NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
. Organization and Background
Red Rock Resorts, Inc. (“Red Rock,” or the “Company”) was formed as a Delaware corporation in September 2015 to manage and own an equity interest in Station Casinos LLC (“Station LLC”). Station LLC, a Nevada limited liability company, 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 a casino in Sonoma County, California and a casino in Allegan County, Michigan, both on behalf of Native American tribes. The Company holds
100%
of the non-economic voting interests in Station LLC and holds an indirect economic interest in Station LLC through its ownership interest in Station Holdco LLC (“Station Holdco”), which holds all of the economic interests in Station LLC. The Company is a subchapter C corporation subject to federal income taxes and state income taxes in California and Michigan.
In
May 2016
, the Company completed its initial public offering (“IPO”) of approximately
29.5 million
shares of Class A common stock,
$0.01
par value per share (“Class A common stock”), at an offering price to the public of
$19.50
per share. The Company received proceeds from the IPO of approximately
$541 million
, net of underwriting discount, which was used to purchase newly issued limited liability company interests in Station Holdco (“LLC Units”) and outstanding LLC Units from existing members of Station Holdco. Station Holdco used the proceeds from the newly issued LLC Units to pay the majority of the purchase price of Fertitta Entertainment LLC (“Fertitta Entertainment”), a related party that managed Station LLC’s properties pursuant to management agreements. The reorganization transactions related to the IPO are referred to herein as the “Reorganization Transactions.”
In connection with the IPO and the reorganization of its corporate structure, the Company:
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•
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Amended and restated its certificate of incorporation (as amended and restated, the “Certificate of Incorporation”) to provide for Class A common stock and Class B common stock, par value of
$0.00001
per share (the “Class B common stock”);
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•
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Amended and restated the limited liability company agreements of both Station LLC and Station Holdco to, among other things, designate the Company as the sole managing member of Station LLC and Station Holdco;
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•
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Issued for nominal consideration
one
share of Class B common stock to LLC Unit holders for each LLC Unit held for an aggregate issuance of
80,562,666
shares of Class B common stock;
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•
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Issued
29,511,828
shares of Class A common stock and received proceeds of approximately
$541 million
, which is net of underwriting discount, and paid
$4.9 million
of offering costs;
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•
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Issued
10,137,209
shares of Class A common stock in connection with the merger of certain entities that own LLC Units (the “Merging Blockers” and such transactions, the “Blocker Mergers”), of which
222,959
shares were withheld to pay withholding tax obligations of
$4.1 million
with respect to certain members of the Merging Blockers;
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Issued, pursuant to the Red Rock Resorts, Inc. 2016 Equity Incentive Plan,
189,568
restricted shares of Class A common stock and options to purchase
1,687,205
shares of Class A common stock to certain of the Company’s executive officers, employees and members of its board of directors, and issued
1,832,884
restricted shares of Class A common stock to current and former employees of Station LLC in substitution for profit units issued by Station Holdco that were held by such current and former employees;
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Purchased
6,136,072
LLC Units from certain LLC Unit holders using approximately
$112.5 million
of the net proceeds from the IPO at a price of
$18.33
per unit, which was the price paid by the underwriters to the Company for Class A common stock in the IPO, and retired an equal number of shares of Class B common stock;
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Acquired newly issued LLC Units using approximately
$424.4 million
of the net proceeds from the IPO;
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Entered into an exchange agreement (the “Exchange Agreement”) with the LLC Unit holders pursuant to which they are entitled at any time to exchange LLC Units, together with an equal number of shares of Class B common stock, for shares of Class A common stock on a
one
-for-
one
basis or for cash, at the Company’s election; and
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RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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Entered into a Tax Receivable Agreement with the LLC Unit holders, as described in Note
2
, that requires the Company to pay
85%
of the amount of benefits it realizes as a result of (i) increases in tax basis resulting from the Company’s purchase or exchange of LLC Units and (ii) certain other tax benefits related to the Tax Receivable Agreement, including tax benefits attributable to payments that the Company is required to make under the Tax Receivable Agreement itself.
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Immediately after the IPO, Red Rock owned
33.4%
of the LLC Units, and at
December 31, 2016
, Red Rock owned
56.9%
of the LLC Units. The increase in Red Rock’s ownership was primarily due to the exchange in November 2016 of
24.5 million
LLC Units and shares of Class B common stock for an equal number of shares of Class A common stock pursuant to the Exchange Agreement. See Note
4
for additional information.
Acquisition of Fertitta Entertainment
In May 2016, Station Holdco contributed
$419.5 million
of the proceeds from its newly issued LLC Units to Station LLC which used the proceeds, along with additional borrowings under its
$350 million
revolving credit facility, to acquire all of the outstanding membership interests of Fertitta Entertainment (the “Fertitta Entertainment Acquisition”) for
$460 million
, which included
$51.0 million
paid in satisfaction of Fertitta Entertainment’s term loan and revolving credit facility on the closing date,
$18.7 million
paid to settle Fertitta Entertainment's liability-classified equity awards, and
$1.3 million
in assumed liabilities.
Prior to the Fertitta Entertainment Acquisition, Station LLC had long-term management agreements with affiliates of Fertitta Entertainment to manage its properties. In connection with the Fertitta Entertainment Acquisition, the management agreements were terminated and Station LLC entered into new employment agreements with its executive officers and other individuals who were employed by Fertitta Entertainment prior to the completion of the Fertitta Entertainment Acquisition.
Prior to the Fertitta Entertainment Acquisition, Station Holdco, Station LLC and Fertitta Entertainment were controlled by brothers Frank J. Fertitta III, the Company’s Chairman and Chief Executive Officer, and Lorenzo J. Fertitta, the Company’s Vice Chairman, who collectively held a majority of the voting and economic interests in these entities. The Fertitta Entertainment Acquisition constituted an acquisition of an entity under common control and was accounted for at historical cost in a manner similar to a pooling of interests. The Company recognized a deemed distribution of approximately
$389.1 million
to equity holders of Fertitta Entertainment, which represented the excess of the purchase price over the historical cost of the net assets acquired. The accompanying consolidated financial statements include the consolidation of Fertitta Entertainment for all periods presented.
2
. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The Company holds
100%
of the voting interest in Station LLC and
100%
of the voting power in Station Holdco, subject to certain limited exceptions, and was designated as the sole managing member of both Station Holdco and Station LLC. The Company controls and operates all of the business and affairs of Station Holdco and Station LLC, and conducts all of its operations through these entities. Station Holdco and Station LLC are variable interest entities, of which the Company is the primary beneficiary. Accordingly, the Company consolidates the financial position and results of operations of Station LLC and its consolidated subsidiaries and Station Holdco, and presents the interests in Station Holdco not owned by Red Rock within noncontrolling interest in the consolidated financial statements. Substantially all of the Company’s assets and liabilities represent the assets and liabilities of Station Holdco and Station LLC, other than assets and liabilities related to income taxes and amounts payable under the Tax Receivable Agreement. Prior to the IPO, Red Rock had no operations or net assets. Red Rock’s predecessor for accounting purposes is Station Holdco, as combined with Fertitta Entertainment, and accordingly, the accompanying financial statements represent the combined financial statements of Station Holdco and Fertitta Entertainment for periods prior to the IPO.
The amounts shown in the accompanying consolidated financial statements also include the accounts of MPM Enterprises, LLC (“MPM”), which is a
50%
owned, consolidated variable interest entity (“VIE”). All significant intercompany accounts and transactions have been eliminated. Investments in all other
50%
or less owned affiliated companies are accounted for using the equity method. Certain amounts in the consolidated financial statements for the previous years have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on the previously reported net income.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Discontinued Operations
In 2014, Station LLC’s majority-owned consolidated subsidiary, Fertitta Interactive LLC (“Fertitta Interactive”), ceased operations. The results of operations of Fertitta Interactive are reported in discontinued operations in the Consolidated Statements of Income. The Consolidated Statements of Cash Flows have not been adjusted for discontinued operations. See Note
23
for additional information.
Fair Value Measurements
The Company accounts for certain assets and liabilities at fair value, and utilizes the fair value hierarchy established by the accounting guidance for fair value measurements and disclosures to categorize the inputs to valuation techniques used to measure fair value into three levels. The three levels of inputs are as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The accounting guidance for fair value measurements and disclosures also provides the option to measure certain financial assets and liabilities at fair value with changes in fair value recognized in earnings each period. The Company has not elected to measure any financial assets or liabilities at fair value that are not required to be measured at fair value.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, receivables and accounts payable approximate fair value primarily because of the short maturities of these instruments.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments purchased with an original maturity of 90 days or less.
Restricted Cash
Restricted cash consists of reserve funds for the Company’s condominium operations at Palms Casino Resort.
Receivables, Net and Credit Risk
Receivables, net consist primarily of casino, hotel, ATM, cash advance, retail, management fees and other receivables, which are typically non-interest bearing.
Receivables are initially recorded at cost and an allowance for doubtful accounts is maintained to reduce receivables to their carrying amount, which approximates fair value. The allowance is estimated based on a specific review of customer accounts, historical collection experience, the age of the receivable and other relevant factors. Accounts are written off when management deems the account to be uncollectible, and recoveries of accounts previously written off are recorded when received. At
December 31, 2016
and
2015
, the allowance for doubtful accounts was
$2.3 million
and
$1.4 million
, respectively. Management believes there are no significant concentrations of credit risk.
Inventories
Inventories primarily represent food and beverage items and retail merchandise which are stated at the lower of cost or market. Cost is determined on a weighted-average basis.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets Held for Sale
The Company classifies assets as held for sale when an asset or asset group meets all of the held for sale criteria in the accounting guidance for impairment and disposal of long-lived assets. Assets held for sale are initially measured at the lower of carrying amount or fair value less cost to sell. At
December 31, 2016
, assets held for sale represented a parcel of undeveloped land in Las Vegas that was expected to be sold within one year.
Property and Equipment
Property and equipment is initially recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, or for leasehold improvements, the shorter of the estimated useful life of the asset or the lease term, as follows:
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Buildings and improvements
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10 to 45 years
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Furniture, fixtures and equipment
|
3 to 7 years
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Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred. Construction in progress is related to the construction or development of property and equipment that has not yet been placed in service for its intended use. Depreciation and amortization of property and equipment commences when the asset is placed in service. When an asset is retired or otherwise disposed, the related cost and accumulated depreciation are removed from the accounts and the gain or loss on disposal is recognized within Write-downs and other charges, net. Assets recorded under capital leases are included in property and equipment and amortization of assets recorded under capital leases is included in depreciation expense and accumulated depreciation.
The Company makes estimates and assumptions when accounting for capital expenditures. The Company’s depreciation expense is highly dependent on the assumptions made for the estimated useful lives of its assets. Useful lives are estimated by the Company based on its experience with similar assets and estimates of the usage of the asset. Whenever events or circumstances occur which change the estimated useful life of an asset, the Company accounts for the change prospectively.
Native American Development Costs
The Company incurs certain costs associated with development and management agreements with Native American tribes (the “Tribes”). In accordance with the accounting guidance for real estate, costs for the acquisition and related development of land and the casino facilities are capitalized as long-term assets. The Company capitalizes interest on Native American development projects when activities are in progress to prepare the asset for its intended use. The assets are typically transferred to the Tribe when the Tribe secures third-party financing or the gaming facility is completed. Upon transfer of the assets to the Tribe, a long-term receivable is recognized in an amount equal to any remaining carrying amount that has not yet been recovered from the Tribe.
The Company earns a return on the costs incurred for the acquisition and development of Native American development projects. The Company accounts for the return earned on Native American development costs using the cost recovery method described in the accounting guidance for real estate sales
.
In accordance with the cost recovery method, recognition of the return is deferred until the assets are transferred to the Tribe, the carrying amount of the assets has been fully recovered and the return is realizable. Repayment of the advances and the return typically is funded from the Tribe’s third-party financing, from the cash flows of the gaming facility, or both.
The Company evaluates its Native American development costs for impairment whenever events or changes in circumstances indicate that the carrying amount of a project might not be recoverable, taking into consideration all available information. Among other things, the Company considers the status of the project, any contingencies, the achievement of milestones, any existing or potential litigation, and regulatory matters when evaluating its Native American projects for impairment. If an indicator of impairment exists, the Company compares the estimated future cash flows of the project, on an undiscounted basis, to its carrying amount. If the undiscounted expected future cash flows do not exceed the carrying amount, the asset is written down to its estimated fair value, which typically is estimated based on a discounted future cash flow model or market comparables, when available. The Company estimates the undiscounted future cash flows of a Native American development project based on consideration of all positive and negative evidence about the future cash flow potential of the project including, but not limited to, the likelihood that the project will be successfully completed, the status of required approvals, and the status and timing of the construction of the project, as well as current and projected economic, political, regulatory and competitive conditions that may adversely impact the project’s operating results.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill
The Company tests its goodwill for impairment annually during the fourth quarter of each year, and whenever events or circumstances indicate that it is more likely than not that impairment may have occurred. Impairment testing for goodwill is performed at the reporting unit level, and each of the Company’s operating properties is considered a separate reporting unit.
When performing the annual goodwill impairment testing, the Company either conducts a qualitative assessment to determine whether it is more likely than not that the asset is impaired, or elects to bypass this qualitative assessment and perform a quantitative assessment. Under the qualitative assessment, the Company considers both positive and negative factors, including macroeconomic conditions, industry events, financial performance and other changes, and makes a determination of whether it is more likely than not that the fair value of goodwill is less than its carrying amount. If, after assessing the qualitative factors, the Company determines it is more likely than not the asset is impaired, it then performs a quantitative assessment, which utilizes a two-step process. In the first step, the estimated fair value of each reporting unit is compared with its carrying amount, including goodwill. The fair value of each reporting unit is estimated using the expected present value of future cash flows along with value indications based on current valuation multiples of the Company and comparable publicly traded companies. If the carrying amount of the reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. In the second step, the Company estimates the implied fair value of the reporting unit’s goodwill by allocating the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit as if it had been acquired in a business combination. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess.
The estimation of fair values involves significant judgment by management. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from such estimates. Cash flow estimates are based on the current regulatory, political and economic climates, recent operating information and projections. Such estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, competition, events affecting various forms of travel and access to the Company’s properties, and other factors. If the Company’s estimates of future cash flows are not met, it may have to record impairment charges in the future.
Indefinite-Lived Intangible Assets
The Company’s indefinite-lived intangible assets primarily represent brands. The fair value of the Company’s brands is estimated using a derivation of the income approach to valuation, based on estimated royalties avoided through ownership of the assets, utilizing market indications of fair value. The Company tests its indefinite-lived intangible assets for impairment annually during the fourth quarter of each year, and whenever events or circumstances indicate that it is more likely than not that an asset is impaired. Indefinite-lived intangible assets are not amortized unless it is determined that an asset’s useful life is no longer indefinite. The Company periodically reviews its indefinite-lived assets to determine whether events and circumstances continue to support an indefinite useful life. If an indefinite-lived intangible asset no longer has an indefinite life, the asset is tested for impairment and is subsequently accounted for as a finite-lived intangible asset.
Finite-Lived Intangible Assets
The Company’s finite-lived intangible assets primarily represent assets related to its management contracts and customer relationships, which are amortized over their estimated useful lives using the straight-line method. The Company periodically evaluates the remaining useful lives of its finite-lived intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization.
The Company’s management contract intangible assets represent the value associated with agreements under which the Company provides management services to various casino properties, primarily Native American casinos which it has developed, and its
50%
owned casino properties. The fair values of management contract intangible assets were determined using discounted cash flow techniques based on future cash flows expected to be received in exchange for providing management services. The Company amortizes its management contract intangible assets over their expected useful lives using the straight-line method, beginning when the property commences operations and management fees are being earned. Should events or changes in circumstances cause the carrying amount of a management contract intangible asset to exceed its estimated fair value, an impairment charge in the amount of the excess would be recognized.
The Company’s customer relationship intangible assets primarily represent the value associated with its rated casino guests. The initial fair values of customer relationship intangible assets were estimated based on a variation of the cost approach. The recoverability of the Company’s customer relationship intangible assets could be affected by, among other things, increased competition within the gaming industry, a downturn in the economy, declines in customer spending which
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
would impact the expected future cash flows associated with the rated casino guests, declines in the number of customer visits which could impact the expected attrition rate of the rated casino guests, and erosion of operating margins associated with rated casino guests. Should events or changes in circumstances cause the carrying amount of a customer relationship intangible asset to exceed its estimated fair value, an impairment charge in the amount of the excess would be recognized.
Impairment of Long-Lived Assets
The Company reviews the carrying amounts of its long-lived assets, other than goodwill and indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability is evaluated by comparing the estimated future cash flows of the asset, on an undiscounted basis, to its carrying amount. If the undiscounted estimated future cash flows exceed the carrying amount, no impairment is indicated. If the undiscounted estimated future cash flows do not exceed the carrying amount, impairment is measured based on the difference between the asset’s estimated fair value and its carrying amount. To estimate fair values, the Company typically uses market comparables, when available, or a discounted cash flow model. Assets to be disposed of are carried at the lower of their carrying amount or fair value less costs of disposal. The fair value of assets to be disposed of is generally estimated based on comparable asset sales, solicited offers or a discounted cash flow model. The Company’s long-lived asset impairment tests are performed at the reporting unit level.
Debt Discounts and Debt Issuance Costs
Debt discounts and costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense using the effective interest method over the expected term of the related debt agreements. Costs incurred in connection with the issuance of revolving lines of credit are presented in Other assets, net on the Consolidated Balance Sheets. All other capitalized costs incurred in connection with the issuance of long-term debt are presented as a direct reduction of Long-term debt, less current portion on the Consolidated Balance Sheets.
