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.

Good afternoon, everybody. I have a question I think probably more for Frank Lorenzo on strategic issues in terms of how your thoughts and views on monetizing casino real estate have evolved, particularly given where valuation multiples are for real estate EBITDA streams. You have 740 million run rate of EBITDA. mid-teens on half of that, mid-teens multiple on half of that EBITDA is like 80% of your float. You know, that kind of does a lot of interesting things for you. How do you think about those things?

Well, I think the value should be an implied end to the fact that we own all of our real estate, whether we have a prop code or an op code. I mean, I think we sit in the perfect position by controlling all the real estate, owning all of the real estate, owning the growth pipeline, you know, we kind of like it, but we also like looking at what people are willing to pay for that kind of two times coverage on, on the rent stream. But there's no reason that that shouldn't be implied into our stock price as well. And that's how we look at it.

Yeah. I mean, look, we looking at the cosmopolitan transaction, I think that was implied at about a 20 times multiple ish. Um, certainly that's, you know, we liked that valuation. I think right now, as you can see, we're kind of in the development mode. We've got six undeveloped pieces of property that we think are very attractive, and based on our historical returns we've been able to generate, we really like the idea of essentially doubling the size of our current operating platform here in Las Vegas. by developing those properties. And we've always got that option down the road. Once we build that out to consider an opco propco structure, if we think it makes sense at the time, we're going to be focused on what's the best way to maximize shareholder value. So we're always going to look at the options.

Okay, great. And then Steve, SG&A was up 10% quarter over quarter in that drove an EBITDA variance versus consensus. Was there anything one time in there? And if you could explain that sort of sequential trend, and then how do you think SG&A and corporate expenses trend from here?

Yeah, we can start with corporate. Corporate's mainly, I mean, in corporate and SG&A, the majority of that is payroll and bonus expense. We've performed really well. We've accrued higher bonuses so we can pay our employees better. There's also a lot of IT, you know, there's IT expense mainly related to the cashless initiatives that we're taking place. But there's nothing unusual or one-time in SG&A or corporate.

Great. Thank you very much.

The next question comes from Carlo Sansarelli with Deutsche Bank. Please go ahead.

Hey, guys. Good afternoon. Thank you. Steve, just to follow up on Joe's question, talking more about just kind of Las Vegas specifically, it looks like if you just kind of do the simple net revenue and kind of get your implied OPEX in there, it looks like that's up about 5%. Could you comment at all about maybe the exit rate coming out of the quarter? Was it pretty consistent throughout the quarter in terms of staffing and expense run rates? or should we perhaps expect that to kick up a little bit more as we move forward?

I think from an operational expense, we were pretty consistent throughout the quarter as we talked about. We fully staffed up in June last year, so we have all of our amenities open. We are completely staffed. What you're seeing quarter over quarter really is a tale of two halves. The first half of the quarter was very consistent with the second half of the quarter, and then upon the mask mandate, we did see some degradation in volume. And we expect that to reverse once the COVID mitigation restrictions get reversed.

But that being said, the Las Vegas operations margins were higher this Q3 than they were a year ago.

We were able to increase margin by about 300 basis points versus Q3 of 20. But like Steve said, it was really more of a revenue issue relative to the margins.

Right. So that kind of takes me to my next question. As you guys look out to 2022 and 2023, how much of the ability to keep margins kind of in these high 40s band that you've kind of been in since the start of this year, and obviously north of that in the 2Q, north of 50 in the 2Q, how much of that boils down to the revenue run rate that we're currently looking at remaining where it is or even perhaps growing versus You know, being able to continue to control cost as you think about maybe some of the things that are out there that could perhaps impact kind of the expense line as we move forward.

