Red Rock Resorts, Inc.

Good afternoon and welcome to Red Rock Resorts' first quarter 2022 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 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 today for Red Rock Resorts' first quarter 2022 earnings conference call. Joining me on the call today are Frank and Lorenzo Vertita, 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 8K, and investor deck. which were filed this afternoon prior to the call. Also, please note this call is being recorded. Now let's take a look at our first quarter results. On a consolidated basis excluding great management fees, our first quarter net revenue was $401.6 million, up 16.6% from $344.5 million in the prior year's first quarter. Our adjusted EBITDA was $178.7 million, up 19.9% from $149 million in the prior year's first quarter. Our adjusted EBITDA margin was 44.5% for the quarter, an increase of 13 basis points from the first quarter of 2021. With respect to our Las Vegas operations, excluding the impact from our closed properties, our first quarter net revenue was $399.5 million, up 18.1% from $338.4 million in the prior year's first quarter. Our adjusted EBITDA was $196.7 million, up 18.8% from $165.6 million in the prior year's first quarter. Our adjusted EBITDA margin was 49.2%, an increase of 29 basis points from the first quarter of 2021. On the same store sale basis, we achieved the highest first quarter net revenue, adjusted EBITDA, and adjusted EBITDA margin in the history of our company. And this marks the seventh quarter in a row that the company has achieved record same store adjusted EBITDA and adjusted EBITDA margin. We continue to prioritize free cash flow, converting 75% of our adjusted EBITDA to operating free cash flow, generating $134.7 million, or $1.25 per share. During the quarter, we remained operationally disciplined and stayed focused on our core mid- to high-end local customers, as well as our regional out-of-town guests. This core strategy allowed us to generate record revenue and profitability with our gaming segment in the first quarter. While a combination of Omnicron and inflationary pressures offset By the lifting of the mask mandates across the state of Nevada on February 10th resulted in a quarter over quarter reduction in visitation. This trend was more than offset by increased time on device, as well as strong spend per visit across our entire portfolio, allowing the company to enjoy record profits within the segment. Moving forward, while we remain vigilant to these trends, we will continue to stay disciplined and focused on executing and investing in our core strategy, including offering new amenities to our guests, such as the VIP high limit table table room at our Red Rock property opening later this week. Turning to our non-gaming segments, we saw continued growth in food and beverage and hotel as both segments delivered one of their most profitable first quarter results ever. With regard to group sales and the catering business segments, the recovery of these business lines was further delayed by the impact of Omnicron in January. At this point, while we are seeing our lead pipeline grow, business has been pushed into the back half of 2022 and into 2023. And finally, as mentioned on prior earnings calls, financials are still carrying approximately $2.1 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 eight quarters to streamline our business, optimize our marketing initiatives, and renegotiate a number of vendor and third-party agreements have have led to a significant transformation of our business, which resulted in same store revenue, which now exceeds 2019 pre-pandemic levels, higher adjusted EBITDA, higher adjusted EBITDA margin, strong pre-cash flow conversion, and the return of over $875 million in capital to our shareholders since we reopened in June of 2020. On the technology front, with regard to cashless gaming, we continue to roll out this product. We are now live at all of our properties, with the exception of our Wildfire Taverns and Sunset Station, which we expect to happen over the next two quarters. While the initial focus is introducing cashless payments on the slot floor, the ultimate goal is to allow our customers to play both cash and credit 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 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 first quarter was $336.6 million. The total principal amount of debt outstanding at the quarter end was $2.8 billion, resulting in net debt of $2.55 billion. As of the end of the first quarter, the company's net debt to EBITDA and interest coverage ratios were 3.4 times and 8.1 times, respectively. Given our low leverage, low cost of capital, and no short-term debt maturities, Our best-in-class balance sheet will allow us to focus on executing on both our longer-term growth opportunities, including the development of our six owned strategically located gaming and title properties, as well as take a balanced approach to returning capital to our stakeholders as we move forward. Also, during the first quarter, we made a distribution of approximately $52.4 million to the LLC unit holders of Station Holco, which included a distribution of approximately $30.6 million to Red Rock Resorts. The company used the distribution to make its first quarter estimated tax payment, pay its previously declared dividend of 25 cents per Class A common share, as well as purchase approximately 185,000 Class A shares at an average price of $47.77 per share under its previously disclosed $300 million share repurchase program, of which we still have $146 million remaining to spend. This brings the total number of shares purchased under the program and under the tender we completed in the fourth quarter of 2021 to approximately 10.7 million Class A shares at an average price of $47.84 per share, reducing our share count at quarter end to approximately 107.5 million shares. When combined with our first quarter dividend, we returned approximately 36.4 million to our shareholders in the first quarter. Capital spent in the first quarter was 38.9 million, which included approximately 29.2 million in investment capital, inclusive of our Durango project, as well as $9.7 million in maintenance capital. For the full year 2022, we continue to 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, as we've mentioned before, we are extremely excited about this project, which is situated on a 71-acre parcel ideally located of the 215 Expressway and the 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 and no unrestricted gaming competitors within the five mile radius of the project site. The project is progressing nicely and continues to remain on schedule with anticipated construction taking approximately 18 to 24 months. When complete, the project will 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, four full-service food and beverage outlets and a food hall with many exciting options, a state-of-the-art experiential race and sports book, and a resort-style pool. As mentioned on our prior earnings calls, 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 are pleased to announce today that we have entered into a guaranteed maximum price contract for the project, under which approximately 70% of the total project costs are now under GMP. As the project stands now, approximately 72% of the project, including the purchase of long lead FF&E items, has been bid out. We will continue to execute on our early procurement strategy in a manner which seeks to minimize supply chain and inflation-related issues. As stated on previous calls, The company expects the return profile for this project to be consistent with past Greenfield projects within our portfolio. Turning now to North Fork, as we noted last quarter, after favorably resolving all of its other litigation, the tribe has only one pending case in the California courts. As we've also noted last quarter, we do not believe that any decision by a California state court could deprive North Fork of its ability to gain on its federal trust land. We continue to work with the tribe as we progress our efforts with respect to this very attractive project, including working toward the approval of a management agreement, continuing our work on the development design, and having preliminary talks with our prospective lending partners. We will continue to provide updates on our quarterly earnings call. Lastly, on May 3, 2022, the companies announced that its board of directors had declared a cash dividend of $0.25 per share payable for the second quarter of 2022. The dividend will be payable on June 30, 2022 to all shareholders of record as of the close of business on June 16, 2022. With our current best-in-class assets and locations coupled with our development pipeline of six owned gaming and title development sites and parcels located in the most desirable locations in the Las Vegas Valley, we have an unparalleled growth story that will allow us to double the size of our portfolio and position us to capitalize on the very favorable long-term demographic trends and the high barriers to entry that characterize the Las Vegas locals market. And while the quarter presented some headwinds, our disciplined approach to running our business coupled with our unparalleled distribution and scale allowed the company to enjoy record high EBITDA and EBITDA margin, and it's allowed the company to continue to execute on its long-term growth opportunities while continuing to return capital to our shareholders. Lastly, we'd like to recognize and extend our thanks to all of our team members for their hard work. We understand and appreciate that the guest experience starts with them and they are the ones that make our property so special. We would also like to add a special note of thanks to them for voting us top employer of the Las Vegas Valley for the second year in a row. And a special thanks goes out to all of our guests for their loyal support over the past 46 years. 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 your question, you may press star then one 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 two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Joe Gref with JPMorgan. Please go ahead.