Derivative Instruments
The Company uses interest rate swaps to hedge its exposure to variability in expected future cash flows related to interest payments. In accordance with the accounting guidance for derivatives and hedging activities, the Company records all derivatives on the balance sheet at fair value. The fair values of the Company’s derivatives are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
The accounting for changes in fair value of derivative instruments depends on the intended use of the derivative and whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting.
For derivative instruments that are designated and qualify as cash flow hedges of forecasted interest payments, the Company defers the effective portion of the change in fair value of the derivative instruments as a component of other comprehensive income until the interest payments being hedged are recorded as interest expense, at which time the amounts in accumulated other comprehensive income (loss) are reclassified as an adjustment to interest expense. Gains or losses on any ineffective portion of the change in fair value of derivative instruments in cash flow hedging relationships are recorded in the period in which they occur as a component of Change in fair value of derivative instruments in the Consolidated Statements of Income. The Company classifies cash flows for derivative instruments accounted for as cash flow hedges as operating activities in the Consolidated Statements of Cash Flows unless the derivative instrument includes an other-than-insignificant financing element at inception. Cash flows related to cash flow hedges that include other-than-insignificant financing elements at inception are classified as financing activities.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income, which includes all other non-owner changes in equity. Components of the Company’s comprehensive income are reported in the Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders’/Members’ Equity, and accumulated other comprehensive income (loss) is included in Stockholders’/Members’ equity on the Consolidated Balance Sheets.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenues and Promotional Allowances
The Company recognizes the net win from gaming activities as casino revenues, which is the difference between gaming wins and losses. The Company recognizes liabilities for funds deposited by customers before gaming play occurs and for chips in the customers’ possession. Casino revenues are recognized net of discounts and certain incentives provided to customers under the Company’s player rewards program, such as cash back and free slot play. Food and beverage, hotel, and other operating revenues are recognized as the service is provided. Other revenues primarily include revenues from tenant leases, retail outlets, bowling, spas and entertainment. Rental income is recognized over the lease term and contingent rental income is recognized when the right to receive such rental income is established according to the lease agreements.
Management fee revenue is recognized when the services have been performed, the amount of the fee is determinable and collectability is reasonably assured. Management fee revenue include reimbursable costs, which represent amounts received or due pursuant to the Company’s management agreements with Native American tribes for the reimbursement of expenses, primarily payroll costs, that it incurs on their behalf. The Company recognizes reimbursable cost revenue on a gross basis, with an offsetting amount charged to operating expense.
The retail value of complimentary goods and services provided to customers is recorded as revenue with a corresponding offsetting amount included in promotional allowances. The estimated departmental costs of providing such complimentary goods and services are included in casino costs and expenses and consisted of the following (amounts in thousands):
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Year Ended December 31,
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2016
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2015
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2014
|
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Food and beverage
|
$
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95,906
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|
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$
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89,593
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|
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$
|
85,555
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Room
|
6,761
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6,216
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6,327
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|
Other
|
4,089
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|
|
3,807
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|
|
3,369
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$
|
106,756
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|
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$
|
99,616
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|
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$
|
95,251
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Player Rewards Program
The Company has a player rewards program (the “Rewards Program”) which allows customers to earn points based on their gaming activity and non-gaming purchases. Points may be redeemed at all of the Company’s Las Vegas area properties for cash, free slot play, food, beverage, rooms, entertainment and merchandise. The Company records a liability for the estimated cost of outstanding points earned under the Rewards Program that management believes ultimately will be redeemed, which totaled
$13.4 million
and
$12.3 million
at
December 31, 2016
and
2015
, respectively. The estimated cost of points expected to be redeemed for cash and free slot play under the Rewards Program reduces casino revenue. The estimated cost of points expected to be redeemed for food, beverage, rooms, entertainment and merchandise is charged to casino expense. Cost is estimated based on assumptions about the mix of goods and services for which points will be redeemed and the incremental departmental cost of providing the goods and services.
Slot Machine Jackpots
The Company does not accrue base jackpots if it is not legally obligated to pay the jackpot. A jackpot liability is accrued with a related reduction in casino revenue when the Company is obligated to pay the jackpot, such as the incremental amount in excess of the base jackpot on a progressive game.
Gaming Taxes
The Company is assessed taxes based on gross gaming revenue, subject to applicable jurisdictional adjustments. Gaming taxes are included in casino costs and expenses in the Consolidated Statements of Income. Gaming tax expense, excluding discontinued operations, was as follows (amounts in thousands):
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Year Ended December 31,
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|
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2016
|
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2015
|
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2014
|
|
Gaming tax expense
|
$
|
63,626
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|
|
$
|
61,091
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|
|
$
|
59,756
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RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share-Based Compensation
The Company measures its share-based compensation expense at the grant date based on the fair value of the award, and recognizes the expense over the requisite service period. The fair value of stock options is estimated using the Black-Scholes option pricing model. The Company uses the straight-line method to recognize compensation expense for share-based awards with graded vesting. Forfeitures are accounted for as they occur.
Advertising
The Company expenses advertising costs the first time the advertising takes place. Advertising expense is primarily included in selling, general and administrative expense in the Consolidated Statements of Income. Advertising expense, excluding discontinued operations, was as follows (amounts in thousands):
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Year Ended December 31,
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|
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2016
|
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2015
|
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2014
|
|
Advertising expense
|
$
|
21,144
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|
|
$
|
16,928
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|
|
$
|
17,498
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Income Taxes
Following the IPO, Station Holdco continues to operate as a partnership for federal, state and local tax reporting. Station Holdco holds
100%
of the economic interests in Station LLC. The members of Station Holdco are liable for any income taxes resulting from income allocated to them by Station Holdco as a pass-through entity. Red Rock is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it by Station Holdco.
The Company recognizes deferred tax assets and liabilities based on the differences between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period in which the enactment date occurs. Deferred tax assets represent future tax deductions or credits. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period.
Each reporting period, the Company analyzes the likelihood that its deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than
50%
) that some portion, or all, of a deferred tax asset will not be realized. On an annual basis, the Company performs a comprehensive analysis of all forms of positive and negative evidence based on year end results. During each interim period, the Company updates its annual analysis for significant changes in the positive and negative evidence.
The Company records uncertain tax positions on the basis of a two-step process in which (1) the Company determines whether it is more likely than not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more likely than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than
50%
likely to be realized upon ultimate settlement with the related tax authority.
The Company determined that no liability for unrecognized tax benefits for uncertain tax positions was required to be recorded at
December 31, 2016
. In addition, 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 will recognize interest and penalties related to income taxes, if any, within the provision for income taxes. The Company has incurred no interest or penalties related to income taxes in any of the periods presented.
Tax Receivable Agreement with Related Parties
In connection with the IPO, the Company entered into a tax receivable agreement (“TRA”) with certain pre-IPO owners of Station Holdco. 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 parties for
85%
of the tax benefits realized by the Company by such exchange. The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such benefits.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of exchanges of LLC Units for Class A common stock and purchases by the Company of LLC Units from holders of such units, the Company is entitled to a proportionate share of the existing tax basis of the assets of Station Holdco at the time of such exchanges or purchases. In addition, such exchanges or purchases of LLC Units are expected to result in increases in the tax basis of the assets of Station Holdco that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that the Company would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
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 and amortizable basis. If the Company does not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, it would not be required to make the related TRA payments. The Company will only recognize a liability for TRA payments if management determines it is probable that it will generate sufficient future taxable income over the term of the TRA to utilize the related tax benefits. If management determines in the future that the Company will not be able to fully utilize all or part of the related tax benefits, it would derecognize the portion of the liability related to the benefits not expected to be utilized. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, the Company considers its historical results and incorporates certain assumptions, including revenue growth, and operating margins, among others.
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 it would have sufficient future taxable income to utilize such tax benefits.
Additionally, the Company estimates the amount of TRA payments expected to be paid within the next
12
months and classifies this amount within current liabilities on its Consolidated Balance Sheets. This determination is based on management’s estimate of taxable income for the next fiscal year. To the extent the Company’s estimate differs from actual results, it may be required reclassify portions of the liability under the TRA between current and non-current.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income attributable to Red Rock by the weighted average number of Class A shares outstanding during the period. Diluted EPS is computed by dividing net income attributable to Red Rock, including the impact of potentially dilutive securities, by the weighted average number of Class A shares outstanding during the period, including the number of Class A shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include the outstanding Class B common stock, outstanding stock options and unvested restricted stock. The Company uses the “if-converted” method to determine the potentially dilutive effect of its Class B common stock, and the treasury stock method to determine the potentially dilutive effect of outstanding stock options and unvested restricted stock.
Recently Issued and Adopted Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued amended accounting guidance to simplify the test for goodwill impairment. The amended guidance removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new guidance, a goodwill impairment is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill allocated to the reporting unit. The guidance is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment tests performed after January 1, 2017. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In November 2016, the FASB issued amended accounting guidance on the presentation of restricted cash in the statement of cash flows. This amendment requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 and early adoption is permitted. The Company will adopt this guidance in the first quarter of 2018.
In August 2016, the FASB issued amended accounting guidance intended to reduce diversity in practice in how cash receipts and cash payments are presented and classified in the statement of cash flows. The amendment addresses specific cash flow issues including the presentation and classification of debt prepayment or debt extinguishment costs and distributions received from equity method investees. The amended guidance also addresses the presentation and classification of separately identifiable cash flows and the application of the predominance principle. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 and early adoption is permitted. The Company will adopt this guidance in the first quarter of 2018. The Company is currently evaluating the impact this guidance will have on its statement of cash flows.
In March 2016, the FASB issued amended accounting guidance that simplifies certain aspects of the accounting for share-based payments, including income taxes, classification of awards as either equity or liabilities and classification within the statement of cash flows. The Company adopted this guidance during the second quarter of 2016 and the adoption had no impact on its financial position or results of operations.
In February 2016, the FASB issued amended accounting guidance that changes the accounting for leases and requires expanded disclosures about leasing activities. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations.
In September 2015, the FASB issued amended accounting guidance that simplifies the accounting for measurement-period adjustments in business combinations. The amended guidance requires an acquirer to record changes in depreciation, amortization, or other income effects, if any, as a result of changes to estimated amounts identified during the measurement period, in the reporting period in which the adjustments are identified, calculated as if the accounting had been completed at the acquisition date. The amended guidance also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings, by line item, that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The Company adopted this guidance in the first quarter of 2016 and the adoption had no impact on its financial position or results of operations.
In August 2014, the FASB issued amended accounting guidance that defines management’s responsibility to evaluate a company’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments are effective for annual reporting periods ending after December 15, 2016 and interim periods thereafter, and early application is permitted. The Company adopted this guidance for the year ended December 31, 2016 and the adoption had no impact on its financial position or results of operations.
In May 2014, the FASB issued a new accounting standard for revenue recognition which requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard supersedes the existing accounting guidance for revenue recognition, including industry-specific guidance, and amends certain accounting guidance for recognition of gains and losses on the transfer of non-financial assets. For public companies, the new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016. Upon adoption, financial statement issuers may elect to apply the new standard either retrospectively to each prior reporting period presented, or using a modified retrospective approach by recognizing the cumulative effect of initial application and providing certain additional disclosures. The Company will adopt this guidance in the first quarter of 2018 and is currently assessing which adoption method it will elect. Under the new standard, the current presentation of gross revenues for
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
complementary goods and services provided to guests with a corresponding offsetting amount included in promotional allowances will be eliminated. In addition, the Company will be required to recognize a liability for the retail value of its performance obligations for points earned by guests under the Rewards Program. Currently, the Company records a liability and a charge to casino expense for the estimated cost of outstanding points earned under the Rewards Program that management believes ultimately will be redeemed. Upon adoption, the Company’s liability for performance obligations under the Rewards Program is expected to be recognized primarily as a reduction to casino revenue. When points are redeemed, revenues and expenses will be recognized and classified based on the goods and services provided and the associated liability will be relieved. The Company is currently evaluating the quantitative effects of the new standard on its financial statements and related disclosures.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3
. Acquisition of Palms Casino Resort
On October 1, 2016, the Company completed its cash purchase of Palms in Las Vegas, which offers gaming, lodging accommodations, dining, and entertainment (the “Palms Acquisition”). The Company acquired
100%
of the equity interests in Palms for
$316.4 million
.
The Palms Acquisition was recorded using the acquisition method of accounting and accordingly, results of its operations have been included in the Company’s consolidated financial statements for periods beginning on October 1, 2016. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, which were based on management estimates and third-party appraisals. The Company recognized the fair value of the assets acquired and liabilities assumed and expensed transaction costs as incurred.
The following condensed balance sheet presents the preliminary estimated fair values of the assets acquired and liabilities assumed (amounts in thousands):
|
|
|
|
|
|
|
|
|
As of
October 1, 2016
|
|
Cash and cash equivalents
|
$
|
10,506
|
|
|
Restricted cash
|
2,152
|
|
|
Receivables, net
|
5,725
|
|
|
Inventories
|
1,614
|
|
|
Prepaid expenses and other assets
|
3,490
|
|
|
Property and equipment
|
302,011
|
|
|
Intangible assets, net
|
15,875
|
|
|
Liabilities assumed
|
(24,980
|
)
|
|
Total identifiable net assets
|
$
|
316,393
|
|
The following table summarizes the acquired property and equipment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As recorded at fair value
|
|
Land
|
|
|
$
|
35,033
|
|
|
Buildings and improvements
|
|
|
253,192
|
|
|
Furniture, fixtures and equipment
|
|
|
13,786
|
|
|
Total property and equipment acquired
|
|
|
$
|
302,011
|
|
The following table summarizes the acquired intangible assets (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Estimated useful life (years)
|
|
As recorded at fair value
|
|
Condominium rental contracts
|
20
|
|
$
|
9,000
|
|
|
Palms Resort trademark rights
|
15
|
|
6,000
|
|
|
Reservation backlog
|
2
|
|
2,000
|
|
|
Customer relationships
|
15
|
|
800
|
|
|
Below market leases, net
|
2 - 15
|
|
(1,925
|
)
|
|
Total intangible assets acquired
|
|
|
$
|
15,875
|
|
The Company has not provided pro forma results of operations as the acquisition was not material to the Company. The Company included the results of operations of Palms in its Consolidated Statements of Income beginning on October 1, 2016. Net revenues and pretax loss of Palms from
October 1, 2016
through
December 31, 2016
were
$38.5 million
and
$1.3 million
, respectively.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4
. Noncontrolling Interest in Station Holdco
Red Rock holds an indirect economic interest in Station LLC through its ownership of approximately
56.9%
of the equity interests in Station Holdco, which holds all of the economic interests in Station LLC. Prior to the IPO, all membership interests in Station Holdco represented controlling interests. As a result of the IPO and Reorganization Transactions described in Note
1
, certain owners of LLC Units at December 31, 2016 who held such units prior to the IPO (“Continuing Owners”)
became noncontrolling interest holders. At that date, the noncontrolling interest holders of Station Holdco owned approximately
66.6%
of the outstanding LLC Units, with the remaining
33.4%
owned by Red Rock. At
December 31, 2016
, the noncontrolling interest in Station Holdco had been reduced to approximately
43.1%
, primarily due to the exchange of approximately
24.5 million
LLC Units and Class B common shares held by noncontrolling interest holders into Class A common shares in November 2016. The exchange transaction included approximately
19.6 million
LLC Units and Class B common shares exchanged by German American Capital Corporation, an affiliate of Deutsche Bank Securities Inc., an underwriter of the IPO and a lender under Station LLC's credit facility. Prospectively, noncontrolling interest will be adjusted to reflect the impact of any changes in Red Rock's ownership interest in Station Holdco. The ownership of the LLC Units is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Units
|
|
Ownership %
|
|
Red Rock's ownership of LLC Units (equal to outstanding Class A common stock)
|
65,893,439
|
|
|
56.9
|
%
|
|
Noncontrolling interest holders' ownership of LLC Units (equal to outstanding
Class B common stock)
|
49,956,296
|
|
|
43.1
|
%
|
|
Total LLC Units
|
115,849,735
|
|
|
100.0
|
%
|
|
|
|
|
|
The Company uses monthly weighted average ownership percentages to calculate the pretax income attributable to Red Rock and the noncontrolling interest holders of Station Holdco.
5
. Property and Equipment
Property and equipment consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Land
|
$
|
232,733
|
|
|
$
|
201,000
|
|
|
Buildings and improvements
|
2,255,580
|
|
|
1,959,160
|
|
|
Furniture, fixtures and equipment
|
476,916
|
|
|
433,962
|
|
|
Construction in progress
|
38,981
|
|
|
25,412
|
|
|
|
3,004,210
|
|
|
2,619,534
|
|
|
Accumulated depreciation and amortization
|
(566,081
|
)
|
|
(478,874
|
)
|
|
Property and equipment, net
|
$
|
2,438,129
|
|
|
$
|
2,140,660
|
|
Depreciation expense, excluding discontinued operations, was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Depreciation expense
|
$
|
137,881
|
|
|
$
|
119,530
|
|
|
$
|
109,626
|
|
At
December 31, 2016
and
2015
, substantially all of the Company’s property and equipment was pledged as collateral for its long-term debt.
