Q3 2019 Earnings Call
Good day and welcome to the right. So its third quarter two dozen of 19 earnings conference call.
All participants will be in a listen I mean my age.
Would you need assistance, please signal French specialist like Crazy stocky <unk> right.
After today's presentation, there will be an opportunity to ask questions.
To ask the question E Bay Press Star, then one well the touched fine fine.
To withdraw your question. Please press Star then change.
The place night.
Being recorded.
I wouldn't like to turn the conference over to Mr.
<unk>.
<unk>, Vice President Chief Financial Officer, and Treasurer. Please go ahead.
Thank you operator, good afternoon, everyone and welcome to Red Rock Resorts' third quarter 2019 earnings Conference call.
Joining me on the call today from Red Rock resorts are Frank <unk>, Chairman and Chief Executive Officer, Rich Haskins, President, Bob Finch Executive Vice President Chief Operating Officer, and Robert <unk> Executive Vice President strategy in development.
On the call today will include forward looking statements on to see power Harbor for residents.
Great Federal Securities laws developments the results may differ from those projected the risks and uncertainties related to these statements are detailed in our filings with the FCC.
During this call. We're also discuss non-GAAP financial measures for definitions and a complete reconciliation of these figures to gap. Please refer to the financial tables in our earnings press release and form 8-K, which were filed this afternoon. Prior to the call also please note that this call is being recorded.
Let's turn now to our third quarter results.
On a consolidated basis net revenues increased 13% to 465.9 million.
Adjusted EBITDA decreased 1.8% 211.1 million and margins decreased 262 basis points to 23.8% for the quarter [noise].
With respect to our Las Vegas operations net revenues for the quarter increased 13.1% to 440.7 million adjusted EBITDA decreased 0.8% to 97.2 million and margins decreased 309 basis points to 22%.
In order to better understand the financial performance of both our core business and the palms. We think it's important to look at the third quarter results from both of those perspectives.
When viewing our third quarter Las Vegas performance, excluding called the palms results continue to be solid and demonstrate the ongoing strength of our core business measured on that basis net revenues increased 3.6%.
Adjusted EBITDA increased 6% and margins increased 67 basis points to 29.6% for the quarter.
In addition flow through for a Las Vegas properties ex palms was just under our historical 50% to 70% range.
The same store measured results represent our.
Our highest third quarter net revenue since 2007.
Our highest third quarter adjusted EBITDA since 2008, and our highest sector are highest or second highest third quarter margins since 2008, [laughter] turning now to the palm strict core performance net revenue for the quarter was 79.5 million well adjusted EBITDA for the quarter was negative 9.8 million in short while the properties experiencing.
Except you don't topline growth across both gaming and non gaming segments with gaming revenues up nearly 30% for the quarter. The expense side of the business has been challenging to date due in large part to the entertainment fixed cost structure associate with the candidate Glove Night club.
Therefore, we have decided to close the club effective immediately and reassessed the use of those don't use going forward in the interim we intend to use the venues for private meeting space and special events. In addition to everyday resort cooperations [noise].
When viewing the palm third quarter performance, excluding that nightclub and day club adjusted for normalize hold.
Net revenue was 60.9 million and adjusted EBITDA was 3.7 million in the third quarter respectively.
In connection with that decision to reassess the use of the equipped nightclub venues. We've taken a onetime charges of 28.2 million in the third quarter related termination of certain artist performance agreements and employment agreements and we anticipate taking similar onetime charges over the next couple of quarters in the range of 16 to 22 million [noise].
Let's take let's look now at some of the key economic indicators.
As we begin the fourth quarter the future outlook remains very bright for the city and surrounding area as it continues to be one of the fastest growing economies in the United States.
Population is at an all time high and rising at Las Vegas remains a second fastest growing and I say in the nation.
Employment also remains at record levels growing at two times the National average and we now have seen 100 consecutive months of broad based deployment.
Average wages as measured by weekly earnings per employee continue to rise with Las Vegas reporting an increase of 2.3% for the trailing 12 months ended September 2019, and we have now experienced 71 consecutive months of wage growth.
Moreover, total earnings which takes into account both employment and wages increased 5% over the same period.
In addition, unemployment was down 50 basis points year over year to 4% approximately 101000 basis points off the peak [laughter] housing also remained solid at median home prices medium sale prices were up 4.7% in September .
