includes tenant lease revenue which is accounted for under the lease accounting guidance. See Note 15. | |
(a) | Includes tenant lease revenue which is accounted for under the lease accounting guidance. See Note 15. |
| |
(b) | Adjusted EBITDA includes net (loss) income plus depreciation and amortization, share-based compensation, write-downs and other charges, net (including net losses on asset disposals, redevelopment and preopening expenses, severance, business innovation and technology enhancements), interest expense, net, loss on extinguishment/modification of debt, net, change in fair value of derivative instruments, provision for income tax and other. |
(b)Adjusted EBITDA includes net income (loss) plus depreciation and amortization, share-based compensation, write-downs and other charges, net (including net losses on asset disposals, severance, redevelopment and preopening expenses, business innovation and technology enhancements), interest expense, net, (gain) loss on extinguishment/modification of debt, net, change in fair value of derivative instruments, (benefit) provision for income tax and other.
Beginning in the first quarter of 2020, the Company changed its methodology for allocating certain corporate technology expenses to its reportable segments. Historically, all technology costs incurred at the corporate level were allocated to the Company’s operating properties on a pro rata basis. Under the new methodology, only technology costs that are directly related to operating properties are allocated to those properties, and expenses associated with corporate technology initiatives remain within corporate expense. For the three months ended March 31, 2020 and 2019, suchSuch corporate technology expenses were $4.4$3.3 million and $4.3$11.0 million for the three and nine months ended September 30, 2020, respectively, and $5.1 million and $13.6 million, for the three and nine months ended
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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
September 30, 2019, respectively. The amountamounts for the prior year period hasperiods have been reclassified from the Las Vegas operations segment to Corporate and other within reportable segment Adjusted EBITDA to conform with the current year presentation.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2019.
Impact of COVID-19
In March 2020, an outbreak of a new strain of coronavirus (“COVID-19”) was declared a global pandemic. As a result of a statewide order mandating the closure of Nevada casinos in an effort to limit the spread of COVID-19, all of our Las Vegas properties have beenwere temporarily closed sinceon March 17, 2020. As permitted under Phase 2 of Nevada’s COVID-19 response plan, on June 4, 2020, we reopened our Red Rock, Green Valley Ranch, Santa Fe Station, Boulder Station, Palace Station and Sunset Station properties, together with our Wildfire properties, subject to certain operational restrictions. Our Texas Station, Fiesta Rancho, Fiesta Henderson and Palms properties remain closed at this time. 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, and we do not expect to reopen any of these properties in 2020. The closure of our properties and the ongoing pandemic has had and may continue to have adverse effects on our business and results of operations, the extent and duration of which are difficult to estimate. In addition, Graton Resort, our managed property Graton Resort, located in northern California, has beentemporarily closed sinceon March 17, 2020 and partially reopened on June 18, 2020. While
We have implemented comprehensive health and cleanliness standards designed to provide the closures are expected tosafest and most secure environment possible for our guests and employees, which include COVID-19 testing of our employees and vendors, personal protective equipment and temperature checks for employees and guests, enhanced cleaning procedures and other measures. We anticipate that for the remainder of the year, and likely thereafter, our results of operations will be temporary, it is difficult to estimate their duration orimpacted by the impact that state-mandated occupancyeconomic and social distancingeffects of the COVID-19 pandemic and the related operational restrictions, and other protective measures will have on our operations once our casino properties are permitted to reopen.which may remain in place for an extended period of time. We also cannot predict the extent to which our business will continue to be affected by the detrimental impacts of COVID-19 on the United States and Las Vegas economies, including widespread unemployment and related effects on consumer confidence and discretionary spending.
Our property closures are ongoing, and people across the world have been advised to avoid all non-essential travel. We anticipate that even after reopening is permitted, there will be a decrease in customer demand due to consumer fears and reduced customer visitation while social distancing requirements, including reduced occupancy limits, are in place. When reopening is permitted by governmental authorities, we expect to first open our Red Rock, Green Valley Ranch, Santa Fe Station, Boulder Station, Palace Station and Sunset Station properties, together with our Wildfire properties. We will assess the performance of the first-to-reopen properties before reopening our Palms, Texas Station, Fiesta Henderson and Fiesta Rancho properties. In collaboration with regulators and government officials, we are developing detailed plans for conducting our operations in compliance with state-mandated occupancy and social distancing restrictions. Our plans include various protocols designed to ensure the safety of our guests and employees, which may include reconfiguration of our slot machine and table game seating, social distancing measures at our restaurants and entertainment venues, personal protective equipment requirements for our employees and guests, temperature checks, disinfection protocols and other measures.
For the three months ended March 31, 2020 as compared to the prior year period, we experienced decreased revenue and operating income across all areas of our business due to the COVID-19 pandemic, primarily due to the mandatory closures in mid-March. We expect that the ongoing closures of our properties during the second quarter of 2020 will cause our results of operations for the second quarter of 2020 to be more unfavorable than those for the first quarter of 2020. In addition, we anticipate that for the remainder of the year, and potentially thereafter, our results of operations will be negatively impacted by the economic and social effects of the COVID-19 pandemic, as well as the anticipated operational restrictions that may remain in place. While we have taken steps to reduce our expenses and increase our cash position in an effort to mitigate these and potential future decreases,effects of COVID-19 on our results of operations, we continue to have significant fixed and variable expenses that will impact our cash position and profitability. In March 2020, we drew $997.5 million under our revolving credit facility to secure our liquidity position and preserve financial flexibility.flexibility, of which $917.5 million was repaid through September 2020. See Liquidity and Capital Resources for additionalmore information. In addition, onwe implemented staffing reductions in May 1, 2020 we announced staffing reductions that affected approximately 39% of our full-time workforce.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides opportunities for additional liquidity and other government programs to support companies and employees affected by the COVID-19 pandemic. We expect to recognize some benefithave received certain benefits from the CARES Act, including significant federalpayroll retention tax credits of up to $5,000 per employee for the wages and health insurance we continuecontinued to provide to team members who were not providing services during the temporary closures of our properties, a deferral of employer social security taxes for the remainder of 2020, 50% of which is payable by December 2021 and certain additional federal income tax benefits. For the remainder payable by December 2022, and additional bonus depreciation related to qualified improvement property placednine months ended September 30, 2020, we recognized $38.2 million in service in 2018 and 2019.payroll retention credits. We intend towill continue to review and consider any availableother potential benefits available under the CARES Act for which we qualify.
