Red Rock Resorts, Inc.

Good afternoon and welcome to Red Rock Resorts' fourth quarter 2021 conference call. All participants will be in a listen-only mode. Please note, this conference is being recorded. I would now like to turn the conference over to Stephen Cooney, 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 today for Red Rock Resorts' fourth quarter full year 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. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release, Form 8-K and investor deck, that 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 fourth quarter and full year results. On a consolidated basis, when excluding great management fees, our fourth quarter net revenue was $422.4 million, up 32.9% from $317.8 million in the prior year's fourth quarter. Our adjusted EBITDA was $189.7 million, up 50.8%, from 125.7 million in the prior year's fourth quarter. Our adjusted EBITDA margin was 44.9% for the quarter, an increase of 535 basis points from the fourth quarter of 2020. With respect to our Las Vegas operations, excluding the impact from our four closed properties, our fourth quarter net revenue was 416.3 million, up 33.5% from 311.8 million in the prior year's fourth quarter. Our adjusted EBITDA was $206.7 million, up 45.6% from $142 million in the prior year's fourth quarter. Our adjusted EBITDA margin was 49.7%, an increase of 412 basis points from the fourth quarter of 2020. On the same store of sales basis, we achieved the highest fourth quarter net revenue adjusted EBITDA and adjusted EBITDA margin in the history of our companies. Let's now turn to our full-year performance. Please note that while we are comparing our 2021 full-year performance to our 2020 full-year performance, 2020 results were severely impacted by the 79-day statewide shutdown of all non-essential businesses, including casinos, in an effort to reduce the spread of COVID-19 and by the restrictions on our business, which followed and continue through today. On a consolidated basis, when excluding great management fees, our 2021 full-year net revenue was $1.61 billion, up 46.2% from $1.1 billion in the prior year. Our 2021 full-year adjusted EBITDA was $733.2 million, up 151.9% from $291 million in the prior year. Our adjusted EBITDA margin was 45.6% for the full year 2021, an increase of 1,912 basis points from the prior year. With respect to our Las Vegas operations, excluding the impact of our foreclosed properties, our full year 2021 net revenue was $1.58 billion, up 59% from $995.4 million in the prior year. Our full year 2021 adjusted EBITDA was $797.6 million, up 120.6% from $361.6 million in the prior year. Our full year 2021 adjusted EBITDA margin was 50.4%, an increase of 1,407 basis points from the prior year. Again, on the same store sales basis, we achieved the highest full-year 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 52 percent of our adjusted EBITDA to operating free cash flow, generating $96.8 million, or 90 cents per share. This brings our 2021 cumulative free cash flow generated by the company to $472 million, or $4.39 per share, with virtually every dollar being returned to our stakeholders. Taking a look behind the numbers within the quarter, the governance mask mandate across the state of Nevada remained in place, and we definitely felt the effects of that and of increased inflationary pressure on ordinary goods and services. These factors were an offset to customary fourth quarter seasonality and resulted in quarter over quarter reduction in visitation. Despite these factors, we experienced increased time on device as well as strong spend per visit across our entire portfolio. Consistent with our experience earlier in the pandemic, the mask mandate and the recent resurgence of the Omicron virus most notably impacted our older guest segment. Despite these headwinds, we remained disciplined and focused on executing on our core strategy, which allowed us to generate record revenue and profitability with our gaming segments in the fourth quarter. Turning to our non-gaming segments, we saw continued growth in food and beverage and hotel as both segments delivered their most profitable fourth quarter results ever. With regard to group sales and catering business segments, these business lines continue to be slow to recover and felt the impact of the recent resurgence in the pandemic. At this point, while we are seeing our lead pipeline grow, business has been pushed into the back half of 2022 and into 2023. Finally, as mentioned on our prior earnings calls, Our financials are still carrying approximately $2.6 million of COVID-19 mitigation costs for the quarter and approximately $2 million in carry costs associated with our closed properties for the quarter. On the expense side, we remain operationally disciplined and continue to look for ways to become more efficient while providing best-in-class wages and benefits to our team members and delivering best-in-class customer service to our guests. The company's actions taken over the past seven quarters to streamline our business, optimize marketing initiatives, renegotiated a number of vendor and third-party agreements have led to a significant transformation of the business, which resulted in same-store revenue which exceeds 2019 pre-pandemic levels, higher adjusted EBITDA margin, and higher adjusted EBITDA and strong free cash flow conversion. On the technology front, with regard to cashless gaming, we have successfully completed our field trial with IGT at our Red Rock and Green Valley Ranch properties and have begun rolling out this product to our remaining properties. We expect to have cashless gaming up and running at all of our properties over the next two quarters. While the initial focus is introducing cashless payments on the slot floor, the eventual goal is to allow customers to play and pay from one mobile digital wallet across all of our amenities at each of our Las Vegas properties. There'll be more to come as we roll out this exciting product. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the fourth quarter was $275.3 million, and the total principal debt amount outstanding at quarter end was $2.89 billion. During the quarter, we further bolstered our balance sheet and increased our financial flexibility as we closed on our previously announced sale of the Palms Casino Resort and Palms Place for an aggregate purchase price of $650 million in cash, coupled with the issuance of a $500 million 4 and 5A senior note due in 2021. We also successfully returned capital to our shareholders through a modified Dutch auction tender offer as well as the payment of a special dividend during the quarter. We continue to be focused on longer-term growth opportunities and on continuing to return capital to our stakeholders. As noted above, the company commenced a modified Dutch auction tender offer in November 2021. Through the tender offer, we were able to purchase approximately 6.9 million Class A shares, representing approximately 10.1 of the Class A shares issued in outstanding, or 6.1 of the total number of shares outstanding, assuming the exchange of all shares of companies class B shares and limited liability interest in station Holco LLC at a purchase price of $51 and 50 cents per share at an aggregate cost of approximately 354.6 million. Also in November of 2021, the company announced that its board of directors had declared a special dividend of $3 per class A share. The special dividend was payable to shareholders of record on November 23rd, 2021 and paid on December 22nd, 2021. Also during the fourth quarter, we made distributions of approximately 124.3 million to the LLC unit holders of Station Holco, which included a distribution of approximately $74 million to Red Rock Resorts. The company elected to use its distribution to pay for a portion of the modified Dutch tender, as well as purchase an additional 389,000 Class A shares at an average price of $49.94 per share under its previously disclosed $300 million share repurchase program. When coupled with the modified Dutch tender, we purchased approximately 7.3 million Class A shares during the quarter at an average price of $51.42, reducing our share count at quarter end to approximately 107.4 million shares. When combined with our special dividend, we've returned approximately $703 million to our shareholders in the fourth quarter. Capital spent in the fourth quarter was $26.4 million and $61.3 million for the full year in 2021. For the full year 2022, we expect to spend between $75 million and $100 million in maintenance capital and an additional $300 million to $400 million in growth capital, inclusive of our Durango project. 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 up at 215 Expressway and Durango Drive in the southwest Las Vegas Valley. The project is located within the fastest-growing area in the Las Vegas Valley with a very favorable demographic profile. The project site provides favorable ingress and egress off the 215 Expressway, which handles over 166,000 vehicles per day, as within a five-minute drive to approximately 125,000 people. Further, there are no unrestricted gaming competitors within a five-mile radius of the project site. In January, we received our permits to begin construction of this project, and we have since broken ground. Anticipating construction will take approximately 18 to 24 months. When complete, the project will include over 73,000 square feet of casino space with over 2,000 slot machines and 46 table games, over 200 hotel rooms and suite product, four full-service food and beverage outlets, a state-of-the-art experiential race and sports book, and a resort-style pool. As mentioned on our prior earnings call, we expect to spend approximately $750 million, which includes all design costs, construction hard-solve costs, pre-open expenses, and any financing costs associated with the project. We have entered into a guaranteed maximum price contract for the early phases of this project, and with the expectation of approximately 70% of the total project cost being under GMP within the next couple quarters. The company expects the return profile of this project to be consistent with the past Greenfield projects within their portfolio. Turning now to North Fork, when we last spoke, we noted that the tribe has resolved favorably all its federal court litigation. Since then, the tribe has settled its California state court litigation, which stand up for California, which leaves only one pending case in the California courts, and that is with the Pequot Rancheria. Although that litigation remains active, we do not believe any decision by the California state court could deprive North Fork of its ability to game on its federal trust land. As noted last quarter, we continue to progress with our efforts with respect to this very attractive project, including development and design and initial talks with prospective lending partners. We will continue to provide updates on our quarterly earnings call. In conclusion, with the back half of the fourth quarter presenting some headwinds, our disciplined approach to running our business allowed the company to enjoy record-high EBITDA and EBITDA margin and allowed the company to return approximately $703 million to our shareholders during the quarter. With our best-in-class assets and locations, unparalleled distribution scale, our own development pipeline of eight strategically located gaming properties. We believe that we are uniquely positioned to capitalize on the very favorable long-term demographic trends and high barriers to entry that characterize the Las Vegas locals market. Lastly, we would like to recognize and extend our thanks again to all of our team members for their hard work and support with us and to our guests for their support throughout this pandemic. Operator, this concludes our prepared remarks 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 touchtone phone. If you are using a speakerphone, 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. The first question today comes from Joe Greff with J.P. Morgan. Please go ahead.