Finally, there is over 20 billion, a new capital investment project plan in Las Vegas, 13 billion, which I've already broken ground, but by the New Rader Stadium projects me on the Convention center expansion and multiple strip developments, all which will further expand the local economy.
These robust economic factors are also feeling what does a very strong and resilient Las Vegas locals gaining market.
Not only was the locals mark to market the fastest growing regional gaming market in United States on a same store sales basis in both 2017 and 2018. It remains the fastest growing market on a trailing 12 month basis, notably during those same time periods, our locals getting revenues, excluding the palms and power station have outpaced the growth rate of the remainder of the market.
These positive economic trends loved the very favorable supply demand supply demand dynamic stable regulatory environment and the lowest gaming tax rate in the nation only serve to support our view.
At the Las Vegas locals market is most attractive gaming market in the United States.
And with our best in class assets in locations Unparalled distribution and scale and deep organic development pipeline. We remained uniquely positioned to take advantage of this extremely vibrant market [noise].
Moving onto the redevelopment of pumps in power station with respect to the palms redevelopment, our 690 million plan to fully Reimage any purpose that property is now complete with the key and final components of phase three of that plant Michelin starred in some restaurant temporal won from Hong Kong and the addition of 16, New gate table games in the West Expansionary, having opened.
In late September .
As a reminder, the palms transformation began back in February 2017.
And took over 32 months to complete needless to say, we're extremely excited to finally have that might be renovation process behind us and look forward to offering our guests for the first time, a premier gaming entertainment destination free of any construction or disruption.
At power station a ramp here has been slower than originally anticipated, where we are experiencing meaningful revenue growth. We remain focused on building continue additional awareness and trial.
To grow top line revenue, while at the same time optimizing the expense structure the property.
In sum we are still very bullish on these eat in each of these opportunities based on their hybrid ability to appeal to both residents in tourist alike and continue to expect them to generate significant returns for the company overtime [noise].
[noise], turning now turning to our Native American segment reported management fees for the third quarter of 22.3 million an increase of 12.6% over the prior year driven by another outstanding quarter at Great Casino resort [noise].
With respect to the North Fork project.
We continue to progress to the few remaining pieces of litigation related to the project as previously noted the California Supreme Court has granted the tries petition for review of a lower a key lower court decision involving the project.
It is deferred taking further action until it has ruled on a very similar case involving the enterprise tribe, which received a favorable ruling of the appellate court level [noise].
The enterprise tribes cases, now the oldest civil case on the California Supreme Court's docket, and we continue anticipate that that fitting schedule hearing on that case in the near future [noise].
I will now cover a few balance sheet in capital items.
The company's cash and cash equivalents at the end of the quarter were 106.4 million and total principal amount of debt outstanding at quarter end was 3.1 billion.
So the ended the third quarter, the company's net debt to EBITDA and interest coverage ratios were 5.5 times and 4.1 times respectively.
Capital spend in the third quarter was 53 million inclusive of the palms redevelopment project, we anticipate the capital expenditures for the balance of the year, we've seen 33 million inclusive of the remaining cost.
Related to the palms redevelopment projects.
Although we are still in the process of finalizing our 2020 capital budget, we anticipate that it will be between 90 million and 110 billion [noise].
With the completion of the palms redevelopment project in September .
We've now reached a key inflection point as a company and expect to generate significant accelerating free cash flow beginning in the first quarter of next year.
As we exit out of this development phase enter into the harvesting phase we will be intently focused on maximizing the financial performance of our existing properties and reducing our net leverage ratio to a target level four times or less.
A combination of paying down debt and increasing EBITDA [noise].
Lastly on October 28, 2019, the company announced that its board of directors that declared a cash dividend of 10 cents per share payable for the fourth quarter of 2019, the dividend will be payable on December 27, 2019 to all shareholders of record as of the close of business on December 13th 2019.
Operator. This concludes our prepared remarks are today and we're now ready to take question and answers from questions from the participants on the call.
[noise] well now begin the question and answer session.
You asked a question you May press Star then one well do a touch type fine.
If you are using a speakerphone. Please pick up you had said before pricing the case.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then change.
At this time, we will pause momentarily.
The first question today comes from Joe Greff with JP Morgan. Please go ahead.
