Q3 2021 Red Rock Resorts Inc Earnings Call
[music].
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 Steven <unk> 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 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 eight.
K, an 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 140.
$6 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 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 re implementation of the mass mandate across the state of Nevada on July 30th as well as return of customary third quarter seasonality did have a modest impact on our reservation and time on device metrics in the latter half of the quarter, but we expect those trends reverse as COVID-19 restrict 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 had been slower to recover post pandemic, we were seeing our lead pipeline grow into the back half of 2022 and into 2023.
Finally as mentioned on prior earnings calls our financial is still carrying approximately $2 4 million of COVID-19 mitigation costs for the quarter.
And approximately $2 6 million and 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 op 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 renegotiated 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.
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'll be more to come as we proceed with our field trial in this exciting product.
Also in October we entered into a partnership with Gan limited to build and deploy the next generation infrastructure stations SDN sports online sports platform mobile applications in 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.
Yes.
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 a total principal amount of debt outstanding at quarter end was $2 six 8 billion in.
In the third quarter, we paid down $37 5 million in debt, bringing 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 the 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.
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 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 ended the first three quarters of 2021, respectively.
As mentioned on our 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 entitled properties.
And the ability to consider additional ways of returning capital 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 2025.
The company used cash on hand, and borrowings under its revolving credit facility to pay the redemption premium accrued and 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 for the life of the senior notes, while further deleveraging the balance sheet, increasing our financial flexibility.
Capital spend 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 unitholders of station Holdco, which include a distribution of approximately $33 5 million to Red rock resorts.
Now to provide a short update on our development pipeline.
Starting with our Durango development. We are extremely excited about this project, which is situated on 71 acre parcel ideally located off the $2 15 Expressway and Durango drive in the southwest Las Vegas Valley.
The project is located within the fastest growing area of Las Vegas Valley, they're very favorable demographic profile.
The project site provides favorable ingress egress off the 215 expressway, which handles over 166000 vehicles per day as one of the five mile radius to approximately 350000 people.
Further there are no unrestricted gaming competitors within a five mile radius of the project site.
We are working through the planning and budgeting phases of this project with the goal and expectation.
Have a shovel in the ground in the first quarter of 2022.
Once the project has started we anticipate construction will take approximately 18 to 24 months when complete the project will be approximately 533000 square feet and include over 73000 square feet of casino space with over 2000 slots and 46 table games.
Over 200 help hotel rooms and suite product.
21000 square feet of convention meeting and catering space.
Full service food and beverage outlets a state of the art sports book in a resort style pool.
But we are still refining the final budget, we expect expect to spend approximately $750 million, which includes all design cost construction hard and soft costs preopening 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 cost.
The company expects the return profile of this project to be consistent with past Greenfield projects in our portfolio well, 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 side, two multifamily development projects for approximately $24 million.
Turning now to North work since we last spoke we received a positive opinion from the Federal District Court in the Eastern District of California, which ends all Federal Court litigation affecting the project.
With respect to the California state courts, while we were disappointed by certain other results the California State courts, we do not believe that any of those state court decisions will ultimately affect north Fork tribe ability to conduct gaming on their trust property.
We have continued to progress our efforts with respect to this very attractive project, including development design and initial talks with a prospective lending partners and 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 pumps casino resort and palms place for an aggregate price of $650 million in cash to an affiliate of the Santa <unk> 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 entitled properties. We believe that we are uniquely positioned to capitalize on the very favorable long term demographic trends and the high barriers to entry to 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 is the top top casino employer in the Las Vegas Valley.
Operator. 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.
I'll ask a question you May press Star then one on you touched on.
If youre using a speakerphone please pick up your handset before pressing the keys.
Is it any time that 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.
And our first question comes from Joe Greff with Jpmorgan. 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.
Yeah that kind of does a lot of interesting things for you and how do you think about those things.
Okay.
Well I think the value should be unemployed and to the fact that we own all of our real estate, whether we have a propco and opco.
I think we said in the perfect position by controlling all the real estate owner of the real estate owning the growth pipeline.
So we kind of like them, but we also like looking at what people are willing to pay for that kind of a two times coverage on the ropes shrimp, but theres no reason that that shouldn't be employed and through our stock price as well that's how we look at yes, I mean look.
Looking at the Cosmopolitan transaction I think that was implied at about a 20 times multiples.
Certainly that's we like 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 doubling the size of our essentially doubling the size of our current operating platform here in Las Vegas by.
<unk> those properties and we've always got that options down the road.
Once we 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.
To maximize shareholder value. So we're always going to look at look at the auctions.
Okay, Great and then.
Steve SG&A was up 10% quarter over quarter net.
Drove an EBITDA variance versus consensus so was there anything onetime in there or and.
If you could explain that sort of sequential trend and then how do you think SG&A and corporate expenses trend from here.
Yes, we can start with corporate and corporates, mainly I mean corporate 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.
Also a lot of <unk> expense, mainly related to the cashless initiatives that were taking place, but there is nothing unusual or one time SG&A where corporate.
Great. Thank you very much.
Yeah.