Overview
Red Rock was formed as a Delaware corporation in September 2015 to own an indirect equity interest in, and manage, Station Casinos LLC, a Nevada limited liability company (“Station LLC”). Station LLC is a gaming, development and management company 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. Station LLC also manages Graton Resort on behalf of a
Native American tribe. We own all of the outstanding voting interests in Station LLC and have an indirect equity interest in Station LLC through our ownership interest in Station Holdco LLC (“Station Holdco”), which owns all of the economic interests in Station LLC. In May 2016, we completed an initial public offering and used the proceeds to purchase newly issued
limited liability company interests in Station Holdco (“LLC Units”), and outstanding LLC Units from existing members of Station Holdco.
At March 31,September 30, 2020, we held 61% of the economic interests in Station Holdco, as well as 100% of the voting interest in Station LLC 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 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.
The United States economy and the economy in the Las Vegas metropolitan area have been significantlynegatively affected by the unprecedented impacts of COVID-19. A significant portion of our business is dependent upon customers who live and/or work in the Las Vegas metropolitan area. FromThe unemployment rate in the period March 15,Las Vegas metropolitan area was 14.8% in September 2020, down from a high of 34% in April 2020. Statewide, the unemployment rate for September 2020 declined to May 2, 2020, Clark County, Nevada had over 342,000 initial claims of unemployment filed.12.6%, as compared to 30% in April 2020.
As a result of the COVID-19 andpandemic, the mandatedtemporary closure of all of our properties onfrom March 17, 2020 through June 3, 2020, and the ongoing closure of four of our year over yearproperties, our year-over-year operating results are not comparable. Further, our operating results for the prior year period were impacted by construction disruption and costs associated with the redevelopment project at Palms, which was completed in the third quarter of 2019.
Information about our results of operations is included herein and in the notes to our Condensed Consolidated Financial Statements.
Key Performance Indicators
We use certain key indicators to measure our performance.
Gaming revenue measures:
•Slot handle, table game drop and race and sports write 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. Write represents the aggregate dollar amount wagered on race and sports events.
•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. |
Results of Operations
Information about our results of operations is presented below (amounts in thousands):
| | | | Three Months Ended March 31, | | Percent change | | Three Months Ended September 30, | | Percent
change | | Nine Months Ended September 30, | | Percent
change |
| | 2020 | | 2019 | | | 2020 | | 2019 | | 2020 | | 2019 | |
| Net revenues | $ | 377,388 |
| | $ | 447,022 |
| | (15.6 | )% | Net revenues | $ | 353,178 | | | $ | 465,858 | | | (24.2) | % | | $ | 839,036 | | | $ | 1,395,748 | | | (39.9) | % |
| Operating income | 2,706 |
| | 66,145 |
| | (95.9 | )% | Operating income | 100,910 | | | 14,243 | | | 608.5 | % | | 9,955 | | | 125,869 | | | (92.1) | % |
| | | | | | | |
| Casino revenues | 208,267 |
| | 244,933 |
| | (15.0 | )% | Casino revenues | 239,866 | | | 238,269 | | | 0.7 | % | | 523,741 | | | 728,470 | | | (28.1) | % |
| Casino expenses | 83,275 |
| | 82,940 |
| | 0.4 | % | Casino expenses | 57,659 | | | 89,205 | | | (35.4) | % | | 172,559 | | | 259,861 | | | (33.6) | % |
| Margin | 60.0 | % | | 66.1 | % | |
|
| Margin | 76.0 | % | | 62.6 | % | | 67.1 | % | | 64.3 | % | |
| | | | | | | |
| Food and beverage revenues | 88,331 |
| | 104,933 |
| | (15.8 | )% | Food and beverage revenues | 45,855 | | | 128,016 | | | (64.2) | % | | 149,171 | | | 370,740 | | | (59.8) | % |
| Food and beverage expenses | 92,486 |
| | 92,236 |
| | 0.3 | % | Food and beverage expenses | 40,356 | | | 128,376 | | | (68.6) | % | | 155,266 | | | 360,767 | | | (57.0) | % |
| Margin | (4.7 | )% | | 12.1 | % | | | Margin | 12.0 | % | | (0.3) | % | | (4.1) | % | | 2.7 | % | |
| | | | | | | |
| Room revenues | 40,076 |
| | 48,075 |
| | (16.6 | )% | Room revenues | 22,068 | | | 48,169 | | | (54.2) | % | | 67,635 | | | 145,555 | | | (53.5) | % |
| Room expenses | 20,673 |
| | 20,196 |
| | 2.4 | % | Room expenses | 11,147 | | | 20,279 | | | (45.0) | % | | 38,222 | | | 61,034 | | | (37.4) | % |
| Margin | 48.4 | % | | 58.0 | % | | | Margin | 49.5 | % | | 57.9 | % | | 43.5 | % | | 58.1 | % | |
| | | | | | | |
| Other revenues | 21,357 |
| | 25,922 |
| | (17.6 | )% | Other revenues | 14,487 | | | 27,823 | | | (47.9) | % | | 42,290 | | | 80,650 | | | (47.6) | % |
| Other expenses | 9,634 |
| | 11,859 |
| | (18.8 | )% | Other expenses | 4,918 | | | 14,077 | | | (65.1) | % | | 17,610 | | | 39,610 | | | (55.5) | % |
| | | | | | | |
| Management fee revenue | 19,357 |
| | 23,159 |
| | (16.4 | )% | Management fee revenue | 30,902 | | | 23,581 | | | 31.0 | % | | 56,199 | | | 70,333 | | | (20.1) | % |
| | | | | | | |
| Selling, general and administrative expenses | 101,273 |
| | 99,065 |
| | 2.2 | % | Selling, general and administrative expenses | 79,491 | | | 107,756 | | | (26.2) | % | | 245,996 | | | 317,423 | | | (22.5) | % |
| Percent of net revenues | 26.8 | % | | 22.2 | % | | | Percent of net revenues | 22.5 | % | | 23.1 | % | | 29.3 | % | | 22.7 | % | |
| | | | | | | |
| Depreciation and amortization | 58,534 |
| | 50,853 |
| | 15.1 | % | Depreciation and amortization | 57,297 | | | 57,925 | | | (1.1) | % | | 173,755 | | | 164,613 | | | 5.6 | % |
| Write-downs and other charges, net | 8,807 |
| | 23,728 |
| | n/m |
| Write-downs and other charges, net | 1,400 | | | 34,094 | | | n/m | | 25,673 | | | 66,668 | | | n/m |
| Tax receivable agreement liability adjustment | | Tax receivable agreement liability adjustment | — | | | (97) | | | n/m | | — | | | (97) | | | n/m |
| Interest expense, net | (36,058 | ) | | (37,438 | ) | | (3.7 | )% | Interest expense, net | (29,798) | | | (40,517) | | | (26.5) | % | | (99,836) | | | (118,936) | | | (16.1) | % |
| Loss on extinguishment/modification of debt, net | (11,411 | ) | | (302 | ) | | n/m |
| |
| Gain (loss) on extinguishment/modification of debt, net | | Gain (loss) on extinguishment/modification of debt, net | 482 | | | — | | | n/m | | 235 | | | (302) | | | n/m |