6
. Goodwill and Other Intangibles
Goodwill, net, which is primarily related to the Las Vegas operations segment, was
$195.7 million
at each of
December 31, 2016
and
2015
. Accumulated goodwill impairment losses at each of
December 31, 2016
and
2015
totaled
$1.2 million
, which was recognized in 2013.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s intangibles, other than goodwill, consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Estimated useful
life
(years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Assets
|
|
|
|
|
|
|
|
|
Brands
|
Indefinite
|
|
$
|
77,200
|
|
|
$
|
—
|
|
|
$
|
77,200
|
|
|
License rights
|
Indefinite
|
|
300
|
|
|
—
|
|
|
300
|
|
|
Customer relationships
|
15
|
|
23,600
|
|
|
(8,432
|
)
|
|
15,168
|
|
|
Management contracts
|
7 - 20
|
|
115,000
|
|
|
(76,532
|
)
|
|
38,468
|
|
|
Condominium rental contracts
|
20
|
|
9,000
|
|
|
(113
|
)
|
|
8,887
|
|
|
Trademarks
|
15
|
|
6,000
|
|
|
(100
|
)
|
|
5,900
|
|
|
Beneficial leases
|
2 - 9
|
|
3,570
|
|
|
(2,044
|
)
|
|
1,526
|
|
|
Other
|
2
|
|
2,000
|
|
|
(250
|
)
|
|
1,750
|
|
|
Intangible assets
|
|
|
236,670
|
|
|
(87,471
|
)
|
|
149,199
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Below market lease
|
15
|
|
2,195
|
|
|
(36
|
)
|
|
2,159
|
|
|
Net intangibles
|
|
|
$
|
234,475
|
|
|
$
|
(87,435
|
)
|
|
$
|
147,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Estimated useful
life
(years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Assets
|
|
|
|
|
|
|
|
|
Brands
|
Indefinite
|
|
$
|
77,200
|
|
|
$
|
—
|
|
|
$
|
77,200
|
|
|
License rights
|
Indefinite
|
|
345
|
|
|
—
|
|
|
345
|
|
|
Customer relationships
|
15
|
|
22,800
|
|
|
(6,899
|
)
|
|
15,901
|
|
|
Management contracts
|
7 - 20
|
|
115,000
|
|
|
(60,084
|
)
|
|
54,916
|
|
|
Beneficial leases
|
9
|
|
3,300
|
|
|
(1,665
|
)
|
|
1,635
|
|
|
Intangible assets
|
|
|
$
|
218,645
|
|
|
$
|
(68,648
|
)
|
|
$
|
149,997
|
|
Amortization expense for intangibles, excluding discontinued operations, was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Amortization expense
|
$
|
18,787
|
|
|
$
|
18,335
|
|
|
$
|
18,335
|
|
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated annual amortization expense for intangibles for each of the next
five
years is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
|
|
2017
|
|
$
|
20,150
|
|
|
2018
|
|
10,997
|
|
|
2019
|
|
8,938
|
|
|
2020
|
|
7,712
|
|
|
2021
|
|
2,424
|
|
The decrease in estimated annual amortization expense for the year ending December 31, 2018 is primarily due to the Gun Lake management agreement intangible becoming fully amortized concurrently with the February 2018 expiration of the agreement.
7
. Land Held for Development
At
December 31, 2016
, the Company controlled approximately
398
acres of land comprised of
seven
strategically-located parcels in Las Vegas and Reno, Nevada, each of which is zoned for casino gaming and other uses. The Company owns approximately
378
acres of such land, and the remaining
20
acres is leased from a third-party lessor, as described in Note
22
.
The Company’s decision whether to proceed with any new gaming or development opportunity is dependent upon future economic and regulatory factors, the availability of acceptable financing and competitive and strategic considerations. As many of these considerations are beyond the Company’s control, no assurances can be made that it will be able to proceed with any particular project. From time to time the Company may acquire additional parcels or sell portions of its existing sites that are not necessary to the development of additional gaming facilities.
During the year ended
December 31, 2015
, the Company engaged a third party real estate firm to assist management in determining the fair value of its land held for development and as a result, recognized an impairment loss of
$4.2 million
to write down the carrying amount of a parcel of land in Las Vegas to its estimated fair value of
$7.0 million
. Also during the year ended
December 31, 2015
, the Company sold certain parcels of land, primarily in northern California, that were previously held for development, and recognized net gains on sale totaling
$6.7 million
.
During the year ended
December 31, 2014
, the Company sold a
101
-acre parcel of land held for development in Reno and recognized an impairment loss of
$11.7 million
to write down the carrying amount of the land to its fair value less cost to sell. Gains and losses on land sales are included in Write-downs and other charges, net in the Consolidated Statements of Income.
8
. Investments in Joint Ventures and Variable Interest Entities
Station LLC holds a
50%
investment in MPM, which manages Gun Lake Casino. Based on the terms of the MPM operating agreement and a qualitative analysis, the Company has determined that MPM is a VIE. Station LLC consolidates MPM in its consolidated financial statements because it directs the activities of MPM that most significantly impact MPM’s economic performance and has the right to receive benefits and the obligation to absorb losses that are significant to MPM. In addition, under the terms of the operating agreement, Station LLC was required to provide the majority of MPM’s initial financing and could be required to provide financing to MPM in the future. The assets of MPM reflected in the Company’s Consolidated Balance Sheets at
December 31, 2016
and
2015
included a management contract intangible asset with a carrying amount of
$11.5 million
and
$21.7 million
, respectively, and management fees receivable of
$3.3 million
and
$3.4 million
, respectively. MPM’s assets may be used only to settle MPM’s obligations, and MPM’s beneficial interest holders have no recourse to the general credit of the Company. See Note
10
for information about MPM’s management agreement with Gun Lake.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has various other investments in
50%
owned joint ventures which are accounted for using the equity method, including
three
50%
owned smaller casino properties. Under the equity method, original investments are initially recorded at cost and are adjusted by the investor’s share of earnings, losses and distributions of the joint venture. The carrying amount of the Company’s investment in
one
of the smaller casino properties has been reduced below
zero
and is presented as a deficit investment balance on the Consolidated Balance Sheets because the Company has received distributions in excess of its investment in the casino. The Company also holds a
50%
investment in a restaurant at one of its properties which is considered to be a VIE, of which the Company is not the primary beneficiary, and held a similar investment in another restaurant which closed in early 2016. At
December 31, 2016
and
2015
, investments in these restaurants totaled
$2.7 million
and
$6.3 million
, respectively.
9
. Native American Development
Following is information about the Company's Native American development activities.
North Fork Rancheria of Mono Indian Tribe
The Company has development and management agreements with the North Fork Rancheria of Mono Indians (the “Mono”), a federally recognized Native American tribe located near Fresno, California, which were originally entered into in 2003. In August 2014, the Mono and the Company entered into the Second Amended and Restated Development Agreement (the “Development Agreement”) and the Second Amended and Restated Management Agreement (the “Management Agreement”). Pursuant to those agreements, the Company will assist the Mono in developing and operating a gaming and entertainment facility (the “North Fork Project”) to be located in Madera County, California. The Company purchased a
305
–acre parcel of land adjacent to Highway 99 north of the city of Madera (the “North Fork Site”), which was taken into trust for the benefit of the Mono by the Department of the Interior (“DOI”) in February 2013.
As currently contemplated, the North Fork Project is expected to include approximately
2,000
slot machines, approximately
40
table games and several restaurants, and the cost of the project is expected to be between
$250 million
and
$300 million
. Development of the North Fork Project is subject to certain governmental and regulatory approvals, including, but not limited to, approval of the Management Agreement by the Chairman of the National Indian Gaming Commission (“NIGC”).
Under the terms of the Development Agreement, the Company has agreed to arrange the financing for the ongoing development costs and construction of the facility. The Company will contribute significant financial support to the North Fork Project. Through
December 31, 2016
, the Company has paid approximately
$29.9 million
of reimbursable advances to the Mono, primarily to complete the environmental impact study, secure the North Fork Site and pay the costs of litigation. The advances are expected to be repaid from the proceeds of third-party financing or from the Mono's gaming revenues; however, there can be no assurance that the advances will be repaid. The carrying amount of the advances was reduced to fair value upon the Company's adoption of fresh-start reporting in 2011. At
December 31, 2016
, the carrying amount of the advances was
$14.8 million
. In accordance with the Company’s accounting policy, accrued interest on the advances will not be recognized in income until the carrying amount of the advances has been recovered.
The Company will receive a development fee of
4%
of the costs of construction (as defined in the Development Agreement) for its development services, which will be paid upon the commencement of gaming operations at the facility. The Management Agreement allows the Company to receive a management fee of
40%
of the North Fork Project’s net income. The Management Agreement and the Development Agreement have a term of
seven
years from the opening of the North Fork Project. The Management Agreement includes termination provisions whereby either party may terminate the agreement for cause, and the Management Agreement may also be terminated at any time upon agreement of the parties. There is no provision in the Management Agreement allowing the tribe to buy-out the agreement prior to its expiration. The Management Agreement provides that the Company will train the Mono tribal members such that they may assume responsibility for managing the North Fork Project upon the expiration of the agreement.
Upon termination or expiration of the Management Agreement and Development Agreement, the Mono will continue to be obligated to repay any unpaid principal and interest on the advances from the Company, as well as certain other amounts that may be due, such as management fees. Amounts due to the Company under the Development Agreement and Management Agreement are secured by substantially all of the assets of the North Fork Project except the North Fork Site. In addition, the Development Agreement and Management Agreement contain waivers of the Mono’s sovereign immunity from suit for the purpose of enforcing the agreements or permitting or compelling arbitration and other remedies.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The timing of this type of project is difficult to predict and is dependent upon the receipt of the necessary governmental and regulatory approvals. There can be no assurance as to when, or if, these approvals will be obtained. The Company currently estimates that construction of the North Fork Project may begin in the next
36
to
48
months and estimates that the North Fork Project would be completed and opened for business approximately
18
months after construction begins. There can be no assurance, however, that the North Fork Project will be completed and opened within this time frame or at all. The Company expects to assist the Mono in obtaining third-party financing for the North Fork Project once all necessary regulatory approvals have been received and prior to commencement of construction; however, there can be no assurance that the Company will be able to obtain such financing for the North Fork Project on acceptable terms or at all.
The Company has evaluated the likelihood that the North Fork Project will be successfully completed and opened, and has concluded that the likelihood of successful completion is in the range of
65%
to
75%
at
December 31, 2016
. The Company's evaluation is based on its consideration of all available positive and negative evidence about the status of the North Fork Project, including, but not limited to, the status of required regulatory approvals, as well as the progress being made toward the achievement of all milestones and the successful resolution of all litigation and contingencies. There can be no assurance that the North Fork Project will be successfully completed or that future events and circumstances will not change the Company's estimates of the timing, scope, and potential for successful completion or that any such changes will not be material. In addition, there can be no assurance that the Company will recover all of its investment in the North Fork Project even if it is successfully completed and opened for business.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the Company’s evaluation at
December 31, 2016
of each of the critical milestones necessary to complete the North Fork Project.
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Federally recognized as an Indian tribe by the Bureau of Indian Affairs (“BIA”)
|
Yes
|
|
Date of recognition
|
Federal recognition was terminated in 1966 and restored in 1983.
|
|
Tribe has possession of or access to usable land upon which the project is to be built
|
The DOI accepted approximately 305 acres of land for the project into trust for the benefit of the Mono in February 2013.
|
|
Status of obtaining regulatory and governmental approvals:
|
|
|
Tribal–state compact
|
A compact was negotiated and signed by the Governor of California and the Mono in August 2012. The Compact was ratified by the California State Assembly and Senate in May 2013 and June 2013, respectively. Opponents of the North Fork Project qualified a referendum, “Proposition 48,” for a state-wide ballot challenging the legislature’s ratification of the Compact. In November 2014, Proposition 48 failed. The State took the position that the failure of Proposition 48 nullified the ratification of the Compact and, therefore, the Compact did not take effect under California law. In March 2015, the Mono filed suit against the State (see North Fork Rancheria of Mono Indians v. State of California) to obtain a compact with the State or procedures from the Assistant Secretary of the Interior for Indian Affairs under which Class III gaming may be conducted on the North Fork Site. In July 2016, the DOI issued Secretarial procedures (the “Secretarial Procedures”) pursuant to which the Mono may conduct Class III gaming on the North Fork Site.
|
|
Approval of gaming compact by DOI
|
The Compact was submitted to the DOI in July 2013. In October 2013, notice of the Compact taking effect was published in the Federal Register. The Secretarial Procedures supersede and replace the Compact.
|
|
Record of decision regarding environmental impact published by BIA
|
In November 2012, the record of decision for the Environmental Impact Statement for the North Fork Project was issued by the BIA. In December 2012, the Notice of Intent to take land into trust was published in the Federal Register.
|
|
BIA accepting usable land into trust on behalf of the tribe
|
The North Fork Site was accepted into trust in February 2013.
|
|
Approval of management agreement by NIGC
|
In December 2015, the Mono submitted the Management Agreement, and certain related documents, to the NIGC. In July 2016, the Mono received a deficiency letter from the NIGC seeking additional information concerning the Management Agreement. Approval of the Management Agreement by the NIGC is expected to occur following the Mono’s response to the deficiency letter. The Company believes the Management Agreement will be approved because the terms and conditions thereof are consistent with the provisions of the Indian Gaming Regulatory Act.
|
|
Gaming licenses:
|
|
|
Type
|
The North Fork Project will include the operation of Class II and Class III gaming, which are allowed pursuant to the terms of the Secretarial Procedures and IGRA, following approval of the Management Agreement by the NIGC.
|
|
Number of gaming devices allowed
|
The Secretarial Procedures allow for the operation of a maximum of 2,000 Class III slot machines at the facility during the first two years of operation and thereafter up to 2,500 Class III slot machines. There is no limit on the number of Class II gaming devices that the Mono can offer.
|
|
Agreements with local authorities
|
The Mono has entered into memoranda of understanding with the City of Madera, the County of Madera and the Madera Irrigation District under which the Mono agreed to pay one-time and recurring mitigation contributions, subject to certain contingencies. The memoranda of understanding with the City and County were amended in December 2016 to restructure the timing of certain payments due to delays in the development of the North Fork Project.
|
Following is a discussion of legal matters related to the North Fork Project.
Stand Up For California! v. Dept. of the Interior.
In December 2012, Stand Up for California!, several individuals and the Ministerial Association of Madera (collectively, the “Stand Up” plaintiffs) filed a complaint against the DOI, the BIA and the Secretary of Interior and Assistant Secretary of the Interior, in their official capacities, seeking to overturn the Secretary’s
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
determination to take the North Fork Site into trust for the purposes of gaming (the “North Fork Determination”) and seeking declaratory and injunctive relief to prevent the United States from taking the North Fork Site into trust. The Mono filed a motion to intervene as a party to the lawsuit, which was granted. In January 2013, the Court denied the Stand Up plaintiffs’ Motion for Preliminary Injunction and the United States accepted the North Fork Site into trust for the benefit of the Mono in February 2013. The parties subsequently filed motions for summary judgment, oppositions to motions for summary judgment and responses thereto, all of which were filed by April 2015. On September 6, 2016, the Court denied the Stand Up plaintiffs' motions for summary judgment and granted the defendants' and the Mono's motions for summary judgment in part and dismissed the remainder of the Stand Up plaintiffs' claims. On October 31, 2016, the Stand Up plaintiffs filed a notice of appeal of the district court’s decision. The Stand Up plaintiffs’ appellate brief is due March 14, 2017, the Mono and federal defendants’ brief is due April 13, 2017, the Stand Up plaintiffs’ reply brief is due May 4, 2017 and final briefs are due May 18, 2017.
Stand Up For California! v. Brown.
In March 2013, Stand Up for California! and Barbara Leach, a local resident, filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against California Governor Edmund G. Brown, Jr., alleging that Governor Brown violated the California constitutional separation-of-powers doctrine when he concurred in the North Fork Determination. The complaint sought to vacate and set aside the Governor’s concurrence. Plaintiffs’ complaint was subsequently amended to include a challenge to the constitutionality of AB 277. The Mono intervened as a defendant in the lawsuit and both the State and the Mono filed demurrers to plaintiffs’ complaint. In March 2014, the court issued its Judgment of Dismissal dismissing plaintiffs’ amended complaint. In September 2014, plaintiffs filed their opening appellate brief appealing the Judgment of Dismissal. The State and the Mono subsequently filed their responsive briefs and the plaintiffs filed their reply brief in January 2015. Oral arguments were heard in July 2016. On August 25, 2016, the appellate court ordered the parties to submit supplemental briefs addressing questions arising from whether there is any legal significance to the fact that the North Fork Site was not “Indian lands” at the time the Compact was negotiated. The parties submitted their responses on September 15, 2016. On October 4, 2016, plaintiffs filed a motion to strike a portion of the Mono’s supplemental brief. The Mono submitted its response on October 19, 2016. On December 12, 2016, the appellate court ruled in favor of the Stand Up plaintiffs concluding that Governor Brown exceeded his authority in concurring in the Secretary’s determination that gaming on the North Fork Site would be in the best interest of the Tribe and not detrimental to the surrounding community. The appellate court’s decision reversed the trial court’s previous ruling in favor of the Mono. The Mono and the State have filed petitions for review in the Supreme Court of California seeking review of the appellate court’s decision. On February 9, 2017, the Stand Up plaintiffs filed their answer to the petitions for review. The Mono and State’s replies were filed on February 21, 2017. Prior to the trial court’s issuing its Judgment of Dismissal, the Mono filed a Cross-Complaint against the State alleging that Proposition 48 was invalid and unenforceable to the extent that it purports to invalidate the legislative ratification of the Compact. The State and the plaintiffs filed demurrers seeking to dismiss the Cross-Complaint. In June 2014, the court sustained the plaintiffs’ and the State’s demurrers and dismissed the Mono’s Cross-Complaint. The Mono timely filed their notice of appeal for dismissal of the Cross-Complaint and in June 2015, filed their opening appellate brief. In September 2015, plaintiffs and the State filed their responsive briefs and in November 2015 the Mono filed its reply brief. In May 2016, the parties stipulated to the dismissal of the Mono’s appeal.