The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, guys. Good afternoon. Thank you.
Steve just to follow up on Joe's question talks.
Talking more about just kind of Las Vegas, specifically it looks like if you just kind of do the simple net revenue less EBITDA and kind of get your implied opex in there.
It looks like that's up about 5% could you comment at all about maybe 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 do we or should we perhaps expect that to tick 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 were we fully staffed up in June last year. So we have all of our amenities opened we are completely staffed.
What youre seeing quarter over quarter or is it really is a tale of two half 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 those COVID-19 mitigation restrictions get reversed.
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 'twenty.
But like Steve said, it was really more of a revenue.
Issue relative to the margins.
Right. So that that 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 forty's.
Ban that you've kind of been in since the start of this year and obviously north of that in the <unk>, North 50, and the <unk>, how much of that boils down to the the revenue run rate.
We're currently looking at remaining where it is or even perhaps growing versus.
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.
Right.
I mean that question gets asked every quarter of our margin sustainable. So let's just let's go back and you can be take a history lesson Q3 going back to Q3 'twenty moving forward right 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 processes put in place our 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 'twenty, two and 'twenty three to help.
To help grow the topline, namely catering sales in the theater business. So yes, we do expect to maintain these margins.
Great. Thanks, everybody.
The next question comes from Shaun Kelly with Bank of America.
I had.
Hey, good afternoon, everyone.
Steve maybe 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 were almost virtually the same in the third quarter between the second.
We were expecting that to ramp up a little bit just as you know.
Some of the restrictions.
Were lifted and obviously there were restrictions that were put back in place, but could you talk about that that 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 I mean as you've seen we've had.
We've had quite a successful quarter in Q3 from a non gaming perspective hotel food and beverage also all returned built out their second quarter growth I'll return record growth in our containers.
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 30, we did see a slowdown in bookings throughout 2021 in the first half of 2022, but as I mentioned in our remarks from a lead generation perspective, we're starting to see return of that corporate.
Business in the back half of 'twenty, two and into 'twenty. Three so we expect good things from there and then on the theater side, which is also non gaming the slate continues to get better and it continues sequentially trend.
Each month tends to be better than last month. So we expect good things from there and again the hotel from a.
What the team is doing that not only are we we had record occupancy and record ADR, yielding the hotel in a much better way. So there are more casino guests in the hotel so a much more profitable holistically.
And there are less wholesale business, which is which is a change that we put in place at the beginning of this year and we're starting to see the fruits of that labor.
Great and I'm not sure we're exactly here in Las Vegas as recovery, yet, but we did see 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 at Edr Red Rock on do you think youre seeing that guests yet or.
Or would you characterize.
A little bit of a crossover from a strip customer kind of pulling down into locals properties.
As districts owner 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.
Okay.
The next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.
Hi, Thanks.
You are still in the early stages of 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.
Yes, I think 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 procure them or at least put those under contracts, we feel pretty good from a pricing perspective.
And frankly, it's.
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 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 sites. So we're taking the upfront 50 acres to ROE will monetize the back.
Probably resulting in multifamily 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 doubled the footprint here in Las Vegas will take breakthrough the heart of each of the properties and sell off the remaining real estate surrounding those developments.
And any sense for where some of that land value.
Sits from from your standpoint at this point.
Well, what do you have for the value on the 23 acres.
We just.
Talked about in the release the back half we have under contract for about $23 million, although a little bit over $1 1 million an acre.
And when you've got I think some of the other land that you have is an undeveloped would you characterize that as equal more or less valuable.
We land prices in Las Vegas or not.
They really have been trending up I think youre seeing a real supply demand dynamic there is a lot of demand for multifamily builders industrial I mean, a lot of different user uses so.
The trends the trends seem to be in our favor us.
Big landowner.
And this early.
Great. Thanks, so much.
The next question comes from Steve <unk> with Stifel. 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.
New competitor comes in and tries to steal some share initially and if so how would you guys react in that situation.
Well I think you can see a complete pivot basically our approach to the market is relying on our a plus locations.
Hey class buildings.
<unk> employees relationship marketing, we're basically pretty much gotten out of the promotional business of the mass market here.
We're relying on our personal relationships.
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 we want to be promotional spend money I mean, you'll have a couple of them on the market right now, but at the end of the day, we were the leader in the market we have the eight locations in the suburban locations.
We just really don't see the need to return to where things were.
Okay got you and the second question would be around the you mentioned the mass mandate a couple of times in your.
In your remarks.
I guess the question is.
What conversations have you had with <unk>.
As your customer base in terms of folks that arent coming back in is it is it something where they are just sitting on the sidelines waiting for that to be removed or is there is there something else going on and then the second part of that question is no.
Have you heard anything in terms of potential timing around the removal of that mandate.
Look I think it varies by age group.
People react to the new cycle Delta variant.
Mask mandates and I think the older the second.
Segmentation of the population the more adverse they are to deal with my asking.
No.
We actually have a new cycle, so I think the younger demographic.
It is not as impacted by mouth standards, but I don't know if you guys have anything you want I think the other area, where we're seeing a little bit of dialogue isn't groups that are looking to book.