Good afternoon guys.
To be Frank Thanks for breaking out a palms from the core Las Vegas results.
So when I kind of look at the core numbers and if you mentioned that the flow through into Threeq. He was it a bit below the 50% to 70% range.
Was there anything unusual that caused that is there anything that would cause you not to do that in that 50% to 70% range going forward for the core Las Vegas results.
Well, it's a great question I guess just wanted to remind you that yeah, well, we just barely missed the 50% to 70% of historical flow through we do take a look at this measure on annual basis, So there's going be ebbs and flows quarter to quarter.
As our second highest margin in 2008 and to answer your last question, there's nothing unusual that drove that flow through down.
And we anticipate I'm.
Working to improve margins and Theres, nothing that would prohibit us from getting within the 50% to 70%.
Great.
And then.
Looking at the palms, and recognizing a shutting down the day and night club you think you're at a pace now where.
Your breakeven or dare I say positive EBITDA going forward taken into account that if you're closing some things that might cause a lot of revenues at some of the more profitable segments.
The answer is you know, we're not break even for a while when do you foresee breakeven EBITDA palms.
I think just wanted to address the club point too I think maybe there's some Q confusion there I mean, we've now operated palms.
Without the night club for about five to six weeks and we actually see no degradation any lines of business at the pumps.
In fact, we saw very little crossover from the nightclub and day club to any of the ancillary businesses.
And we plan to use the Pearl really to activate that property going forward.
In terms of breakeven I think now with the club business behind us.
When we take a look at every single business line within the palms, there they're all profitable.
So as we looked forward to sequential improvement this quarter, and then really break moving beyond breakeven in Q1.
Thank you guys.
Thank you.
Your next question comes from call. It that's really with Deutsche Bank. Please go ahead.
Hey, guys. Thank you for taking my question, Steve Frank If you guys could just [noise].
Maybe to the extent they that you're able to articulate it.
The thought process behind making the decision at this stage to close the club and.
What were some of the other considerations that you potentially had you know as it pertains to the property.
Well, it's I think we took a look at the business and it's obviously the nightclub <unk> bar.
Environment of Vegas is extremely competitive it doesn't appear but the market has grown though.
For the amount of supply and the market.
The cost of entertainment is exceptionally hard.
And we just made the decision to focus were where the fish or you know a growth driven by core business Lisa Palmer.
What's not working for us.
No no we have a new leadership team in place over the ponds literature, we focused on you know hotel <unk> casino all the things that are working and Steve from talk little bit too similar before we're booking a traction that we're setting up the homes, but there's lot of good things happening over there and I'm sure we didn't want to be described.
Good by the things that weren't working for us.
Great. Thank you and Steve you kind of just alluded to it but just in terms of [noise].
The I. I guess it would be more on the revenue side the drivers of that customer that chaos customer whether it's on the casino floor or through the restaurants, you are saying in the period of time when the dome was being constructed can you saw very little in terms of changes in restaurant covers gaming performance et cetera.
That is correct and if you kind of use when the pro was activated we actually saw an increase in some of the lines of business in terms of that crossover.
No we have seen good correlation from live entertainment and apparel and crossover both through the gaming floor as well as the restaurants, we did not see that correlation with a nightclub.
And you know one could even make a case that it may or may have had a negative impact to the core gaming customer.
At the proper.
Great. Thank you and Steve started to do this you you started to numbers and I kind of missed the preamble to 60.9 million of net revenue and the 3.7 million of EBITDA, what was that referring to.
That is referring to the palms pro forma without the night club.
[noise] as what it would've been in the quarter. If you excluded all night club expenses and revenues associated correct guest for that quarter. So they think of it as the bridge between the three to three the bridge between the 9.8 million.
Got it okay guys. Thank you very much.
Hey, Keith.
Our next question comes from Shaun Kelley from Bank of America. Please go ahead.
Great. Thanks, good afternoon.
Maybe just to stay on the palms I could you just give us maybe a little bit more color you mentioned, Frank maybe some some bookings data, but yeah, maybe a little bit more color on what kind of the operating strategy is going to be if yeah. I think this was a the thought process was initially it's probably going to be a bit of kind of a nightlife heavy venue. So yeah from here on.
