Q2 2022 Red Rock Resorts Inc Earnings Call
Good afternoon, and welcome to Red Rock Resorts' second 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 <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 today for Red Rock Resorts second quarter 2022 earnings Conference call.
Joining me on the call today are frankly, 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 for these figures to GAAP. Please refer to the financial tables in our earnings press release form 8-K, investor deck, which were filed this afternoon prior to the call.
Also please note that this call is being recorded.
The second quarter represented another strong quarter for the company by any measure in terms of same store net revenue adjusted EBITDA and adjusted EBITDA margin in the second quarter of 2022 was our second best quarter in the history of our company only surpassed by last year's record setting second quarter.
On a consolidated basis, excluding great management fees, our second quarter net revenue was $422 2 million down one 4% from $428 $2 million in the prior year second quarter.
Our adjusted EBITDA was $190 1 million down nine 5% from $210 2 million in the prior year second quarter.
Our adjusted EBITDA margin was 45% for the quarter, a decrease of 406 basis points from the prior year second quarter.
We expect to our Las Vegas operations, excluding the impact from our closed properties. Our second quarter net revenue was $419 9 million effectively flat when compared to prior year second quarter. Our adjusted EBITDA was $205 million down eight 6% from $224 8 million in the prior year second quarter, our adjusted EBITDA margin.
<unk> was 49, 9% a decrease of 450 basis points from the prior year second quarter.
When we look at our Las Vegas operations on a quarter over quarter basis, excluding the impact from our closed properties. We note. The continued stability of our business as well as our continued confidence that our team can deliver adjusted EBITDA and adjusted EBITDA margin well in excess of our pre pandemic levels.
Our second quarter net revenue was up five 1% when compared to the first quarter of this year. Our adjusted EBITDA was up four 5% when compared to the first quarter. This year and our adjusted EBITDA margin was 48, 9% flat when compared against the first quarter of this year and represents the eighth quarter in a row. The company delivered same store adjusted EBITDA.
Arjun in access of 45%.
We continue to prioritize free cash flow converting them was 50% of our adjusted EBITDA to operating free cash flow generating $90 4 million or <unk> 87 per share. This brings our 2022 year to date cumulative free cash flow to $226 million or $2 16 per share with virtually every dollar being reinvested into our <unk>.
Durango project will return to our stakeholders.
During the quarter remained operationally disciplined and stayed focused on our core local customers as well as our regional and out of town guests.
When comparing our results to last quarter, we saw a rise in visitation as well as strong spend per visit across our portfolio, allowing the company to enjoy near record profits across our gaming segments.
The trends across our database in the second quarter were similar to those we saw in the first quarter and those trends have remained consistent throughout the beginning of the third quarter.
Turning to the non gaming segments, we saw continued growth in food and beverage and hotel as both segments Stewart what are their most profitable quarter results.
Ever fueled by the strength of our regional and out of town business.
With regard to group sales and catering business segments to recover these business lines continues as we saw sequential growth in the business line for the six quarter in a row and we continue to see our lead pipeline grow throughout the back portion of 2022 and 2023.
On the expense side, we remain operationally disciplined to 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.
While we recognize there are some headwinds in the economy and the adverse impact inflation has on both the company and our customers we feel that the actions taken over the past nine quarters to streamline our business coupled with our team's ability to deliver best in class service and amenities to our guests has allowed us to continue to drive same store revenue, which exceeds 2019 pre pandemic levels will.
Driving higher adjusted EBITDA higher adjusted EBITDA margin and returning over $1 billion in capital to our shareholders. Since we reopened in June of 2020.
Moving forward, while we remain vigilant to macroeconomic trends, we will continue to stay disciplined and focused on executing and investing in our core strategy, including offering new amenities for our guests such as the recent opening of the Boulder station food Court and the recent announced transformation of Red rock properties buffet space into a new VIP high limit table room, a new cost.
<unk> bar and two new exciting restaurant concepts.
Now, let's cover a few balance sheet and capital items.
The companys cash and cash equivalents at the end of the second quarter was $256 3 million. The total principal amount of debt outstanding at quarter end was $2 88 billion, resulting in net debt of $2 six 2 billion.