I mean, Carl, I mean, that question gets asked every quarter of, you know, are margins sustainable? So let's just, you know, let's go back and maybe take a history lesson, you know, Q3, going back to Q3 20 moving forward, right? You know, same store margins of 46.2%, 45.5%, 48.9%, 53.4%. And then this quarter was 49.2%. So what I'm seeing is a seismic change in the way we're running the business from an operational focus. And we see a lot of these cost savings that we've put in place and a lot of the processes we've put in place are permanent. And while we have no crystal ball in terms of a revenue standpoint, we do expect several high margin lines of business to come back in 22 and 23 to help grow the top line, namely catering, sales, and the theater business. So we do expect to maintain these margins. Great, thanks everybody.

The next question comes from Sean Kelly with Bank of America. Please go ahead.

Hey, good afternoon everyone. Steve, maybe I just want to follow up on that last point about some of the non-gaming amenities coming back on board. I think when we look at your sort of non-gaming revenues, we're almost virtually the same in the third quarter between the second. We were expecting that to maybe ramp up a little bit just as some of the restrictions were lifted and obviously there were restrictions that were put back in place. But can you talk about the non-gaming amenity openings? And I think I heard in the prepared remarks something about looking out a little later in 2023 for I think some of the banquet and catering side. But can you just talk about how you expect maybe the non-gaming piece to ramp up over the next couple of quarters?

Sure. I mean, right now, you've seen we've had quite a successful quarter in Q3 from a non-gaming perspective. Hotel, food and beverage all returned, built up their second quarter growth, all returned record growth. And we continue to expect the hotel to deliver that performance as we get sales and group coming back. With the restrictions going on in June, July 30th, we did see a slowdown in bookings throughout 2021 and the first half of 2022. But as I mentioned in our remarks, From a lead generation perspective, we're starting to see the return of that corporate business in the back half of 22 and into 23, so we expect good things from there. On the theater side, which is also non-gaming, the slate continues to get better, and it continues sequentially. Each month tends to be better than the last month, so we expect good things from there. Again, the hotel, what the team is doing, not only are we We had record, you know, occupancy and record ADR yielding the hotel in a much better way. So there are more casino guests in the hotel. So much more profitable holistically. And they're less wholesale business, which is, which is a change that, you know, we put in place at the beginning of this year. We're starting to see the fruits of that labor.

Great. And I'm not sure we're exactly here in Las Vegas's recovery yet, but, you know, we did see You know, many years ago when the Strip was kind of as hot as it probably is now, we did see some spillover into the locals, more of your destination oriented properties like a GVR, Red Rock. Do you think you're seeing that guess yet? Or how would you characterize, you know, again, a little bit of the crossover from maybe the Strip customer, you know, kind of pulling down into the locals properties as the Strip's own occupancy and pricing continue to push higher?

Yes, we are starting to see that regional out-of-town guests kind of push over, particularly into the higher end properties.

Thank you very much.

The next question comes from Steven Grambling with Goldman Sachs. Please go ahead.

Hi, thanks. Realizing you're still in the early stages for development for Durango, but in your initial conversations, have you seen any color on procurement pressures given some of the supply chain concerns we've heard out there? Have you been able to think about ways to control construction costs between now and when you start to break ground?

Yeah, I think the planning process for this has been quite extensive. As you've probably heard in some of the calls, we've delayed giving the budget until just now. And so through that, we've identified all the long-lead procurement items that need to be done. and bought prior to us breaking ground in Q1 and we've procured them or we've at least put those under contracts. We feel pretty good from a pricing perspective. And frankly, construction costs have risen, but we feel we've captured that in the $750 million number.

That's helpful. And then separately, maybe I missed this too, but how do you think about capturing the value of some of the still undeveloped land that you still have that maybe won't be utilized

Well, we're planning on monetizing the back 23 acres of the Durango site. So we're taking the front 50 acres to develop. We'll monetize the back, probably resulting in multi-family residential behind the property, which will be good for the property. And we're going to continue to look at each one of the development sites here in Vegas as we roll forward, try to build out the portfolio, double the footprint here in Las Vegas. We'll take basically the heart. of each of the properties and sell off the remaining real estate surrounding those development sites.

