Red Rock Resorts, Inc.

Good afternoon and welcome to Red Rock Resorts Third Quarter 2021 Conference Call. All participants will be in a listen-only mode. Please note this conference call is being recorded. I would now like to turn the conference over to Stephen Coote, Executive Vice President, Chief Financial Officer, and Treasurer of Red Rock Resorts. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on today's Red Rock Resorts Third 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 the call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release, form 8K and investor deck, which were filed this afternoon prior to the call. Also, please note that this call is being recorded. Now let's take a look at our third quarter results. On a consolidated basis, our third quarter net revenue was $414.8 million, up 17.4% from $353.2 million in the prior year's third quarter. Our adjusted EBITDA was $184.5 million, up 14.7% from $160.9 million in the prior year's third quarter. Our adjusted EBITDA margin was 44.5% for the quarter, a decrease of 107 basis points from the third quarter of 2020. With respect to our Las Vegas operations, excluding the impact from our foreclosed properties, our third quarter net revenue was 407.4 million, up 28.9% from 316 million in the prior year's third quarter. Our adjusted EBITDA was 200.5 million, up 37.2% from $146.1 million in the prior year's third quarter. Our adjusted EBITDA margin was 49.2%, an increase of 296 basis points from the third quarter of 2020. On a same-store basis, we achieved the highest third quarter net revenue, adjusted EBITDA, and adjusted EBITDA margin in the history of our company. During the quarter, we continued to prioritize free cash flow, converting 70% of our adjusted EBITDA to operating free cash flow, generating $126.3 million, or $1.10 per share. This brings operating free cash flow generated by the company for the first three quarters of 2021 to approximately $365 million, or $3.18 per share, with virtually every dollar being returned to our stakeholders. Taking a look behind the numbers, the third quarter saw impressive growth versus the prior third quarter with increased visitation, time on device, and spend per visit experience across our database, which allowed the company to deliver record gaming revenue in the quarter. The reimplementation of the mask mandate across the state of Nevada on July 30th, as well as the return of customary third quarter seasonality, did have a modest impact on our visitation and time and device metrics in the latter half of the quarter, but we expect those trends to reverse as COVID-19 restrictions are eventually lifted. Turning to the non-gaming segments, we saw considerable strength in food and beverage and hotel as both segments built upon their strong second quarter performance to deliver their best third quarter results in the history of the company. With regard to group sales and catering business segments, while these business lines have been slower to recover post-pandemic, we are seeing our lead pipeline grow into the back half of 2022 and into 2023. Finally, as mentioned on prior earnings calls, our financials are still carrying approximately $2.4 million of COVID-19 mitigation costs for the quarter and approximately $2.6 million in carry costs associated with our closed properties for the quarter. On the expense side, we continue to expect to achieve approximately $200 million per annum of cost savings compared to our pre-pandemic cost structure. 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. On the technology front, we are making substantial progress on several initiatives. With regard to cashless gaming, we have entered into a field trial with IGT at our Red Rock and Green Valley Ranch properties, with the initial focus of introducing cashless payments on the slot floor, with the eventual goal to allow our customers to play and pay from one mobile digital wallet across all of our amenities at each of our Las Vegas properties. There will be more to come as we proceed with our field trial on this exciting product. Also in October, we entered into a partnership with Gann Limited to build and deploy the Next Generation Infrastructure Station's STN Sports online sports platform. mobile applications, and retail over-the-counter and kiosk-based sports betting throughout Nevada. While the product launch is subject to regulatory approval, we are excited about the partnership and building upon our leading race and sports franchise. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the third quarter were $89.9 million, and the total principal amount of debt outstanding at quarter end was $2.68 billion. In the third quarter, we paid down $37.5 million in debt, bringing the total debt reduction for the first three quarters of 2021 to approximately $265 million. Additionally, the company used $85.5 million during the third quarter to purchase approximately 2.1 million Class A shares at an average price of $41.44 per share under its previously disclosed $150 million share repurchase program, bringing total shares repurchased for the first three quarters of 2021 to over 3.2 million Class A shares at an average price of $39.08, thus reducing our share count to approximately 114.7 million Class A and Class B shares combined. Within the quarter, our board authorized an increase of $150 million to our existing share repurchase program, giving us over $173 million of the availability for future share repurchases. When combined with our debt repayment, we returned $123 million and $391.1 million