As of this ended the second quarter, the company's net debt to EBITDA to interest coverage ratios were three five times and seven five times respectively.
Given our low leverage low cost of capital and no short term debt maturities are best in class balance sheet will allow us to focus on executing on both our longer term growth opportunities, including the planning entitling of our seven owned strategically located properties.
Let's take a balanced approach to returning capital to our stakeholders as we move forward.
Also during the second quarter, we made distributions of approximately $78 1 million to the LLC unitholders of station Holdco, which included a distribution of approximately $45 million to Red rock resorts.
The company used the distribution to make it second quarter estimated tax payment page previously declared dividend of <unk> 25 per class a common share as well as partially fund the purchase of approximately 3 million class a shares at an average price of $37 42 per share under its previously disclosed $300 million share repurchase program.
In August the board authorized an increase of $300 million to our existing share repurchase program, giving us $332 million availability for future share repurchases.
The second quarter purchases, bringing the total number of shares purchased under the program and through our 2021 tender to approximately $13 7 million class a shares at an average price of $45 37 per share, reducing our share count at quarter end to approximately $104 4 million shares.
When combined with our second quarter dividend, we returned approximately $147 million to our shareholders during the second quarter.
Capital spend in the second quarter was $62 4 million, which included approximately $45 5 million in investment capital inclusive of our Durango project as well as $16 9 million in maintenance capital.
For the full year 'twenty, two we continue to expect to spend between $75 million and $100 million of maintenance capital and additional $300 million to $400 million in growth capital inclusive of our Durango project.
Now lets provide an 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 71 acre parcel ideally located off the $2 15 Expressway and Durango drive in the southwest Las Vegas Valley the.
The project is located within the fastest growing area of the Las Vegas Valley with a very favorable demographic profile and no unrestricted gaming competitors within a five mile radius of the project site.
The project is progressing nicely and we expect to top out later this fall.
Project continues to remain on schedule with an anticipated opening in the fall of 2023.
As mentioned on our prior earnings calls, we 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 and are currently operating under a guaranteed maximum price contract, which represents approximately 70% of the total project cost.
As the project stands now approximately 77% of the project, including the purchase of long lead <unk> has been secured.
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 favorable resolving all of its other litigation. The tribe has only one pending case in the California courts. As we also noted last quarter, we do not believe that any decision by the California State Court could deprive North Fork are its ability to gave on its federal Trust land.
We continue to work with to try to progress our efforts with respect to this very attractive project, including working towards approval of a management agreement continue our work on development and design and having preliminary talks with prospective lending partners we.
We will continue to provide updates on our quarterly earnings calls.
Subsequent to quarter end, we announced the permanent closure of our Texas station yesterday, Rancho at Fiesta Henderson properties.
The facilities at these properties other than the ice rink at Fiesta Rancho are anticipated to be demolished and reposition for sale on a deed restricted basis.
While these properties have been an important part of our business over many years, our teams ability to recapture the majority of the gaming play from these properties is made the reopening of these properties uneconomic.
While the decision was difficult it was the correct one and will enable to enable the company to move more quickly to develop and deliver the next generation of station casinos resorts to the residents and visitors to North Las Vegas, Henderson, and the rest of Las Vegas Valley.
To that end, we are proud to announce that we have closed on 127 seven acres of additional land south of our existing parcel on Cactus Avenue, and Las Vegas Boulevard, South for $172 million.
We are excited about the potential of this site as a local and regional destination Casino resort and look forward to sharing our plans for this parcel in the future.
We've also signed a purchase and sale agreement and are conducting due diligence on a 67 acre gaming site that is master planned for casino resort in North Las Vegas at <unk> in the $2 15 Expressway.
These two acquisitions are a continuation of our 46 year history of growth through the purchase of gaming sites located in high growth areas with superior ingress and egress, along the major belt waves in the Las Vegas Valley.
We are currently working through the planning entitlement and zoning processes for these properties, which would be strong additions to the robust development pipeline, which will fuel the next chapter of growth at station casinos.
Lastly on August nine 2000, 2022, the company announced that its board of directors had declared a cash dividend of <unk> 25 per share payable for the third quarter of 2022, the dividend will be payable on September 30 to all shareholders of record as of the close of business on September 15.