North Fork Rancheria of Mono Indians v. State of California.
In March 2015, the Mono filed a complaint against the State alleging that the State violated 25 U.S.C. Section 2710(d)(7) et. seq. by failing to negotiate with the Mono in good faith to enter into a tribal-state compact governing Class III gaming on the Mono’s Indian lands. The compliant sought a declaration that the State failed to negotiate in good faith to enter into an enforceable tribal-state compact and an order directing the State to conclude an enforceable tribal-state compact within 60 days or submit to mediation. The Mono filed a motion for judgment on the pleadings in August 2015 and the State’s opposition and cross motion for judgment on the pleadings was filed in September 2015. In November 2015, the district court issued its order granting judgment in favor of the Mono and ordering the parties to conclude a compact within 60 days. The parties were unable to conclude a compact within such period and in January 2016 the district court filed its Order to Show Cause as to why the court should not order the parties to submit to mediation. In January 2016, the court also filed its order confirming the selection of a mediator and requiring the parties to submit their last, best offers for a compact to the mediator within ten days. In February 2016, the mediation was conducted and the mediator issued her decision selecting the Mono’s compact as the compact that best comports with the law and the orders from the district court. The State had 60 days in which to consent to the selected compact. The State failed to consent to the selected compact and in April 2016, the selected compact was submitted to the Secretary of the Interior for the adoption of procedures consistent with the terms of the selected compact to allow the Mono to conduct Class III gaming at the North Fork Site. In March 2016, the Picayune Rancheria of Chukchansi Indians (“Picayune”) filed a motion to intervene in the lawsuit. In April 2016, the Mono and the State filed briefs opposing the intervention. In June 2016, the court denied Picayune’s motion to intervene, but requested briefing on issues raised by Picayune and allowed Picayune to file a brief as an
amicus curiae
. The Mono, State and Picayune filed briefs and reply briefs on July 15, 2016 and July 22, 2016, respectively. On July 29, 2016, the DOI issued the Secretarial Procedures. In August 2016, the court entered judgment and closed this case. No appeal was filed.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Picayune Rancheria of Chukchansi Indians v. Brown
. In March 2016, Picayune filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against Governor Edmund G. Brown, Jr., alleging that the referendum that invalidated the Compact also invalidated Governor Brown's concurrence with the North Fork Determination. The complaint seeks to vacate and set aside the Governor’s concurrence. In May, the Mono filed an ex-parte application to intervene in this case. In July 2016, the court granted the Mono’s application to intervene and the Mono filed a demurrer seeking to dismiss the case. Picayune filed its brief opposing the demurrer in September 2016, the Mono filed its reply brief on October 3, 2016, and oral arguments were scheduled for October 27, 2016. On October 20, 2016, the court vacated the hearing scheduled for October 27, 2016 in order to give the parties the opportunity to file briefs concerning the significance of the Third Appellate District Court of Appeal’s decision in
United Auburn Indian Community of the Auburn Rancheria v. Brown
. In that case, the appellate court ruled that Governor Brown had the power under state law to concur in the Secretary’s determination that taking land into trust for a tribe was in the best interests of the tribe and not detrimental to the surrounding community. On November 30, 2016, the district court sustained the Mono’s and State’s demurrers and dismissed Picayune’s complaint. On January 10, 2017, the court vacated its ruling on the demurrers based on the December 12, 2016, decision by the Fifth District Court of Appeal in
Stand Up for California! v. Brown
. A case management conference has been scheduled for May 8, 2017, to decide how the case should proceed in light of the California Supreme Court’s ruling on the petitions for review in
Stand Up for California! v. Brown
.
Picayune Rancheria of Chukchansi Indians v. United States Department of the Interior.
In July 2016, Picayune filed a complaint in the United States District Court for the Eastern District of California for declaratory and injunctive relief against the DOI. The complaint seeks a declaration that the North Fork Site does not come under one of the exceptions to the general prohibition against gaming on lands taken into trust after October 1988 set forth in IGRA and therefore is not eligible for gaming. It also seeks a declaration that the North Fork Determination has expired because the legislature never ratified Governor Brown’s concurrence, and seeks injunctive relief prohibiting the DOI from taking any action under IGRA concerning the North Fork Site. The Mono filed a motion to intervene in September 2016. The Department of Justice supported the Mono's intervention and Picayune failed to file any opposition. On October 21, 2016, the court granted the Mono's motion to intervene. A briefing schedule has been set pursuant to which the parties are to file cross motions for summary judgment, with briefs due on January 20, February 22, March 21 and April 18, 2017.
Stand Up for California! et. al. v. United States Department of the Interior.
On November 11, 2016, Stand Up for California! and other plaintiffs filed a complaint in the United States District Court for the Eastern District of California alleging that the DOI’s issuance of Secretarial Procedures for the Mono was subject to the National Environmental Policies Act and the Clean Air Act, and violate the Johnson Act. The complaint further alleges violations of the Freedom of Information Act and the Administrative Procedures Act. The DOI filed its answer to the complaint on February 15, 2017 denying plaintiffs’ claims and asserting certain affirmative defenses.
10
. Management Agreements
The Federated Indians of Graton Rancheria
The Company manages Graton Resort & Casino (“Graton Resort”), which opened in November 2013, on behalf of the Federated Indians of Graton Rancheria (the “Graton Tribe”). Graton Resort is located approximately
43
miles north of downtown San Francisco. The management agreement for Graton Resort will expire in November 2020. The Company is entitled to receive a management fee of
24%
of Graton Resort's net income (as defined in the management agreement) in years
1
through
4
and
27%
of Graton Resort's net income in years
5
through
7
. Excluding reimbursable expenses, management fees from Graton Resort totaled
$58.4 million
,
$43.0 million
and
$27.3 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The management agreement may be terminated under certain circumstances, including but not limited to, material breach, changes in regulatory or legal status, and mutual agreement of the parties. There is no provision in the management agreement allowing the Graton Tribe to buy-out the management agreement prior to its expiration. Under the terms of the management agreement, the Company will provide training to the Graton Tribe such that the tribe may assume responsibility for managing Graton Resort upon expiration of the seven-year term of the management agreement. Upon termination or expiration of the management and development agreements, the Graton Tribe will continue to be obligated to pay certain amounts that may be due to the Company, such as any unpaid management fees. Certain amounts due to the Company under the management and development agreements are subordinate to the obligations of the Graton Tribe under its third-party financing. The management and development agreements contain waivers of the Graton Tribe’s sovereign immunity from suit for the purpose of enforcing the agreements or permitting or compelling arbitration and other remedies.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gun Lake Casino
The Company holds a
50%
interest in MPM, which manages Gun Lake Casino (“Gun Lake”) in Allegan County, Michigan, under a management agreement with the Match–E–Be–Nash–She–Wish Band of Pottawatomi Indians of Michigan, a federally recognized Native American tribe commonly referred to as the Gun Lake Tribe. Gun Lake, which opened in February 2011, is located approximately
25
miles south of Grand Rapids, Michigan and
27
miles north of Kalamazoo, Michigan. The management agreement, which expires in February 2018, provides for a management fee of
30%
of Gun Lake’s net income (as defined in the management agreement) to be paid to MPM. Excluding reimbursable expenses, MPM’s management fee revenue from Gun Lake included in the Consolidated Statements of Income for the years ended
December 31, 2016
,
2015
and
2014
totaled
$40.5 million
,
$37.7 million
and
$33.3 million
, respectively. Under the terms of the MPM operating agreement, the Company’s portion of the management fee is
50%
of the first
$24 million
of management fees,
83%
of the next
$24 million
of management fees and
93%
of any management fees in excess of
$48 million
, each calculated on an annual basis. The Company receives monthly cash distributions from MPM representing its portion of the management fees, less certain expenses of MPM, and the remainder of MPM’s distributable cash is required to be distributed to MPM’s noncontrolling interest holders and investors.
Other Managed Properties
The Company is the managing partner of
three
50%
owned smaller casino properties in the Las Vegas regional market and receives a management fee equal to
10%
of earnings before interest, taxes, depreciation and amortization (“EBITDA”) from these properties.
Reimbursable Costs
Management fee revenue includes reimbursable payroll and other costs, primarily related to Graton Resort. Reimbursable costs totaled
$8.9 million
,
$7.3 million
and
$7.5 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
11
. Other Accrued Liabilities
Other accrued liabilities consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Accrued gaming and related
|
$
|
46,744
|
|
|
$
|
42,610
|
|
|
Accrued payroll and related
|
44,202
|
|
|
36,359
|
|
|
Construction payables and equipment purchase accruals
|
17,642
|
|
|
13,686
|
|
|
Advance deposits
|
16,283
|
|
|
11,356
|
|
|
Other
|
28,271
|
|
|
28,188
|
|
|
|
$
|
153,142
|
|
|
$
|
132,199
|
|
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12
. Long-term Debt
Long-term debt consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
$1.5 billion Term Loan B Facility, due June 8, 2023, interest at a margin above LIBOR or base rate (3.75% at December 31, 2016), net of unamortized discount and deferred issuance costs of $42.9 million at December 31, 2016
|
$
|
1,449,591
|
|
|
$
|
—
|
|
|
$225 million Term Loan A Facility, due June 8, 2021, interest at a margin above LIBOR or base rate (3.20% at December 31, 2016), net of unamortized discount and deferred issuance costs of $7.4 million at December 31, 2016
|
211,978
|
|
|
—
|
|
|
$685 million Revolving Credit Facility, due June 8, 2021, interest at a margin above LIBOR or base rate (3.44% weighted-average at December 31, 2016)
|
120,000
|
|
|
—
|
|
|
$1.625 billion Term Loan Facility, due March 1, 2020, interest at a margin above LIBOR or base rate (4.25% at December 31, 2015), net of unamortized discount and deferred issuance costs of $45.6 million
|
—
|
|
|
1,423,026
|
|
|
$350 million Revolving Credit Facility, due March 1, 2018, interest at a margin above LIBOR or base rate (6.00% at December 31, 2015)
|
—
|
|
|
20,000
|
|
|
$500 million 7.50% Senior Notes, due March 1, 2021, net of unamortized discount and deferred issuance costs of $9.4 million and $11.3 million at December 31, 2016 and 2015, respectively
|
490,568
|
|
|
488,735
|
|
|
Restructured Land Loan, due June 16, 2017, interest at a margin above LIBOR or base rate (5.27% and 3.92% at December 31, 2016 and 2015, respectively), net of unamortized discount of $0.6 million and $2.1 million, respectively
|
115,378
|
|
|
112,517
|
|
|
Other long-term debt, weighted-average interest of 3.92% and 4.46% at December 31, 2016 and 2015, respectively, maturity dates ranging from 2017 to 2027
|
34,786
|
|
|
110,919
|
|
|
Total long-term debt
|
2,422,301
|
|
|
2,155,197
|
|
|
Current portion of long-term debt
|
(46,063
|
)
|
|
(88,937
|
)
|
|
Long-term debt, net
|
$
|
2,376,238
|
|
|
$
|
2,066,260
|
|
New Credit Facility
In June 2016, Station LLC entered into a new credit agreement consisting of a
$225 million
term loan A facility (the “Term A Facility”), a
$1.5 billion
term loan B facility (the “Term B Facility”) and a
$685 million
revolving credit facility (the “Revolver”, and collectively the “New Credit Facility”).
In January 2017, Station LLC entered into an amendment to the New Credit Facility (the “Amendment”) to, among other things, (a) increase the Term B Facility by
$125.0 million
to an aggregate outstanding principal amount of
$1.6 billion
and (b) reduce the applicable margin for LIBOR loans from
3.00%
to
2.50%
and the applicable margin for alternate base rate loans from
2.00%
to
1.50%
. Pursuant to the terms of the New Credit Facility, as a result of the reduction in margin effected by the Amendment, Station LLC incurred a repricing fee in the amount of
1.00%
of the aggregate principal amount of the Term B Facility outstanding prior to the incurrence of the incremental Term B Facility borrowings. Station LLC applied the proceeds of the incremental Term B Facility borrowings to repay outstanding borrowings under its Revolver and pay fees and expenses incurred in connection with the Amendment.
At
December 31, 2016
, Station LLC's borrowing availability under the Revolver, subject to continued compliance with the terms of the New Credit Facility, was
$531.8 million
, which was net of
$120.0 million
of outstanding borrowings and
$33.2 million
in outstanding letters of credit and similar obligations. The amount outstanding under the Revolver at
December 31, 2016
was primarily used to fund the acquisition of Palms, which is described in Note
3
.
The Term A Facility and the Revolver will mature in June 2021. The Term B Facility will mature in June 2023. Station LLC must pay a
1.00%
premium if it prepays the Term B Facility prior to June 8, 2017. Station LLC is required to make quarterly principal payments of
$2.8 million
on the Term A Facility and
$3.8 million
on the Term B Facility on the last day of each quarter. In addition, Station LLC is required to make mandatory payments of amounts outstanding under the New Credit Facility with the proceeds of certain casualty events, debt issuances, asset sales and equity issuances and, depending on its consolidated total leverage ratio, Station LLC is required to apply a portion of its excess cash flow to repay amounts outstanding under the New Credit Facility, which would reduce future quarterly principal payments.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At
December 31, 2016
, the Term A Facility and debt incurred under the Revolver bear interest at a rate per annum, at Station LLC’s option, equal to either LIBOR plus an amount ranging from
1.75%
to
2.75%
or an alternate base rate plus an amount ranging from
0.75%
up to
1.75%
, depending on Station LLC’s consolidated total leverage ratio. At
December 31, 2016
, the margin applicable to the Term A Facility and Revolver for LIBOR loans and alternate base rate loans was
2.50%
and
1.50%
, respectively. The Term B Facility bears interest at a rate per annum, at Station LLC’s option, equal to either LIBOR plus
3.00%
, or an alternate base rate plus
2.00%
, subject to a minimum LIBOR rate of
0.75%
at
December 31, 2016
.
Borrowings under the New Credit Facility are guaranteed by all of Station LLC’s existing and future material restricted subsidiaries and are secured by pledges of all of the equity interests in Station LLC and its material restricted subsidiaries, a security interest in substantially all of the personal property of Station LLC and the subsidiary guarantors, and mortgages on the real property and improvements owned or leased by certain of Station LLC’s subsidiaries.
The New Credit Facility contains a number of customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and the subsidiary guarantors to incur debt; create a lien on collateral; engage in mergers, consolidations or asset dispositions; pay dividends or make distributions; make investments, loans or advances; engage in certain transactions with affiliates or subsidiaries; or modify their lines of business.
The New Credit Facility also includes certain financial covenants, including the requirements that Station LLC maintain throughout the term of the New Credit Facility and measured as of the end of each quarter, a maximum consolidated total leverage ratio of not more than
6.50
to
1.00
through June 30, 2017,
6.25
to
1.00
for September 30, 2017 through September 30, 2018,
5.75
to
1.00
for December 31, 2018 through March 31, 2019,
5.50
to
1.00
for June 30, 2019 through December 31, 2019 and
5.25
to
1.00
thereafter. Station LLC is also required to maintain an interest coverage ratio of not less than
2.50
to
1.00
measured on the last day of each quarter. A breach of the financial ratio covenants shall only become an event of default under the Term B Facility if the lenders providing the Term A Facility and the Revolver take certain affirmative actions after the occurrence of a default of such financial ratio covenants. At
December 31, 2016
, Station LLC's total leverage ratio was
4.66
to
1.00
and its interest coverage ratio was
4.62
to
1.00
, both as defined in the New Credit Facility, and the Company believes Station LLC was in compliance with all applicable covenants.
The proceeds from the New Credit Facility were used to repay all amounts outstanding under Station LLC's
$1.625 billion
term loan facility and
$350 million
revolving credit facility (together, the “Prior Credit Facility”), which was terminated in June 2016. Such transactions are referred to herein as the “Refinancing Transaction”. The Company evaluated the Refinancing Transaction on a lender by lender basis and accounted for the portion of the transaction that did not meet the accounting criteria for debt extinguishment as a debt modification. As a result of the Refinancing Transaction, Station LLC recognized a
$6.6 million
loss on debt extinguishment and modification, which included
$2.9 million
in third-party fees and the write-off of
$3.7 million
in unamortized debt discount and debt issuance costs related to the extinguished principal amount under the Prior Credit Facility.
7.50% Senior Notes
In March 2013, Station LLC issued
$500 million
in aggregate principal amount of
7.50%
senior notes due March 1, 2021 (the “7.50% Senior Notes”), pursuant to an indenture (the “Indenture”) among Station LLC, the guarantors party thereto and Wells Fargo Bank, National Association, as trustee. The 7.50% Senior Notes are guaranteed by all subsidiaries of Station LLC other than unrestricted subsidiaries including Landco Holdco and its subsidiaries, MPM, and Restaurant Holdco. Interest is due March 1 and September 1 of each year.