| Change in fair value of derivative instruments | (20,010 | ) | | (6,638 | ) | | n/m |
| Change in fair value of derivative instruments | (108) | | | (1,739) | | | n/m | | (21,368) | | | (21,335) | | | n/m |
| Provision for income tax | (113,185 | ) | | (1,919 | ) | | n/m |
| |
| Net (loss) income attributable to noncontrolling interests | (25,601 | ) | | 8,961 |
| | n/m |
| |
| Net (loss) income attributable to Red Rock | (152,199 | ) | | 11,323 |
| | n/m |
| |
| Benefit (provision) for income tax | | Benefit (provision) for income tax | — | | | 842 | | | n/m | | (113,185) | | | (124) | | | n/m |
| Net income (loss) attributable to noncontrolling interests | | Net income (loss) attributable to noncontrolling interests | 28,410 | | | (11,141) | | | n/m | | (44,066) | | | (5,401) | | | n/m |
| Net income (loss) attributable to Red Rock | | Net income (loss) attributable to Red Rock | 43,634 | | | (15,657) | | | n/m | | (180,107) | | | (8,180) | | | n/m |
____________________________________n/m = Not meaningful
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 March 31,September 30, 2020 decreased by $69.6$112.7 million and $556.7 million, respectively, as compared to the prior year periods. The decrease in net revenues for the three months ended September 30, 2020 reflects lower revenue from our non-gaming operations, primarily hotel and food and beverage, partially offset by a slight increase in casino revenues, as well as the impact of the ongoing closure of four of our properties. For the nine months ended September 30, 2020, revenues were lower due to the mandated closure of all of our properties from March 17, 2020 through June 3, 2020 and the ongoing closures of the four properties, as well as state-mandated occupancy, social distancing and other restrictions in place at our reopened properties.
Operating Income. For the three and nine months ended September 30, 2020, we produced operating income of $100.9 million and $10.0 million, respectively, as compared to $14.2 million and $125.9 million, respectively, for the prior year periods. The year-over-year increase for the three months ended September 30, 2020 was primarily due to lower operating costs and expenses, including the impact of cost streamlining efforts at our reopened properties and the ongoing closure of four of our properties. The decrease in operating income for the nine months ended September 30, 2020 was primarily due to the mandated closure of all of our properties from March 17, 2020 through June 3, 2020 and the ongoing closure of the four properties, partially offset by the impact of cost reduction measures. Additional information about factors impacting our operating income is discussed below.
Casino. For the three months ended September 30, 2020, casino revenue increased by 0.7% and casino expenses decreased by 35.4% as compared to the prior year period. Casino revenue grew slightly in the third quarter as we continued to attract our core customers to our reopened properties, including customers who previously visited our properties that remain closed. In addition, we saw growth in new customers and a sequential increase in signups for our Boarding Pass loyalty program. The decrease in casino expenses for the third quarter was primarily due to our four properties that continue to be closed, as well as cost reduction measures at our reopened properties and optimization of our marketing initiatives. For the nine months ended September 30, 2020, casino revenues decreased by 28.1% and casino expenses decreased by 33.6% as compared to the prior year period. The decreaseyear-over-year decreases in netcasino revenues was dueand casino expenses for the nine months ended September 30, 2020 were primarily attributable to the temporarymandated closure of all of our properties as a resultfrom March 17, 2020 through June 3, 2020 and the ongoing closure of the COVID-19 pandemic.
Operating Income. Operating income for the three months ended March 31, 2020 decreased by $63.4 million as compared to the prior year period. The decrease was primarily a result of the decline in net revenues due to our temporary property closures and additional payroll and related costs that were recognized as of March 31, 2020 due to the continuation of pay and benefits to our employees. Upon the closurefour of our properties, in March, we committed that we would continue to offer regular pay and health benefits to all ofas well as cost reduction measures at our full-time team members through April 30, 2020. Subsequently, this date was extended through May 16, 2020. Additionally, our operating income during 2020 was impacted by higher costs at Palms with additional restaurants, bars and other amenities opened as part of the completion of the redevelopment project in the third quarter of 2019. Other factors impacting operating income are discussed below.
Casino. Casino revenues decreased by 15.0% for the three months ended March 31, 2020 as compared to the prior year period. Property closures led to decreased volume across all major categories of gaming operations. Casino expenses increased for the three months ended March 31, 2020 primarily due to additional payroll and related costs during the current year period.reopened properties.
Food and Beverage. Food and beverage includes restaurants, bars and catering at all of our Las Vegas properties. For the three months ended March 31,September 30, 2020, food and beverage revenue decreased by 15.8% as compared to the prior year period due to the property closures. For the three months ended March 31, 2020, food and beverage expense increased64.2% as compared to the prior year period, primarily due to additional payrollthe closure of our four properties, particularly Palms. In addition, the closure of all of the buffets at our reopened properties, as well as lower catering revenue due to the impact of COVID-19 on group business, contributed to the year-over-year decrease in food and related costs.beverage revenues for the third quarter. For the three months ended September 30, 2020, food and beverage expenses decreased by 68.6% as compared to the prior year period, which was driven primarily by the same factors as the decline in revenues. For the nine months ended September 30, 2020, food and beverage revenue decreased by 59.8% and food and beverage expenses decreased by 57.0% due to the impact of the four closed properties, primarily Palms, the ongoing closure of our buffets, and the mandated closure of all of our properties from March 17, 2020 through June 3, 2020.