With our current best in class assets and locations coupled with our development pipeline of seven owned development sites located 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 high barriers to entry that characterize the Las Vegas locals market.
While the quarter presented some economic uncertainty in record inflation, our disciplined approach to running our business coupled with our unparalleled distribution and scale allowed the company to enjoy near record high EBITDA and EBITDA margin has 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 who made them.
A special.
We would also like to add a special note of thanks to them for voting us at top casino employer in the Las Vegas Valley for second year in a row.
A special Thanks also 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.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset.
Yes.
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 Greff with Jpmorgan. Please go ahead.
Yeah.
Good afternoon everybody.
We often had been focusing on sort of the lower end consumer to give us a sense of.
Consumer sensitivity to however, you want to describe the mixed signal macroeconomic environment.
Well, maybe we can switch gears and maybe can you talk about sort of the higher end of your.
Database and how.
That higher end consumer.
Trended throughout to achieve maybe in relation to <unk> and then is there anything noticeable.
From your drive in Southern California consumer.
Any impact there from obviously higher gas prices and higher costs overall.
Sure I'll be quarter over quarter Joe.
Overall across the entire portfolio. We show we showed consistent trends throughout the database compared to Q1 that includes the higher end as well as the locals well below <unk>.
Point on the locals while it represents a small portion of our overall business.
We've actually seen stability and consistency quarter over quarter and actually a slight uptick in the lower end of our database.
Great.
And then obviously you guys are building for the future and and.
Acquiring.
Sites.
Can you talk about the timing of the planned divestiture of the three closed properties.
Is that under any kind of.
Preliminary agreement.
Agreement or any kind of a letter of intent with a potential purchaser under non gaming entitlement.
<unk> or is that sort of the processes beginning on that front.
Yes, we just announced this just literally within the months. So that process is just beginning but that said, we're seeing an extraordinary amount of inbound calls and demand for those three properties.
Great. Thanks, guys.
Okay.
The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Okay. Thanks, Scott.
Hey, Frank Lorenzo whoever wants to address the two parcels that you guys bought the 128 and the 67 acres.
As you think about kind of the timeframe and acknowledging it's kind of planning for the future much like the sales.
How do you guys kind of think about when you go into the ground as Durango need to open or could you kind of starts on the bad stuff earlier.
No I think we wanted to Durango open and Steve Your operating results out of Durango, We're very optimistic given the location of demographics for Jamie supply.
In that area, but we want to Durango open and there will be ready to start on the next project Turbo and we expect to basically double the size of the portfolio by 2030 years kind of what the plans are and continue to rollout new properties.
One after the other.
Just to add to what Frank said, we're going to go forward with entitling a zoning all of these properties. So that when we open Durango when we see how drank was absorbed in the market that we have optionality that you'll go through any one of the seven sites.
But it's consistent with the strategy we've had.
For a long time, we've actually owned the Durango property for over 20 years.
So for instance on the on the piece of property that we have tied up on Lucy.
We think long term longer term, that's going to be a tremendous location because of the growth out in that way masterplan communities. The population growth and in order to kind of get these things to where they are in the pipeline you have to step up and be willing to put them in.
<unk> portfolio of the real estate portfolio. So that it ensures that the company has this this growth pipeline for for years to come so.
Our strategy is very consistent with what we've done in the past.
Great.
And then if I could just kind of more near term.
Yeah.
Talked about kind of stable with three key trends from a seasonality perspective.
<unk> have been an equal number over that.
Great.
Meyer to the pandemic, but as we think about kind of normal seasonality in Las Vegas.
Or is there anything that.
Would stand out to you as being notable.
And the business seems very stable, we don't see anything at this point in time and that would cause.
Cause us to change our outlook on the business going forward.
Great. That's helpful. Thank you.
The next question comes from Shaun Kelly with Bank of America. Please go ahead.
Hi, good afternoon, everyone.
I wanted to also ask about the sort of the capital development.
So I'm just intrigued as you think about the sites that you have and then of course the incremental purchase here.
Maybe you're not ready to share it with us, but did you have a pecking order for kind of what you think about it next behind Durango or do you, let sort of the demographics and some of the changes in the valley there kind of lead the way first before you before you make that decision.
