10-Q 1 rrr10-qx06302017.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
For the quarterly period ended June 30, 2017
OR
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to     
Commission file number 001-37754
RED ROCK RESORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
47-5081182
(I.R.S. Employer
Identification No.)
1505 South Pavilion Center Drive, Las Vegas, Nevada
(Address of principal executive offices)
89135
(Zip Code)
(702) 495-3000
Registrant’s telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
 (Do not check if a
smaller reporting company)
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at July 31, 2017
Class A Common Stock, $0.01 par value
 
68,126,446
Class B Common Stock, $0.00001 par value
 
47,954,413



RED ROCK RESORTS, INC.
INDEX

 
 
 
 
 
 
 
 
 
 




Part I.    Financial Information
Item 1.    Financial Statements
RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
 
June 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
125,307

 
$
133,776

Restricted cash
2,829

 
2,377

Receivables, net
41,238

 
43,547

Income tax receivable
9,419

 
7,698

Inventories
11,131

 
11,956

Prepaid gaming tax
24,764

 
20,066

Prepaid expenses and other current assets
11,405

 
11,401

Assets held for sale
19,602

 
19,020

Total current assets
245,695

 
249,841

Property and equipment, net of accumulated depreciation of $641,125 and $566,081 at
June 30, 2017 and December 31, 2016, respectively
2,480,759

 
2,438,129

Goodwill
195,676

 
195,676

Intangible assets, net of accumulated amortization of $95,406 and $87,471 at
June 30, 2017 and December 31, 2016, respectively
137,964

 
149,199

Land held for development
163,700

 
163,700

Investments in joint ventures
10,005

 
10,572

Native American development costs
16,393

 
14,844

Deferred tax asset, net
250,296

 
244,466

Other assets, net
63,580

 
59,728

Total assets
$
3,564,068

 
$
3,526,155

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
33,549

 
$
30,710

Accrued interest payable
9,062

 
15,841

Other accrued liabilities
153,696

 
153,142

Current portion of payable pursuant to tax receivable agreement
874

 
1,021

Current portion of long-term debt
71,341

 
46,063

Total current liabilities
268,522

 
246,777

Long-term debt, less current portion
2,427,682

 
2,376,238

Deficit investment in joint venture
2,270

 
2,307

Other long-term liabilities
10,164

 
10,041

Payable pursuant to tax receivable agreement, net of current portion
274,405

 
257,440

Total liabilities
2,983,043

 
2,892,803

Commitments and contingencies (Note 13)

 

Stockholders’ equity:
 
 
 
  Preferred stock, par value $0.01 per share, 100,000,000 shares authorized; none issued and outstanding

 

  Class A common stock, par value $0.01 per share, 500,000,000 shares authorized; 68,140,197 and 65,893,439 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
681

 
659

  Class B common stock, par value $0.00001 per share, 100,000,000 shares authorized; 47,954,413 and 49,956,296 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
1

 
1

Additional paid-in capital
334,235

 
329,002

(Accumulated deficit) retained earnings
(1,879
)
 
17,628

Accumulated other comprehensive income
2,800

 
2,458

Total Red Rock Resorts, Inc. stockholders’ equity
335,838

 
349,748

Noncontrolling interest
245,187

 
283,604

Total stockholders’ equity
581,025

 
633,352

Total liabilities and stockholders’ equity
$
3,564,068

 
$
3,526,155


The accompanying notes are an integral part of these condensed consolidated financial statements.

3





RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data, unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Operating revenues:
 
 
 
 
 
 
 
Casino
$
258,396

 
$
233,796

 
$
521,368

 
$
473,567

Food and beverage
75,303

 
66,408

 
155,418

 
133,028

Room
44,641

 
32,979

 
94,405

 
67,363

Other
23,699

 
17,705

 
46,519

 
34,887

Management fees
30,676

 
27,455

 
60,903

 
54,104

Gross revenues
432,715

 
378,343

 
878,613

 
762,949

Promotional allowances
(29,222
)
 
(26,857
)
 
(57,388
)
 
(52,216
)
Net revenues
403,493

 
351,486

 
821,225

 
710,733

Operating costs and expenses:
 
 
 
 
 
 
 
Casino
103,170

 
88,986

 
204,824

 
176,407

Food and beverage
55,059

 
44,501

 
110,105

 
87,025

Room
18,239

 
11,893

 
38,306

 
24,278

Other
9,079

 
6,305

 
16,912

 
12,027

Selling, general and administrative
94,781

 
80,152

 
189,204

 
155,242

Preopening
368

 
373

 
398

 
721

Depreciation and amortization
46,807

 
38,436

 
92,060

 
77,863

Write-downs and other charges, net
8,826

 
10,966

 
9,850

 
13,334

Related party lease termination
98,393

 

 
98,393

 

 
434,722

 
281,612

 
760,052

 
546,897

Operating (loss) income
(31,229
)
 
69,874

 
61,173

 
163,836

Earnings from joint ventures
420

 
428

 
835

 
1,040

Operating (loss) income and earnings from joint ventures
(30,809
)
 
70,302

 
62,008

 
164,876

Other (expense) income:
 
 
 
 
 
 
 
Interest expense, net
(33,853
)
 
(34,078
)
 
(68,797
)
 
(69,146
)
Loss on extinguishment/modification of debt, net
(975
)
 
(7,084
)
 
(2,994
)
 
(7,084
)
Change in fair value of derivative instruments
3,330

 
90

 
3,369

 
87

 
(31,498
)
 
(41,072
)
 
(68,422
)
 
(76,143
)
(Loss) income before income tax
(62,307
)
 
29,230

 
(6,414
)
 
88,733

Benefit (provision) for income tax
11,813

 
(7,502
)
 
1,134

 
(7,502
)
Net (loss) income
(50,494
)
 
21,728

 
(5,280
)
 
81,231

Less: net (loss) income attributable to
noncontrolling interests
(24,574
)
 
16,075

 
857

 
17,939

Net (loss) income attributable to Red Rock Resorts, Inc.
$
(25,920
)
 
$
5,653

 
$
(6,137
)
 
$
63,292

 
 
 
 
 
 
 
 
(Loss) earnings per common share (Note 12):
 
 
 
 
 
 
 
(Loss) earnings per share of Class A common stock, basic and diluted
$
(0.39
)
 
$
0.01

 
$
(0.09
)
 
$
0.33

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
67,311

 
30,031

 
66,506

 
19,960

Diluted
67,311

 
30,193

 
66,506

 
20,041

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.10

 
$

 
$
0.20

 
$


The accompanying notes are an integral part of these condensed consolidated financial statements.

4





RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(amounts in thousands, unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(50,494
)
 
$
21,728

 
$
(5,280
)
 
$
81,231

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
(Loss) gain on interest rate swaps:
 
 
 
 
 
 
 
Unrealized loss arising during period
(2,606
)
 
(4,979
)
 
(1,491
)
 
(6,494
)
Reclassification into income
783

 
(28
)
 
2,011

 
1,238

(Loss) gain on interest rate swaps recognized in other comprehensive (loss) income
(1,823
)
 
(5,007
)
 
520

 
(5,256
)
Gain (loss) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gain arising during period

 
19

 
8

 
38

Reclassification into income

 

 
(120
)
 

Gain (loss) on available-for-sale securities recognized in other comprehensive (loss) income

 
19

 
(112
)
 
38

Other comprehensive (loss) income, net of tax
(1,823
)
 
(4,988
)
 
408

 
(5,218
)
Comprehensive (loss) income
(52,317
)
 
16,740

 
(4,872
)
 
76,013

Less: comprehensive (loss) income attributable to noncontrolling interests
(24,348
)
 
12,536

 
1,083

 
14,400

Comprehensive (loss) income attributable to Red Rock Resorts, Inc.
$
(27,969
)
 
$
4,204

 
$
(5,955
)
 
$
61,613

The accompanying notes are an integral part of these condensed consolidated financial statements.