to our stakeholders during the third quarter and to the first three quarters of 2021, respectively. As mentioned on a prior call, we are well on our way to having one of the most solid balance sheets in the industry, which gives us the ability to focus on longer-term growth opportunities, including the development of our six owned, strategically located gaming and title properties, and the ability to consider additional ways of returning capital to our stakeholders as we move forward. Since the close of the third quarter, the company's consolidated subsidiary, Station Casinos, issued a notice of redemption for the remaining 280.3 million 5% senior notes due 2035. The company used cash on hand and borrowings under its revolving credit facility to pay the redemption premium, accrued in unpaid interest, and any fees or expenses related to the redemption. The transaction closed on October 29th and is expected to save the company approximately $14 million per annum to the life of the senior notes, while further deleveraging the balance sheet, increasing our financial flexibility. Capital spent for the third quarter was $14.7 million. As mentioned in our previous earnings call, we anticipate our 2021 maintenance capital spend to be between $65 and $75 million. Also, during the third quarter, we made a tax distribution of approximately $51.1 million to the LLC unit holders of Station Holco, which included a distribution of approximately $33.5 million to Red Rock Resorts. Now, let's provide a short update on our development pipeline. Starting with our Durango development, we are extremely excited about this project which is situated on a 71-acre parcel ideally located off the 215 Expressway and Durango Drive in the southwest Las Vegas Valley. The project is located within the fastest-growing area of Las Vegas Valley with a very favorable demographic profile. The project site provides favorable ingress-egress off the 215 Expressway, which handles over 166,000 vehicles per day and is within a five-mile radius to approximately 350,000 people. Further, there are no unrestricted gaming competitors within the five-mile radius of the project site. We are working through the planning and budgeting phases of this project with the goal and expectation to have a shovel in the ground in the first quarter of 2022. Once the project is started, we anticipate construction will take approximately 18 to 24 months. When complete, the project will be approximately 533,000 square feet and include over 73,000 square feet of casino space with over 2,000 slots and 46 table games. over 200 hotel rooms and suite product, over 21,000 square feet of convention, meeting, and catering space, four full-service food and beverage outlets, a state-of-the-art sportsbook, and a resort-style pool. While we are still refining the final budget, we expect to spend approximately $750 million, which includes all design costs, construction hard and soft costs, pre-opening expenses, and any financing costs associated with the project. We expect to enter into a guaranteed maximum price contract for approximately 70% of the total project costs. The company expects the return profile of this project to be consistent with past Greenfield projects in our portfolio, while the funding of this project is expected to come from a combination of cash flow from operations and the sale of a portion of the current Durango site to multifamily development projects for approximately $24 million. Tony Doan- Turning out of North Fork since we last spoke, we received a positive opinion from the federal district court of the eastern district of California, which ends all federal court litigation affecting the project. Tony Doan- With respect to the California state courts, while we were disappointed by certain of the results of the California state courts, we do not believe that any of those state court decisions will ultimately affect North Fork tribes ability to conduct gaming on their trust property. We have continued to progress our efforts with respect to this very attractive project, including development and design and initial talks with our prospective lending partners. We will continue to provide updates on our quarterly earnings calls. Lastly, and as previously disclosed on our prior earnings call, on May 3rd, we entered into definitive agreements to sell Palms Casino Resort and Palms Place for an aggregate 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, and is expected to be completed before the end of this year. In conclusion, while the third quarter presented some headwinds, our disciplined approach to running our business allowed the company to enjoy record-high EBITDA, EBITDA margin, and free cash flow conversion. With our best-in-class assets and locations, unparalleled distribution and scale, and our own pipeline of six strategically located gaming and title properties, We believe that we are uniquely positioned to capitalize on the very favorable long-term demographic trends and the high barriers to entry that characterize the Las Vegas Locals Market. Lastly, we'd like to recognize and extend our thanks to all of our team members for their hard work and to our guests for their support throughout this pandemic. And with respect to our team members, a special note of thanks for voting us a top casino employer in the Las Vegas Valley. Operators, this concludes our prepared remarks today, and we are now ready to take questions from participants on the call.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Joe Gref with JP Morgan. Please go ahead.