Its all really dependent on demographics, and where we see the demand versus the supply.
So obviously, we are in the ground with Durango, we're expected to open that call it around for Q2.
<unk> 23.
We're currently working on plans right now on the <unk> location as well as what we call. The Skye Canyon locations up in the northwest So that as Frank mentioned, we get the plan would be that we get Durango up and operating stabilized generating the returns that we're looking for and then we'd be in a position where we could.
The board can make a decision if they wanted to pull the trigger on those projects. So it's just a matter of our team continually working on entitlements, making sure that we're completely up to date.
Sure.
Really what's going on in the real estate market in Las Vegas.
Where where the growth is going.
And whether it's short term view or more importantly for me and Frank what's the long term view.
For where we see this company going and our ability to multiply the size of the company the way that we're going to do it is the way that we build the company, which is through development of Greenfield projects and in order to be successful there you have to have.
You got to control the real estate and you got to have growth.
Executed Scott.
Yeah.
Thank you for that and then I guess the follow up to it.
In order to achieve a goal as ambitious as doubling the size of the of the portfolio by 2030.
Would that imply that the scope or scale over the next couple of developments could be on par with Durango or.
What you've done with Red rock in the past are we talking that level of development I would think it would need to be large in size in order to in order to have a big impact on the portfolio like like like you mentioned.
Is going to be dependent on the market size I mean, some of the projects will be considerably smaller.
We've got a couple of projects in the pipeline that will be at least on par with where Durango is so it's a little bit of a mix of both.
So outside the Permian, so all sides, but all of the projects are planned to be able to expand overtime right. So even though some of these projects may start out maybe smaller than Durango, very will be able to grow through Durango, plus as the market demand.
Yes, and it's really hyper focused on returns rates so.
Signing these properties with the expectation that we can hit our historical return numbers are kind of that 20% Unlevered return on invested capital.
So that's really what's going to determine that kind of a good <unk> cost and the size of the project relative to the what we projected demand to be in those different submarkets.
Thank you very much.
<unk>.
The next question comes from Steve <unk> with Stifel. Please go ahead.
Okay.
Hey, guys good afternoon.
So so obviously labor has been a big issue not only for for your company. The casino industry, but also the general entertainment industry as well and I guess I'm wondering what the three assets that are being closed permanently does this does this help your labor situation at all meaning no have you been able to bring a lot of those employees over to the to the other.
<unk> operating assets.
Yes, I mean at the time, when we closed the property back and call back in June of 2020.
So we closed the property just recently there was a very small staff at all three properties in which we were able we were able to bring over.
All or at least the majority of the staff over.
Yes, Steve This is Scott I think Warner important factors is are we able to staff our properties appropriately to maximize revenue. So we can tell you that were very successful and being fully staffed and fully operational across the brand.
Albeit we are seeing some wage inflation, we think that that's a relatively temporary phenomenon that will decrease over the next eight months or so.
Understood. Thanks, and then Steve or Scott I guess, when we look at the <unk>, let's call. It 52 ish type margin last year at Vegas, and I understand that level.
It wasn't probably sustainable long term, but if you look at the I think you called out a 450 basis point drop in margin. This year is there anything that you would kind of highlight as putting more pressure on that margin.
No I think I think we've always we've been pretty consistent it's about the operating leverage in the gaming revenues and the revenues that flow through the system.
I think last year I think if you point out the new slide that you posted in the direct alright.
Alright. Thank you Tom Page 40, you basically shows the margins.
We opened in <unk> of 'twenty and I think there was a lot of doubt when we posted a 46, 2% margin and a 45% margin whether we can maintain those margins and I'll say, but other than that.
<unk> of 'twenty, one outlier with all the stimulus money in the system, our margins have basically been very tight right around 49% in.
In the Las Vegas operations for the last four quarters. So.
I would say the only thing that has gotten a little bit of pressure as the wage inflation of course.
We managed our trying to maintain cost of sales and a pretty close range based on adjusting prices driven.
Cost of goods are.
But again last four quarters, we've been plus or minus 49%. So we're pretty pleased.
Okay, great. Thanks, guys appreciate it.