5





RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands, unaudited)

 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(5,280
)
 
$
81,231

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
92,060

 
77,863

Change in fair value of derivative instruments
(3,369
)
 
(87
)
Reclassification of unrealized loss on derivative instruments into income
2,521

 
1,601

Write-downs and other charges, net
2,903

 
1,108

Amortization of debt discount and debt issuance costs
8,918

 
9,115

Interest—paid in kind

 
2,130

Share-based compensation
3,738

 
4,301

Settlement of liability-classified equity awards

 
(18,739
)
Earnings from joint ventures
(835
)
 
(1,040
)
Distributions from joint ventures
705

 
589

Loss on extinguishment/modification of debt, net

2,994

 
7,084

Deferred income tax
157

 
3,799

Changes in assets and liabilities:
 
 
 
Restricted cash
(452
)
 

Receivables, net
3,723

 
898

Interest on related party notes receivable

 
(247
)
Inventories and prepaid expenses
(4,092
)
 
(5,802
)
Accounts payable
6,939

 
(111
)
Accrued interest payable
(6,698
)
 
4,338

Income tax payable/receivable, net
(1,721
)
 
3,703

Other accrued liabilities
(1,528
)
 
(6,775
)
Other, net
1,847

 
1,023

Net cash provided by operating activities
102,530

 
165,982

Cash flows from investing activities:
 
 
 
Capital expenditures, net of related payables
(101,855
)
 
(87,633
)
Proceeds from asset sales
627

 
8,318

Acquisition of land from related party
(23,440
)
 

Proceeds from repayment of related party notes receivable

 
18,330

Deposit for business acquisition

 
(20,002
)
Distributions in excess of earnings from joint ventures
660

 
476

Native American development costs
(2,134
)
 
(933
)
Other, net
(6,539
)
 
(1,312
)
Net cash used in investing activities
(132,681
)
 
(82,756
)

6





RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(amounts in thousands, unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from financing activities:
 
 
 
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discount and offering costs

 
531,949

Purchase of LLC Units from existing owners—deemed distribution

 
(112,474
)
Purchase of Fertitta Entertainment—deemed distribution

 
(389,054
)
Borrowings under credit agreements with original maturity dates greater than
three months
729,688

 
1,717,500

Payments under credit agreements with original maturity dates greater than three months
(627,453
)
 
(1,468,613
)
Payments under credit agreements with original maturity dates of three months or less, net

 
(53,900
)
Cash paid for early extinguishment of debt
(9,401
)
 

Proceeds from exercise of stock options
1,574

 

Distributions to members and noncontrolling interests
(23,691
)
 
(100,537
)
Dividends
(13,338
)
 

Payment of debt issuance costs
(21,098
)
 
(36,778
)
Payments on derivative instruments with other-than-insignificant financing elements

 
(10,831
)
Payments on other debt
(3,634
)
 
(21,216
)
Acquisition of subsidiary noncontrolling interests
(4,484
)
 

Other, net
(6,481
)
 
(4,485
)
Net cash provided by financing activities
21,682

 
51,561

Cash and cash equivalents:
 
 
 
(Decrease) increase in cash and cash equivalents
(8,469
)
 
134,787

Balance, beginning of period
133,776

 
116,623

Balance, end of period
$
125,307

 
$
251,410

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest, net of $197 and $0 capitalized, respectively
$
63,456

 
$
55,545

Cash paid for income taxes
$
430

 
$

Non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
26,465

 
$
27,855


The accompanying notes are an integral part of these condensed consolidated financial statements.

7





RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.    Organization, Basis of Presentation and Significant Accounting Policies
Organization    
Red Rock Resorts, Inc. (“Red Rock,” or the “Company”) was formed as a Delaware corporation in September 2015 to manage and own an equity interest in Station Casinos LLC (“Station LLC”). In May 2016, the Company completed an initial public offering (“IPO”) and used the proceeds to purchase newly issued limited liability company interests in Station Holdco LLC (“Station Holdco” and such units, the “LLC Units”), and outstanding LLC Units from existing members of Station Holdco. The Company owns all of the outstanding voting interests in Station LLC and has an indirect interest in Station LLC through its ownership interest in Station Holdco, which owns all of the economic interests in 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.
At June 30, 2017, the Company held approximately 59% of the economic interests in Station Holdco as well as 100% of the voting interest in Station LLC and 100% of the voting power in Station Holdco, subject to certain limited exceptions, and 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. The Company is a subchapter C corporation subject to federal income taxes and state income taxes in California and Michigan.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for the interim periods have been made. The interim results reflected in these condensed consolidated financial statements are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2016. Certain amounts in the condensed consolidated financial statements for the prior year have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on the previously reported net income.
Principles of Consolidation
Station Holdco and Station LLC are variable interest entities (“VIEs”), of which the Company is the primary beneficiary. Accordingly, the Company consolidates the financial position and results of operations of Station LLC and its consolidated subsidiaries and Station Holdco, and presents the interest in Station Holdco not owned by Red Rock within noncontrolling interest in the condensed consolidated financial statements. 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. For periods prior to the Company’s IPO in May 2016, the accompanying condensed consolidated financial statements represent the financial statements of Station Holdco, the Company’s predecessor for accounting purposes. All intercompany accounts and transactions have been eliminated.
The amounts shown in the accompanying condensed consolidated financial statements also include the accounts of MPM Enterprises, LLC (“MPM”), which is a 50% owned, consolidated VIE that manages Gun Lake Casino. The financial position and results of operations attributable to third party holdings of MPM are reported within noncontrolling interest in the condensed consolidated financial statements. The Company consolidates MPM 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, and as such, is MPM’s primary beneficiary. The assets of MPM reflected in the Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016 included a management contract intangible asset with a carrying amount of $6.4 million and $11.5 million, respectively, and management fees receivable of $6.5 million and $3.3 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.

8




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The Company has investments in three 50% owned smaller casino properties, which are accounted for using the equity method. 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 Condensed 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.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with 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.
Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10–K for the year ended December 31, 2016.    
Recently Issued and Adopted Accounting Standards
In May 2017, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that amends the scope of modification accounting for share-based payment arrangements. The amended guidance clarifies which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017, and early application is permitted. The Company expects to adopt this guidance in the first quarter of 2018. The adoption is not expected to have a material impact on the Company’s financial position or results of operations.
In January 2017, the 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 financial position and results of operations and anticipates early adoption in 2017.
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 May 2014, the FASB issued a new accounting standard for revenue recognition which requires an entity 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. 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 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 Company’s player rewards program (“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

9




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

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.
2.    Noncontrolling Interest in Station Holdco
As discussed in Note 1, Red Rock holds a controlling interest in and consolidates the financial position and results of operations of Station LLC and its subsidiaries and Station Holdco, and presents the interests in Station Holdco not owned by Red Rock within noncontrolling interest in the condensed consolidated financial statements. During the three months ended June 30, 2017, approximately 2.0 million LLC Units and Class B common shares held by related party noncontrolling interest holders were exchanged for Class A common shares, which increased Red Rock’s ownership interest in Station Holdco. The exchange also resulted in a $17.3 million increase in amounts payable under the tax receivable agreement liability, which is described in Note 10, and an increase to deferred tax assets of $6.1 million, both of which were recorded through equity.
Following is a summary of LLC Unit ownership:        
 
June 30, 2017
 
December 31, 2016
 
Units
 
Ownership %
 
Units
 
Ownership %
Red Rock
68,140,197

 
58.7
%
 
65,893,439

 
56.9
%
Noncontrolling interest holders
47,954,413

 
41.3
%
 
49,956,296

 
43.1
%
Total
116,094,610

 
100.0
%
 
115,849,735

 
100.0
%
 
 
 