Station LLC may redeem all or a portion of the 7.50% Senior Notes at the redemption prices (expressed as percentages of the principal amount) set forth below plus accrued and unpaid interest and additional interest to the applicable redemption date:
|
|
|
|
|
|
|
|
Years Beginning March 1,
|
|
Percentage
|
|
|
2017
|
|
103.750
|
%
|
|
2018
|
|
101.875
|
%
|
|
2019 and thereafter
|
|
100.000
|
%
|
The Indenture governing the 7.50% Senior Notes requires that Station LLC offer to purchase the 7.50% Senior Notes at a purchase price in cash equal to
101%
of the aggregate principal amount outstanding plus accrued and unpaid interest thereon if Station LLC experiences certain change of control events (as defined in the Indenture). The Indenture also requires that Station LLC make an offer to repurchase the 7.50% Senior Notes at a purchase price equal to
100%
of the principal amount of the purchased notes if it has excess net proceeds (as defined in the Indenture) from certain asset sales.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Indenture contains a number of customary covenants that, among other things and subject to certain exceptions, restrict Station LLC’s ability and the ability of its restricted subsidiaries to incur or guarantee additional debt; 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 pay dividends or 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 also provides for events of default which, if any of them occurs, would permit or require the principal and accrued interest on the 7.50% Senior Notes to be declared due and payable.
Restructured Land Loan
In June 2011, an indirect wholly owned subsidiary of Station LLC, CV PropCo, LLC (“CV Propco”), as borrower, entered into an amended and restated credit agreement (the “Restructured Land Loan”) with Deutsche Bank AG Cayman Islands Branch (“Deutsche Bank”) and JPMorgan Chase Bank, N.A. as initial lenders (the “Land Loan Lenders”), consisting of a term loan facility with a principal amount of
$105 million
. In July 2016 CV Propco entered into the First Loan Modification Agreement and Omnibus Amendment (the “First Modification”) with respect to the amended and restated credit agreement governing the Restructured Land Loan. Pursuant to the First Modification, CV Propco has
three
one
-year extension options. CV Propco exercised its first
one
-year option to extend the maturity date of the Restructured Land Loan from June 2016 to June 2017 and paid an extension fee of
$1.2 million
. During the first extension period, the Restructured Land Loan bears interest at a rate per annum, at CV Propco’s option, equal to either LIBOR plus
4.50%
or an alternate base rate plus
3.50%
. In connection with the Restructured Land Loan, CV Propco entered into interest rate cap agreements with a combined notional amount of
$117 million
that limit LIBOR to a maximum of
1.50%
.
Pursuant to the First Modification, the Land Loan Lenders agreed to release their lien on a parcel of land located on the northeast corner of Interstate 15 and Cactus Avenue in Las Vegas (the “Cactus Assemblage”) upon a sale of the Cactus Assemblage that satisfies specified conditions. One of the conditions to the release of the Cactus Assemblage is a maximum loan to value ratio of
50%
following such release, which Station LLC may satisfy by delivering a guaranty in an amount up to
$40.0 million
. In addition, if the Cactus Assemblage is sold on or before June 16, 2017: (i) beginning on June 17, 2017, and through all extension periods, interest will accrue at a rate equal to LIBOR plus
4.50%
(as opposed to
5.50%
) (ii) immediately upon closing of the sale, CV Propco will have the option of paying cash interest at a rate per annum of LIBOR plus
3.00%
with the remaining interest to be paid in kind, and (iii) CV Propco and NP Tropicana LLC (“NP Tropicana”) had the option, exercisable on or before June 17, 2017, to repurchase the outstanding warrants to purchase
60%
of the interests of CV Propco and NP Tropicana that were held by the Land Loan Lenders at December 31, 2016 for
$4.0 million
or to cancel such warrants for
no
consideration if the Restructured Land Loan was paid in full on or before June 17, 2017. The warrants were issued to the Land Loan Lenders as part of the consideration for their agreement to enter into the Restructured Land Loan in 2011, and were exercisable for a nominal exercise price commencing on the earlier of (i) the date that the Restructured Land Loan was repaid, (ii) the date CV Propco sold any land to a third party, and (iii) the fifth anniversary of the Restructured Land Loan.
In March 2017, CV Propco and the Land Loan Lenders entered into the Second Modification Agreement and Consent (the “Second Modification”) with respect to the amended and restated credit agreement governing the Land Loan Lenders. Pursuant to the Second Modification, (i) CV Propco paid Deutsche Bank
$61.8 million
plus accrued and unpaid interest then due to Deutsche Bank under the Restructured Land Loan in full settlement of all obligations (including outstanding principal in the amount of
$72.6 million
) owed to Deutsche Bank under the Restructured Land Loan and (ii) the outstanding warrants to purchase
60%
of the interests of CV Propco and NP Tropicana were canceled. After the March 2017 repayment, the aggregate principal amount outstanding under the Restructured Land Loan was
$43.3 million
.
In order for CV Propco to execute the second and third
one
-year extension options, CV Propco is required to, among other things, pay an extension fee for each extension option equal to
1.00%
of the Restructured Land Loan's then outstanding principal balance. At
December 31, 2016
, CV Propco had the intent and ability to execute the second
one
-year extension option to extend the Restructured Land Loan’s maturity date to June 17, 2018. Accordingly, the amounts outstanding under the Restructured Land Loan were excluded from the current portion of long-term debt at
December 31, 2016
.
The credit agreement governing the Restructured Land Loan contains a number of customary covenants that, among other things and subject to certain exceptions, restrict CV Propco’s ability and the ability of its restricted subsidiaries to incur or guarantee additional debt; create liens on collateral; engage in activity that requires CV Propco to be licensed as a gaming company; engage in mergers, consolidations or asset dispositions; make distributions; make investments, loans or advances; engage in certain transactions with affiliates or subsidiaries; or make capital expenditures. The Company believes CV Propco was in compliance with all applicable covenants at
December 31, 2016
.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The credit agreement governing the Restructured Land Loan contains a number of customary events of default (subject to grace periods and cure rights). If any event of default occurs, the lenders under the Restructured Land Loan would be entitled, in certain cases, to take various actions, including accelerating amounts due thereunder and taking all actions permitted to be taken by a secured creditor.
The Restructured Land Loan is guaranteed by NP Tropicana, NP Landco Holdco LLC (a subsidiary of the Company and parent of CV Propco and NP Tropicana) and all subsidiaries of CV Propco. The Restructured Land Loan is secured by a pledge of the equity of CV Propco and NP Tropicana and all tangible and intangible assets of NP Tropicana, Landco Holdco and CV Propco and its subsidiaries, principally consisting of land located on the southern end of Las Vegas Boulevard at Cactus Avenue and land surrounding Wild Wild West. The Restructured Land Loan is also secured by the leasehold interest in the land on which Wild Wild West is located. The land carry costs of CV Propco are supported by Station LLC under a limited support agreement and recourse guaranty (the “Limited Support Agreement”). Under the Limited Support Agreement, Station LLC guarantees the net operating costs of CV Propco and NP Tropicana. Such net operating costs include timely payment of all capital expenditures, taxes, insurance premiums, other land carry costs and any indebtedness payable by CV Propco (excluding debt service for the Restructured Land Loan), as well as rent, capital expenditures, taxes, management fees, franchise fees, maintenance, and other costs of operations and ownership payable by NP Tropicana. Under the Limited Support Agreement, Station LLC also guarantees certain recourse liabilities of CV Propco and NP Tropicana under the Restructured Land Loan, including, without limitation, payment and performance of the Restructured Land Loan in the event any of CV Propco, Landco Holdco or NP Tropicana files or acquiesces in the filing of a bankruptcy petition or similar legal proceeding.
Other Debt
Included in Other long-term debt at December 31, 2015, was
$51.5 million
of debt associated with Fertitta Entertainment's credit facility, which was fully repaid as part of the Fertitta Entertainment Acquisition. Fertitta Entertainment recognized a loss on debt extinguishment of
$0.5 million
in connection with the repayment. Also included in Other long-term debt at December 31, 2015 was
$21.3 million
in debt related to an aircraft owned by a consolidated subsidiary of Fertitta Entertainment. Fertitta Entertainment sold this subsidiary to a related party in April 2016, as described in Note
20
. Accordingly, the Company did not assume the debt related to the aircraft.
Corporate Office Lease
The Company leases its corporate office building under a lease agreement which was entered into in 2007 pursuant to a sale-leaseback arrangement with a third-party real estate investment firm. The lease has an initial term of
20
years with
four
five
-year extension options. The lease also contains
two
options for the Company to repurchase the corporate office building,
one
option at the end of year
five
of the original lease term, which was not exercised, and another option at the end of year
ten
of the original lease term, which is exercisable in November 2017. The options constitute continuing involvement under the accounting guidance for sale-leaseback transactions involving real estate. As a result, the sale-leaseback transaction is accounted for as a financing transaction. The corporate office building is included in Property and equipment, net on the Consolidated Balance Sheets and is being depreciated according to the Company’s policy. The carrying amount of the related obligation is
$31.8 million
, which is included in long-term debt on the Consolidated Balance Sheets, and the lease payments are recognized as principal and interest payments on the debt. The lease payment in effect at
December 31, 2016
was
$3.3 million
on an annualized basis, which will increase annually by the greater of
1.25%
or the percentage increase in a cost of living factor, not to exceed
2%
.
Minimum lease payments on the corporate office lease for each of the next
five
years are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
|
|
2017
|
|
$
|
3,367
|
|
|
2018
|
|
3,409
|
|
|
2019
|
|
3,451
|
|
|
2020
|
|
3,494
|
|
|
2021
|
|
3,538
|
|
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Principal Maturities
Scheduled principal maturities of Station LLC's long-term debt for each of the next
five
years and thereafter are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
|
2017
|
$
|
46,063
|
|
|
2018
|
145,396
|
|
|
2019
|
51,117
|
|
|
2020
|
29,273
|
|
|
2021
|
798,459
|
|
|
Thereafter
|
1,412,264
|
|
|
|
2,482,572
|
|
|
Debt discounts and issuance costs
|
(60,271
|
)
|
|
|
$
|
2,422,301
|
|
13
. Derivative Instruments
The Company’s objective in using derivative instruments is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Station LLC uses interest rate swaps, including forward-starting interest rate swaps, as a primary part of its cash flow hedging strategy, which involves the receipt of variable–rate payments in exchange for fixed–rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivative financial instruments for trading or speculative purposes.
In June 2016, in connection with the Refinancing Transaction, Station LLC terminated the cash flow hedging relationship of its interest rate swap that existed at that time and paid
$7.3 million
to the counterparty. As a result of the termination of the hedging relationship, cumulative net losses that had been deferred in accumulated other comprehensive loss are being amortized over the remaining life of the original swap as an increase to interest expense through July 2017 as the hedged interest payments continue to occur.
Also in June 2016, Station LLC entered into
16
interest rate swaps with
four
different counterparties with maturity dates that run concurrently. The interest rate swaps each have
one
-year terms that run consecutively which began in July 2016 and will end in July 2020 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 swaps. Station LLC pays a weighted–average fixed rate of
0.85%
during the first
one
-year term ending in July 2017, which will increase to a weighted–average rate of approximately
1.11%
,
1.39%
, and
1.69%
in the second, third and fourth one-year terms, respectively. At
December 31, 2016
, Station LLC's interest rate swaps effectively converted
$1.1 billion
of Station LLC's variable interest rate debt (based on
one
-month LIBOR that is subject to a minimum of
0.75%
) to a fixed rate of
3.85%
.
At
December 31, 2016
and
2015
, all of Station LLC’s interest rate swaps were designated and qualified as cash flow hedges of forecasted interest payments. The fair value of the interest rate swaps, as well as their classification on the Consolidated Balance Sheets, is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31,
|
|
|
2016
|
|
2015
|
|
Prepaid expenses and other current assets
|
|
$
|
19
|
|
|
$
|
—
|
|
|
Other assets, net
|
|
10,661
|
|
|
—
|
|
|
Other accrued liabilities
|
|
8
|
|
|
—
|
|
|
Other long–term liabilities
|
|
—
|
|
|
8,334
|
|
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information about gains (losses) on derivative financial instruments held by Station LLC and their location within the consolidated financial statements is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) on Derivatives Recognized in Other Comprehensive Income (Effective Portion)
|
|
Location of Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
|
|
Amount of Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
2016
|
|
2015
|
|
2014
|
|
Interest rate swaps
|
|
$
|
8,035
|
|
|
$
|
(6,851
|
)
|
|
$
|
(7,999
|
)
|
|
Interest expense, net
|
|
$
|
(5,066
|
)
|
|
$
|
(8,548
|
)
|
|
$
|
(12,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Location of Gain (Loss) on Derivatives Recognized in Income
(Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|
Amount of Gain (Loss) on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Interest rate swaps
|
|
Change in fair value of derivative instruments
|
|
$
|
87
|
|
|
$
|
(1
|
)
|
|
$
|
(90
|
)
|
Losses reclassified from accumulated other comprehensive income into interest expense, net included deferred losses related to terminated cash flow hedging relationships that were being amortized as an increase to interest expense as the previously hedged interest payments continued to occur. Approximately
$2.8 million
of deferred losses included in accumulated other comprehensive income on the Company’s Consolidated Balance Sheet at
December 31, 2016
is expected to be reclassified into earnings during the next twelve months and is primarily related to the cash flow hedging relationship that was terminated in June 2016.
At
December 31, 2016
, Station LLC had not posted any collateral related to its interest rate swap agreements; however, Station LLC’s obligations under the interest rate swaps are subject to the security and guarantee arrangements applicable to the related credit agreement. The interest rate swap agreements contain cross-default provisions under which Station LLC could be declared in default on its obligations under the agreements if certain conditions of default exist on the New Credit Facility. At
December 31, 2016
, the termination value of Station LLC’s interest rate swaps, including accrued interest, was a net asset of
$10.6 million
.
14
. Fair Value Measurements
Assets 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 December 31, 2016
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
248
|
|
|
$
|
248
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate swaps
|
$
|
10,680
|
|
|
$
|
—
|
|
|
$
|
10,680
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
Balance at December 31, 2015
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
85
|
|
|
$
|
85
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
8,334
|
|
|
$
|
—
|
|
|
$
|
8,334
|
|
|
$
|
—
|
|
Assets Measured at Fair Value on a Nonrecurring Basis
During the year ended
December 31, 2015
, the Company engaged a third party real estate firm to assist management in determining the fair value of its land held for development and as a result, recognized an impairment loss of
$4.2 million
to write-down the carrying amount of a parcel of land in Las Vegas to its estimated fair value of
$7.0 million
. Also during the year ended December 31, 2015, the Company recognized an impairment charge of
$1.9 million
to write down the carrying amount of a parcel of land held for sale in Las Vegas to
$2.0 million
, representing its estimated fair value less cost to sell. The sale was completed in December 2016. During the year ended December 31, 2014, the Company entered into an agreement to sell a parcel of land in Reno and recognized a
$11.7 million
impairment charge to write down the carrying amount of the land to
$2.0 million
, which represented its estimated fair value less cost to sell. The land sale was completed in December 2014.
During the year ended
December 31, 2014
, the Company performed an interim impairment assessment for Fertitta Interactive's goodwill and long-lived assets. The Company determined that the carrying amounts were not recoverable due to negative cash flows forecasted for future periods and that the assets would have minimal value to a market participant. As a result, the Company recognized impairment charges to write off the goodwill and other long-lived assets of Fertitta Interactive, which are included in Discontinued operations in the Consolidated Statements of Income. The Company's assessment was based on Level 3 unobservable inputs under the fair value hierarchy. See Note
23
for additional information about Fertitta Interactive.
Fair Value of Long-term Debt
The estimated fair value of the Company’s long-term debt compared with its carrying amount is presented below (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Aggregate fair value
|
$
|
2,521
|
|
|
$
|
2,177
|
|
|
Aggregate carrying amount
|
$
|
2,422
|
|
|
$
|
2,155
|
|
The estimated fair value of the Company’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 hierarchy.
15
. Stockholders’/Members’ Equity
Subsequent to the IPO and the Reorganization Transactions described in Note
1
, the Company has
two
classes of common stock. The Company's Certificate of Incorporation authorizes
500,000,000
shares of Class A common stock, par value
$0.01
per share and
100,000,000
shares of Class B common stock, par value
$0.00001
per share. In addition, the Certificate of Incorporation authorizes up to
100,000,000
shares of preferred stock, par value of
$0.01
per share,
none
of which have been issued.
Class A Common Stock
Voting Rights
The holders of Class A common stock are entitled to
one
vote per share on all matters to be voted upon by the stockholders and have economic rights. Holders of shares of the Company’s Class A common stock and Class B common stock
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
vote together as a single class on all matters presented to the Company’s stockholders for their vote or approval, except as otherwise required by applicable law or the Certificate of Incorporation.
Dividend Rights
Subject to preferences that may be applicable to any outstanding preferred stock, the holders of Class A common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor.
Subject to legally available funds, the Company intends to pay quarterly cash dividends to the holders of Class A common stock initially equal to
$0.10
per share of Class A common stock, which commenced in the third quarter of 2016. The declaration, amount and payment of any future dividends on shares of Class A common stock will be at the sole discretion of the board of directors and it may reduce or discontinue entirely the payment of such dividends at any time. The board of directors may take into account general economic and business conditions, the Company’s financial condition and operating results, its available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends to stockholders or the payment of distributions by subsidiaries (including Station Holdco) to the Company, and such other factors as the board of directors may deem relevant. During 2016, the Company declared and paid cash dividends of
$0.20
per share to Class A common shareholders.