Room. Information about our hotel operations is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Occupancy | 61.1 | % | | 88.4 | % | | 70.4 | % | | 88.7 | % |
| Average daily rate | $ | 105.86 | | | $ | 126.68 | | | $ | 120.55 | | | $ | 128.71 | |
| Revenue per available room | $ | 64.67 | | | $ | 111.97 | | | $ | 84.86 | | | $ | 114.11 | |
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Occupancy | 82.7 | % | | 87.7 | % |
| Average daily rate | $ | 132.52 |
| | $ | 131.38 |
|
| Revenue per available room | $ | 109.55 |
| | $ | 115.17 |
|
For the three months ended March 31,September 30, 2020, room revenues decreased by 16.6%54.2% and room expenses decreased by 45.0% as compared to the prior period. The year-over-year decline in revenues for the period was due to reduced occupancy and average daily rate as a result of decreased travel amid the COVID-19 pandemic, as well as the impact of the ongoing closure of four of our properties. The decrease in room expenses for the period was attributable to the ongoing closure of the four properties, as well as our cost streamlining initiatives. For the nine months ended September 30, 2020, room revenues decreased by 53.5% and room expenses decreased by 37.4% as compared to the prior year period, due to the property closureslower occupancy and a decrease in travelaverage daily rate, the temporary closure of all of our properties from March 17, 2020 through June 3, 2020 and demand for rooms amid the COVID-19 pandemic. Room expenses increased forongoing closure of the three months ended March 31, 2020,four properties, as compared to the prior year period, primarily due to additional payroll and related costs.well as cost reduction measures.
Other. Other primarily represents revenues from tenant leases, retail outlets, bowling, spas, entertainment and entertainmentother, and their corresponding expenses. For the three months ended September 30, 2020, other revenues decreased by 47.9% and other expenses decreased by 65.1% as compared to the prior year period, primarily due to the ongoing closure of the four properties, a reduction in non-gaming amenities offered at our reopened properties, such as movie theaters, and lower revenues from amenities that are operating. Other revenues and other expenses decreased by 47.6% and 55.5%, respectively, for the threenine months ended March 31,September 30, 2020 as compared to the prior year period, due to the same factors impacting the three-month period, as well as the property closures have reduced business volume.temporary closure of all of our properties from March 17, 2020 through June 3, 2020.
Management Fee Revenue. Management fee revenue primarily represents fees earned from our agreementagreements with a Native American tribe to manage Graton Resort. For the three months ended March 31,September 30, 2020, management fee revenue increased by 31.0% as compared to the prior year period due to improved performance of Graton Resort’s gaming operations. For the nine months ended September 30, 2020, management fee revenue decreased by 16.4%20.1% due to $19.4 million due tothe effects of the COVID-19 pandemic, including the temporary closure of Graton Resort.Resort from March 17, 2020 through June 17, 2020. Our agreementagreements to manage Graton Resort waswere originally scheduled to expire in November 2020. The management agreement providesparties have agreed that its termthe terms and expiration datedates of the management agreements will be extended as a result of the closure;closure to February 5, 2021. Whether the management agreements provide for an additional extension beyond that date is in dispute and the length of suchan additional extension, if any, has not yet been determined.agreed and cannot be determined at this time.
Selling, General and Administrative (“SG&A”). For the three and nine months ended March 31,September 30, 2020, SG&A expenses increaseddecreased by $2.2$28.3 million and $71.4 million, respectively, as compared to the prior year period,periods, primarily due to increased payroll and relatedthe property closures, as well as various cost reduction initiatives, including employee costs. As a percentage of net revenue, SG&A expenses increased by 4.6 percentage points for the three months ended March 31, 2020, as compared to the prior year period, primarily due to lower net revenues.
Depreciation and Amortization. For the three and nine months ended March 31,September 30, 2020, depreciation and amortization expense decreased by 1.1% and increased to $58.5 million,by 5.6%, respectively, as compared to $50.9 million for the prior year period.periods. The increase for the nine months ended September 30, 2020 was primarily due to additional portions of the Palms redevelopment project being placed into service in April 2019 and September 2019.
Write-downs and Other Charges, net. Write-downs and other charges, net include asset disposals, severance, preopening and redevelopment, severance, business innovation and technology enhancements and non-routine expenses. For the three and nine months ended March 31,September 30, 2020, write-downs and other charges, net totaled $8.8$1.4 million and $25.7 million, respectively, which included net losses on asset disposals, severance, and contract termination costs and other expenses related to various technology projects, as well as severance.projects. For the three months ended March 31,September 30, 2019, write-downs and other charges, net totaled $23.7$34.1 million, which included $20.6$28.2 million in Palms
the closure of Palms’ nightclub and dayclub. For the nine months ended September 30, 2019, write-downs and other charges, net totaled $66.7 million, which included the costs associated with the closure of Palms’ nightclub and dayclub in the third quarter as well as $25.9 million in Palms redevelopment and preopening expenses, comprising various costs associated with the brand repositioning campaign, as well as preopening related to new restaurants, nightclubs, bars and other amenities.
Interest Expense, net. Interest expense, net decreased to $36.1$29.8 million and $99.8 million for the three and nine months ended March 31,September 30, 2020, respectively, as compared to $37.4$40.5 million and $118.9 million for the prior year period.same periods in 2019. The decrease in interest expense was primarily due to lower variable interest rates on our credit facility, primarily due to a decrease in LIBOR, partially offset by higher outstanding indebtedness.LIBOR. Interest rates have decreased in the current year period in response to current economic and growth uncertainty surrounding the COVID-19 pandemic. Additional information about long-term debt is included in Note 7 to the Condensed Consolidated Financial Statements.
LossGain (Loss) on Extinguishment/Modification of Debt, net. For the three months ended March 31,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. For the three and nine months ended September 30, 2019, we recorded $11.4 million anda $0.3 million respectively, of loss on extinguishment/modification of debt, net, primarily resulting from amendmentsthe amendment to the credit facility in February 2020 and February 2019, respectively.2019. See Note 7 for additional information.
Change in Fair Value of Derivative Instruments. During the three and nine months ended March 31,September 30, 2020, we recognized a net losslosses of $20.0$0.1 million and $21.4 million, respectively, in the fair value of our interest rate swaps, as compared to a net losslosses of $6.6$1.7 million and $21.3 million for the prior year period. Fluctuations in the fair value of our interest rate swaps areperiods. The losses were primarily due to downward movements in the forward interest rate curve during the current year period.curve.