 
 
 
 
 
The Company uses monthly weighted average LLC Unit ownership to calculate the pretax income (loss) and other comprehensive income (loss) of Station Holdco attributable to Red Rock and the noncontrolling interest holders. There was no noncontrolling interest in Station Holdco prior to the Company’s IPO in May 2016.
3.    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 June 30, 2017, the Company has paid approximately $31.5 million of reimbursable advances to the Mono, primarily to complete the environmental impact study, purchase the North Fork Site and pay the costs of litigation. The advances are expected to be repaid from the proceeds of 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 June 30, 2017, the carrying amount of the advances was $16.4 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

10




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Project. The Management Agreement includes termination provisions whereby either party may terminate the agreement for cause, and the Management Agreement may also be terminated at any time upon agreement of the parties. There is no provision in the Management Agreement allowing the tribe to buy-out the agreement prior to its expiration. The Management Agreement provides that the Company will train the Mono tribal members such that they may assume responsibility for managing the North Fork Project upon the expiration of the agreement.
Upon termination or expiration of the Management Agreement and Development Agreement, the Mono will continue to be obligated to repay any unpaid principal and interest on the advances from the Company, as well as certain other amounts that may be due, such as management fees. Amounts due to the Company under the Development Agreement and Management Agreement are secured by substantially all of the assets of the North Fork Project except the North Fork Site. In addition, the Development Agreement and Management Agreement contain waivers of the Mono’s sovereign immunity from suit for the purpose of enforcing the agreements or permitting or compelling arbitration and other remedies.
The timing of this type of project is difficult to predict and is dependent upon the receipt of the necessary governmental and regulatory approvals. There can be no assurance as to when, or if, these approvals will be obtained. The Company currently estimates that construction of the North Fork Project may begin in the next 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 June 30, 2017. The Company’s evaluation is based on its consideration of all available positive and negative evidence about the status of the North Fork Project, including, but not limited to, the status of required regulatory approvals, as well as the progress being made toward the achievement of all milestones and the successful resolution of all litigation and contingencies. There can be no assurance that the North Fork Project will be successfully completed or that future events and circumstances will not change the Company’s estimates of the timing, scope, and potential for successful completion or that any such changes will not be material. In addition, there can be no assurance that the Company will recover all of its investment in the North Fork Project even if it is successfully completed and opened for business.


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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The following table summarizes the Company’s evaluation at June 30, 2017 of each of the critical milestones necessary to complete the North Fork Project.
 
As of June 30, 2017
Federally recognized as an Indian tribe by the Bureau of Indian Affairs (“BIA”)
Yes
Date of recognition
Federal recognition was terminated in 1966 and restored in 1983.
Tribe has possession of or access to usable land upon which the project is to be built
The DOI accepted approximately 305 acres of land for the project into trust for the benefit of the Mono in February 2013.

Status of obtaining regulatory and governmental approvals:
 
Tribal–state compact
A compact was negotiated and signed by the Governor of California and the Mono in August 2012. The California State Assembly and Senate passed Assembly Bill 277 (“AB 277”) which ratified the Compact in May 2013 and June 2013, respectively. Opponents of the North Fork Project qualified a referendum, “Proposition 48,” for a state-wide ballot challenging the legislature’s ratification of the Compact. In November 2014, Proposition 48 failed. The State took the position that the failure of Proposition 48 nullified the ratification of the Compact and, therefore, the Compact did not take effect under California law. In March 2015, the Mono filed suit against the State (see North Fork Rancheria of Mono Indians v. State of California) to obtain a compact with the State or procedures from the Secretary of the Interior under which Class III gaming may be conducted on the North Fork Site. In July 2016, the DOI issued Secretarial procedures (the “Secretarial Procedures”) pursuant to which the Mono may conduct Class III gaming on the North Fork Site.
Approval of gaming compact by DOI
The Compact was submitted to the DOI in July 2013. In October 2013, notice of the Compact taking effect was published in the Federal Register. The Secretarial Procedures supersede and replace the Compact.
Record of decision regarding environmental impact published by BIA
In November 2012, the record of decision for the Environmental Impact Statement for the North Fork Project was issued by the BIA. In December 2012, the Notice of Intent to take land into trust was published in the Federal Register.
BIA accepting usable land into trust on behalf of the tribe
The North Fork Site was accepted into trust in February 2013.
Approval of management agreement by NIGC
In December 2015, the Mono submitted 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 (“IGRA”).
Gaming licenses:
 
Type
The North Fork Project will include the operation of Class II and Class III gaming, which are allowed pursuant to the terms of the Secretarial Procedures and IGRA, following approval of the Management Agreement by the NIGC.
Number of gaming devices allowed
The Secretarial Procedures allow for the operation of a maximum of 2,000 Class III slot machines at the facility during the first two years of operation and thereafter up to 2,500 Class III slot machines. There is no limit on the number of Class II gaming devices that the Mono can offer.
Agreements with local authorities
The Mono has entered into memoranda of understanding with the City of Madera, the County of Madera and the Madera Irrigation District under which the Mono agreed to pay one-time and recurring mitigation contributions, subject to certain contingencies. The memoranda of understanding 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.


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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

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 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. In September 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. The Stand Up plaintiffs appealed the district court’s decision and proceedings on the appeal are pending. All briefs have been filed and oral arguments have been scheduled for October 13, 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. In March 2014, the court dismissed plaintiffs’ amended complaint, which dismissal was appealed by plaintiffs. In December 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 filed petitions in the Supreme Court of California seeking review of the appellate court’s decision. In March 2017, the Supreme Court of California granted the Mono and State’s petitions for review and deferred additional briefing or other action in this matter pending consideration and disposition of a similar issue in United Auburn Indian Community of Auburn Rancheria v. Brown.
Picayune Rancheria of Chukchansi Indians v. Brown. In March 2016, Picayune Rancheria of Chukchansi Indians (“Picayune”) filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against Governor Edmund G. Brown, Jr., alleging that the referendum that invalidated the Compact also invalidated Governor Brown’s concurrence with the North Fork Determination. The complaint seeks to vacate and set aside the Governor’s concurrence. In July 2016, the court granted the Mono’s application to intervene and the Mono filed a demurrer seeking to dismiss the case. In November 2016, the district court dismissed Picayune’s complaint, but the court subsequently vacated its ruling based on the December 2016, decision by the Fifth District Court of Appeal in Stand Up for California! v. Brown. In May 2017, the court stayed the case for six months by agreement of the parties and scheduled a status conference on November 13, 2017 to address how the case should proceed in light of the California Supreme Court’s granting of the Mono and State’s 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, which was subsequently granted. The Mono and federal defendants filed motions for summary judgment in March 2017. On August 8, 2017, Picayune filed a brief arguing that the court should stay the proceedings in light of the Fifth District Court's decision in Stand Up for California! v. Brown and the appeal pending in the California Supreme Court.
Stand Up for California! et. al. v. United States Department of the Interior. In November 2016, Stand Up for California! and other plaintiffs filed a complaint in the United States District Court for the Eastern District of California 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 in February 2017 denying plaintiffs’ claims and asserting certain affirmative defenses. A motion to intervene filed by the Mono was granted in March 2017. Plaintiffs’ subsequently filed a motion to stay the proceedings in May 2017. Briefing on the contested stay request concluded in July 2017 and briefing on cross-motions for summary judgment is scheduled to conclude in September 2017.