In March 2017, the board of directors declared a dividend of
$0.10
per share of Class A common stock to holders of record as of
March 15, 2017
to be paid on
March 31, 2017
. Prior to the payment of the dividend, Station Holdco will make a cash distribution to all LLC Unit holders, including the Company, of
$0.10
per unit for a total distribution of approximately
$11.6 million
, of which
$5.0 million
will be paid to its noncontrolling interest holders.
Red Rock is a holding company and has no material assets other than its equity interest in Station Holdco and its voting interest in Station LLC. The Company intends to cause Station Holdco to make distributions in an amount sufficient to cover cash dividends declared, if any. If Station Holdco makes such distributions to Red Rock, the other holders of LLC Units will be entitled to receive proportionate distributions based on their percentage ownership of Station Holdco.
The existing debt agreements of Station LLC, including those governing the New Credit Facility and the 7.50% Senior Notes, contain restrictive covenants that limit its ability to make cash distributions. Because the only asset of Station Holdco is its interest in Station LLC, the limitations on such distributions will effectively limit the ability of Station Holdco to make distributions to Red Rock. In addition, any financing arrangements that the Company or any of its subsidiaries enter into in the future may contain similar restrictions. Station Holdco is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of Station Holdco (with certain exceptions) exceed the fair value of its assets. Subsidiaries of Station Holdco, including Station LLC and its subsidiaries, are generally subject to similar legal limitations on their ability to make distributions to their members or equity holders.
Because the Company must pay taxes and make payments under the TRA, amounts ultimately distributed as dividends to holders of Class A common stock are expected to be less than the amounts distributed by Station Holdco to its members on a per LLC Unit basis.
Rights upon Liquidation
In the event of liquidation, dissolution or winding-up of Red Rock, whether voluntarily or involuntarily, the holders of Class A common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.
Other Rights
The holders of Class A common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Class A common stock. The rights, preferences and privileges of holders of Class A common stock will be subject to those of the holders of any shares of preferred stock the Company may issue in the future.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Class B Common Stock
Voting Rights
All Continuing Owners of Station Holdco other than Red Rock hold shares of Class B common stock. Although Class B shares have no economic rights, they allow those owners of Station Holdco to exercise voting power at Red Rock, which is the sole managing member of Station Holdco.
Each outstanding share of Class B common stock that is held by a holder that, together with its affiliates, owned LLC Units representing at least
30%
of the outstanding LLC Units and, at the applicable record date, maintains direct or indirect beneficial ownership of at least
10%
of the outstanding shares of Class A common stock (determined on an as-exchanged basis assuming that all of the LLC Units were exchanged for Class A common stock) is entitled to
ten
votes and each other outstanding share of Class B common stock is entitled to
one
vote.
Affiliates of Frank J. Fertitta III and Lorenzo J. Fertitta hold all of the Company’s issued and outstanding shares of Class B common stock that have ten votes per share. As a result, Frank J. Fertitta III and Lorenzo J. Fertitta, together with their affiliates, control any action requiring the general approval of the Company’s stockholders, including the election of the board of directors, the adoption of amendments to the Certificate of Incorporation and bylaws and the approval of any merger or sale of substantially all of the Company’s assets.
Each share of Class B common stock is entitled to only
one
vote automatically upon it being held by a holder that, together with its affiliates, did not own at least
30%
of the outstanding LLC Units immediately following the IPO or owns less than
10%
of the outstanding shares of Class A common stock (determined on an as-exchanged basis assuming that all of the LLC Units were exchanged for Class A common stock). In accordance with the Exchange Agreement, holders of LLC Units are entitled at any time to exchange LLC Units, together with an equal number of shares of Class B common stock, for shares of Class A common stock on a one-for-one basis or for cash, at the Company’s election. Accordingly, as members of Station Holdco exchange LLC Units, the voting power afforded to them by their shares of Class B common stock will be correspondingly reduced. As described in Note
4
, holders of Class B common stock exchanged
24.5 million
shares of such stock, along with an equal number of LLC Units, for an equal number of shares of Class A common stock in November 2016.
Automatic Transfer
In the event that any outstanding share of Class B common stock shall cease to be held by a holder of a LLC Unit (including a transferee of a LLC Unit), such share shall automatically be transferred to the Company and thereupon shall be retired.
Dividend Rights
Class B stockholders will not participate in any dividends declared by the board of directors.
Rights upon Liquidation
In the event of any liquidation, dissolution, or winding-up of Red Rock, whether voluntary or involuntary, the Class B stockholders will not be entitled to receive any of the Company’s assets.
Other Rights
The holders of Class B common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Class B common stock. The rights, preferences and privileges of holders of Class B common stock will be subject to those of the holders of any shares of preferred stock the Company may issue in the future.
Preferred Stock
Subject to limitations prescribed by Delaware law and the Certificate of Incorporation, the board of directors is authorized to issue preferred stock and to determine the terms and conditions of the preferred stock, including whether the shares of preferred stock will be issued in one or more series, the number of shares to be included in each series and the powers, designations, preferences and rights of the shares. The board of directors is authorized to designate any qualifications, limitations or restrictions on the shares without any further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plan to issue any shares of preferred stock.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss)
The following table presents changes in accumulated other comprehensive income (loss) balances, net of tax and noncontrolling interest (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on interest rate swaps, net
|
|
Unrealized (loss) gain on available-for-sale securities
|
|
Unrecognized pension liability
|
|
Total
|
|
Balances, December 31, 2014
|
$
|
(6,976
|
)
|
|
$
|
(123
|
)
|
|
$
|
—
|
|
|
$
|
(7,099
|
)
|
|
Unrealized loss arising during the period
|
(6,851
|
)
|
|
(102
|
)
|
|
—
|
|
|
(6,953
|
)
|
|
Reclassification of unrealized loss into income
|
8,548
|
|
|
201
|
|
|
—
|
|
|
8,749
|
|
|
Net current-period other comprehensive income
|
1,697
|
|
|
99
|
|
|
—
|
|
|
1,796
|
|
|
Balances, December 31, 2015
|
(5,279
|
)
|
|
(24
|
)
|
|
—
|
|
|
(5,303
|
)
|
|
Unrealized gain arising during the period (a)
|
1,859
|
|
|
39
|
|
|
2
|
|
|
1,900
|
|
|
Reclassification of unrealized loss into income
|
3,001
|
|
|
—
|
|
|
—
|
|
|
3,001
|
|
|
Net current-period other comprehensive income
|
4,860
|
|
|
39
|
|
|
2
|
|
|
4,901
|
|
|
Effects of reorganization transactions
|
3,768
|
|
|
7
|
|
|
—
|
|
|
3,775
|
|
|
Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco
|
(945
|
)
|
|
30
|
|
|
—
|
|
|
(915
|
)
|
|
Balances, December 31, 2016
|
$
|
2,404
|
|
|
$
|
52
|
|
|
$
|
2
|
|
|
$
|
2,458
|
|
_______________________________________
|
|
|
|
(a)
|
Net of
$2.3 million
tax expense related to unrealized gain on interest rate swaps.
|
Net Income Attributable to Red Rock Resorts, Inc.
Net income attributable to Red Rock was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Income from continuing operations
|
$
|
91,967
|
|
|
$
|
137,753
|
|
|
$
|
124,401
|
|
|
Net loss from discontinued operations
|
—
|
|
|
(95
|
)
|
|
(23,859
|
)
|
|
Net income attributable to Red Rock Resorts, Inc.
|
$
|
91,967
|
|
|
$
|
137,658
|
|
|
$
|
100,542
|
|
|
|
|
|
|
|
|
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Income Attributable to Red Rock Resorts, Inc. and Transfers (to) from Noncontrolling Interests
The table below presents the effect on Red Rock Resorts Inc. stockholders’ equity from net income and changes in its ownership of Station Holdco LLC (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net income attributable to Red Rock Resorts, Inc.
|
$
|
91,967
|
|
|
$
|
137,658
|
|
|
$
|
100,542
|
|
|
Transfers (to) from noncontrolling interests:
|
|
|
|
|
|
|
Allocation of equity to noncontrolling interests of Station Holdco in the Reorganization Transactions
|
(362,908
|
)
|
|
—
|
|
|
—
|
|
|
Exchanges of noncontrolling interests for Class A common stock
|
128,387
|
|
|
—
|
|
|
—
|
|
|
Rebalancing of ownership percentage between the Company and noncontrolling interests of Station Holdco
|
1,277
|
|
|
—
|
|
|
—
|
|
|
Net transfers to noncontrolling interests
|
(233,244
|
)
|
|
—
|
|
|
—
|
|
|
Change from net income attributable to Red Rock Resorts, Inc. and net transfers to noncontrolling interests
|
$
|
(141,277
|
)
|
|
$
|
137,658
|
|
|
$
|
100,542
|
|
|
|
|
|
|
|
|
16
. Share-Based Compensation
The Red Rock Resorts, Inc. 2016 Equity Incentive Plan (the “Equity Incentive Plan”) 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
11,585,479
shares of Class A common stock are reserved for issuance under the plan.
In connection with the IPO, the Company granted equity incentive awards to each of its executive officers (other than the Company’s Chairman and Chief Executive Officer) and certain other employees. The awards consisted of (i) options to acquire
1,687,205
shares of Class A common stock and
166,492
restricted shares of Class A common stock. The options will vest in
four
annual installments of
25%
, and the exercise price of the options is equal to the fair market value of the Class A common stock on the date of grant. The options will expire
seven
years from the grant date. The restricted shares generally will vest in installments of
50%
in each of the third and fourth years following the grant date. The Company also awarded to its independent directors a total of
23,076
restricted shares of Class A common stock having a
one
-year vesting period. In addition, concurrently with the IPO, the Company issued
1,832,884
restricted shares of Class A common stock to the holders of Station Holdco profit units in substitution for such profit units, of which
180,632
shares were unvested at the date of substitution. Prior to the IPO, the Company had
three
share-based compensation plans which were terminated in connection with the IPO and Reorganization Transactions. The terminated plans are described in more detail below.
The following table presents information about stock option awards under the Equity Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-average exercise price
|
|
Weighted-average remaining contractual life (years)
|
|
Aggregate intrinsic value (amounts in thousands)
|
|
Outstanding at January 1, 2016
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Granted
|
1,789,362
|
|
|
19.69
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
(152,333
|
)
|
|
19.50
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
1,637,029
|
|
|
$
|
19.71
|
|
|
6.3
|
|
$
|
5,698
|
|
|
Expected to vest at December 31, 2016
|
1,637,029
|
|
|
$
|
19.71
|
|
|
6.3
|
|
$
|
5,698
|
|
The weighted average grant date fair value of stock options granted during the year ended
December 31, 2016
was
$6.05
per share. As of
December 31, 2016
, none of the outstanding stock options were exercisable.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company estimates the grant date fair value of stock option awards using the Black-Scholes option pricing model. The weighted average assumptions utilized in estimating the fair values of stock option awards for the year ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
Expected stock price volatility
|
41.26
|
%
|
|
Expected term (in years)
|
4.75
|
|
|
Risk-free interest rate
|
1.35
|
%
|
|
Expected dividend yield
|
1.99
|
%
|
Expected stock price volatility is based on the historical volatility of comparable public companies. Expected term represents the period of time that the options are expected to be outstanding. The Company uses the simplified method to estimate the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for a period equal to the expected term.
The following table presents information about nonvested restricted stock awards under the Equity Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-average grant date fair value
|
|
Outstanding at January 1, 2016
|
—
|
|
|
$
|
—
|
|
|
Issued in substitution for unvested Station Holdco profit units
|
180,632
|
|
|
6.83
|
|
|
New awards
|
217,288
|
|
|
19.94
|
|
|
Vested
|
(129,468
|
)
|
|
9.80
|
|
|
Forfeited
|
(45,965
|
)
|
|
17.47
|
|
|
Outstanding at December 31, 2016
|
222,487
|
|
|
$
|
15.70
|
|
The fair value of restricted stock awards that vested during the year ended
December 31, 2016
was
$2.8 million
.
The Company recognized share-based compensation expense of
$6.9 million
for the year ended
December 31, 2016
, which included
$3.4 million
recognized subsequent to the IPO for awards issued under the Equity Incentive Plan. For the pre-IPO period from January 1, 2016 through May 1, 2016, the Company recognized share-based compensation expense of
$3.5 million
for awards issued under the
three
terminated plans described below. Share-based compensation expense was
$19.7 million
and
$12.8 million
for the years ended
December 31, 2015
and
2014
, respectively. At
December 31, 2016
, unrecognized share-based compensation cost was
$10.6 million
which is expected to be recognized over a weighted-average period of
3.2
years.
Share-based compensation is classified in the same financial statement line items as cash compensation. The following table presents the location of share-based compensation expense in the accompanying Consolidated Statements of Income (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
Casino
|
$
|
340
|
|
|
$
|
128
|
|
|
$
|
125
|
|
|
Food and beverage
|
21
|
|
|
—
|
|
|
—
|
|
|
Room
|
75
|
|
|
62
|
|
|
62
|
|
|
Selling, general and administrative
|
6,457
|
|
|
19,536
|
|
|
12,570
|
|
|
Total share-based compensation expense
|
$
|
6,893
|
|
|
$
|
19,726
|
|
|
$
|
12,757
|
|
|
|
|
|
|
|
|
Following is a description of the three share-based compensation plans that were terminated in connection with the IPO and Reorganization Transactions.
Station Holdco Profit Units Plan
Under the Station Holdco Amended and Restated Profit Units Plan (the “Profit Units Plan”), profit units in Station Holdco (“Profit Units”) were awarded to certain employees of the Company. The awards were subject to service-based vesting, and holders of vested Profit Units were entitled to participate in Station Holdco's distributions, subject to certain preferred
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
distribution rights of the LLC Unit holders. Restricted shares of Class A common stock were issued to current and former employees of the Company in substitution for all outstanding vested and unvested Profit Units on a value-for-value basis. Unvested restricted shares awarded in substitution for unvested Profit Units continued to vest under the same terms as the related Profit Unit awards.
A summary of the changes in nonvested units outstanding under the Profit Units Plan for the year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Units
(amounts in thousands)
|
|
Weighted-average grant date fair value per unit
|
|
Nonvested units at January 1, 2016
|
2,462
|
|
|
$
|
1.24
|
|
|
Activity during the period:
|
|
|
|
|
Vested
|
(1,465
|
)
|
|
1.25
|
|
|
Substituted
|
(997
|
)
|
|
1.24
|
|
|
Nonvested units at December 31, 2016
|
—
|
|
|
$
|
—
|
|
The estimated fair value of Profit Units that vested during the years ended
December 31, 2016
,
2015
and
2014
was
$5.2 million
,
$7.8 million
and
$3.1 million
, respectively.
Fertitta Entertainment Profit Units Plan
The Fertitta Entertainment profit units plan provided for the issuance of Fertitta Entertainment profit interests (“FE Profit Interests”) to certain key executives of Fertitta Entertainment. The FE Profit Interests vested over requisite service periods of
four
to
five
years. Holders of FE Profit Interests were entitled to participate in Fertitta Entertainment's distributions, subject to the return of capital contributions made by the common unit holders and certain other preferred distribution rights. The Company applied liability accounting for certain awards of FE Profit Interests that were subject to cash settlement and remeasured the liability awards at fair value each reporting period. A liability of
$15.8 million
related to these awards was included in Other long-term liabilities in the accompanying Consolidated Balance Sheet at December 31, 2015. Upon completion of the Fertitta Entertainment Acquisition, all outstanding FE Profit Interests were settled, including the liability awards which were settled for
$18.7 million
.
A summary of the changes in outstanding nonvested FE Profit Interests for the year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Awards
|
|
Liability Awards
|
|
|
Units
|
|
Weighted-average grant date fair value per unit
|
|
Units
|
|
Weighted-average grant date fair value per unit
|
|
Nonvested units at January 1, 2016
|
125
|
|
|
$
|
1,362
|
|
|
625
|
|
|
$
|
1,362
|
|
|
Activity during the period:
|
|
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vested
|
(125
|
)
|
|
1,362
|
|
|
(625
|
)
|
|
1,362
|
|
|
Canceled or forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Nonvested units at December 31, 2016
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
The estimated fair value of FE Profit Interests that vested during the years ended
December 31, 2016
,
2015
and
2014
was
$3.1 million
,
$8.9 million
and
$5.4 million
, respectively.
FI Station Investor Profit Units Plan
Certain key executives of Fertitta Entertainment were issued profit interest awards by FI Station Investor LLC (“FI Station Investor”) pursuant to the FI Station Investor Profit Units Plan (the “FI Profit Interests”). FI Station Investor is an affiliate of Frank J. Fertitta III and Lorenzo J. Fertitta. Holders of FI Profit Interests were entitled to participate in FI Station Investor's distributions, subject to the return of capital contributions made by the common unit holders and certain other preferred distribution rights. Immediately prior to the completion of the IPO, FI Station Investor distributed a portion of its LLC Units to holders of vested FI Profit Interests in settlement of such profit interests. There were no outstanding nonvested FI Profit Interests at December 31, 2015.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated fair value of FI Profit Interests that vested during the years ended
December 31, 2015
and
2014
was
$17.4 million
and
$4.9 million
, respectively.
For share-based compensation awards granted under the terminated plans, the fair value of the awards was measured on the date of grant using an option pricing method, which utilized various key inputs and assumptions that were estimated by management, including total equity value, expected volatility, risk free rate and time to liquidity event. Management estimated the total equity value using a combination of the income approach, which was based on discounted cash flow projections, and the market approach, which was based on observable market indicators of value. Expected volatility was estimated using the historical weekly average stock price volatility for comparable companies, and the discount for post-vesting restrictions was estimated based on an average strike-put option model. For share-based compensation awards that the Company intended to settle partially in cash, the Company applied liability accounting, and compensation expense was measured based on the fair value of the awards, which was remeasured at each reporting period until the liability was settled.