ProvisionBenefit (Provision) for Income Tax. For the three months ended March 31,September 30, 2020, we recognized no income tax benefit or provision. For the nine months ended September 30, 2020, we recognized income tax expense of $113.2 million, primarily related to the establishment of a full valuation allowance on our deferred tax assets as our abilitydue to realize the benefit has been negatively impacted as a resultuncertainty of realizing the economic downturn and uncertainty caused by the COVID-19 pandemic.tax benefits. 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 nor benefit from a taxable loss. Due to these factors, our effective tax rate of (175.17)0.0% and (102.0)% for the three and nine months ended March 31,September 30, 2020, respectively, was less than the statutory rate. The provision forWe recognized an income tax was $1.9benefit of $0.8 million for the three months ended March 31,September 30, 2019, and a provision for income tax of $0.1 million for the nine months ended September 30, 2019.
Net Income (Loss) Income Attributable to Noncontrolling Interests. Net (loss) income attributable to noncontrolling interests for the three and nine months ended March 31,September 30, 2020 and 2019 represented the portion of net (loss) income attributable to the ownership interest in Station Holdco not held by us. The net loss in the current year period was due to the COVID-19 pandemic and resulting temporary closure of all of our properties.
Adjusted EBITDA
Adjusted EBITDA for the three and nine months ended March 31,September 30, 2020 and 2019 for our two reportable segments and a reconciliation of net income (loss) income 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 arrangements. | | | | Three Months Ended March 31, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Net revenues | | | | Net revenues | | | | | | | |
| Las Vegas operations | $ | 356,465 |
| | $ | 422,370 |
| Las Vegas operations | $ | 320,765 | | | $ | 440,695 | | | $ | 778,250 | | | $ | 1,320,818 | |
| Native American management | 19,260 |
| | 22,996 |
| Native American management | 30,718 | | | 23,453 | | | 55,872 | | | 69,901 | |
| Reportable segment net revenues | 375,725 |
| | 445,366 |
| Reportable segment net revenues | 351,483 | | | 464,148 | | | 834,122 | | | 1,390,719 | |
| Corporate and other | 1,663 |
| | 1,656 |
| Corporate and other | 1,695 | | | 1,710 | | | 4,914 | | | 5,029 | |
| Net revenues | $ | 377,388 |
| | $ | 447,022 |
| Net revenues | $ | 353,178 | | | $ | 465,858 | | | $ | 839,036 | | | $ | 1,395,748 | |
| | | | | | | | | | | | |
| Net (loss) income | $ | (177,800 | ) | | $ | 20,284 |
| |
| Net income (loss) | | Net income (loss) | $ | 72,044 | | | $ | (26,798) | | | $ | (224,173) | | | $ | (13,581) | |
| Adjustments | | | | Adjustments | |
| Depreciation and amortization | 58,534 |
| | 50,853 |
| Depreciation and amortization | 57,297 | | | 57,925 | | | 173,755 | | | 164,613 | |
| Share-based compensation | 4,053 |
| | 3,853 |
| Share-based compensation | 633 | | | 4,464 | | | 8,275 | | | 12,849 | |
| Write-downs and other charges, net | 8,807 |
| | 23,728 |
| Write-downs and other charges, net | 1,400 | | | 34,094 | | | 25,673 | | | 66,668 | |
| Tax receivable agreement liability adjustment | | Tax receivable agreement liability adjustment | — | | | (97) | | | — | | | (97) | |
| Interest expense, net | 36,058 |
| | 37,438 |
| Interest expense, net | 29,798 | | | 40,517 | | | 99,836 | | | 118,936 | |
| Loss on extinguishment/modification of debt, net | 11,411 |
| | 302 |
| |
| (Gain) loss on extinguishment/modification of debt, net | | (Gain) loss on extinguishment/modification of debt, net | (482) | | | — | | | (235) | | | 302 | |
| Change in fair value of derivative instruments | 20,010 |
| | 6,638 |
| Change in fair value of derivative instruments | 108 | | | 1,739 | | | 21,368 | | | 21,335 | |
| Provision for income tax | 113,185 |
| | 1,919 |
| |
| (Benefit) provision for income tax | | (Benefit) provision for income tax | — | | | (842) | | | 113,185 | | | 124 | |
| Other | 42 |
| | 69 |
| Other | 99 | | | 82 | | | 262 | | | 234 | |
| Adjusted EBITDA | $ | 74,300 |
| | $ | 145,084 |
| Adjusted EBITDA | $ | 160,897 | | | $ | 111,084 | | | $ | 217,946 | | | $ | 371,383 | |
| | | | | | | | | | | | |
| Adjusted EBITDA | | | | Adjusted EBITDA | |
| Las Vegas operations | $ | 68,485 |
| | $ | 134,754 |
| Las Vegas operations | $ | 141,670 | | | $ | 102,226 | | | $ | 198,060 | | | $ | 342,975 | |
| Native American management | 17,601 |
| | 21,476 |
| Native American management | 29,826 | | | 22,273 | | | 52,634 | | | 65,699 | |
| Reportable segment Adjusted EBITDA | 86,086 |
| | 156,230 |
| |
| Corporate and other | (11,786 | ) | | (11,146 | ) | Corporate and other | (10,599) | | | (13,415) | | | (32,748) | | | (37,291) | |
| Adjusted EBITDA | $ | 74,300 |
| | $ | 145,084 |
| Adjusted EBITDA | $ | 160,897 | | | $ | 111,084 | | | $ | 217,946 | | | $ | 371,383 | |
| | | | | | | | | | | | |
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) income,, 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) income plus depreciation and amortization, share-based compensation, write-downs and other charges, net (including net losses on asset disposals, severance, redevelopment and preopening expenses, severance, business innovation and technology enhancements), interest expense, net, (gain) loss on extinguishment/modification of debt, net, change in fair value of derivative instruments, (benefit) 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.
Beginning in the first quarter of 2020, we changed our methodology for allocating certain corporate technology expenses to our reportable segments. Historically, all technology costs incurred at the corporate level were allocated to our
operating properties on a pro rata basis. Under the new methodology, only technology costs that are directly related to operating properties are allocated to those properties, and expenses associated with corporate technology initiatives remain within corporate expense. For the three and nine months ended March 31,September 30, 2020, such corporate technology expenses were $3.3 million and $11.0 million, respectively, and for the three and nine months ended September 30, 2019, such corporate technology expenses were $4.4$5.1 million and $4.3$13.6 million, respectively. The amountamounts for the prior year period hasperiods have been reclassified from the Las Vegas operations segment to Corporate and other within reportable segment Adjusted EBITDA to conform with the current year presentation.
Holding Company Financial Information
The indentures governing the 5.00% Senior Notes and 4.50% Senior Notes contain 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 payable or receivable byof the Holding Company and the liability relating to the tax receivable agreement (“TRA”).