13




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

4.    Long-term Debt
Long-term debt consisted of the following indebtedness of Station LLC (amounts in thousands):
 
June 30,
2017
 
December 31, 2016
$1.875 billion Term Loan B Facility, due June 8, 2023, interest at a margin above LIBOR or base rate (3.71% and 3.75% at June 30, 2017 and December 31, 2016, respectively), net of unamortized discount and deferred issuance costs of $57.8 million and $42.9 million at June 30, 2017 and December 31, 2016, respectively

$
1,775,642

 
$
1,449,591

$275 million Term Loan A Facility, due June 8, 2021, interest at a margin above LIBOR or base rate (3.17% and 3.20% at June 30, 2017 and December 31, 2016, respectively), net of unamortized discount and deferred issuance costs of $5.7 million and $7.4 million at June 30, 2017 and December 31, 2016, respectively
255,877

 
211,978

$685 million Revolving Credit Facility, due June 8, 2021, interest at a margin above LIBOR or base rate (3.31% and 3.44% weighted average at June 30, 2017 and December 31, 2016, respectively)
190,000

 
120,000

7.50% Senior Notes, due March 1, 2021, net of unamortized discount and deferred issuance costs of $4.2 million and $9.4 million at June 30, 2017 and December 31, 2016, respectively
245,770

 
490,568

Restructured Land Loan, due June 17, 2017, interest at a margin above LIBOR or base rate (5.27% at December 31, 2016), net of unamortized discount of $0.6 million

 
115,378

Other long-term debt, weighted-average interest of 3.68% and 3.92% at June 30, 2017 and December 31, 2016, respectively, maturity dates ranging from 2018 to 2037
31,734

 
34,786

Total long-term debt
2,499,023

 
2,422,301

Current portion of long-term debt
(71,341
)
 
(46,063
)
Total long-term debt, net
$
2,427,682

 
$
2,376,238

Credit Facility
In January 2017, Station LLC amended its credit facility to increase the existing Term Loan B Facility by $125.0 million and reduce the applicable margins for LIBOR and base rate loans by 50 basis points. Station LLC used the proceeds of the incremental Term Loan B Facility borrowings to repay outstanding borrowings under its Revolving Credit Facility and pay fees and costs incurred in connection with the transaction, including a repricing fee of $14.9 million, which represented 1.00% of the aggregate principal amount of the Term Loan B Facility outstanding prior to the $125.0 million increase in borrowings. Station LLC evaluated the transaction on a lender by lender basis in accordance with the accounting guidance for debt modifications and extinguishments. The majority of the transaction was accounted for as a debt modification and as a result, Station LLC capitalized $14.9 million in related fees and costs and recognized a $2.0 million loss on debt extinguishment and modification, which was primarily related to third-party fees it incurred in connection with the repricing.
In May 2017, Station LLC amended its credit facility to increase the Term Loan B Facility by an additional $250.0 million. Station LLC applied the proceeds of the incremental borrowings under the Term Loan B Facility, together with cash on hand, to pay for the redemption of $250.0 million of its 7.50% Senior Notes and to pay fees and costs incurred in connection with the transactions. Station LLC capitalized $3.8 million in fees and costs related to the $250.0 million in incremental borrowings. As a result of the January 2017 and May 2017 increases to the Term Loan B Facility, the required quarterly principal payments increased to $4.7 million. 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 Term Loan B Facility, which reduces future quarterly principal payments.
Also in May 2017, Station LLC completed a series of amendments to its credit facility to increase the existing Term Loan A Facility by $50.0 million and reduce the applicable margins for LIBOR and base rate loans under the Revolving Credit Facility and Term Loan A Facility. As amended, the Revolving Credit Facility and the Term Loan A Facility bear interest at a rate per annum, at Station LLC’s option, equal to either LIBOR plus an amount ranging from 1.75% to 2.00% or base rate plus an amount ranging from 0.75% to 1.00%, depending on Station LLC’s consolidated leverage ratio. Prior to the amendments, the Revolving Credit Facility and the Term Loan A Facility bore interest at a rate per annum, at Station LLC’s option and subject to a leverage-based grid, of either LIBOR plus an amount ranging from 1.75% to 2.75% or base rate plus an amount ranging from 0.75% to 1.75%. Station LLC evaluated the transaction on a lender by lender basis in accordance with the accounting guidance for debt modifications and extinguishments and as a result, Station LLC capitalized $1.3 million in related fees and costs and

14




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

recognized a $2.1 million loss on debt extinguishment and modification, which was primarily related to the write-off of unamortized debt discount related to the extinguished debt.
The credit facility governing Station LLC’s term loans and revolver contains a number of customary covenants including the requirements that Station LLC maintain throughout the term of the credit facility and measured as of the end of each quarter a minimum interest coverage ratio of 2.50 to 1.00 and a maximum consolidated total leverage ratio ranging from 6.50 to 1.00 at June 30, 2017 to 5.25 to 1.00 at March 31, 2020 and thereafter. A breach of the financial ratio covenants shall only become an event of default under the Term B Loan Facility if the lenders providing the Term Loan A Facility and the Revolving Credit Facility take certain affirmative actions after the occurrence of a default of such financial ratio covenants. At June 30, 2017, Station LLC’s interest coverage ratio was 4.58 to 1.00 and its consolidated total leverage ratio was 4.96 to 1.00, both as defined in the credit facility. The Company believes it was in compliance with all applicable covenants at June 30, 2017.
Revolving Credit Facility Availability
At June 30, 2017, Station LLC’s borrowing availability under its Revolving Credit Facility, subject to continued compliance with the terms of its credit facility, was $461.0 million, which was net of $190.0 million in outstanding borrowings and $34.0 million in outstanding letters of credit and similar obligations.
Restructured Land Loan
In March 2017, Station LLC’s wholly owned subsidiary, CV Propco, LLC (“CV Propco”), as borrower, and Deutsche Bank AG Cayman Islands Branch (“Deutsche Bank”) and JPMorgan Chase Bank, N.A. (“JPMorgan”), as initial lenders, amended the $105 million Restructured Land Loan. Pursuant to the amendment, CV Propco paid $61.8 million in full settlement of the $72.6 million outstanding principal amount owed to Deutsche Bank under the Restructured Land Loan. In addition, the outstanding warrants held by Deutsche Bank and JPMorgan to purchase 60% of the interests of both CV Propco and NP Tropicana LLC were canceled. Prior to the cancellation, the warrants were accounted for as noncontrolling interests.
The Company accounted for the $61.8 million settlement as consideration paid to Deutsche Bank to (i) extinguish the debt and (ii) acquire the warrants held by Deutsche Bank. Accordingly, the Company attributed $57.3 million of the $61.8 million to extinguishment of the debt and $4.5 million to the acquisition of the warrants. The settlement resulted in a $14.9 million gain on debt extinguishment in June 2017, the date when all contingencies related to the settlement were satisfied. In June 2017, CV Propco repaid the remaining $43.3 million in outstanding principal under the Restructured Land Loan in full.
7.50% Senior Notes
As noted above, in May 2017, Station LLC redeemed $250.0 million in aggregate principal amount of its 7.50% Senior Notes at a redemption price equal to 103.75% of the principal amount of such notes. Following the redemption, $250.0 million in aggregate principal amount of 7.50% Senior Notes remain outstanding. Station LLC recognized a $13.8 million loss on debt extinguishment related to the 7.50% Senior Notes redemption, primarily comprising the write-off of $4.4 million in unamortized debt discount and issuance costs related to the extinguished debt and the redemption premium of $9.4 million.
5.    Derivative Instruments
The Company’s objective in using derivative instruments is to manage its exposure to interest rate movements. To accomplish this objective, Station LLC uses interest rate swaps, including forward–starting swaps, as a primary part of its cash flow hedging strategy, which involves the receipt of variable–rate interest payments in exchange for fixed–rate payments without exchange of the underlying notional amount. The Company may elect not to apply hedge accounting to its derivative instruments; however, it does not use derivative financial instruments for trading or speculative purposes.
On June 30, 2017, the Company dedesignated the hedge accounting relationships of Station LLC’s 16 interest rate swaps that were previously designated as cash flow hedges of forecasted interest payments. The 16 interest rate swaps are with four different counterparties and have 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 paid a weighted–average fixed rate of 0.85% during the first one-year term that ended 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. As a result of the June 2017 dedesignation, cumulative deferred gains of $8.6 million that had previously been recognized in accumulated other comprehensive income will be amortized as a reduction of interest expense as the hedged interest payments continue to occur through July 2020.