And any sense for where some of that land value, you know, kind of sits from your standpoint at this point?

What do you have for the value on the back 23 acres?

What we just talked about in the release, the back half, you know, we have under contract for about $23 million, so about, you know, a little bit over 1.1 million an acre.

And would you generally think some of the other land that you have that's undeveloped, would you characterize that as equal, more or less valuable?

Land prices in Las Vegas are trending up. They really have been trending up. I think you're seeing a real supply-demand dynamic there. There's a lot of demand from multifamily builders, industrial, a lot of different uses. The trends seem to be in our favor as a big landowner in this valley.

Great, thanks so much.

The next question comes from Steve Wycinski with Steeple. Please go ahead.

Yeah, hey guys, good afternoon. So it sounds like from Steve's remarks, in his prepared remarks, the promotional environment in the locals market still seems pretty rational if I read into your comments. So I guess the question is, the Palms deal, does close and you see a new competitor come into the market and operate the palms, do you think there's any risk that a new competitor comes in and tries to steal some share initially? And if so, how would you guys react in that situation?

I think you can see a complete pivot in basically our approach to the market is relying on our A-plus locations, A-class buildings, A-class employees, relationship marketing. We've basically pretty much gotten out of the promotional business of the mass market here, and we're relying on personal relationships. And, you know, our intent is to stick to that strategy, even if you're going to get, you know, a one-off player or someone maybe come in and want to be promotional and spend money. I mean, you have a couple of them on the market right now, but at the end of the day, we are the leader in the market. We have the A locations and the suburban locations, and we just really don't see the need to return to where things were.

Okay, gotcha. And the second question would be, you know, around the, you mentioned the mask mandate a couple times in your remarks. And now I guess the question is, you know, what conversations have you had with, you know, with your customer base in terms of, you know, folks that aren't coming back in? Is it something where they're just sitting on the sidelines waiting for that to be removed? Or is there something else going on? And then the second part of that question is, have you heard anything in terms of potential timing around the removal of that mandate?

Look, I think it varies by age group on how people react to the new cycle, Delta variant, mask mandates. And I think the older the segmentation of the population, the more adverse they are to deal with masks and react to the news cycle. So I think the younger demographic is not as impacted by mask mandates, but I don't know if you guys have anything you want to add.

I think the other area where we're seeing a little bit of dialogue is in groups that are looking to book, whether it's conventions, meetings, social events. I think the mask mandate definitely impacts that line of business. As Steve had mentioned, we're starting to see that pipeline kind of come back into late 22, 23, I think as people are presuming that masks hopefully by then will be a thing of the past. We don't have really any updates from the governor of the state relative to exactly what they're thinking on the mask mandate. We know tracking the numbers, they seem to be going in the right direction, so we're hopeful that sometime in the near future that that can be lifted. I think we're one of six states that still have a mask mandate in place. So certainly, you know, we think when the mask mandate hopefully ends, it should be relatively positive from a psychological and just an overall for our business. Okay, great. Thanks, guys. Thanks for the color.

The next question comes from Chad Baynon with Macquarie. Please go ahead.

Hi. Thanks for taking my question. Regarding the four properties that remain closed, can you help us think about what you need to see in the existing business or the market to allow you to open up one or all these properties going forward? Thanks.

Well, the Palms is going to be sold, so it's down to three properties. And I think what we have to look at is that those three properties represented less than 10% of the cash flow, even though they were one third of the casinos. And we've been very successful at moving a lot of the business at those closed properties to the six open properties, which has resulted in the higher margins that we're seeing at 49% for Las Vegas operations before allocation. I don't know if you have anything to add, Steve. And until we're confident that we can deliver incremental absolute profitability, we're not going to go and open something and cannibalize our other properties. end up making less money.

Yeah, I think just to add to Frank's points, because he nailed them all, with SB 386 in place, it really makes it administratively hard to open up a brand new property.