17
. Write-downs and Other Charges, Net
Write-downs and other charges, net include various charges to record net losses on asset disposals and non-routine transactions, and consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Transaction-related costs
|
$
|
9,684
|
|
|
$
|
5,819
|
|
|
$
|
—
|
|
|
Loss on disposal of assets, net
|
6,182
|
|
|
1,665
|
|
|
19,728
|
|
|
Development costs
|
4,350
|
|
|
—
|
|
|
—
|
|
|
Severance expense
|
3,314
|
|
|
1,135
|
|
|
1,941
|
|
|
Other, net
|
1,069
|
|
|
895
|
|
|
(713
|
)
|
|
|
$
|
24,599
|
|
|
$
|
9,514
|
|
|
$
|
20,956
|
|
Transaction-related costs included IPO-related advisory, legal and other costs that were not deferred as direct and incremental costs of the IPO, as well as costs related to the Fertitta Entertainment Acquisition.
Loss on disposal of assets for the year ended
December 31, 2016
primarily represents asset disposals related to renovation projects, as well as a
$2.5 million
loss on the sale of a parcel of land in Las Vegas. During the year ended
December 31, 2015
, the Company sold certain parcels of land that were previously held for development, and recognized gains on sale totaling
$6.7 million
. The gain was offset by losses on disposal of various assets, primarily property and equipment. Loss on disposal of assets for the year ended
December 31, 2014
primarily represents the abandonment of certain assets, including an amphitheater and an outdoor water feature, as well as asset disposals related to various renovation projects.
Development costs included costs associated with various development and acquisition activities, primarily
$3.2 million
in acquisition and integration costs related to Palms. Severance expense for the year ended
December 31, 2016
primarily relates to the acquisition of Palms.
18
. Income Taxes
Income Taxes
Red Rock is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it by Station Holdco based upon Red Rock’s economic interest held in Station Holdco. The Company was formed in September 2015 and did not engage in any operations prior to the IPO. As part of the IPO, Red Rock acquired the outstanding stock of the Merging Blockers which are taxed as corporations. As a result, Red Rock will file as a consolidated group for federal income tax reporting purposes and in certain states as required or allowed. Station Holdco is treated as a pass-through 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 share of Station Holdco's pass-through taxable income.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Tax Expense
The components of income tax expense were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Current income taxes
|
|
|
Federal
|
$
|
1,233
|
|
|
State and local
|
17
|
|
|
Total current income taxes
|
1,250
|
|
|
Deferred income taxes
|
|
|
Federal
|
6,614
|
|
|
State and local
|
348
|
|
|
Total deferred income taxes
|
6,962
|
|
|
Total income tax expense
|
$
|
8,212
|
|
The Company had
no
income tax expense for the years ended December 31, 2015 and 2014.
A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Expected U.S. federal income taxes at statutory rate
|
35.00
|
%
|
|
Income attributable to noncontrolling interests
|
(27.20
|
)%
|
|
State and local income taxes, net of federal benefit
|
0.06
|
%
|
|
Non-deductible expenses
|
0.14
|
%
|
|
Tax credits
|
(0.15
|
)%
|
|
Other
|
0.81
|
%
|
|
Valuation allowance
|
(3.65
|
)%
|
|
Income tax expense
|
5.01
|
%
|
The Company’s effective tax rate includes a rate benefit attributable to the fact that Station Holdco operates as a limited liability company which is not subject to federal income tax. Accordingly, the Company is not liable for income taxes on the portion of Station Holdco’s earnings attributable to noncontrolling interests.
The components of deferred tax assets and liabilities are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
Deferred tax assets
|
|
|
Investment in partnership
|
$
|
256,983
|
|
|
Payable pursuant to tax receivable agreement
|
91,144
|
|
|
Total gross deferred tax assets
|
348,127
|
|
|
Valuation allowance
|
(103,661
|
)
|
|
Total deferred tax assets, net of valuation allowance
|
$
|
244,466
|
|
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 deferred tax asset for its liability related to payments to be made pursuant to the TRA representing
85%
of the tax savings the Company expects to receive from the amortization deductions associated with the step up in the basis of depreciable assets under Section 754 of the Internal Revenue Code. This deferred tax asset will be recovered as cash payments are made to the TRA participants. Both of these deferred tax assets were recorded through equity.
Each reporting period, the Company analyzes the likelihood that its deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
likelihood of more than
50%
) that some portion, or all, of a deferred tax asset will not be realized. On an annual basis, the Company performs a comprehensive analysis of all forms of positive and negative evidence based on year end results. During each interim period, the Company updates its annual analysis for significant changes in the positive and negative evidence. As a result of this analysis, the Company determined that the deferred tax asset related to acquiring its interest in Station Holdco through the newly issued LLC Units is not expected to be realized unless the Company disposes of its investment in Station Holdco. Accordingly, as part of the Reorganization Transactions in May 2016, the Company established a valuation allowance of
$109.4 million
against this portion of its deferred tax asset, which was also recorded through equity. The Company recognizes subsequent changes to the valuation allowance through the provision for income tax or other comprehensive income (loss), as applicable, and at December 31, 2016, the valuation allowance was
$103.7 million
.
In
2016
, the Company adopted accounting guidance which simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax assets and liabilities into current and noncurrent amounts. This guidance requires all deferred tax assets and liabilities to be classified as noncurrent.
Uncertain Tax Positions
The Company records uncertain tax positions on the basis of a two-step process in which (1) the Company determines whether it is more likely than not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more likely than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than
50%
likely to be realized upon ultimate settlement with the related tax authority.
The Company determined that no liability for unrecognized tax benefits for uncertain tax positions was required at
December 31, 2016
. In addition, 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 first tax year subject to examination by taxing authorities for U.S. federal and state income tax purposes is 2015, though the Company reported no activity during that period. Additionally, although Station Holdco is treated as a partnership for U.S. federal and state income tax purposes, it is required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service (“IRS”). The statute of limitations has expired for tax years through 2012 for Station Holdco.
Tax Receivable Agreement
Pursuant to the election under Section 754 of the Internal Revenue Code, the Company expects to obtain an increase in its share of the tax basis in the net assets of Station Holdco when LLC Interests are exchanged by Station Holdco’s noncontrolling interest holders and other qualifying transactions. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
In connection with the IPO, the Company entered into the TRA with certain pre-IPO owners of Station Holdco. In the event that such parties exchange any or all of their Holdco 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 by 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. In connection with the IPO and the related Reorganization Transactions, the Company initially recorded a liability of
$44.5 million
under the TRA. In November 2016, the Company recognized a
$213.2 million
increase in the liability as a result of the exchange transaction described in Note
4
. At
December 31, 2016
, the Company's liability under the TRA was
$258.5 million
, of which
$1.0 million
is presented within current liabilities.
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
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
right to terminate the TRA, or if the TRA is terminated early in accordance with its terms, Red Rock’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.
Tax Distributions
Station Holdco is treated as a pass-through partnership for income tax reporting purposes. Federal, state and local taxes resulting from the pass-through taxable income of Station Holdco are obligations of its members. Net profits and losses are generally allocated to the members of Station Holdco (including the Company) in accordance with the number of Holdco Units held by each member for tax reporting. The amended and restated operating agreement of Station Holdco provides for cash distributions to assist members (including the Company) in paying their income tax liabilities. Station Holdco paid tax distributions of
$30.4 million
to noncontrolling interest holders for the period from
May 2, 2016
through
December 31, 2016
.
19
. Retirement Plans
401(k) Plan
The Company has a defined contribution 401(k) plan (the “401(k) Plan”) which covers all employees who meet certain age and length of service requirements and allows an employer contribution of up to
50%
of the first
4%
of each participating employee’s compensation contributed to the plan. Participants may elect to defer pretax compensation through payroll deductions. These deferrals are regulated under Section 401(k) of the Internal Revenue Code. The Company recorded expense for matching contributions of
$3.4 million
,
$3.4 million
and
$3.3 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Palms 401(k) Plan
In connection with the Palms Acquisition, the Company adopted a defined contribution 401(k) plan that was maintained by Palms (the “Palms 401(k) Plan”). The Palms 401(k) Plan covered substantially all employees of Palms who had met certain age requirements. Employees were eligible to participate on their first day of employment. The Palms could make discretionary contributions to the Palms 401(k) Plan based on its profitability. No matching contributions were made to the Palms 401(k) Plan during the three months ended
December 31, 2016
. The Palms 401(k) Plan was merged into the Company’s 401(k) Plan effective
January 1, 2017
.
Palms Pension Plan
In connection with the Palms Acquisition, the Company adopted a single-employer defined benefit pension plan (the “Pension Plan”), which covers eligible employees of Palms. The Pension Plan provides a cash balance form of pension benefits for eligible Palms employees who met certain age requirements and length of service requirements. There has been a plan curtailment since 2009, and as of the curtailment date, new participants were no longer permitted, and existing participants’ accrual of benefits for future service ceased.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides information about the changes in benefit obligation and the fair value of plan assets (amounts in thousands):
|
|
|
|
|
|
|
|
|
For the three months ended December 31, 2016
|
|
Change in Benefit Obligation:
|
|
|
Benefit obligation (accumulated and projected) as of October 1, 2016
|
$
|
14,689
|
|
|
Interest cost
|
131
|
|
|
Actuarial gain
|
(205
|
)
|
|
Benefits paid
|
(334
|
)
|
|
Other
|
(553
|
)
|
|
Benefit obligation (accumulated and projected) at December 31, 2016
|
$
|
13,728
|
|
|
|
|
|
Change in Fair Value of Plan Assets:
|
|
|
Fair value of plan assets as of October 1, 2016
|
$
|
10,228
|
|
|
Actual return on plan assets
|
(113
|
)
|
|
Benefits paid
|
(334
|
)
|
|
Other
|
(553
|
)
|
|
Fair value of plan assets at end of year
|
$
|
9,228
|
|
|
Net funded status at December 31, 2016
|
$
|
(4,500
|
)
|
The Company’s qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended. The Company expects to contribute
$0.5 million
to the Pension Plan for the year ending
December 31, 2017
and the Company does not expect any plan assets to be returned in the year ending
December 31, 2017
.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below provides the components of pension expense incurred subsequent to the
October 1, 2016
acquisition of the Palms for the year ended
December 31, 2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the three months ended December 31, 2016
|
|
Components of net periodic benefit cost:
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
Interest cost
|
|
131
|
|
|
Expected return on plan assets
|
|
(86
|
)
|
|
Amortization of net loss
|
|
—
|
|
|
Effect of settlement
|
|
—
|
|
|
Net periodic cost
|
|
$
|
45
|
|
|
|
|
|
|
Other changes recognized in Other Comprehensive Income:
|
|
|
|
Net gain
|
|
$
|
6
|
|
|
Amortization of net gain
|
|
—
|
|
|
Amount recognized due to settlement
|
|
—
|
|
|
Total recognized in other comprehensive income
|
|
$
|
6
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
(39
|
)
|
Amounts recognized on the Consolidated Balance Sheet at
December 31, 2016
related to the Pension Plan consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Current liabilities
|
|
$
|
—
|
|
|
Long-term liabilities
|
|
4,500
|
|
|
Total
|
|
$
|
4,500
|
|
|
|
|
|
|
Net actuarial gain recognized in Accumulated Other Comprehensive Income
|
|
$
|
6
|
|
The Company does not expect to amortize any net actuarial loss from accumulated other comprehensive income into net pension expense during
2017
.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table represents the weighted-average actuarial assumptions used to calculate the net periodic benefit cost and obligation:
|
|
|
|
|
|
|
|
|
For the three months ended December 31, 2016
|
|
Net periodic benefit cost
|
|
|
|
Discount rate
|
|
3.85%
|
|
Expected long-term rate of return
|
|
6.30%
|
|
Rate of compensation increase
|
|
n/a
|
|
|
|
|
|
Benefit obligations
|
|
|
|
Discount rate
|
|
4.15%
|
|
Rate of compensation increase
|
|
n/a
|
The discount rate used reflects the expected future benefit cash flows based on plan provisions and participant data as of the beginning of the plan year. The expected future cash flows are discounted by a pension discount yield curve on measurement dates and modified as deemed necessary. The expected return on plan assets uses a weighted average rate based on the target asset allocation of the plan and capital market assumptions developed with a primary focus on forward looking valuation models and market indicators. The key inputs for these models are future inflation, economic growth, and interest rate environment.
The composition of the Pension Plan assets at
December 31, 2016
, along with the targeted mix of assets, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
December 31, 2016
|
|
Fixed Income
|
50
|
%
|
|
52
|
%
|
|
Domestic Income
|
20
|
%
|
|
21
|
%
|
|
International Equity
|
12
|
%
|
|
14
|
%
|
|
Long/Short Equity
|
10
|
%
|
|
9
|
%
|
|
Other
|
8
|
%
|
|
4
|
%
|
|
|
100
|
%
|
|
100
|
%
|
The investment strategy for the Company’s defined benefit plan assets covers a diversified mix of assets, including equity and fixed income securities and real estate. Assets are managed within a risk management framework which addresses the need to generate incremental returns in the context of an appropriate level of risk, based on plan liability profiles and changes in funded status. The return objectives are to satisfy funding obligations when and as prescribed by law and to minimize the risk of large losses primarily through diversification.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Entities are required to use a fair value hierarchy to measure the plan assets. See Note
2
for a description of the fair value hierarchy. The fair values of the Pension Plan assets at
December 31, 2016
by asset category were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
Balance at December 31, 2016
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fixed Income
|
$
|
4,769
|
|
|
$
|
4,294
|
|
|
$
|
475
|
|
|
$
|
—
|
|
|
Domestic Income
|
1,942
|
|
|
188
|
|
|
1,754
|
|
|
—
|
|
|
International Equity
|
1,285
|
|
|
1,054
|
|
|
231
|
|
|
—
|
|
|
Long/Short Equity
|
825
|
|
|
825
|
|
|
—
|
|
|
—
|
|
|
Other
|
407
|
|
|
—
|
|
|
407
|
|
|
—
|
|
|
|
$
|
9,228
|
|
|
$
|
6,361
|
|
|
$
|
2,867
|
|
|
$
|
—
|
|
At
December 31, 2016
, expected benefit payments for the next ten years were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
|
|
2017
|
|
$
|
1,620
|
|
|
2018
|
|
710
|
|
|
2019
|
|
580
|
|
|
2020
|
|
630
|
|
|
2021
|
|
1,500
|
|
|
2022 - 2026
|
|
4,250
|
|
20
.
Related Party Transactions
Station LLC has entered into credit agreements with certain lenders including Deutsche Bank, which owned approximately
17%
of the LLC Units prior to the November 2016 exchange transaction. See Note
12
for additional information about long-term debt.
During the year ended
December 31, 2016
, the Company completed the Fertitta Entertainment Acquisition described in Note
1
.
During the year ended
December 31, 2016
, the Company purchased LLC Units from Continuing Owners described in Note
1
included
$44.6 million
paid to entities controlled by Frank J. Fertitta III and Lorenzo J. Fertitta and
$55.7 million
paid to German American Capital Corporation (“GACC”), an indirect wholly owned subsidiary of Deutsche Bank. In addition, the Company’s liability under the TRA at
December 31, 2016
included
$21.6 million
due to entities controlled by Frank J. Fertitta III and Lorenzo J. Fertitta and
$193.3 million
due to GACC, which was a related party prior to the November 2016 exchange transaction.
In April 2012, Fertitta Entertainment entered into a non-recourse secured note receivable due April 30, 2019 from Fertitta Investment LLC (“FI”), the parent of FI Station Investor LLC, an entity controlled by Frank J. Fertitta III and Lorenzo J. Fertitta, under which Fertitta Entertainment could lend or advance up to a maximum of
$15.0 million
. The principal balance accrued interest at an annual rate of
4.99%
. The carrying amount of the note receivable was
$17.6 million
at December 31, 2015, which included unpaid interest of
$2.7 million
. The note receivable was paid in full in April 2016.
In May 2016, the Company reimbursed GACC approximately
$2.1 million
for expenses incurred by GACC in connection with the IPO and Reorganization Transactions. Additionally, the Company paid a financial advisory fee in the amount of
$4.0 million
to Deutsche Bank Corporate Finance for services provided in connection with the IPO and Reorganization Transactions.
Fertitta Entertainment entered into various agreements for partial use of and to share in the cost of aircraft with Fertitta Enterprises, Inc., a company owned by the Frank J. Fertitta and Victoria K. Fertitta Revocable Family Trust. Frank J. Fertitta, Jr.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and Victoria K. Fertitta are the parents of Frank J. Fertitta III and Lorenzo J. Fertitta. The agreements were terminated in April 2016. Selling, general and administrative expenses related to these agreements were
$1.1 million
,
$2.2 million
and
$2.1 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
In April 2016, Fertitta Entertainment sold all of the outstanding membership interest in FE Aviation II LLC (“FE Aviation”) to Fertitta Business Management LLC, an entity controlled by Frank J. Fertitta III and Lorenzo J. Fertitta for
$8.0 million
. The carrying amount of FE Aviation exceeded the sales price by approximately
$0.5 million
, which was recognized as a deemed distribution.
The Company has entered into long-term agreements with a related party for ground leases at
two
of its properties. The Company's annual lease payments related to these ground leases totaled approximately
$7.1 million
,
$6.9 million
and
$6.7 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, which is included in selling, general and administrative expense in the Consolidated Statements of Income. See Note
22
for additional information about the ground leases.