At March 31,September 30, 2020, 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 $0.3$0.1 million that is solely an asset of the Holding Company, partially offset byas well as liabilities that are solely the Holding Company’s, consisting of a $27.1$27.4 million liability under the TRA and $0.9$0.6 million of other current liabilities. At December 31, 2019, the Holding Company had cash of $0.2 million and a net deferred tax asset of $113.2 million, partially offset byas well as liabilities that are solely the Holding Company’s, consisting of a $25.1 million liability under the TRA and $0.8 million of other net current liabilities.
For the three months ended March 31,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 representing provision for income tax to establish a full valuation allowance against its deferred tax assets. See Note 13 to the Condensed Consolidated Financial Statements for additional information about income taxes. For the three and nine months ended September 30, 2019, the Holding Company recognized net lossesincome of $113.2$0.9 million and $1.9a net loss of $0.1 million, respectively, primarily representing provision for income tax.taxes.
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, 2019 and Item 1A—Risk Factors in this Quarterly Report on Form 10-Q.
All of our Las Vegas casino properties have been closed since March 17, 2020 as a result of a statewide order mandating the closure of Nevada casinos in response to the COVID-19 pandemic. Our managed property, Graton Resort, also has been closed since March 17, 2020. Although weWe have taken steps to reduce our operating costs while our casinos are closed,business continues to be impacted by the COVID-19 pandemic but we continue to have substantial payment obligations, with respect to expenses that cannot be eliminated notwithstanding the closure of our casinos, including salaries, wages and employee benefits, payments with respect to our outstanding indebtedness, service contracts, property taxes, insurance salaries, wages and employee benefits.other obligations. In addition, on May 19, 2020, we announced that our board of directors had suspended the payment of dividends for the remainder of 2020. To increase our cash position and preserve financial flexibility in light of uncertainty in the global markets, on March 12, 2020, Station LLC borrowed $997.5 million under its revolving credit facility. Atfacility in March 31, 2020, of which $917.5 million was repaid through September 2020. Station LLC’s borrowing availability under its revolving credit facility, subject to continued compliance with the terms of the credit facility, was $29.8$918.5 million at September 30, 2020, which was net of $997.5$80.0 million in outstanding borrowings and $3.8$32.6 million in outstanding letters of credit.credit and similar obligations. In addition, we reduced our outstanding indebtedness by approximately $65 million subsequent to September 30, 2020.
37
Following the reopening
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.payments. Our anticipated uses of cash for the remainder of 2020 are expected to include required principal and interest payments on Station LLC’s indebtedness, totaling $19.6$4.1 million and $121.8$32.1 million, respectively, and approximately $20.0$8.0 million to $30.0$12.0 million for maintenance capital expenditures. We expect to use cash on hand and when we are permitted to reopen, cash generated from operations to meet such obligations. At March 31,September 30, 2020, we had $1.09 billion$108.9 million in cash and cash equivalents.
We expect that cash on hand, and any 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.
On February 7, 2020, we amended Station LLC’s credit facility to, among other things, (i) increase the borrowing availability under the revolving credit facility by $135.1 million to $1.03 billion, (ii) extend the maturity date for term loans A and B and the revolving credit facility to February 7, 2025, February 7, 2027, and February 7, 2025, respectively, (iii) reduce the interest ratesrate margin under the term loan B by 25 basis points and (iv) increase the consolidated total leverage ratios by 0.50x, the achievement of which will result in an interest rate step-down for the term loan A and the revolving credit facility. We also issued $750.0 million in aggregate principal amount of 4.50% senior notes due 2028 pursuant to an indenture dated as of February 7, 2020, among Station LLC, the guarantors party thereto and Wells Fargo Bank, National Association, as Trustee. See Note 7 to the Condensed Consolidated Financial Statements for more information.
We are obligated to make payments under the TRA, which is described in Note 13 to the Condensed Consolidated Financial Statements. At March 31,September 30, 2020, such obligations with respect to previously consummated transactions totaled $27.1$27.4 million. Future payments in respect of any subsequent exchanges of LLC Units for Class A common stock would be in addition to these amounts and are expected to be substantial. Required TRA payments are generally limited to one payment per year, and the timing of these payments may vary. The amount of such payments is also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash that might have otherwise been available to us, but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments.
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. We are not obligated to repurchase any shares under this 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. Through March 31,September 30, 2020, no repurchases were made 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. During the nine months ended September 30, 2020, we repurchased $81.9 million in principal amount of our outstanding indebtedness, primarily our 4.50% and 5.00% senior notes.
Following is a summary of our cash flow information (amounts in thousands):
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| Net cash provided by (used in): | | | |
| Operating activities | $ | 85,553 | | | $ | 216,649 | |
| Investing activities | (56,998) | | | (376,758) | |
| Financing activities | (48,233) | | | 152,356 | |
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Cash flows provided by (used in): | | | |
| Operating activities | $ | 47,884 |
| | $ | 54,605 |
|
| Investing activities | (31,288 | ) | | (157,168 | ) |
| Financing activities | 945,729 |
| | 97,304 |
|
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 threenine months ended March 31,September 30, 2020, net cash provided by operating activities was $47.9$85.6 million as compared to $54.6$216.6 million for the prior year period. Operating cash flows were negatively impacted by the ongoing COVID-19 pandemic, including the temporary closure of all of our properties on March 17, 2020 as a resultand the continued closure of four of our properties, the COVID-19 pandemic.effects of state-mandated occupancy and social distancing restrictions, and reduced consumer confidence, discretionary spending and travel.
Cash Flows from Investing Activities
For the threenine months ended March 31,September 30, 2020, cash paid for capital expenditures totaled $30.8$53.4 million. During the threenine months ended March 31,September 30, 2019, capital expenditures were $160.0$324.4 million, which primarily were related to the redevelopment project at Palms.
Cash Flows from Financing Activities
During the threenine months ended March 31,September 30, 2020, we incurredreduced our net borrowings under the revolving credit facility of $557.5by $360.0 million which were primarily held to secure our liquidity position and preserve financial flexibility. In addition, we issued $750.0 million in principal amount of 4.50% senior notes due 2028 and2028. In addition, we repaid $330.8$334.9 million of outstanding borrowings under our term loans.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 $7.1$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 $19.4$22.9 million in fees and costs related to the amendment of the credit facility and new senior notes.