Thank you. And then regarding your comment around Durango, your goal of generating returns that are similar to prior projects, obviously with the cost of capital down at this point, you can certainly get a positive IRR. at a lower return. When you talk about consistent with prior projects, should we think somewhere in the ballpark between kind of the 10% and 20% goalposts, depending on what happens between now and 23? Or is there a more finite number that you're willing to provide? Thanks.

I think that's the right range. And typically, we've been able to get into the 20s type return on a stabilized basis.

If you look at just kind of where we sit today, you look at our trailing 12 EBITDA at $730 million being generated by six properties, you know, that kind of comes out to an average per property of about $122 million, $120 million to $122 million a property. And, you know, looking at the demographics, we actually posted some information on the investor deck on our website. When you look at the demographics, the traffic flows, everything else, we certainly expect this to be an above-average property relative to the rest of the population.

If you compare the adult population in a five-mile radius per gaming position to Red Rock and Green Valley, Durango is two times the amount of adults per gaming position. So we feel pretty good about it.

Thanks for the additional color. Appreciate it.

The next question comes from Barry John with Truett Securities. Please go ahead.

Thank you. Have you guys historically or are you now seeing any impacts from higher gas prices? And I guess I'd extend that to any thoughts on the wider inflation we're seeing, either from the revenue or the cost perspective.

On the cost side, you're definitely seeing cost of goods sold. That's up year over year, about 12%. on a per cover basis to get on the food standpoint. But on the revenue side, we really haven't seen that impact. It's been more, you know, it's been, or it's been tough to see because you're seeing, you have the mask mandate in place.

Got it, got it. And can you give any color, I'm not sure if you've talked about what you're seeing across the database, any color you can give on any segments or demographics, if anything's performing better than... than others?

Well, the higher end segments continue to perform, outperform, no question about it. And then the other areas, the growth we've seen in the younger demographic, we were just looking at kind of where we sat in the 21 to 35 demo prior to COVID and now coming out of post-COVID. I think their theoretical win is up about 75% versus pre-COVID. So we've been successful at driving that incremental kind of younger demo into our properties, which we think is super healthy and good long-term for the business.

Great. If I could just sneak one more in. You know, it's been a few years since you guys have issued a dividend. I'm just curious where a resumption of the dividend would rank in terms of your capital allocation strategies.

Yeah, I think the good thing is we're starting from a great place. We've got probably the strongest balance sheet in the industry, and in about a month we're going to get about $650 million from the Palms closing. What the board is considering is you've got to balance return of capital versus also the six strategically located properties that we can start developing. So we're going to consider all options are on the table.

Helpful. Thanks so much, guys.

The next question comes from Dan Pulitzer with Wells Fargo. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking my questions. So most of them answered, but on the 55 plus 65 core customer, in what inning are we of that customer base returning? And as the broader reopening has occurred, have you seen any declines at all in that unrated higher margin player?

We definitely have some room to go. I mean, they're not all back yet. I don't know necessarily what inning we're in. I think that, you know.

The inning changes depending on Delta variant and mask mandate.

Yeah, they're definitely the most affected by kind of what's going on with COVID. We're hopeful that if the mask mandate comes off sometime in the near future, that that segment will really start to kind of come back and forth. The older portions of our database is definitely where we're seeing that we have room to grow.

What was the second part of the question?

I think it was on the unrated, which we've really seen no change in unrated play pre and post-pandemic. Got it.

And then just in terms of the three properties that you guys have yet to open, I mean, is there any change or pivot in your decision-making process there? Have you had any conversations with potentially interested parties?

I mean, there's all sorts of inbound calls, you know, coming in for those three properties. But I think I can pretty say, you know, we would never sell a gaming-entitled property, those three, you know, gaming-entitled. So really no decision has been made whether we're going to open or potentially scrape or sell. All right. Understood. Thanks so much.

This concludes our question-and-answer session. I would like to turn the conference back over to Stephen Cootey for any closing remarks.

Well, thank you everyone for joining the call and we look forward to seeing you again in the next 90 days. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.