Red Rock Resorts, Inc.

Welcome to Red Rock Resort's first quarter 2021 conference call. All participants will be in listen-only mode. Please note this conference is being recorded. I would now like to turn the conference over to Stephen Kuti, Executive Vice President, Chief Financial Officer, and Treasurer of Red Rock Resort. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resort's first quarter 2021 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta, as well as our executive management team. I'd like to remind everyone that our call today will include forward-looking statements under the safe harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. During this call, we will also discuss non-GAAP financial measures. the definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release in form 8K, which were filed this afternoon prior to the call. Also, please note that this call is being recorded. Before we get started, I would like to note that we are comparing our 2020-21 first quarter results against our 2019 first quarter results. Given that our properties were closed for a portion of the prior year's first quarter due to COVID-19 pandemic, we believe this financial comparison is a better reflection of our performance this past quarter. Now let's take a look at our first quarter results. On a consolidated basis, our first quarter net revenue was $352.6 million, down 21.1% from $447 million in the first quarter of 2019. Our adjusted EBITDA was $156.6 million, up 8% from $145.1 million in the first quarter of 2019. Our adjusted EBITDA margin was 44.4% for the quarter, an increase of 1,197 basis points from the first quarter of 2019, and up 59 basis points from the fourth quarter of 2020. With respect to our Las Vegas operations, excluding the impact from our four closed properties, our first quarter net revenues was 338.4 million, up 5.4% from 321 million in the first quarter of 2019. Our adjusted EBITDA was $165.6 million, up 38% from $120 million in the first quarter of 2019. Our adjusted EBITDA margin was 48.9%, an increase of 1,155 basis points from the first quarter of 2019 and up 339 basis points from the fourth quarter of 2020. On a same store basis, we achieved the second highest net revenue and the highest adjusted EBITDA and adjusted EBITDA margin in the history of our operations. During the quarter, we continue to prioritize free cash flow, converting 57% of our adjusted EBITDA to free cash flow, generating $88.8 million, or 76 cents per share. This brings our total free cash flow generated by the company from our June 2020 reopening through the end of the first quarter to almost $350 million, or $2.97 per share, with virtually every dollar going to pay down debt and 45-hour balance sheet. Taking a look behind the numbers, the overall customer trends we saw in the first quarter were consistent with the trends we've seen since our reopening last June. We continue to see strong visitation from a younger demographic, increased spend per visit, more time spent on device, plus the glowing return of our core customer. These trends were all positively impacted by the continued rollout of the COVID-19 vaccination program easing of capacity restrictions from 25% to 50% on March 15, and federal stimulus money. These positive trends were offset by approximately $4.8 million of COVID-19 mitigation costs for the quarter, approximately $4.9 million in carry costs associated with our closed properties for the quarter, and the continued negative impact of government-mandated occupancy restrictions on several of our core business lines, including hotel, food and beverage, and sales and catering. As of May 1st, occupancy restrictions were further eased to prevent 80% occupancy, and if at least 60% of Clark County residents are vaccinated by June 1st, we expect occupancy to increase to 100%. While these developments should improve the business segments most impacted by these restrictions, we still expect to carry, to continue to carry our COVID-19 mitigation costs, as well as our carry costs associated with our closed properties, at least over the short term. On the expense side, as we begin the anniversary of the government mandated closures in March of 2020, we now expect to achieve over $200 million per annum in cost savings. This new target is $50 million above the $150 million per annum cost savings we referenced on prior earnings calls, as the company continues to benefit from the actions we took to streamline our business, optimize our marketing initiatives, and renegotiate a number of vendor and third party agreements. These initiatives, along with maintaining a disciplined operational focus, have enabled the company to achieve and sustain higher profitability and drive more free cash flow. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the first quarter were $117.9 million and total principal amount of debt outstanding at quarter end was $2.87 billion. In the first quarter, we paid down $78 million in debt and since our reopening in June, we've reduced our net debt levels by approximately $334 million to a peak level of $3.1 billion. Capital spend in the first quarter was $5.1 million, and as mentioned in our previous earnings call, we anticipate our 2021 maintenance capital spend to be between $65 and $75 million. Also during the first quarter, we made a tax distribution of approximately $31.5 million to the LLC unit holders of Station Holco, which included a distribution of approximately $18.1 million to Red Rock Resorts. Because Red Rock Resorts does not expect to pay cash income taxes in 2021, the company elected to use $14.1 million of its distribution to purchase slightly over 382,000 Class A shares and redeem 100,000 Class B shares at an average price of $29.16 per share under its previously disclosed $150 million share repurchase program. When combined with our debt repayment, we returned $92.4 million to our stakeholders in the first quarter. Now let's provide a short update on our North Fork project. We continue to move forward on this project that are near completion with our design efforts. Over the next couple of weeks, we will be having discussions with our lending partners as to how we can most efficiently finance this project. We continue to expect to have a shovel in the ground in the second quarter of 2021 with the construction expected to take 15 to 18 months. As of now, The budget for the full completion of this project, excluding any financing cost, is expected to be between $350 and $400 million. Upon completion, we expect this project to include over 213,000 square feet, including almost 100,000 square feet of casino space, 2,000 class three slots, and 40 table games, and two standalone restaurants, as well as a food hall concept. We are excited to begin the development of this very attractive project on behalf of the North Fork Tribe. and we'll be providing more details in the coming quarters. Lastly, on May 3rd, we entered into definitive agreements to sell the Palms Casino Resort in Palms Place for an aggregate purchase price of $650 million in cash to an affiliate of the San Manuel Band of Mission Indians. The closing of this transaction is subject to customary closing conditions, including regulatory approvals, as expected to be completed before the end of the year. While we are incredibly proud of how we transformed this iconic property, We determined that the sale of the property is the best way to create shareholder value and enables us to emerge from the pandemic on a more accelerated timeline. Going forward, we will continue to focus on and improve operations of our existing portfolio of leading gaming assets in the Las Vegas locals market. With this transaction, we can accelerate the development of our Durango project, located in the fast-growing and underserved southwest Las Vegas market, while maintaining a fortress balance sheet. Finally, this transaction will further reduce our interest expense costs and eliminate approximately $9.5 million of our current annual closed property carry costs, of which $2.7 million was incurred in the first quarter. In conclusion, with government-mandated restrictions waning, with widespread vaccinations, and with significant pent-up leisure demand, we believe the worst is finally behind us, and we look forward to a brighter future. We are proud of our team members and how we managed to weather the storm in such a positive We were one of the only gaming companies in the United States that did not raise additional debt or equity during this crisis. Instead, we paid our team members during the crisis, increased team member benefits while simultaneously reducing its costs for our team members, kept our focus on being destinations of choice within the Las Vegas locals market by increasing our service levels and quality of our amenities, generated historically high EBITDA and EBITDA margins while converting 68% of that EBITDA to cash since our reopening in June of 2020. We paid down $334 million in debt, so we're now sitting at levels well below pre-COVID level. Reduced our share count in a series of creative transactions, all while continuing to be one of the few gaming companies that still owns all of its real estate and operating assets. When these highlights are coupled with very favorable supply-demand pandemic, the positive long-term trends in population growth, and the stable regulatory environment that characterized the Las Vegas locals market, and where our best-in-class, irreplaceable assets and locations, unparalleled distribution, and scale in our deep organic development pipeline, we believe that we are uniquely positioned to thrive in this highly attractive market. Lastly, we'd like to recognize and extend our thanks again to all of our team members for their hard work and to our guests for their support through this pandemic. Operator, this concludes our prepared remarks for today, and we are now ready to take questions from participants on the call.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Joe Greff from JP Morgan. Go ahead.