Wall Street analysts expect Red Rock Resorts to begin expansion of its newly opened $780 million Durango Casino & Resort early a year from now as they tout its initial success.
Company executives hosted several analysts Monday in Durango in southwest Las Vegas. Among them was Deutsche Bank’s Carlo Santarelli, who spoke of how management expected the property to be profitable when it opened on December 5.
Given what appears to be a successful opening, Santarelli said it indicates management is moving forward with Phase 2 of Durango as quickly as possible, with groundbreaking occurring during the fourth quarter of 2024 at the earliest.
Santarelli said he expects the 200-room hotel to expand to a minimum of 600 rooms, with the possibility of 800 rooms if allowed under the Clark County permitting process. Red Rock executives hope the completion of the Fontainebleau Las Vegas and Durango projects in recent weeks will fetch more favorable rates from contractors.
“We believe this phase will also include doubling the convention space, increasing the casino space, and more entertainment venues — bowling alleys, movie theaters, and the Country West Ballroom,” Santarelli said.
But before that can happen, the property needs to expand parking.
“The property could use more parking space, given the strong food and beverage demand, and could possibly support more hotel rooms and suites,” said Joseph Greif, of JPMorgan. “We could see the second phase of the expansion in Durango starting at the end of 2024, which is probably the closest thing it could be done anyway.”
Santarelli said Red Rock management was surprised by Durango’s younger demographic, with a group of 25 to 35 people showing up on the casino floor and at food and beverage outlets.
Another surprise, though somewhat related to demographics, was the late-night demand at the hotel, specifically for food and beverages, Santarelli said. When sector workers return home after their shifts, they look for a meal closer to their neighborhoods.
Given the demographics in and around Durango, with a large mix of Asian residents, table gaming has been a larger portion of the gaming revenue mix than most locals’ properties, Santarelli said.
“About 30% of the nearby adult population is Asian, a segment that is doing well,” Greif noted.
Red Rock Resorts expects Durango to cannibalize the portfolio balance by about 10%. That means about $80 million of Durango’s annual EBITDA will come from other Red Rock properties, with Red Rock taking the brunt of the hit, Santarelli said.
“Given the previously observed total return from the project, which management noted was very high, over time, the implication is that Durango on a standalone basis is targeting approximately $220 million in EBITDA on the current investment of $780 million.” When fully stabilized,” Santarelli said. “We do not expect this operating rate to be achieved until 2025 at the earliest.”
Santarelli said the unbundling was in line with management’s expectations of about 10%, though executives also said the database shows increased visits from Red Rock customers. “We think this is somewhat positive, given that the early trial tends to be more difficult.”
David Katz, an analyst with Jefferies Equities Research, said the new resort supports their bullish view on the Red Rock Resorts property and stock with their buy rating.
“We reached comfortable estimates for Durango, based on management’s clear focus on its detailed positioning and optimism about the long-term growth trajectory around the company’s Las Vegas locals market,” Katz said.
Katz said management indicates the medium-term ROI target is 20%, while profitability should be immediate with a rapid increase in double-digit returns. “In this context, we believe our estimates, which include approximately $65 million of EBITDA growth in 2024 primarily from Durango and $80 million in 2025 (vs. 2023 before Durango), are appropriate given the investment.”
Management spent a lot of time discussing its approach to positioning the new property and its upscale food and beverage offerings. It includes four full-service restaurants, in addition to a food court with 10 outlets.
Santarelli said that the administration was surprised by the volume of traffic in the food and beverage establishments, most notably the food hall and its 25,000 square feet of space.
“Red Rock noted that the popularity of the food hall has created parking congestion and a need for expanded parking facilities, a potential requirement before moving forward with Phase II development,” Santarelli said. “Food and beverage outlets in Durango are primarily leased, and as such, the grace period for restaurants should not impact ownership margins.”
Despite a modest promotional push from a local casino competitor before Durango opened, management said it was too early to tell whether competitors would ramp up promotions in the future, Santarelli said.
Santarelli said a common strategy among competitors is to figure out what the ramifications of the experiment will look like for the new competitor before adjusting the promotional strategy, if necessary. “We believe most competitors, at this point, are allowing the trial period to move forward and evaluating options on how, if any, to respond.”
Durango “looks like an early hit,” said Barry Jonas of Truist Securities. He said it has performed better than expectations and any dismantling of existing Red Rock properties may be less than he fears. He added that the administration emphasized its confidence in the new housing projects around Summerlin to fill the demand for real estate in Red Rock over time.
“Durango’s early success could indicate market growth,” Jonas said. “The property is seeing increased travel from existing Red Rock Resorts loyalty customers as well as strong card sign-ups from new customers. Management therefore believes the property is growing in the market. Additionally, management now believes Durango can boost margin in the near term. They forecast Previously this would be margin dilutive in the near term before they adjust their cost structure post open.
Beyond development beyond Durango’s second phase, Katz said the administration didn’t share anything new in terms of timing, but remained optimistic about population demographics and income in the valley.
“Our feeling is that of the six sites earmarked for potential development with 441 acres, the Insperada site (in west Henderson) is next,” Katz said.
Santarelli said the department would not undertake multiple projects at the same time, but would instead implement them over an extended period. He also suggested Inspirada near the Anthem residential masterplan near the M Resort, one of the highest wealth neighborhoods in Las Vegas, could be next.