Okay.
The next question comes from Barry Jonas.
Please go ahead.
Hey, guys, Patrick but Barry Jonas two if I may one the street is assuming Las Vegas, EBITDA will be down year over year in 2022, and 2023 do you think that's an overly cautious view, even if you exclude durango.
So if you look at two.
<unk> 2022 for instance, if you take the first half of 'twenty two.
I think we're ahead by $12 million in EBITDA versus 2021.
As Frank mentioned.
You know.
We don't have any change in our outlook for the business based on what we've seen in Q1 and Q2. So far this year. So we've got pretty little bit of cushion or some cushion rolling into the second half of the year.
From a business volume standpoint, we feel pretty good.
Looking out beyond 2023, it's impossible to know kind of what the future holds.
Can tell you that.
We're obviously very bullish on Durango, we think it's going to be a great project and it's going to get great returns and certainly will add some stub period to 23, but more so we'll get a full year of it in 'twenty, four which we would expect to be able to post pretty good growth in EBITDA with the addition of that.
Yes, I agree.
Alright, that's great. Thank you and as a follow up are there any early trends are updates from cashless gaming that you saw in the quarter.
Yeah. This is Scott Patrick.
We were encouraged so one of our goals was to get this rolled out to all of our properties and to have a very.
Complete application that goes across all of our point of sale processes.
As we start to market into the.
The product, we're seeing two things on a percentage basis a pretty.
Dynamic growth.
<unk> of usage and then also a pretty nice uptick in the average spend per customer that participates in the program over their previous spend.
Hi, there. It's early days I think it's early days and the adoption, but we are encouraged by the product and its rollout.
That's great to hear thanks, so much guys congrats on the quarter.
Thank you.
Your next question comes from Dan <unk> with Wells Fargo. Please go ahead.
Hey, good afternoon, everyone and thanks for taking my questions.
So just in terms of how youre thinking about building out the portfolio. It sounds like you have some some pretty aspirational plans ahead, how do you think through the lever your leverage ratio and financing that would you would you look to maybe alternative sources of financing such as gaming reaches a possible source of funding.
I think the intent is to too we have a very strong balance sheet right now.
We have very low leverage of three five times leverage very low cost low very low cost of capital no long term maturities.
Idea here is to fund these resorts out of free cash flow.
Got it and then.
I think you had $2 2 million of quarterly costs give or take for the Missouri properties, which youre demolishing and selling the land for what should we think about how should we think about the timing of when these costs might roll off and come back into the P&L.
And before the next earnings call.
Alright. Thanks.
As a reminder, if you would like to ask a question. Please press star one to be joined into the queue.
The next question comes from Chad Beynon with Macquarie. Please go ahead.
Afternoon, Thanks for taking my question.
With respect to the strong non gaming trends that you posted in the quarter, particularly around food and beverage in your prepared remarks, you talked about some of the things that you're doing within the four walls of your properties, but maybe just from a same store customer basis are you still seeing opportunities for your customers to spend more on your <unk>.
<unk> either customers that have been holding back or just.
Inflationary opportunities that youre able to push down to the consumer and there is no pushback on that thanks.
Well first of all I think that.
Overall, we're seeing very dynamic growth in all the non gaming sectors of the business.
One of our strategies is to continue to invest in the amenities of the property. So we are pretty robust slate of new products coming online across all the properties and so not only do we see people continue to spend into these non gaming experiences we're going to meet them.
With new amenities across all of our properties, which we think will increase.
Even more of that spend per visit and visitation in those areas.
I think if you look for opportunities for growth I think the one area. That's still we think we have a lot of room to recoveries in banquets and catering.
While it's up versus last year.
It still hasnt fully recovered, but the pipeline moving forward looks looks promising and we're confident that that will start to come back over the next 12 to 18 months.
Thanks, and then is there any update on the north fork opportunity or any other management opportunities in California or other markets.
Jeff did you want to take that call.
Right now we're still working through the management agreement process. So right now there is no further update but hopefully soon.
Thanks I appreciate it.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Stephen <unk> for any closing remarks.
Thank you everyone for joining the call and I look forward to talking to you in 90 days. Thank you.
Yes.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.