At
December 31, 2015
, Receivables, net included balances due from related parties totaling
$1.2 million
for goods and services provided by the Company in the ordinary course of business.
21
. Earnings Per Share
Basic net income per share is calculated by dividing net 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 net income 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 as-if converted method. Dilutive shares included in the calculation of diluted net income per share represent nonvested restricted shares of Class A common stock. All other potentially dilutive shares have been excluded from the calculation of diluted net income per share because their inclusion would not have been dilutive.
For purposes of calculating net income per share for periods prior to the IPO, including the year ended
December 31, 2016
for which a portion of the period preceded the IPO, the Company has retrospectively presented net income per share as if the Reorganization Transactions had occurred at the beginning of the earliest period presented. Such retrospective presentation reflects approximately
10 million
Class A shares outstanding, representing the LLC Units held by the Merging Blockers, which were the only LLC Units exchanged for Class A shares in the Reorganization Transactions. Accordingly, for periods prior to the IPO, the Company has applied a hypothetical allocation of net income to the Class A common stock, with the remainder of net income being allocated to noncontrolling interests. For periods prior to the IPO date, the retrospective presentation does not include the
29.5 million
shares of Class A common stock issued in the IPO. This hypothetical allocation of net income differs from the allocation of net income to Red Rock and noncontrolling interests presented in the Consolidated Statements of Income, which assumes no noncontrolling interest in Station Holdco existed prior to the IPO.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the numerator used in the calculation of basic net income per share is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Income from continuing operations, basic
|
$
|
155,775
|
|
|
$
|
143,418
|
|
|
$
|
131,135
|
|
|
Less income from continuing operations attributable to noncontrolling interests, basic (a)
|
(120,483
|
)
|
|
(128,289
|
)
|
|
(117,490
|
)
|
|
Income from continuing operations attributable to Red Rock, basic (a)
|
$
|
35,292
|
|
|
$
|
15,129
|
|
|
$
|
13,645
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, basic
|
$
|
—
|
|
|
$
|
(166
|
)
|
|
$
|
(42,548
|
)
|
|
Add loss from discontinued operations attributable to noncontrolling interests, basic (a)
|
—
|
|
|
156
|
|
|
39,977
|
|
|
Loss from discontinued operations attributable to Red Rock, basic (a)
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
(2,571
|
)
|
|
|
|
|
|
|
|
|
Net income, basic
|
$
|
155,775
|
|
|
$
|
143,252
|
|
|
$
|
88,587
|
|
|
Less net income attributable to noncontrolling
interests, basic (a)
|
(120,483
|
)
|
|
(128,133
|
)
|
|
(77,513
|
)
|
|
Net income attributable to Red Rock, basic (a)
|
$
|
35,292
|
|
|
$
|
15,119
|
|
|
$
|
11,074
|
|
|
|
|
|
|
|
|
__________________________________________________________
|
|
|
|
(a)
|
Represents retrospective allocation of net income as if the Reorganization Transactions had occurred at the beginning of the earliest period presented.
|
A reconciliation of the numerator used in the calculation of diluted net income per share is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Income from continuing operations attributable to Red Rock, basic
|
$
|
35,292
|
|
|
$
|
15,129
|
|
|
$
|
13,645
|
|
|
Effect of dilutive securities
|
(102
|
)
|
|
—
|
|
|
—
|
|
|
Income from continuing operations attributable to Red Rock, diluted
|
$
|
35,190
|
|
|
$
|
15,129
|
|
|
$
|
13,645
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations attributable to Red Rock, basic
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
(2,571
|
)
|
|
Effect of dilutive securities
|
—
|
|
|
—
|
|
|
—
|
|
|
Loss from discontinued operations attributable to Red Rock, diluted
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
(2,571
|
)
|
|
|
|
|
|
|
|
|
Net income attributable to Red Rock, basic
|
$
|
35,292
|
|
|
$
|
15,119
|
|
|
$
|
11,074
|
|
|
Effect of dilutive securities
|
(102
|
)
|
|
—
|
|
|
—
|
|
|
Net income attributable to Red Rock, diluted
|
$
|
35,190
|
|
|
$
|
15,119
|
|
|
$
|
11,074
|
|
The denominators used in the calculation of basic and diluted net income per share are presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Weighted average shares of Class A common stock outstanding, basic
|
34,141
|
|
|
9,888
|
|
|
9,888
|
|
|
Effect of dilutive securities
|
144
|
|
|
—
|
|
|
—
|
|
|
Weighted average shares of Class A common stock outstanding, diluted
|
34,285
|
|
|
9,888
|
|
|
9,888
|
|
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The calculation of diluted net income per share of Class A common stock excluded the following shares that could potentially dilute basic earnings per share in the future because their inclusion would have been antidilutive (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Shares issuable in exchange for Class B common stock and LLC Units
|
49,956
|
|
|
80,335
|
|
|
80,335
|
|
|
Share issuable upon exercise of stock options
|
1,637
|
|
|
—
|
|
|
—
|
|
|
Share issuable upon vesting of restricted stock
|
5
|
|
|
—
|
|
|
—
|
|
Shares of Class B common stock are not entitled to share in the earnings of the Company and are not participating securities. Accordingly, separate presentation of earnings per share of Class B common stock under the two-class method has not been presented. The shares of Class B common stock are not dilutive under the if-converted method, and therefore are not included in the calculation of diluted net income per share.
22
. Commitments and Contingencies
Leases
Boulder Station Lease
Station LLC leases a portion of the land on which Boulder Station is located pursuant to a ground lease. Station LLC leases this land from KB Enterprises, a company owned by the Frank J. Fertitta and Victoria K. Fertitta Revocable Family Trust (the “Related Lessor”). The lease has a maximum term of
65
years, ending in June 2058. The lease provides for monthly payments of
$222,933
through
June 2018
. In July 2018, and every
ten
years thereafter, the rent will be adjusted by a cost of living factor. In July 2023 and every
ten
years thereafter, the rent is subject to adjustment based on the product of the fair market value of the land and the greater of the then prevailing annual rate of return for comparably situated property or
8%
per year. In no event will the rent for any period be less than the rent for the immediately preceding period. Pursuant to the ground lease, Station LLC has an option to purchase the land at fair market value, exercisable in July 2018 and at
five
-year intervals thereafter. Station LLC’s leasehold interest in the property is subject to a lien to secure borrowings under its credit agreements.
Texas Station Lease
Station LLC leases
47
acres of land on which Texas Station is located pursuant to a ground lease. Station LLC leases this land from Texas Gambling Hall & Hotel, Inc., a company owned by the Related Lessor. The lease has a maximum term of
65
years, ending in July 2060. The lease provides for monthly rental payments of
$366,435
through
July 2020
. In August 2020, and every
ten
years thereafter, the rent is subject to adjustment based on the product of the fair market value of the land and the greater of the then prevailing annual rate of return for comparably situated property or
8%
per year. In August 2025 and every
ten
years thereafter, the rent will be adjusted by a cost of living factor. In no event will the rent for any period be less than the rent for the immediately preceding period. Pursuant to the ground lease, Station LLC has an option to purchase the land at fair market value, exercisable in April 2030 and at
five
-year intervals thereafter. Station LLC’s leasehold interest in the property is subject to a lien to secure borrowings under its credit agreements.
Wild Wild West Lease
Station LLC leases from a third-party lessor the
20
-acre parcel of land on which Wild Wild West is located and is a party to a purchase agreement for the land. The significant terms of the agreement include (i) annual rent adjustments through January 2020 and every
three
years thereafter, (ii) options under which Station LLC may purchase the land at any time through 2019 at established fixed prices, (iii) a one-time termination option at Station LLC’s election in 2019, and (iv) options under which Station LLC may purchase the land in July 2023, 2044 and 2065 for a purchase price equal to fair market value at July 2022, 2043 and 2064, respectively. Monthly rental payments under the Wild Wild West lease were
$131,998
for the year ended
December 31, 2016
, which increased to
$135,298
in January 2017.
Other Operating Leases
In addition to the leases described above, the Company also leases certain other buildings and equipment used in its operations, which have operating lease terms expiring through
2042
.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments required under all non-cancelable operating leases are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
|
2017
|
$
|
9,206
|
|
|
2018
|
9,181
|
|
|
2019
|
9,199
|
|
|
2020
|
10,203
|
|
|
2021
|
10,208
|
|
|
Thereafter
|
382,456
|
|
|
|
$
|
430,453
|
|
Rent expense, excluding discontinued operations, was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Rent expense
|
$
|
8,968
|
|
|
$
|
8,644
|
|
|
$
|
8,509
|
|
Legal Matters
The Company and its subsidiaries are defendants in various lawsuits relating to routine matters incidental to their business. As with all litigation, no assurance can be provided as to the outcome of any legal matters and litigation inherently involves significant costs.
23
. Discontinued Operations
The Company’s majority-owned consolidated subsidiary, Fertitta Interactive, ceased operations during the fourth quarter of 2014. Fertitta Interactive previously operated online gaming in New Jersey and online poker in Nevada under the Ultimate Gaming and Ultimate Poker brands, respectively.
In September 2014, Fertitta Interactive terminated its online gaming operations agreement with its partner in New Jersey due to multiple breaches by the partner. Later in the same month, the partner filed for Chapter 11 bankruptcy reorganization and Fertitta Interactive ceased operating online gaming in New Jersey. As a result of these developments, management determined that the carrying amounts of Fertitta Interactive's long-lived assets were no longer recoverable, primarily due to forecasted negative cash flows. Accordingly, the Company performed an interim impairment test for all of Fertitta Interactive's long-lived assets during the third quarter of 2014 and recognized impairment charges totaling
$21.5 million
to write off all of the assets. The charges included
$5.6 million
for goodwill impairment and
$15.9 million
for other asset impairment, primarily representing property and equipment and an advancement fee related to its New Jersey operations. In November 2014, Fertitta Interactive ceased operating online poker in Nevada and commenced a wind-down of its operations.
The results of Fertitta Interactive have been reported as discontinued operations in the accompanying Consolidated Statements of Income for all periods presented. Discontinued operations were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
2014
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
6,859
|
|
|
Operating costs and expenses
|
|
278
|
|
|
27,109
|
|
|
Asset impairment charges and other, net
|
|
(112
|
)
|
|
22,298
|
|
|
Net loss from discontinued operations
|
|
(166
|
)
|
|
(42,548
|
)
|
|
Less net loss from discontinued operations attributable
to noncontrolling interests
|
|
(71
|
)
|
|
(18,689
|
)
|
|
Net loss from discontinued operations attributable to Red Rock Resorts, Inc.
|
|
$
|
(95
|
)
|
|
$
|
(23,859
|
)
|
|
|
|
|
|
|
Fertitta Interactive had nominal assets and liabilities at
December 31, 2015
. The Consolidated Statements of Cash Flows have not been adjusted for discontinued operations.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
24
. Segments
The Company views each of its Las Vegas casino properties and each of its Native American management arrangements as individual operating segments. The Company aggregates all of its Las Vegas operating segments into one reportable segment because all of its Las Vegas properties offer similar products, cater to the same customer base, have the same regulatory and tax structure, share the same marketing programs, all are directed by a centralized management structure, and have similar economic characteristics.
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company utilizes adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) as the primary measure of each of its properties’ performance. The Company’s segment information is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net revenues
|
|
|
|
|
|
|
Las Vegas operations
|
$
|
1,336,177
|
|
|
$
|
1,258,207
|
|
|
$
|
1,217,935
|
|
|
Native American management
|
110,962
|
|
|
88,277
|
|
|
68,149
|
|
|
Reportable segment net revenues
|
1,447,139
|
|
|
1,346,484
|
|
|
1,286,084
|
|
|
Corporate and other
|
5,288
|
|
|
5,651
|
|
|
5,532
|
|
|
Consolidated net revenues
|
$
|
1,452,427
|
|
|
$
|
1,352,135
|
|
|
$
|
1,291,616
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (a)
|
|
|
|
|
|
|
Las Vegas operations
|
$
|
423,692
|
|
|
$
|
410,301
|
|
|
$
|
379,748
|
|
|
Native American management
|
87,259
|
|
|
66,622
|
|
|
46,937
|
|
|
Reportable Segment Adjusted EBITDA
|
510,951
|
|
|
476,923
|
|
|
426,685
|
|
|
Corporate and other
|
(26,509
|
)
|
|
(25,509
|
)
|
|
(27,636
|
)
|
|
Consolidated Adjusted EBITDA
|
484,442
|
|
|
451,414
|
|
|
399,049
|
|
|
|
|
|
|
|
|
|
Other operating income (expense)
|
|
|
|
|
|
|
Preopening
|
(731
|
)
|
|
(1,165
|
)
|
|
(640
|
)
|
|
Depreciation and amortization
|
(156,668
|
)
|
|
(137,865
|
)
|
|
(127,961
|
)
|
|
Share-based compensation
|
(6,893
|
)
|
|
(19,726
|
)
|
|
(12,757
|
)
|
|
Donation to UNLV
|
—
|
|
|
(2,500
|
)
|
|
—
|
|
|
Asset impairment
|
—
|
|
|
(6,301
|
)
|
|
(11,739
|
)
|
|
Write-downs and other charges, net
|
(24,599
|
)
|
|
(9,514
|
)
|
|
(20,956
|
)
|
|
Adjusted EBITDA attributable to MPM noncontrolling interest
|
14,675
|
|
|
14,192
|
|
|
13,424
|
|
|
Other
|
1,133
|
|
|
(537
|
)
|
|
(435
|
)
|
|
Operating income and earnings from joint ventures
|
311,359
|
|
|
287,998
|
|
|
237,985
|
|
|
Other (expense) income
|
|
|
|
|
|
|
Interest expense, net
|
(140,189
|
)
|
|
(144,489
|
)
|
|
(151,702
|
)
|
|
Loss on extinguishment/modification of debt
|
(7,270
|
)
|
|
(90
|
)
|
|
(4,132
|
)
|
|
Gain on Native American development
|
—
|
|
|
—
|
|
|
49,074
|
|
|
Change in fair value of derivative instruments
|
87
|
|
|
(1
|
)
|
|
(90
|
)
|
|
Income before income tax
|
163,987
|
|
|
143,418
|
|
|
131,135
|
|
|
Provision for income tax
|
(8,212
|
)
|
|
—
|
|
|
—
|
|
|
Income from continuing operations
|
155,775
|
|
|
143,418
|
|
|
131,135
|
|
|
Discontinued operations
|
—
|
|
|
(166
|
)
|
|
(42,548
|
)
|
|
Net income
|
$
|
155,775
|
|
|
$
|
143,252
|
|
|
$
|
88,587
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
Total assets
|
|
|
|
|
|
|
Las Vegas operations
|
$
|
2,883,733
|
|
|
$
|
2,506,411
|
|
|
|
|
Native American management
|
61,379
|
|
|
74,000
|
|
|
|
|
Corporate and other
|
581,043
|
|
|
351,700
|
|
|
|
|
|
$
|
3,526,155
|
|
|
$
|
2,932,111
|
|
|
|
|
|
|
|
|
|
|
____________________________________
|
|
|
|
(a)
|
Adjusted EBITDA includes net income plus preopening, depreciation and amortization, share-based compensation, a donation to UNLV, asset impairment, write-downs and other charges, net, interest expense, net, loss on
|
RED ROCK RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
extinguishment/modification of debt, change in fair value of derivative instruments and provision for income tax, and excludes gain on Native American development, Adjusted EBITDA attributable to the noncontrolling interests of MPM and discontinued operations.
The Company’s capital expenditures, which were primarily related to Las Vegas operations, were
$162.4 million
,
$129.9 million
and
$102.7 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
25
. Quarterly Financial Information (Unaudited)
Quarterly financial information is presented below (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
Net revenues
|
$
|
359,247
|
|
|
$
|
351,486
|
|
|
$
|
347,140
|
|
|
$
|
394,554
|
|
|
|
Operating income
|
93,962
|
|
|
69,874
|
|
|
73,349
|
|
|
72,261
|
|
|
|
Net income
|
59,503
|
|
|
21,728
|
|
|
33,444
|
|
|
41,100
|
|
|
|
Net income attributable to Red Rock Resorts, Inc.
|
57,639
|
|
|
5,653
|
|
|
8,272
|
|
|
20,403
|
|
|
|
Earnings per share, basic and diluted
|
$
|
0.64
|
|
|
$
|
0.01
|
|
|
$
|
0.20
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
Net revenues
|
$
|
342,769
|
|
|
$
|
337,818
|
|
|
$
|
323,597
|
|
|
$
|
347,951
|
|
|
|
Operating income
|
81,753
|
|
|
64,345
|
|
|
56,816
|
|
|
84,275
|
|
|
|
Income from continuing operations
|
45,698
|
|
|
28,146
|
|
|
21,016
|
|
|
48,558
|
|
|
|
Discontinued operations
|
(132
|
)
|
|
(33
|
)
|
|
(6
|
)
|
|
5
|
|
|
|
Net income
|
45,566
|
|
|
28,113
|
|
|
21,010
|
|
|
48,563
|
|
|
|
Net income attributable to Red Rock Resorts, Inc.
|
44,107
|
|
|
25,790
|
|
|
19,062
|
|
|
48,699
|
|
|
|
Earnings per share, basic and diluted
|
$
|
0.49
|
|
|
$
|
0.29
|
|
|
$
|
0.21
|
|
|
$
|
0.54
|
|
|
All periods presented include the consolidation of Fertitta Entertainment.