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Red Rock Resorts: Don't Discount Regional Gaming

Mar. 09, 2018 7:14 PM ETRed Rock Resorts, Inc. (RRR)BYD, ERI, LVS, MGM, WYNN11 Comments


  • Red Rock Resorts caters to the Las Vegas locals market; the company is not reliant on tourism.
  • Locals casinos do not require the amount of capital to maintain appearances. The market is also supply constrained; no new new-builds in this market are likely.
  • Las Vegas is finally in a turnaround. Housing prices are growing and it is one of the fastest growing regions in the United States. Tax reform is a major catalyst.
  • Same store sales comps are accelerating. Given the fixed cost base and high margins on slot play, incremental EBITDA margins are very high for the firm.
  • Once Palace Station and the Palms renovations are complete, $750mm (or more) in EBITDA in 2020 is possible.

It has been some time since I covered casino stocks; not since owning Wynn Resorts (WYNN) off the multi-year lows. Investors that have missed my efforts on these companies should look for more coverage from me in the coming months. I’ll be spending several days in Macau in early May before heading to China and Hong Kong to spend some time with industrial suppliers in that region. It’s a pilgrimage I’m trying to make more often in order to provide deeper value to Industrial Insights subscribers via “boots on the ground” expertise, but luckily that carries over to other sectors as well.

In the interim, I wanted to highlight one of my favorite picks in a completely different space in gaming: Red Rock Resorts (NASDAQ:RRR), which operates in the Las Vegas locals market. There is a world of difference between how an operator tries to run a business on the Las Vegas Strip (competing with the likes of Las Vegas Sands (LVS) and MGM Resorts (MGM) versus how a business is run to cater to the local community. It’s an entirely different demographic. I think the market has been missing a lot of the story for this company over 2017. In fact, the company is dirt cheap and has 40% upside from today’s prices. Contributor Vince Martin has laid out concerns in great coverage since the initial public offering (“IPO”), and I’ll work through a lot of those points today in how I see the bullish case here versus his cautious take. The largest difference in his work and mine, in my opinion, is overly discounting likely tailwinds from strengthening in the local market and potential contribution from current renovations.

Business Overview, Why The Macro Picture Matters

Today, Red Rock Resorts operates ten major gaming and entertainment facilities alongside ten smaller

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This article was written by

Michael Boyd profile picture

Author of Energy Investing Authority

Top 1% Analyst According to TipRanks

I have a decade of experience in both the investment advisory and investment banking spaces, with stints in portfolio management, residential mortgage-backed securities, derivatives, and internal audit at various firms. Today, I am a full-time investor and "independent analyst for hire" here on Seeking Alpha.

Analyst’s Disclosure: I am/we are long RRR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (11)

I concur, those metrics you reference are likely spot on, sometimes I even walk into Caesars though and wonder what they were thinking...lol...we locals do however appreciate all tourist travel and spend !
While I don’t necessarily disagree with your numbers and other thoughts, i’ve lived in Vegas over 12 years, I will take exception that the maintaining of appearance it’s not as important as you think, we locals do know the difference between a casino that’s keeping itself presentable to all the customers that it serves versus those that don’t....hence the reason for example that many of us locals will not visit our friends should they choose to stay at Excalibur or Circus Circus....I’ll meet you at Green Valley Ranch or Red Rock, but should you decide to stay at Palace Station I’ll catch you next time around....
Michael Boyd profile picture
Certainly has a factor - after all if it didn't they wouldn't bother with remodel. My comment there was more directed at the difference (at least in my view) between the Strip's focus on high roller tourism, particularly international. The success of the Strip's giants on that front - Wynn, Bellagio, Venetian, Cosmpolitan - seems predicated on frequent turnover on assets to keep up that allure.

Certainly they can't neglect you all off strip - you don't want to go enjoy your free time at a dump - but the sustaining capex on a square footage basis is likely much lower off strip.
Citadel West profile picture
I visited the Palms Resort in January and it was possibly the worst casino experience I've ever had in Las Vegas. Parts of the main level were walled off with loud construction noise and hard hats running around everywhere. The areas of the main level that were open were overstaffed and at times it felt like there were more employees than customers. Even the parking structure was terrible, dimly lit with leaks and puddles everywhere from the rain.

Purchasing the run down Palms Resort may have been a mistake for Red Rock, but keeping this property open during major renovation is an even a bigger one. RRR would have been well advised to close down for six months and have a grand reopening, rather than subject their customers to such an ongoing poor experience.
Michael Boyd profile picture
They are still generating $25mm in EBITDA from the asset even during the closure; that's a lot of cash flow to give up that is very helpful to debt service and their leverage covenants. I don't believe closing the property down would accelerate the timeline of the remodel (YE 2019 fully complete).

I'm sure the thinking is that all will be forgiven once the remodel is done.
Citadel West profile picture
I have difficulty comprehending how RRR is generating $2.1mm per month from the Palms Resort, given its poor condition and low volume of slot play. I didn't see this number reported in their financial disclosures or in the transcript of their last cc.

Would you point me to where that number comes from Michael?
Michael Boyd profile picture
You're right that they don't disclose property level EBITDA, so it takes some finangling from their calls.

If you go back to the original deal presentation when they bought the Palms, RRR guided to $35mm in EBITDA contribution in the first year of ownership from the Palms.

I'd have to dig, but I was going off memory from a call that more aggressive construction activity dented that figure by $10mm.
so stock has been trading 20-25 since back on line in 16. Then November of 17 rolls around and it goes up 50%. Seems like there might be some retracement as that was a major move already. I own WYNN, LVS, and MGM but have some interest here.

Was the move due to the improvements you see and RRR was just languishing for so long that it kind of needed to catch up? Due you think it has a decent chance to come back below $30 before moving up again?
Michael Boyd profile picture
You've seen a lot of multiple expansion in this sector, which I'm going to peg on improving economics. Those that live in Las Vegas will tell you its getting so much better there than most expected.

I actually think RRR deserves a premium to players like Boyd that are more diversified across the U.S.. Regional gaming (nation-wide) has had some really tough comps over the past several years due to:

1) a lot of new supply, both current and future, including from big players (see WYNN in Boston)
2) movement by younger gamblers away from slots

Las Vegas is the best option (see the demographics I highlighted), and what I think some people miss is that their gambling taxes are much lower than elsewhere. A dollar into a slot machine in Pennsylvania is less accretive to the bottom line than one in Vegas. The Northeast's reputation for higher taxes extends to this as well.
Nell_E profile picture
thanks for article. what's your opinion of management?
Michael Boyd profile picture
The Fertitta family know this business really well; they've been doing it for decades. Richard Haskins has been with the company a very long time, and they've got an extremely solid track record.

The lead-up to the 2009 bankruptcy was an example of getting over-levered at precisely the wrong time. I think some lessons were learned there. I don't think any management team could have had that company survive the Great Recession with that debt load.

Hopefully Stephen Cootey helps. As CFO, he was pulled from Wynn, and he did a great job getting Wynn Resorts running correctly during the Wynn Palace phase from announcement all the way through construction and opening, so he has experience working with the capital markets to raise funds for large projects. That should help with the Palms.
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