Is it all kind of whats the go to market isn't going to be more on live entertainment. It any more about core gaming and some cross over into locals or just kind of how do you envision yeah. The property from here.
Well every segment of the property club.
When you know tracking to what our plan was.
And at the end of the day, you know the Greg Club Joe.
That does that crowd did not have or spendable.
Spendable money, we didn't see the crossover casino.
We acknowledge the fact that it wasn't working and decided to focus on what was working and look we've gotten rave reviews at the property in terms of.
Basically being Oh, a brand new facility in terms with the casino the hotel rooms to sweep.
We've seen great pick up and table games boy growing to swap business.
And I'll, let Steve talk a little bit about the problem that we had originally.
What the old calls on being able to book, Yes group business corporate business in hotel business is that people didn't know what the product was it. We're gonna have I think now that we have expose the property when people seem to quality of the product, we're getting really good pickup and forward bookings into 2020 or 2020 War.
I would I would add to that Sean I think as you know we did and one of the reasons, we decided to push the dome up despite a really shorts sale window, we see an excellent demand for the done and we see that just with catering and group business that product to be a good return we're going to get are good return our investment and as Frank alluded to we are seeing substantial pick up no.
Different than the rest of the strip during 2020 from both a revenue a room night indicator in perspective.
Great. Thanks, very much and then just as my follow up.
As we kind of look through the you know the like the segment level detail you casino operating expenses were up a little bit kind of higher than they typically are it's all been difficult because we know this sort of noncomp of what's going on to palms is that more related to you know table and fought mix could that be or or is it anything else going on the promotional side right.
Any call out there because it just like all the elevated relative what we've seen in the past.
When you think would you separate the Tom's outage it becomes much more normalized so I would say that we've had rapid growth in both tables and slots the palms and you've had the mix of table revenue at the comps much having heard or other properties of significantly higher yes.
Look I think it's fairly rational promotional environment and Las Vegas, right now, but I definitely think there's room for more.
More efficient spend on the marketing sorry.
Great. Thanks very much.
We're very focused on that.
[noise] [noise]. Thank you.
The next question comes from Chad Beynon that with Macquarie. Please go ahead.
Hi, good afternoon, and thanks for taking my questions.
Frank It's it's public knowledge that that you've been buying stock in the quarter and we've also seen a number of asset sales from.
Many of the operators in the southern Nevada region, which certainly highlights the intrinsic value of properties, including some of yours. So I guess first off is it your view that you're just not getting the full valuation on your core assets and then secondly on that if you could maybe talk about any updated.
Views on Opco propco, given that we're seeing you know cap rates in kinda, 6% to 7% range. Thanks.
Well you know we believe that we have a very unique.
Platform here, we think it's a very unique supply demand situation in the Las Vegas validate what Sbtwo wave.
Which limits where local consumers can be built.
We own a control most of the future pipeline of where that growth can take place. We think we are best in class assets.
Thus locations, we see the Las Vegas economy, continuing to grow.
And you know if you look at precedence Red rock is anticipated are forecasted to have 17% population growth in the next five years within three miles.
Green Valley routes, 13% over the next five years within three miles Santa Fe Mary percent sensor up 9%. So our portfolio is really are located in a way to capture the future growth and the valley limits on supply can I think.
When you look at Blackstone's validation.
The real estate side of the consumer business, we think it's going to continue to drive valuation.
And the industry.
Real estate.
Thank you.
Did you very much and then secondly on power station given that the the ramp and the return profile is kind of take a little bit longer does this kind of change how you're thinking about marketing expenses or you're going to make another push in the next couple of quarters, where is the ramp just kind of take longer just does that kind of the word of mouth.
Spreads in terms of the new amenities. Thank you.
Alsatian has had good revenue growth I think you know we can do a better job on the hotel side over there and I think we can do a better job rightsizing. The expenses of the bigger plant facility going forward, but college station is seeing nice revenue growth overall, I think it should be better, but our goal is to be more efficient work.
Our marketing and advertising and I would say no to.
Okay, great portion.
Appreciate it thank you very much.
Okay.
Thank you.
Your next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.
Good afternoon, thanks for taking the questions on palms, where do you think you are in the ramp of the non chaos segments and what would the ROI on the project look like based on your underwriting if we effectively zeroed out the chaos contribution and then perhaps as a follow up to that as you think about refurbishing. The group meeting space is there any way to size the demand that you've seen.
So far from the group meeting segment and the comp profitability contribution. Thanks.
Well in terms of proposals are where we are on the ramp we're in the first thing I mean, the property just literally finished getting other construction mode in September without being up table games in the trimmer one restaurant.
The other day these are long term assets.
And.
Taken place like Red Rock is still growing its been open for 12 years.
My anticipation is a palms as a brand new asset in the marketplace.
It literally just open there's a lot of things that we can do better and my anticipation we will continue to grow overtime. So I think we're really really were.
And in terms the group business. The thing is that's a little early as well to Franks point I mean for example, we're just stuff.
We're just going through the 18 months sales cycle for Twoq, 2020, and I kind of walk through the stats, we seen substantial uplift year over year and the don't with virtual no sales cycle.
We decided to put up the don't because we feel we're going to make a very good return on capital on that investment.
Thanks, and then one other quick follow up on the $90 million to $110 million, a capex does that assume any spend for the repositioning of the ponds, there's any incremental spend that could happen from that and then are there any cash charges that we should be thinking about associated with the impairments have been taken.
Well I mean, I think from a capex perspective, the only thing that's really inclusive as it and then what are the I should remind everyone. It does have the red rock were model.
So the it does have that an embedded into the 110. So I think that was probably good time to remind everyone for Q3 in Q4.
We had about 11500 rooms out of off offline or anticipate offline in Q4 room nights room nights excuse me so that should that should be that youve caused about it. It should result in about $1.9 million of.
An adverse revenue effect at the hotel.
And that project will be completed in Q1 April Yeah archery April .
Couple of color. Thanks, so much.
Thank you.
Your next question comes from Barry Jonas with Suntrust.
Please go ahead.
Thank you.
Im curious.
You guys thinking about some of your excess land.
Any thoughts on monetizing it does that maybe play into your de leverage targets.
I'd say the answer is yes, Jeff.
Our sole focus right now is on deleveraging the balance sheet to get to four times are less both through free cash flow paying down debt as well as growing cash flow, but we would definitely consider selling non strategic pieces of real estate we own.
A different locations with about 475 acres I think the and to put that really kind of frame that Frank said and what we kind of look as 2020 or 25 credit strategy and while we don't use got you don't give guidance. If you take consensus EBITDA results. I think you guys are probably estimate about $580 million in core business EBITDA, our interest expense, which is.
Mostly fixed due to our swap portfolio should be about $125 million working capital should be zero as the palms is finished its ramp we're going to we expect to be zero taxpayer in 2020.
And with Capex I will use the high end of the range $110 million and the dividend is continuing to be roughly $47 million that yields that's $300 million of free cash to.
To be used to help delever the balance sheet.
Along with any monetization from any non core asset.
That's helpful. And then just a lot the palms curious about San Juan it's been open for a little over a month I think curious.
How that's doing and maybe if it's been a driving an Asian play to the property. Thanks.
I mean, the reception at Tim along as I think Thats sensational. It's early days were in the first five weeks of open.
We've seen a great traction if covers in that.
Yeah, sometimes over 5000 a week.
And that's really energized the west expansion of before.
And the Asian type initiatives.
Great. Thank you so much.
Thank you.
So again, if you have a question. Please press Star then one.
Your next question comes from John that degree with Union gaming.
Please go ahead.
Hi, everyone. Thanks for taking my questions I think most of which have been answered but to stay on the leverage target of four times in under the free cash flow inflection that we're looking for really to kick in next year I'm wondering if you could talk about capital allocation as he starts approached four times, where would you look too.
To deploy capital.
Increased the dividend is is the idea that maybe look for another growth project. How do you how do you view capital allocation as you start to get closer to your leverage target.
I don't think we're there yet I think we have a singular focus for the time being which has to get there and then we have the benefit of having a lot of options and I mean, we do control a great pipeline.
Development sites and the fastest growing areas of Las Vegas.
Thank you have the option to continue to de lever to increase dividends too.
Developer project out to free cash flow, but I think thats, putting the cart before the horse.
Fair enough that's a.
Question for me thanks.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Stephen King for any closing remarks.
Thank you everyone for joining the call and we look forward to talking next quarter. Thank you very much like.
[noise].