Red Rock Resorts Palms Sale Credit Positive, But No Ratings Upgrade Yet, Says Moody’s

Last week, Red Rock Resorts, Inc. (NASDAQ:RRR) announced the $650 million sale of Palms Casino Resort in Las Vegas to the San Manuel Band of Mission Indians. The move is lauded by Moody’s Investors Service.

The announcement of the transaction arrived nearly five years to the day that Red Rock revealed it was acquiring the off-Strip venue, and ends lengthy speculation about the fate of the property. While the operator is selling the integrated resort at a loss when combining the original purchase price and enhancements, Moody’s sees the move as beneficial.

The sale is credit positive for Station because it will strengthen its balance sheet, allow the company to focus on and improve operations of its core Las Vegas local market assets, and reduce closed property carrying costs for the company,” said the research firm.

While Moody’s applauds Red Rock’s decision to part with Palms, it said the gaming company’s B2 credit rating remains in place for now. That grade is well into junk territory, is considered speculative, and “subject to high credit risk.”

Red Rock Plans for Cash

While selling a Las Vegas property at a time when valuations are depressed because of the coronavirus pandemic isn’t ideal, the influx of cash is still positive for Red Rock.

“Cash proceeds from the sale would bolster Station’s balance sheet, providing funds to potentially expedite deleveraging, while also providing capital for the expected development of a new gaming resort facility on the company’s 71 acres of owned land at the intersection of Durango Road and Interstate 215 in the southwestern area of the Las Vegas Valley,” notes Moody’s.

“The company expects construction to start in 2022,” the note continues.”The sale proceeds would enable the company to develop the property without adding incremental debt or leverage to its balance sheet, a credit positive.”

The Palms sales arrive as Red Rock’s balance sheet is steadily improving. On the company’s recent earnings conference call, CFO Stephen Cootey said $350 million in free cash flow was generated from June 2020 reopening through the end of March 2021.

Another Benefit for Red Rock

By selling the Palms, which has been shuttered for over a year, Red Rock also trims costs.

“The sale of the Palms would also reduce closed property carrying costs for Station. The Palms location has been closed since 17 March 2020 and has not generated any revenue or EBITDA for more than a year. Station has been paying carrying costs for the location over this time,” said Moody’s.

Divesting the location will reduce these costs by $9.5 million annually,” according to Moody’s. “These costs have been a drag on the company’s margins since reopening.”

Red Rock’s Fiesta Henderson, Fiesta Rancho, and Texas Station remain closed through at least the end of June. In announcing the Palms sale, the operator didn’t comment on the fate of those venues.