15




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

In June 2017, Station LLC entered into eight additional interest rate swaps for which hedge accounting was not elected. These swaps are also intended to meet the Company’s objectives noted above and are not speculative. The eight interest rate swaps are with two different counterparties and have maturity dates that run concurrently. The interest rate swaps each have one-year terms that run consecutively beginning July 2017 and will end in July 2021 with predetermined fixed pay rates that increase with each new term to more closely align with the one-month LIBOR forward curve as of the trade date of the interest rate swaps. Station LLC will pay a weighted-average fixed rate of 1.32% during the first one-year term ending in July 2018, which will increase to a weighted-average rate of approximately 1.59%, 1.78% and 1.94% during the second, third and fourth one-year terms, respectively.
At June 30, 2017, Station LLC’s interest rate swaps effectively converted $1.0 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 3.47%.
The fair values of Station LLC’s interest rate swaps, exclusive of accrued interest, as well as their classification on the Condensed Consolidated Balance Sheets, are presented below (amounts in thousands):
 
June 30,
2017
 
December 31, 2016
Interest Rate Swaps Designated in Cash Flow Hedging Relationships
 
 
 
Prepaid expenses and other current assets
$

 
$
19

Other assets, net

 
10,661

Other accrued liabilities

 
8

Interest Rate Swaps Not Designated in Cash Flow Hedging Relationships
 
 
 
Prepaid expenses and other current assets
61

 

Other assets, net
11,868

 

For derivative instruments that are designated and qualify as cash flow hedges of forecasted interest payments, the Company defers the gain or loss on the effective portion of the derivative’s change in fair value as a component of other comprehensive income (loss) until the interest payments being hedged are recorded as interest expense, at which time the amounts in accumulated other comprehensive income are reclassified as an adjustment to interest expense. The Company recognizes the gain or loss on any ineffective portion of the derivative’s change in fair value in the period in which the change occurs as a component of Change in fair value of derivative instruments in the Condensed Consolidated Statements of Operations. For derivative instruments that are not designated in cash flow hedge accounting relationships, the Company records the derivative’s change in the fair value in the period in which the change occurs as a component of Change in fair value of derivative instruments in the Condensed Consolidated Statements of Operations.
As a result of (i) the June 2017 dedesignation of Station LLC’s 16 interest rate swaps previously designated in cash flow hedging relationships and (ii) the Company’s election not to apply hedge accounting to its eight new interest rate swaps, beginning July 2017, the changes in fair value of all of Station LLC’s derivative instruments will be reflected in Change in fair value of derivative instruments in the Condensed Consolidated Statements of Operations in the period in which the change occurs. As such, interest expense will not reflect a fixed rate as it previously did under hedge accounting for that portion of the debt hedged. However, the economics will be unchanged and the Company will continue to meet its risk management objective and achieve fixed cash flows attributable to interest payments on the debt principal being hedged by its interest rate swaps.
At June 30, 2017, approximately $2.6 million of deferred net gains from Station LLC’s previously designated interest rate swaps is expected to be reclassified from accumulated other comprehensive income into earnings during the next twelve months due to the amortization of deferred gains from the interest rate swaps that were dedesignated on June 30, 2017 and the amortization of deferred losses on a previously terminated interest rate swap.

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RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Information about pretax gains and losses on derivative financial instruments that were designated in cash flow hedging relationships and their location within the condensed consolidated financial statements is presented below (amounts in thousands):
Derivatives Designated in Cash Flow Hedging Relationships
 
Amount of Loss on Derivatives Recognized in Other Comprehensive (Loss) 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)
 
Location of (Loss) Gain on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of (Loss) Gain on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Three Months Ended June 30,
 
 
Three Months Ended June 30,
 
 
Three Months Ended June 30,
 
2017
 
2016
 
 
2017
 
2016
 
 
2017
 
2016
Interest rate swaps
 
$
(3,268
)
 
$
(5,612
)
 
Interest expense, net
 
$
(986
)
 
$
(335
)
 
Change in fair value of derivative instruments
 
$
(37
)
 
$
90

Derivatives Designated in Cash Flow Hedging Relationships
 
Amount of Loss on Derivatives Recognized in Other Comprehensive (Loss) 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)
 
Location of Gain on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Six Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
Six Months Ended June 30,
 
2017
 
2016
 
 
2017
 
2016
 
 
2017
 
2016
Interest rate swaps
 
$
(1,875
)
 
$
(7,127
)
 
Interest expense, net
 
$
(2,521
)
 
$
(1,601
)
 
Change in fair value of derivative instruments
 
$
2

 
$
87

Information about pretax gains on derivative financial instruments that were not designated in hedge accounting relationships and their location within the Condensed Consolidated Statements of Operations is presented below (amounts in thousands):
Derivatives Not Designated in Cash Flow Hedging Relationships
 
Location of Gain on Derivatives Recognized in Income
 
Amount of Gain on Derivatives Recognized in Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest rate swaps
 
Change in fair value of derivative instruments
 
$
3,367

 
$

 
$
3,367

 
$

Station LLC has not posted any collateral related to the interest rate swap agreements; however, Station LLC’s obligations under the interest rate swap agreements are subject to the security and guarantee arrangements applicable to the credit facility. The interest rate swap agreements contain a cross-default provision under which Station LLC could be declared in default on its obligation under such agreements if certain conditions of default exist on the credit facility. At June 30, 2017, the termination value of Station LLC’s interest rate swaps, including accrued interest, was a net asset of $12.0 million.

17




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

6.    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 June 30, 2017
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Interest rate swaps
$
11,929

 
$

 
$
11,929

 
$

 
 
 
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

 

The fair values of Station LLC’s interest rate swaps were determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the interest rate swaps. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. Station LLC incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the counterparty’s nonperformance risk in the fair value measurement.
Fair Value of Long-term Debt
The estimated fair value of Station LLC’s long-term debt compared with its carrying amount is presented below (amounts in millions):
 
 
June 30,
2017
 
December 31, 2016
Aggregate fair value
 
$
2,574

 
$
2,521

Aggregate carrying amount
 
2,499

 
2,422

The estimated fair value of Station LLC’s long-term debt is based on quoted market prices from various banks for similar instruments, which is considered a Level 2 input under the fair value measurement hierarchy.