During the threenine months ended March 31,September 30, 2019, we incurred net borrowings under the revolving credit facility of $116.3$212.1 million. We also completed an amendment to our credit facility and paid $2.5 million in related fees and costs. In addition,For the same period, we paid $7.0$20.9 million in dividends to Class A common shareholders and $4.7$14.1 million in cash distributions primarily to the noncontrolling interest holders of Station Holdco.
Restrictive Covenants
The agreements governing our credit facility and the indentures 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. 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, 2019, the amendment of the credit facility in February 2020 included changes to certain financial ratio covenants that Station LLC is required to maintain throughout the term of the facility. During the threenine months ended March 31,September 30, 2020, there were no other changes to the covenants included in the credit facility or the indentures governing the senior notes. At March 31, 2020, Station LLC’s interest coverage ratio was 6.36 to 1.00 and its consolidated total leverage ratio was 4.16 to 1.00, both as defined in the credit facility. We believe that as of March 31,September 30, 2020, 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 will be negatively impacted if the period of casino closures is prolonged or if our business does not return to expected levels following reopening of our casino properties.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 the debtsuch covenants. There can be no assurance that we will 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 March 31,September 30, 2020, 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 comprise interest rate swaps as described in Note 8 to the Condensed Consolidated Financial Statements. At March 31,September 30, 2020, we had outstanding letters of credit and similar obligations totaling $3.8$32.6 million.
Contractual Obligations
During the threenine months ended March 31,September 30, 2020, there have been no material changes to the contractual obligations previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 other than the February 2020 amendment to Station LLC’s credit facility and the issuance of $750.0 million in aggregate principal amount of 4.50% senior notes due 2028 and a $557.5 million increase in outstanding indebtedness under the revolving credit facility.2028. These transactions are described in Note 7 to the Condensed Consolidated Financial Statements.
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 5 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, the California Gambling Control Commission and the Federated Indians of Graton Rancheria Gaming 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 regular legislative session ended in June 2019. 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.
Description of Certain Indebtedness
A description of our indebtedness is included in Note 119 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 and Note 7 to the Condensed Consolidated Financial Statements. Material changes to the terms of our indebtedness during the threenine months ended March 31,September 30, 2020 are described therein and include the February 2020 amendment to Station LLC’s credit facility and the issuance of $750.0 million in aggregate principal amount of 4.50% senior notes due 2028.
Derivative and Hedging Activities
A description of our derivative and hedging activities is included in Note 8 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, 2019. There were no material changes to our critical accounting policies and estimates during the threenine months ended March 31,September 30, 2020.
Forward-looking Statements
The outbreak of COVID-19 has resulted in the closure of all of our casino properties and all other casino properties located in Nevada. The expected durationNevada 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 closureeconomy as a whole, the health of our casinothe Las Vegas economy, customer demand, expense of operating the properties and the impact of COVID-19restrictions on operations to implement social distancing and measures instituted to curtail COVID-19 on our results of operations, the economyother health and discretionary spending cannot be estimated at this time. However, thesafety protocols. The outbreak of COVID-19 and measures to implement social distancing 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. In addition, even after our casinos are permitted to reopen, we expect that our operations will continue to be negatively impacted by diminished consumer confidence and discretionary spending and by social distancing measures applicable to our gaming and entertainment venues.
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. Further information on potential factors which could affect our financial condition, results of operations and business includes, without limitation, the extent and duration of the impact of the COVID-19 pandemic on the Company’s business, financial results and liquidity; the duration of the closure of the Company’s properties;properties that we have not reopened; the impact and cost of new operating procedures expectedimplemented at our properties in response to be implemented upon reopening of the Company’s properties;COVID-19 pandemic; the impact of actions that the Company has undertaken to reduce costs and improve efficiencies to mitigate losses as a result of the COVID-19 pandemic; the impact of the COVID-19 pandemic, and resulting unemployment and changes in general economic conditions on discretionary spending and consumer demand; 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 (including the current government-mandated property closures)operational restrictions); 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 natural disasters;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, 2019.
LIBOR is expected to be discontinued after 2021. The interest rate per annum applicable to loans under our credit facility is, at our option, either LIBOR plus a margin or a base rate plus a margin. The credit facility permits the administrative agent to approve a comparable or successor base rate in the event that LIBOR is discontinued, but there can be no assurances as to what the alternative base rate may be and whether such base rate will be more or less favorable than LIBOR or any other unforeseen impacts of the potential discontinuation of LIBOR. We intend to continue monitoring the developments with respect to the potential phasing out of LIBOR after 2021 and workare working with our lenders to ensure anythe transition away from LIBOR will have minimal impact on our financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.
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 March 31,September 30, 2020. 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 March 31,September 30, 2020,, 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
In addition to the information set forth below, refer to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.
The COVID-19 outbreak has resulted in the temporary closure of our casino properties, which has negatively impacted our results of operations, cash flows and liquidity. Such negative impacts could continue for an extended period of time and may worsen.
On March 13, 2020, in response to the COVID-19 pandemic the United States government declared a national state of emergency. In an effort to help control the spread of COVID-19, public health officials implemented social distancing and sheltering-in-place requirements and, on March 17, 2020,requirements. As a result of orders implemented by Nevada Governor Steve Sisolak, ordered the temporary closure of all casinos in the State of Nevada. As a result, all of our properties have beenwere closed sincefrom March 17, 2020 through June 3, 2020.
While We reopened the closure of our casino properties is expected to be temporary, we cannot estimate the impact of the COVID-19 pandemic on our future financial results or cash flows, in part due to our inability to reasonably estimate the duration of the closuremajority of our properties on June 4, 2020, but Texas Station, Fiesta Rancho, Fiesta Henderson and the range of factors thatPalms will influence our results of operations once our properties reopen. At such time as is permitted by government authorities, we expect that we will initially reopen Red Rock, Green Valley Ranch, Santa Fe Station, Boulder Station, Palace Station and Sunset Station as well as our Wildfire properties and assess the performance of such properties before reopening our remaining properties. Some portion of our properties may remain closed for an extended period evenuntil we determine when and if they are permitted to reopen under applicable governmental regulations and directives. Our future financial results and cash flows will be impacted bythem 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, expense of operating the properties and restrictions on operations to implement social distancing and other health and safety protocols.