Conventions meetings.
It'll events I think that the.
Masks mandate definitely impacts that line of business.
As Steve had mentioned, we're starting to see that pipeline kind of come back into late 'twenty. Two 'twenty three I think as people are presuming that Nash hopefully by then we'll be we'll be I think in the past.
We don't have really any updates from the governor of the state relative to exactly what they are thinking on the mass 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 were 106 states that they still have a mass mandate in place.
So certainly we think when the mass mandate, hopefully and it should be should be relatively positive from a psychological and just an overall overall for our business.
Okay, great. Thanks, guys. Thanks for the color.
Mhm.
The next question comes from Chad Beynon 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 do you need to see in the existing business or the market.
To allow you to open up one or all of these properties going forward. Thanks.
While the palms who's going to be sold so it's down to three properties and I think what we have to look at it.
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 move.
Moving a lot of the business with those closed properties through the six open properties, which has resulted in the higher margins that we're seeing at.
49% for Las Vegas operations before allocation.
Don't know if you have anything to add I mean, so we're confident.
We can deliver incremental absolute profitability, we're not going to go and open sampling and cannibalize our other properties.
And Doug mentioned, that's funny, yes, I think just to add to Frank's points, because he nailed them all with SB 386 in place it really makes it administratively heart.
<unk> opened up a brand new property.
Thank you.
And then regarding your comment around Durango your goal of generating.
<unk>.
Turns 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.
What happens between now and 'twenty three or is there a more.
Finally at a number that youre willing to provide.
I think that's the that's the right range and typically we have been able to get into the Twenty's type return on a stabilized basis.
If you look at the just kind of where we sit today you look at our trailing 12 EBITDA of $730 million being generated by six properties.
That kind of comes out to an average per property of about 120 to $120 million to $122 million property and 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 for the property relative to the rest of the.
Okay.
If you compare comparably adult population on a five mile radius per gaming positions to Red Rock and Green Valley Durango is two times.
The amount of adults per gaming positions, so we feel pretty good about it.
Thanks for the additional color I appreciate it.
Yeah.
The next question comes from Barry Jonathan with Jewish Securities. Please go ahead.
Thank you have you guys historically now seeing any impacts from higher gas prices and I guess I'd extend that any thoughts on the wider inflation, we're seeing either from a revenue or the cost perspective.
On the cost side, you're definitely seeing in cost of goods sold that's up that's up year over year by 12% on a coverup recover basically on the food standpoint.
But on the revenue side that really really haven't seen that impact has been more it's been it's been tough.
To see because youre seeing you have the mass mandate in place.
Got it got it and can you give any color I'm not sure. If you talked about what you're seeing across the database.
Color you can give on any segment or demographics, if anything is performing better than.
Yeah than others.
So the higher end the higher end segments continue to perform outperform.
And then the other areas the growth we've seen in the younger demographics. We were just looking at kind of where we sat in the 20% to 35 demo prior to Covid and now coming out of post Covid I think theyre theoretical.
When is up about 75% versus pre COVID-19. So we've been we've been successful in driving that.
That incremental kind of younger demo into a properties, which we think is super healthy and good long term for the business.
Great if I could just sneak one more and it's been a few years.
Yeah.
You guys have initiated dividends I'm, just curious where a resumption of the dividend would rank in terms of your capital allocation strategies.
Yes, I think the good thing is we're starting from a great place, we have probably the strongest balance sheet in the industry in about a month, we're going to get about $650 million from the palms closing.
At the end of what the board is considering as you get a balanced return of capital versus also the sixth.
Strategically located properties that we could start developing.
So we're going to consider all balanced approach all options are on the table.
Helpful. Thanks, So much Scott.
The next question comes from Dan Palm pilots.
Wells Fargo. Please go ahead.
Hey, guys. Good afternoon, thanks for taking my questions.
Most of an answer but on the 55, plus 65 customer core customer and what inning are we have that that customer base, returning and as the broader reopening have occurred have you seen any declines at all and that unrated higher margins later.
We definitely have some room to go I mean, they're not all back yet.
I don't know necessarily what anywhere in I think that.
I mean changes dependent.
Further in America.
Yes, there is definitely the most effected by kind of what's going on with Covid, we're hopeful that if.
If the mask mandate comes off sometime in the near future that that segment will really start to kind of come back in force.
The older portions of our database is definitely where we're seeing that we have room to grow.
Can you have moved to the second part of your question I think it was on the unrated.
Really seeing no change in unrated play pre and post pandemic.
Got it and then just in terms of the three properties that you guys had yet to open.
Is there any change in activity decision in your decision, making process. There have you had any conversations with potentially interested parties.
I mean, there's also there's all sorts of inbound calls coming in for those three properties, but I think I can pretty significantly.
We would never sell a property gaming entitled property.
<unk> entitled.
So there's really no decision's been made whether we're going to open or potentially scrape herself.
Alright understood. Thanks, so much.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Steven could you for any closing remarks.
Well, thank everyone for joining the call and we look forward to.
See you again in the next 90 days take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.