18




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

7.    Stockholders’ Equity    
The changes in stockholders' equity and noncontrolling interest for the six months ended June 30, 2017 were as follows (amounts in thousands):
 
Red Rock Resorts, Inc. Stockholders’ Equity
 
 
 
 
Common Stock
 
Additional paid-in capital
 
Retained earnings (accumulated deficit)
 
Accumulated other comprehensive income
Noncontrolling interest
Total stockholders’ equity
Class A
 
Class B
Shares
 
Amount
Shares
 
Amount
Balances,
December 31, 2016
65,893

 
$
659

 
49,956

 
$
1

 
$
329,002

 
$
17,628

 
$
2,458

 
$
283,604

 
$
633,352

Net (loss) income

 

 

 

 

 
(6,137
)
 

 
857

 
(5,280
)
Other comprehensive income, net of tax

 

 

 

 

 

 
182

 
226

 
408

Share-based compensation

 

 

 

 
3,764

 

 

 

 
3,764

Distributions

 

 

 

 

 

 

 
(23,691
)
 
(23,691
)
Dividends

 

 

 

 

 
(13,370
)
 

 

 
(13,370
)
Issuance of restricted stock awards, net of forfeitures
167

 
1

 

 

 
(1
)
 

 

 

 

Stock option exercises
81

 
1

 

 

 
1,573

 

 

 

 
1,574

Exchanges of noncontrolling interests for Class A common stock
2,002

 
20

 
(2,002
)
 

 
11,200

 

 
180

 
(11,400
)
 

Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interests for Class A common stock

 

 

 

 
(17,261
)
 

 

 

 
(17,261
)
Deferred tax assets resulting from exchanges of noncontrolling interests for Class A common stock

 

 

 

 
6,086

 

 

 

 
6,086

Repurchase of Class A common stock
(3
)
 

 

 

 
(73
)
 

 

 

 
(73
)
Acquisition of subsidiary noncontrolling interests

 

 

 

 
2,850

 

 

 
(7,334
)
 
(4,484
)
Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco

 

 

 

 
(2,905
)
 

 
(20
)
 
2,925

 

Balances,
June 30, 2017
68,140

 
$
681

 
47,954

 
$
1

 
$
334,235

 
$
(1,879
)
 
$
2,800

 
$
245,187

 
$
581,025

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2017, noncontrolling interest represented the 41% ownership interest in Station Holdco not held by Red Rock, as well as a 50% ownership interest in MPM.

19




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

On August 4, 2017, the Company announced that it would pay a dividend of $6.8 million, or $0.10 per share of Class A common stock, to holders of record as of August 15, 2017 to be paid on August 31, 2017. Prior to the payment of the dividend, Station Holdco will pay 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 $4.8 million will be paid to noncontrolling interest holders.
Changes in Accumulated Other Comprehensive Income
The following table presents changes in accumulated other comprehensive income, net of tax and noncontrolling interest, by component for the six months ended June 30, 2017 (amounts in thousands):
 
Accumulated Other Comprehensive Income
 
Unrealized Gain on Interest Rate Swaps
 
Unrealized Gain on Available-for-sale Securities
 
Unrecognized Pension Liability
 
Total
Balances, December 31, 2016
$
2,404

 
$
52

 
$
2

 
$
2,458

Unrealized (loss) gain arising during
the period (a)
(702
)
 
4

 

 
(698
)
Amounts reclassified from accumulated other comprehensive income into income (b)
936

 
(56
)
 

 
880

Net current-period other comprehensive income (loss)
234

 
(52
)
 

 
182

Exchanges of noncontrolling interests for Class A common stock
180

 

 

 
180

Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco
(20
)
 

 

 
(20
)
Balances, June 30, 2017
$
2,798

 
$

 
$
2

 
$
2,800

____________________________________
(a)
Net of $0.4 million tax benefit.
(b)
Net of $0.5 million tax expense.
Net (Loss) Income Attributable to Red Rock Resorts, Inc. and Transfers from (to) Noncontrolling Interests
The table below presents the effect on Red Rock Resorts, Inc. stockholders’ equity from net (loss) income and transfers from (to) noncontrolling interests (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net (loss) income attributable to Red Rock Resorts, Inc.
$
(25,920
)
 
$
5,653

 
$
(6,137
)
 
$
63,292

Transfers from (to) noncontrolling interests:
 
 
 
 
 
 
 
Allocation of equity to noncontrolling interests of Station Holdco in the reorganization transactions

 
(362,908
)
 

 
(362,908
)
Exchanges of noncontrolling interests for Class A
common stock
11,400

 

 
11,400

 

Acquisition of subsidiary noncontrolling interests

 

 
2,850

 

Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco
(2,388
)
 

 
(2,925
)
 

Net transfers from (to) noncontrolling interests
9,012

 
(362,908
)
 
11,325

 
(362,908
)
Change from net (loss) income attributable to Red Rock Resorts, Inc. and net transfers from (to) noncontrolling interests
$
(16,908
)
 
$
(357,255
)
 
$
5,188

 
$
(299,616
)
 
 
 
 
 
 
 
 

20




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

8.    Share-Based Compensation
The Company maintains an equity incentive plan which is designed to attract, retain and motivate employees and to align the interests of those individuals with the interests of the Company. A total of 11.6 million shares of Class A common stock are reserved for issuance under the plan, of which 5.0 million shares were available for issuance at June 30, 2017.
The following table presents information about share-based compensation awards under the equity incentive plan:
 
Restricted Class A
 Common Stock
 
Stock Options
 
Shares
 
Weighted-average grant date fair value
 
Shares
 
Weighted-average exercise price
Outstanding at January 1, 2017
222,487

 
$
15.70

 
1,637,029

 
$
19.71

Activity during the period:
 
 
 
 
 
 
 
Granted
258,143

 
21.92

 
3,276,164

 
21.76

Vested/exercised
(85,811
)
 
11.89

 
(80,727
)
 
19.50

Forfeited
(90,824
)
 
20.23

 
(463,400
)
 
21.07

Outstanding at June 30, 2017
303,995

 
$
20.71

 
4,369,066

 
$
21.11

 
 
 
 
 
 
 
 
The Company recognized share-based compensation expense of $2.3 million and $3.7 million, respectively, for the three and six months ended June 30, 2017 and $3.7 million and $4.3 million, respectively, for the three and six months ended June 30, 2016. At June 30, 2017, unrecognized share-based compensation cost was $28.7 million, which is expected to be recognized over a weighted-average period of 3.4 years.        
9.    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. For the three and six months ended June 30, 2017, write-downs and other charges, net were $8.8 million and $9.9 million, respectively. These amounts included $3.5 million in tenant lease termination expenses, as well as losses on fixed asset disposals of $5.5 million and $5.6 million, respectively, for the three and six months ended June 30, 2017.
For the three and six months ended June 30, 2016, write-downs and other charges, net were $11.0 million and $13.3 million, respectively. Included in this amount was $7.8 million and $9.0 million, respectively, in IPO-related advisory, legal and other transaction-related costs that were not deferred as direct and incremental costs of the IPO, as well as costs related to the acquisition of Fertitta Entertainment. The Company also incurred $1.3 million in costs associated with various development and acquisition activities, including the acquisition of Palms Casino Resort completed during the fourth quarter of 2016.
10.    Income Taxes
Red Rock is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from Station Holdco based upon Red Rock’s economic interest held in Station Holdco. 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.     
The Company’s effective tax rates for the three and six months ended June 30, 2017 were 18.96% and 17.68%, respectively, as compared to 25.67% and 8.45%, respectively, for the three and six months ended June 30, 2016. The Company’s effective tax rate is significantly less than the statutory rate of 35% primarily because its 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. Station Holdco operates in Nevada, California and Michigan. Nevada does not impose a state income tax and the Company’s activities in California and Michigan are minimal; as a result, state income taxes do not have a significant impact on the Company’s effective rate. The effective tax rates for the three and six months ended June 30, 2016 are also lower than statutory rates because income for the period prior to the IPO was not taxable to the Company as it did not yet hold an equity interest in Station Holdco. The Company recognized an income tax benefit of $11.8 million and $1.1 million for the three and six months ended June 30, 2017, respectively, and income tax expense of $7.5 million for the three and six months ended June 30, 2016.

21




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)


As a result of the IPO and certain reorganization transactions, the Company recorded a net deferred tax asset resulting from the outside basis difference of its interest in Station Holdco. The Company also recorded a deferred tax asset for its liability related to payments to be made pursuant to the tax receivable agreement 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 tax receivable agreement participants.
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 recognized a charge to equity to establish a $109.4 million valuation allowance against this portion of its deferred tax asset. The Company recognizes subsequent changes to the valuation allowance through the provision for income tax or other comprehensive income, as applicable, and at June 30, 2017 and December 31, 2016, the valuation allowance was $101.3 million and $103.7 million, respectively.
Tax Receivable Agreement
In connection with the IPO, the Company entered into a tax receivable agreement 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 tax receivable agreement requires the Company to make payments to such holders for 85% of the tax benefits realized by the Company as a result of such exchange. The Company expects to realize these tax benefits based on current projections of taxable income. The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such benefits. At June 30, 2017 and December 31, 2016, the Company's liability under the tax receivable agreement was $275.3 million and $258.5 million, respectively, of which $0.9 million and $1.0 million was presented within current liabilities, respectively. As a result of exchanges of approximately 2.0 million LLC Units and Class B common shares for Class A common shares during the three months ended June 30, 2017, the Company recognized a $17.3 million increase in the liability.
The timing and amount of aggregate payments due under the tax receivable agreement 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 tax receivable agreement 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 tax receivable agreement will remain in effect until all such tax benefits have been utilized or expired, unless the Company exercises its right to terminate the tax receivable agreement. The tax receivable agreement will also terminate if the Company breaches its obligations under the tax receivable agreement 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 tax receivable agreement, or if the tax receivable agreement 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.
11.    Related Party Transactions
Prior to April 27, 2017, the Company leased the land on which each of Boulder Station and Texas Station is located pursuant to long-term ground leases which provided for monthly payments of $222,933 and $366,435, respectively, subject to future increases. The Company leased this land from entities owned by the Frank J. Fertitta and Victoria K. Fertitta Revocable Family Trust. Frank J. Fertitta, Jr. and Victoria K. Fertitta are the parents of Frank J. Fertitta III, the Company’s Chairman and Chief Executive Officer, and Lorenzo J. Fertitta, the Company’s Vice Chairman. On April 27, 2017, the Company acquired the land subject to the ground leases, including the residual interest in the gaming and hotel facilities and other real property improvements thereon, for aggregate consideration of $120.0 million. As a result of such acquisition and the termination of the ground leases, the Company recognized a charge of $98.4 million in related party lease termination costs, which was an amount equal to the difference between the aggregate consideration paid by the Company and the acquisition date fair value of the land and residual interests. In addition, the transaction generated a tax benefit of approximately $35 million to Red Rock and the other owners of Station Holdco.

22




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Under the tax receivable agreement described in Note 10, the Company is required to make payments to certain pre-IPO owners of Station Holdco for 85% of the tax benefits realized by the Company as a result of certain transactions with the pre-IPO owners. At June 30, 2017 and December 31, 2016, $22.5 million and $21.6 million, respectively, of the Company’s liability under the tax receivable agreement was payable to related parties.
12.    (Loss) Earnings Per Share
Basic (loss) earnings per share is calculated by dividing net (loss) income attributable to Red Rock by the weighted average number of shares of Class A common stock outstanding during the period. The calculation of diluted earnings per share gives effect to all potentially dilutive shares, including shares issuable pursuant to outstanding stock options and nonvested restricted shares of Class A common stock, based on the application of the treasury stock method, and outstanding Class B common stock that is exchangeable, along with an equal number of LLC Units, for Class A common stock, based on the application of the if-converted method. For the three and six months ended June 30, 2017, the Company incurred a net loss. As a result, all potentially dilutive securities, which included outstanding shares of Class B common stock, nonvested restricted shares of Class A common stock and outstanding stock options, were excluded from the calculation of diluted loss per share because their inclusion would have been antidilutive.
For purposes of calculating earnings per share for the three and six months ended June 30, 2016 the Company has retrospectively presented earnings per share as if the IPO had occurred at the beginning of the earliest period presented. Such retrospective presentation reflects approximately 10 million Class A shares outstanding, representing certain LLC Units that were exchanged for shares of Class A common stock in connection with the IPO. Accordingly, for the three and six months ended June 30, 2016, 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. This hypothetical allocation of net income differs from the allocation of net income to Red Rock and noncontrolling interests presented in the Condensed Consolidated Statements of Operations, which assumes no noncontrolling interest in Station Holdco existed prior to the IPO.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted (loss) earnings per share is presented below (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(50,494
)
 
$
21,728

 
$
(5,280
)
 
$
81,231

Less: net (loss) income attributable to noncontrolling interests
(24,574
)
 
21,426

 
857

 
74,614

Net (loss) income attributable to Red Rock, basic
and diluted
$
(25,920
)
 
$
302

 
$
(6,137
)
 
$
6,617

 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Weighted average shares of Class A common stock outstanding, basic
67,311

 
30,031

 
66,506

 
19,960

Effect of dilutive securities

 
162

 

 
81

Weighted average shares of Class A common stock outstanding, diluted
67,311

 
30,193

 
66,506

 
20,041

The calculation of diluted (loss) earnings per share of Class A common stock excluded the following potentially dilutive shares because their inclusion would have been antidilutive (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Shares issuable in exchange for Class B common stock and LLC Units
47,954

 
74,427

 
47,954

 
74,427

Share issuable upon exercise of stock options
4,369

 
1,687

 
4,369

 
1,687

Shares issuable upon vesting of restricted stock
293

 

 
293

 


23




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Shares of Class B common stock are not entitled to share in the earnings of the Company and are not participating securities. Accordingly, earnings per share of Class B common stock under the two-class method has not been presented.
13.    Commitments and Contingencies
The Company and its subsidiaries are defendants in various lawsuits relating to routine matters incidental to their business. As with all litigation, no assurance can be provided as to the outcome of any legal matters and litigation inherently involves significant costs.
14.    Segments
The Company views each of its Las Vegas casino properties and each of its Native American management arrangements as individual operating segments. The Company aggregates all of its Las Vegas operating segments into one reportable segment because all of its Las Vegas properties offer similar products, cater to the same customer base, have the same regulatory and tax structure, share the same marketing techniques, are directed by a centralized management structure and have similar economic characteristics. The Company also aggregates its Native American management arrangements into one reportable segment.

24




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The Company utilizes Adjusted EBITDA as its primary performance measure. The Company’s segment information and a reconciliation of net (loss) income to Adjusted EBITDA are presented below (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net revenues
 
 
 
 
 
 
 
Las Vegas operations
$
371,492

 
$
322,876

 
$
757,730

 
$
654,334

Native American management
30,543

 
27,320

 
60,648

 
53,807

Reportable segment net revenues
402,035

 
350,196

 
818,378

 
708,141

Corporate and other
1,458

 
1,290

 
2,847

 
2,592

Net revenues
$
403,493

 
$
351,486

 
$
821,225

 
$
710,733

 
 
 
 
 
 
 
 
Net (loss) income
$
(50,494
)
 
$
21,728

 
$
(5,280
)
 
$
81,231

Adjustments
 
 
 
 
 
 
 
Preopening
368

 
373

 
398

 
721

Depreciation and amortization
46,807

 
38,436

 
92,060

 
77,863

Share-based compensation
2,326

 
3,681

 
3,738

 
4,301

Write-downs and other charges, net
8,826

 
10,966

 
9,850

 
13,334

Related party lease termination
98,393

 

 
98,393

 

Interest expense, net
33,853

 
34,078

 
68,797

 
69,146

Loss on extinguishment/modification of debt, net
975

 
7,084

 
2,994

 
7,084

Change in fair value of derivative instruments
(3,330
)
 
(90
)
 
(3,369
)
 
(87
)
Adjusted EBITDA attributable to MPM
noncontrolling interest
(6,418
)
 
(5,211
)
 
(11,056
)
 
(9,332
)
(Benefit) provision for income tax
(11,813
)
 
7,502

 
(1,134
)
 
7,502

Other

 
(1,133
)
 

 
(1,133
)
Adjusted EBITDA (a)
$
119,493

 
$
117,414

 
$
255,391

 
$
250,630

 
 
 
 
 
 
 
 
Adjusted EBITDA
 
 
 
 
 
 
 
Las Vegas operations
$
104,711

 
$
104,627

 
$
225,277

 
$
223,637

Native American management
22,695

 
20,096

 
46,012

 
40,528

Reportable segment Adjusted EBITDA
127,406

 
124,723

 
271,289

 
264,165

Corporate and other
(7,913
)
 
(7,309
)
 
(15,898
)
 
(13,535
)
Adjusted EBITDA
$
119,493

 
$
117,414

 
$
255,391

 
$
250,630

 
 
 
 
 
 
 
 
____________________________________
(a)
Adjusted EBITDA includes net (loss) income plus preopening, depreciation and amortization, share-based compensation, write-downs and other charges, net, related party lease termination, interest expense, net, loss on extinguishment/modification of debt, net, change in fair value of derivative instruments and income taxes, and excludes Adjusted EBITDA attributable to the noncontrolling interests of MPM.

25





Item 2.    
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes (the “Condensed Consolidated Financial Statements”) included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Overview
Red Rock Resorts, Inc. (“we,” “our,” “us,” or the “Company”) was formed as a Delaware corporation in September 2015 to manage and own an indirect equity interest in Station Casinos LLC (“Station LLC”). In May 2016, we completed an initial public offering (“IPO”) and used the proceeds to purchase newly issued limited liability company interests in Station Holdco LLC (“Station Holdco,” and such units, the “LLC Units”), and outstanding LLC Units from existing members of Station Holdco. We own all of the outstanding voting interests in Station LLC and have an indirect economic interest in Station LLC through our ownership interest in Station Holdco, which owns all of the economic interests in Station LLC. Station LLC is a gaming, development and management company that owns and operates ten major gaming and entertainment facilities and ten smaller casinos (three of which are 50% owned) in the Las Vegas regional market, including its recent acquisition of Palms Casino Resort (“Palms”) in October 2016. In addition, Station LLC manages Graton Resort & Casino (‘‘Graton Resort’’) in Sonoma County, California and Gun Lake Casino (‘‘Gun Lake’’) in Allegan County, Michigan, both on behalf of Native American tribes.
At June 30, 2017, we held approximately 59% of the economic interests in Station Holdco, as well as 100% of the voting interest in Station LLC and 100% of the voting power in Station Holdco, subject to certain limited exceptions, and were designated as the sole managing member of both Station Holdco and Station LLC. We control and operate all of the business and affairs of Station Holdco and Station LLC, and conduct all of our operations through these entities. Our Condensed Consolidated Financial Statements reflect the consolidation of Station LLC and its consolidated subsidiaries, and Station Holdco. The financial position and results of operations attributable to LLC Units we do not own are reported separately as noncontrolling interest. Station Holdco is our predecessor for accounting purposes and accordingly, for all periods prior to May 2, 2016, the financial information presented herein represents the information of the predecessor.
Our principal source of revenue and operating income is gaming, and our non-gaming offerings include restaurants, hotels and other entertainment amenities. Approximately 80% to 85% of our casino revenue is generated from slot play. The majority of our revenue is cash-based and as a result, fluctuations in our revenues have a direct impact on our cash flows from operations. Because our business is capital intensive, we rely heavily on the ability of our properties to generate operating cash flow to repay debt financing and fund capital expenditures.
A significant portion of our business is dependent upon customers who live and/or work in the Las Vegas metropolitan area. The Las Vegas economy, although severely impacted by the recession and housing crisis that spanned from 2008 to 2011, began to stabilize in 2012 and, based on population and employment growth, is once again one of the fastest growing economies in the United States. Based on a recent U.S. Census Bureau release, Nevada was second among all states in percentage growth of population from July 2015 to July 2016. In addition, based on preliminary data for June 2017 from the U.S. Bureau of Labor Statistics, Las Vegas experienced a 3.7% year-over-year increase in employment to 981,000 jobs which is an all-time high. This resulted in an unemployment rate of 5.1% which has declined from 14.1% in July 2011. Businesses and consumers in Las Vegas continue to increase their spending as evidenced by 47 consecutive months of year-over-year increases in taxable retail sales from July 2013 to May 2017. Home values have also improved significantly over the past several years with the median price of an existing single family home in Las Vegas up approximately 130% at June 2017 compared to January 2012, as reported by the Greater Las Vegas Association of Realtors.
The Las Vegas economy has shown improvements in employment, taxable sales and home prices, and we believe the stabilization of the local economy, positive trends in many of the key economic indicators and future projects and infrastructure investments provide a foundation for future growth in our business. Although we experienced improved operating results over the past few years due, in part, to more favorable local economic conditions, we cannot be sure if, or how long, these favorable market conditions will persist or that they will continue to positively impact our results of operations.

26





Our Key Performance Indicators
We use certain key indicators to measure our performance.
Gaming revenue measures:
Slot handle and table game drop are measures of volume. Slot handle represents the dollar amount wagered in slot machines, and table game drop represents the total amount of cash and net markers issued that are deposited in table game drop boxes.
Win represents the amount of wagers retained by us and recorded as casino revenue.
Hold represents win as a percentage of slot handle or table game drop.
As our customers are primarily Las Vegas residents, our hold percentages are generally consistent from period to period. Fluctuations in our casino revenue are primarily due to the volume and spending levels of customers at our properties.
Food and beverage revenue measures:
Average guest check is a measure of sales and represents the average amount spent per customer visit.
Number of guests served is an indicator of volume.
Room revenue measures:
Occupancy is calculated by dividing total occupied rooms, including complimentary rooms, by total rooms available.
Average daily rate (“ADR”) is calculated by dividing total room revenue, which includes the retail value of complimentary rooms, by total rooms occupied, including complimentary rooms.
Revenue per available room is calculated by dividing total room revenue by total rooms available.

27





Results of Operations
Information about our results of operations is presented below (dollars in thousands):
 
Three Months Ended June 30,
 
Percent
change
 
Six Months Ended June 30,
 
Percent
change
 
2017
 
2016
 
 
2017
 
2016
 
Net revenues
$
403,493

 
$
351,486

 
14.8
 %
 
$
821,225

 
$
710,733

 
15.5
 %
Operating (loss) income
(31,229
)
 
69,874

 
n/m

 
61,173

 
163,836

 
(62.7
)%
 
 
 
 
 
 
 
 
 
 
 
 
Casino revenues
258,396

 
233,796

 
10.5
 %
 
521,368

 
473,567

 
10.1
 %
Casino expenses
103,170

 
88,986

 
15.9
 %
 
204,824

 
176,407

 
16.1
 %
Margin
60.1
%
 
61.9
%
 


 
60.7
%
 
62.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Food and beverage revenues
75,303

 
66,408

 
13.4
 %
 
155,418

 
133,028

 
16.8
 %
Food and beverage expenses
55,059

 
44,501

 
23.7
 %
 
110,105

 
87,025

 
26.5
 %
Margin
26.9
%
 
33.0
%
 
 
 
29.2
%
 
34.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Room revenues
44,641

 
32,979

 
35.4
 %
 
94,405

 
67,363

 
40.1
 %
Room expenses
18,239

 
11,893

 
53.4
 %
 
38,306

 
24,278

 
57.8
 %
Margin
59.1
%
 
63.9
%
 
 
 
59.4
%
 
64.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other revenues
23,699

 
17,705

 
33.9
 %
 
46,519

 
34,887

 
33.3
 %
Other expenses
9,079

 
6,305

 
44.0
 %
 
16,912

 
12,027

 
40.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Management fee revenue
30,676

 
27,455

 
11.7
 %
 
60,903

 
54,104

 
12.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
94,781

 
80,152

 
18.3
 %
 
189,204

 
155,242

 
21.9
 %
Percent of net revenues
23.5
%
 
22.8
%
 
 
 
23.0
%
 
21.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
46,807

 
38,436

 
21.8
 %
 
92,060

 
77,863

 
18.2