While we are currently operating the majority of our properties, shelter-in-place or other governmental orders or directives could require us to close the properties that are beyond our control, includingcurrently operating in the duration and extent of shelter-in-place and social distancing measures, the impact of such measures on our ability to reopen and operate our casinos profitably and our ability to adjust our cost structure to mitigate the impact of the COVID-19 pandemic on our business and results of operations. Government and health authorities may implement new or extend existing restrictions, impose restrictions on travel and business operations and advise or require individuals to limit time spent outside of their homes, further delaying or interrupting our business.future. In addition, we anticipatecannot predict when our properties that socialremain closed will reopen or will remain operating when and if we decide to reopen those properties. Social distancing measures will resulthave resulted in new restrictions on our operations, following the time that our casinos reopen, requiring a reconfiguration of our gaming floor to limitincluding limiting the number of customers present in our facilities or within certain areas and reduced gaming operations, implementation of additional health and safety measures, such as enhanced cleaning protocols, temperature checks and use of face masks, restrictions on hotel, food and beverage outlets and limits on concerts, conventions or special events that would otherwiseevents. These measures have had a material adverse impact on our ability to attract customers to our properties.properties and our results of operations.
Our future financial results and cash flows will continue to be impacted by a number of factors that are beyond our control, including the duration and extent of social distancing measures, the possibility that governmental regulations and directives enacted in the future may require one or more of our properties to close or place additional restrictions on the operations of our properties, the impact of such measures on our ability to operate our casinos profitably or at all and our ability to adjust our cost structure to mitigate the impact of the COVID-19 pandemic on our business and results of operations. Restrictions that are currently in place, and additional restrictions implemented in the future, in response to COVID-19 or other public health emergencies could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may also face unforeseen liability or be subject to additional obligations as a result of the COVID-19 pandemic, including as a result of claims alleging exposure to COVID-19 in connection with our operations or facilities or to the extent we are subject to a governmental enforcement action as a result of failing to comply with applicable health and safety regulations. COVID-19 has materially adversely affected the economy and financial markets of the United States and the world and has resulted in widespread unemployment in the United States. We are particularly sensitive to downturns in the economy and the associated impact on discretionary spending on leisure activities which bring demand for casino hotel properties such as ours. We also expect that visitation to our casino hotel properties will continue to be impacted by travel restrictions or warnings and consumer concerns about visiting public places. The duration and impact of the economic downturn, widespread unemployment and consumer fears on overall customer demand and on our properties cannot reasonably be determined but may be protracted and could have a material adverse impact on our business and results of operations.
In addition, future outbreaks
The impact of the COVID-19 pandemic may also have the effect of exacerbating many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019. As a result of the foregoing, we cannot predict the ultimate scope, duration and impact that the COVID-19 pandemic will have on our results of operations, but we expect that it will continue to have a material impact on our business, financial condition, liquidity, results of operations (including revenues and profitability) and stock price.
As a result of the COVID-19 pandemic, we have implemented aggressive cost reduction and efficiency improvement measures, which could adversely affect the loyalty of our guests and our ability to attract and retain employees.
We have taken steps to reduce our operating costs and improve efficiencies including implementing staffing reductions that affected approximately 39% of our full-time workforce, as a result of our property closures and the ongoing uncertainty surrounding the COVID-19 pandemic, and we may undertake additional steps in the future. Such steps may harm our reputation by adversely impacting guest loyalty and our ability to attract and retain employees. While we have retained a majority of our full-time team members, our reduced operations and continued closure of a number of our properties has resulted in long term reductions in our full-time workforce. When the COVID-19 pandemic subsides, we may experience difficulties in resuming normal operations if employees impacted by our staffing reductions find new employment or elect not to return to work with us.operations.
Our ability to remain in compliance with our covenants contained in the agreements governing our indebtedness and our liquidity may be negatively impacted by the COVID-19 pandemic, measures implemented to curtail its spread, and changes in the economy, discretionary spending and consumer confidence.
We rely on our casino operations as a primary source of income and operating cash flows to remain in compliance with covenants contained in the documents governing our outstanding indebtedness. At March 31,September 30, 2020 we were in compliance with such covenants; however, our ability to remain in compliance with the covenants contained in such agreements may be negatively impacted if the COVID-19 pandemic, measures implemented to curtail its spread, and changes in the economy, discretionary spending and consumer confidence have a protracted negative effect on our business .business. Failure to satisfy such debt covenants would require us to seek waivers or amendments of such covenants. If we are unable to obtain such waivers or amendments, our creditors would be entitled to exercise remedies under the documents governing such obligations, including acceleration of the outstanding principal amount of such indebtedness. In addition, while we believe that our cash on hand will be sufficient to provide liquidity to meet our obligations during the current period that our operations are impacted by the COVID-19 pandemic, a protracted period of closure of our casinos or a failure of our business to return to expected levels upon the reopening of our casinos could impact our ability to make required payments under our outstanding indebtedness or other obligations.obligations may be impacted by additional measures that we are required to take in response to the COVID-19 pandemic and widespread unemployment and disruption to the economy caused by the COVID-19 pandemic.
In addition, 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, and changes in the economy, discretionary spending and consumer confidence have a protracted negative effect on our business.
Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds—None.
Recent Sales of Unregistered Securities
In February and March 2020, we issued an aggregate of 241,566 and 400,000 shares, respectively, of Class A common stock in exchange for an equivalent number of shares of Class B common stock and LLC Units pursuant to the terms of the exchange agreement entered into in connection with our initial public offering. Such shares were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933.
Issuer Purchases of Equity Securities
In March 2020, we repurchased 6,555 shares of Class A common stock in satisfaction of tax withholding obligations on vested restricted stock at an average price of approximately $10.44 per share, for a total purchase price of approximately $68,400. The shares were retired upon repurchase. These repurchases were not part of the Company’s equity repurchase program.
Item 3. Defaults Upon Senior Securities—None.
Item 4. Mine Safety Disclosures—None.
Item 5. Other Information—None.
Item 6. Exhibits
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.
No. 101.SCH—XBRL Taxonomy Extension Schema Document
No. 101.CAL—XBRL Taxonomy Extension Calculation Linkbase Document
No. 101.DEF—XBRL Taxonomy Extension Definition Linkbase Document
No. 101.LAB—XBRL Taxonomy Extension Label Linkbase Document
No. 101.PRE—XBRL Taxonomy Extension Presentation Linkbase Document
No. 104—Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
SIGNATURE
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.
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| | RED ROCK RESORTS, INC.,
Registrant |
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| Date: | November 6, 2020 | RED ROCK RESORTS, INC.,
Registrant
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Date: | May 19, 2020 | /s/ STEPHEN L. COOTEY |
| | Stephen L. Cootey Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |