Q2 2024 Red Rock Resorts Inc Earnings Call
Good afternoon, everyone and welcome to the Red Rock resorts second quarter 2024 hour conference call.
All participants will be in a listen only mode.
Note. This conference is being recorded.
At this time I'd like to turn the conference over to Stephen <unk> Executive Vice President Chief Financial Officer, and Treasurer of Red Rock resorts.
Go ahead.
Thank you operator, and good afternoon, everyone.
For joining us today from Red Rock resorts second quarter 2024 earnings conference call joining.
Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreger, and our executive management team.
I'd like to remind everyone that our call. Today will include forward looking statements under the safe Harbor provisions of the United States Federal Securities laws developments and results may differ from those projected.
During this call we will also discuss non-GAAP financial measures.
For definitions and complete reconciliation of these figures to GAAP. Please refer to the financial tables in our earnings press release form 8-K, and Investor deck, which were filed this afternoon prior to the call.
Also please note that this call is being recorded.
Let's start off by stating that the second quarter represented another strong quarter for the company by any measure.
In terms of net revenue and adjusted EBITDA, Our Las Vegas operations had its best second quarter in our history.
In addition, our Las Vegas operations achieved near record adjusted EBITDA margin.
In addition to showing strong financial results in the quarter, we continue to be pleased with the financial performance of our Durango Casino resort.
Team of Durango continues to execute and improve the properties operational formats, while at the same time driving incremental play from our existing customers and attracting new customers to our brand.
With two full quarters under our belt, the property increased visitation and that theoretical win and the surrounding Durango area by approximately 90 and 88% respectively.
Signing up over 55000, new customers to our database over the same time period.
While it's still early days Durango continues to ramp it remains on track to become one of our highest margin property in the medium and long term as well as generate a return consistent with or in excess of our prior greenfield developments.
That said and as stated on past earnings calls, we continue to experience cannibalization in line with our expectations, primarily at our Red rock property due to the drag of opening are consistent with our past performance history.
Got to backfill this revenue given the strong long term demographic growth profile of the Las Vegas Valley and the proximity of our properties to those high growth areas within the valley.
Okay.
Based on our success of Durango, we were pleased to announce an expansion of the property.
Our current plans for the next phase of Durango, what over 25000 square feet of additional casino space, including a new high limit slot and bar area and totally expansion will add to Durango Bedraggled Casino, Florida additional 230 slot machines, including 120 slot machine is dedicated to our new high limit room.
In addition to the expanded casino space, we will be adding an additional covered parking garage with almost 2000.
Onions parking spots significantly improving customer access to the property.
Biding us flexibility for future expansions of Durango.
While we are still in the planning and budgeting stages of expansion. We currently expect construction to start later this year.
We'll provide more information of <unk> and then this expansion on future earnings calls.
With regard to the rest of our portfolio, we continue to execute on our core strategy of reinvesting in our existing properties to deliver fresh and relevant amenities for our guests all while remaining focused on best in class customer service.
With the disruption we experienced at palace station from the roadwork that impacted the ingress and egress to the property and the disruption we experienced at the Sunset station from a major renovation upgrade in the race and sports book and Casino bolt tailing off in the middle of the quarter. The team delivered another strong quarter across all business lines.
But this quarter, marking the 16th consecutive quarter that the Las Vegas operations delivered adjusted EBITDA margins in excess of 45%.
Now, let's take a closer look at our second quarter.
With respect to our Las Vegas operations, our second quarter net revenue was $483 2 million up 17, 1% from the prior year second quarter.
Our adjusted EBITDA was $223 1 million up 15, 6% from the prior year second quarter. Our adjusted EBITDA margin was 46, 2% a decrease of 61 basis points from the prior year second quarter.
On a consolidated basis, our second quarter net revenue was $486 4 million up 16, 9% in the prior year's second quarter.
Our adjusted EBITDA was $201 7 million up 15% from the prior year second quarter. Our adjusted EBITDA margin was 41, 5% for the quarter a decrease of 67 basis points from the prior year second quarter.
In the quarter, we converted 58% of our adjusted EBITDA to operating free cash flow generating a $117 6 million or $1 11 per share.
This brings our year to date cumulative free cash flow to $246 2 million or $2 33 per share. This significant level of free cash flow was either reinvested in our long term growth strategy reinvested into our existing properties will return to our stakeholders via debt paydown share repurchases and dividends.
As we finish up the second quarter, we remain focused on our core local gas as we continue to grow our regional and national segments across our portfolio.
When comparing our results to last year's second quarter, we continue to see upside from strong visitation in card and harvest slot play across the majority of our database, including a regional national segments. This strength, coupled with strong spend per visit across the database a lot of us enjoy record second quarter revenue and profitability across our gaming segment in the quarter.
Turning to the non gaming segments, both hotel and food and beverage continued to grow year over year and deliver record revenue and profitability in the second quarter.
Our hotel division experienced its highest ever second quarter revenue and profit in our history.
Driven by our team's success on continuing to drive higher occupancy and ADR across our hotel portfolio.
And not to be outdone, our food and beverage division also experienced its highest ever second quarter revenue and profit driven by higher average check and cover counts across our food and beverage outlets.
With regard to our group sales and catering businesses as mentioned on our last earnings call. We faced a tough second quarter comparable and expect to face tough comparable for the remainder of the year, mainly because of cobot sales that were postponed and rebooked into 2023.
That said, we are seeing positive momentum in both of these business lines as we continue to build our pipeline into 2025.
As we look ahead into the third quarter, we are seeing stability in the locals market and across our card a database and remain confident in our business prospects moving forward.
On the expense and labor side remain operationally disciplined and continue to look for ways to become more efficient. We will continue to provide best in class customer service to our guests and remaining the <unk> of choice in the Las Vegas Valley.
Within the quarter. The company continued to manage our expenses generate record financial performance near record margins reinvest in our properties and return capital to our shareholders or.
Our continued success demonstrates the resilience of our business model the sustainability of our operating margins and the ability of our management team to execute on our long term growth strategy, all while taking a balanced approach in returning capital to our shareholders.
Now, let's cover a few balance sheet and capital items.
The company's cash and cash equivalents at the end of the second quarter was $136 4 million and the total principal amount of debt outstanding was 3.4 dollars 7 billion.
Resulting in net debt of 3.3 dollars 4 billion.
As of the end of the second quarter, the company's net debt to EBITDA ratio was four two times as we stated on previous earnings calls our leverage has plateaued and is beginning to ramp down as we look to delever to a long term net leverage target of three times.
Also during the second quarter, we made a distribution of approximately $53 5 million to the LLC unitholders of station Holdco, which included a distribution of approximately 31 point $31 1 million to Red rock resorts.
The company used the distribution to make it second quarter estimated tax payment.
Hey, its previously declared dividend of <unk> 25 per class a common share as well as fund the purchase of 75000 class a common shares at an average price of $52 29 per share under its previously disclosed $600 million share repurchase program.
The second quarter purchases, bringing the total number of shares purchased under the program and through our 2021 tender to approximately $14 3 million class a common shares at an average price of $45 32 per share, reducing our share count at quarter end to approximately $105 5 million shares.
Capital spend in the second quarter was $78 6 million, which includes approximately $35 9 million of investment capital inclusive of the Durango project pertaining <unk>.
As well as $42 7 million in maintenance capital for the full year 2024, not including the spend to closeout. Our Durango project, we still expect to spend capital spend to be between 140 and $180 million spread between maintenance and investment capital.
During the quarter, we remained committed strategic to strategically investing in offering new amenities for our guests at.
At our existing locations in order to drive incremental visitation and spend on our properties.
During the quarter, we successfully opened or Tiki administrating grill at our Green Valley.
Pretty and open Liberal Mishoe on restaurant at our Palace station property and completing upgrades to our race and sports book and partial casino remodel at Sunset station.
We are pleased with the guest response and the early results from these new amenities, we expect to continue to invest in our existing properties throughout 2024, including adding additional restaurant offering our palace station property as well as the new yard house restaurants at our Sunset station property.
Like our other recently introduced amenities, we expect these to be solid investments over the medium and long term.
Looking forward to moving beyond the disruption challenges at these properties as we introduce these new amenities to our customers later this year.
Yeah.
Turning now to North Fork, we continue to move forward with the project but.
But we are finalizing the design and continue to work through the project budgeting process. We expect to begin preparatory site work on the project next month with construction soon to follow in the fourth quarter of this year.
The total construction time for the project is currently anticipated to be between 18, and 20 months, putting the opening of the resort into 2026.
We are very excited to be making progress on this project and we will continue to move provide updates on our quarterly earnings calls.
Okay.
Lastly, the company's board of directors has declared a cash dividend of 25 cents per class a common share payable on September 30th to class a shareholders of record as of September 16th.
When we combine our recent share repurchases with our special and regular dividends, we've returned approximately $168 $5 million to our shareholders in 2024.
The company continues to have a strong year and Durango continues to validate our long term growth strategy and demonstrate the power of our own development pipeline and real estate Bank, which consists of over 445 acres of developable land <unk>.
Position in highly favorable areas across the Las Vegas Valley.
This pipeline coupled with our best in class assets and locations gives us an unparalleled growth story that will allow us to double the size of our portfolio and capitalize on the very favorable long term demographic trends and the high barriers to entry that characterize the Las Vegas locals market.
We'd like to recognize and extend our thanks to all of our team members for their hard work our success starts with them and they continue to be the primary reason why our guests return time after time.
We would again to thank them recently for voting us top casino employer in the Las Vegas Valley for the fourth consecutive year and finally, we thank our guests for their loyal support each of the last six decades.
Operator. This concludes our prepared remarks today, and we are ready to take questions.
Ladies and gentlemen at this time well begin the question and answer session. If you'd like to ask a question you May Press Star and then one isn't a touchtone telephone withdraw.
Withdraw your question you May press Star two.
If you are using a speaker phone we do ask that you. Please answer that part of the person that can used to ensure the best sound quality.
Once again that is star and then one to join the question queue.
We will pause momentarily to assemble the roster.
And our first question today comes from Joe Greff from Jpmorgan. Please go ahead with your question.
Good afternoon guys.
Steve or Frank Lorenzo I was hoping maybe you can give us some sort of sense of a range of capex associated with the Durango expansion.
Speaker Change: And particularly.
Particularly with respect to the expansion of the casino floor.
Adding some slots are raising the bar.
Anticipate any of the construction to result in disruption at all.
Speaker Change: And then I have a quick follow I'll take I'll take the first part of that Joe I think it's right now we're still going through the design and planning process. So we expect to have a budget in the next month or so and we'll be announcing that on our next earnings call.
In terms of disruption expected to be minimal disruption to the property.
Okay.
And then you you've mentioned it earlier, Steve in your prepared remarks that you know the Red rock cannibalization was in line with your expectations.
If we look at your performance in.
Q2 year over year and they exclude whatever the contribution is from incremental EBITDA generated from Durango, and the cannibalization impact hit Red rock. The property does that imply that the rest of the portfolio was up year over year on a on a on an EBITDA basis is that the implied math.
<unk>.
Yes, I mean, effectively if you kind of strip away exactly what you talked about.
Our portfolio is probably flat.
But it should be noted that with Durango, probably we've grown operating LBO EBITDA over $30 million.
Which is pretty much the majority of the Las Vegas growth story over the last quarter.
Yeah got it alright, thanks, guys.
Our next question comes from Carlo Santarelli from Deutsche Bank. Please go ahead with your question.
Hey, guys. Thank you, Steve you talked about starting Durango kind of later this year.
Obviously in the slide deck and previously you guys have talked about kind of the next legs of unit growth is there a scenario where you could basically get started with a next project while phase two so to speak at Durango is ongoing.
Yes Carlo this is Scott maybe I can take that one as we've said in past calls one we like the Optionality of our development portfolio. So we have several options that we can entertain and we're driving all of those projects through their entitlement process, We've mentioned <unk> Patel.
Joe project, that's on the forefront and really we will just have to see how we manage capital, but there is the possibility of doing joint development as we go forward.
Great. Thank you and then just a quick follow up if you guys could comment at all on in terms of what you're seeing across the locals market. I mean as you know we all see state reported G. G. Ours, there's only so much you could take from from them, but in terms of the D.
Relative health of the market spend levels et cetera, as well as kind of a promotional environment is there anything that you guys would identify as being a notable change in the QQ relative to say the <unk>.
Carlo This is Scott again, yes lets take it from a database perspective first one we see stability and consistency in Q2 performance and as we kind of going through July we're seeing that trend continue when you look at the individual segments of our database.
In Q2, all of our segments were had positive growth year on year.
With specifically high performance in our VIP section, which is attributed to our shift towards our higher net worth customer.
And also in our regional and national segments as well. So we saw strong growth in our new member sign ups were up about 23% and new member sign ups. Our overall active database group.
Speaker Change: Double digits.
And if you look at our own carded segment of our business. It was stable while in aggregate growing up over 11%. So when we look at all of our database trends and our customers.
Metrics, we're very optimistic about where we're at.
And what we're seeing going into Q3, I think Carl your second part was promotional environment I think what we're seeing is rationale consistent and really no change systematically from what we've seen in the past.
Understood. Thank you both very much.
Yeah.
Our next question comes from Shaun Kelley from Bank of America. Please go ahead with your question.
Hi, good afternoon, and thank you all for taking my question.
Steve or Keith just wanted to ask about sort of the implications of Durango on margins, obviously when you open a property.
And just sort of trying to square that with the kind of down 60. This quarter and then obviously, it's slightly different comps year on year on the on the margins too. So just kind of where do we sit right now in terms of marginal margin and cost stabilization at Durango.
Yes, I would this spring.
Remember, it's only the second full quarter.
This property is open.
This was a long term asset and a market that is confirm continuing to grow month by month with new population.
We're extremely happy with the results so far.
But we've always said that it takes at least three or four quarters really to get ever.
Everything fine tune I think we're on our way.
We're super pleased with results, Yes, Sean I think also we should kind of revisit Q2 of 'twenty three if you recall.
Last year was the first time, we became a self insured plan and the plant has run exceptionally well last year. So we're able to take a benefited with almost a $3 million accrual benefit in Q3, So when you take that out.
Margins, while we reflect and reported down 60 basis points are effectively flat to slightly up.
And Steve I guess kind of follow up on that last point.
Is it too much of a read then and maybe help me background that adjustment to think of the same store portfolio. We are a little bit of drag net for Durango.
At the same store portfolio had been flat in the quarter or are we there on a margin basis or is that too aggressive.
You do have a little bit of labor in there. So as we mentioned in the first quarter February we did do a pro active.
Labor increase across them.
Board to kind of mark to market on labor.
So right now we've been able to absorb that labor increase teams are doing a really nice job of managing their labor and it really our labor increases are really at market right now when you look at the rest of the volume increases.
Yes. Thank you so much.
Say its slightly its.
Slightly below flat, it's darn close.
Thanks, guys.
Our next question comes from Jordan Bender from JMP. Please go ahead with your question.
Great. Thanks.
Is your operating leverage continued to improve here into the second quarter would you expect to get back to that 50, plus percent, which I believe you've targeted historically just given what you see in the business today.
You're referring to flow through or are you referring to margin because I don't think we've ever put forward, a 50% margin target flow through.
Speaker Change: You have flow through right now we're up roughly about 37, 5%.
That is our target and I think we will eventually be able to get there you just have to fight some of the cannibalization is that we've talked about in the earnings remarks.
Takes about two to three years for the backfill of Red rock to fill in and that's when you really start getting the benefit of that leverage and flow through.
Yeah.
Okay.
Just on the follow up when you think about your capital allocation.
Price would you look at an asset or assets coming up for sale in the Las Vegas locals market. Thank you.
Yes, I think we've said this in the past we will look at everything.
But I think as Scott Scott articulated we have a a great.
Owned pipeline of growth.
We're currently working on and so the bar after incredibly high yes, we'd have to be very high I would tell you that all of our development opportunities are where all the growth is taking place in the suburbs.
And we think those are far better than.
Looking at older assets, maybe in areas that are not growing as fast.
Great nice quarter.
Thank you.
Steven Moyer Wieczynski: Our next question comes from Steve <unk> from Stifel. Please go ahead with your question.
Hey, guys good afternoon, and congratulations on the quarter here, so Steve or Scott if we look at I'm looking at slide I think it's slide 37 in your deck.
Can you just kind of walk me through some of the assumptions that are that are kind of going on here with the with that graph I'm just trying to understand better maybe some of the assumptions that need to happen in order to move.
<unk> from that you've kind of showing that 20% ROI to the property got what 180 of EBITDA that would be what 23% somewhere in that range.
Just trying to understand that a little bit better than maybe.
How do you kind of came up with that.
Sure No problem. This is the slide here is really so much not so much focused on Durango, but really focused on the 445 acres of real estate and how we view the real estate as opposed to a per acre price, but what youre seeing is on the left hand of the chart for those you don't.
Can't call. It home, we originally purchased the Durango side for $38 million and then we so sold off a piece of the Durango land for $23 eight. So your net cost of your land is roughly $7 million. The project has come in around $800 million and then the charts on the right and the left $128 million was just really ease.
EBITDA analysts' consensus that we were able to pull from your research reports and then what we stated was that.
Within three years that we would be at a 20% rois. So thats, how we came up with the 160 and then the $180 million long term growth platform is just to outline that these properties don't stop growing after.
Three years that continue to grow if you've look at Red rock.
It's opened and what 2000 22005 and has continued to grow ever since.
Okay.
That's perfect. Thanks Steven.
Second question.
More of a high level question, but obviously theres been a lot of.
Kind of rumors going around about M&A across the gaming space over the last call it six weeks or so.
Just wondering if you could help us think about your current appetite for M&A.
Guessing you probably don't have much of an appetite for buying versus building given your your large.
Land Bank, but just wanted to hear if anything has kind of changed on that front.
No I think we touched on it maybe a little bit earlier, so that we will look at everything because just it's the right thing to do as a public company, but Scott I think articulated we have a.
<unk> owned growth platform that we are busy executing on right now.
Okay got you thanks, guys appreciate it.
Our next question comes from Barry Jonas from curious Securities. Please go ahead with your question.
Hey, guys I know, it's been pretty hot in Vegas curious if that impacted the top line or should we be modeling, maybe a meaningful increase in energy costs for Q3.
Yeah. This is Scott.
If you look at our energy costs for the quarter, the only increase in energy cost as a kind of a pro rata increase of adding Durango. If you look at our core six.
Property energy, it's actually flat to down.
So these energy costs are starting to.
To come down slightly plus it's our team's efforts to continue to look for ways to conserve.
Energy and.
But no I wouldnt anticipate that it goes up any more than what its been trending up.
Got it Okay, and then I appreciate the comments about the health or the stability of the consumer just curious if you could maybe talk a little bit about the low end I know that was something where you would see and I think previously some growth while others had seen.
A little more contraction so curious how that's trending.
I think you just nailed it so were forecast or we had reported in the past that there was some slight growth in that stable and consistent into this quarter as well, so slightly up and our lowest in customer segment, which by the way as we've said in the past, it's really not our core focus our core focuses.
To go after these customers that are high net worth and the high growth areas of the valley.
And so we're encouraged by the fact that even our lowest end of the database is showing positive growth and as Scott mentioned earlier on Carnival handle was up which is another view.
Got it got it alright, thank you so much.
Our next question comes from Stephen Grambling from Morgan Stanley. Please go ahead with your question.
Hey, Thank you. So it looks like you already have the 15% plus return on Durango and continued ramp gets you to 20% plus returns I realize you haven't given the capex for the expansion project, but how do you typically think about the returns and spend on expansion projects like what you were thinking about Durango versus a typical.
Greenfield build.
I think we look at the returns in the same manner that we expect that 20% ROI net of any cannibalization I think what you're really thinking about is on the exist with the Durango I think the risk is just much lower because we know we know the demographic profile and we know that needs the resort.
And then similarly, I know, it's early but when you look at the future ground up development projects, you've got out there is there anything that may make those different durango in terms of targeted returns or does this.
Initial out of the gate.
Execution gives you more confidence in the potential to build in those markets.
Well look I think we're probably most specifically thinking around the <unk> area.
As a next step when we look at the demographic profile out there.
It's one of the fastest growing areas in the highest network area of the Bali, If we do our math.
The project could sustain those returns in the near future.
It really is just a matter of capital allocation and opportunity as we weigh those opportunities.
As time goes on that area as filling in more and more on that I'll just bolster our.
Our view on the return there.
I think our thesis is still the same or new Greenfield projects.
Our target is to you know in your one to get a low double digit return growing overtime to 20 plus percent return.
That's net of cannibalization that's correct.
Great and if I can just sneak one other one and thats changing directions, a little bit I think last quarter, you called out ingress egress around palace station.
That.
Cited are there still any kind of one off to think about in call. It the core portfolio that could still be weighing on trends.
The.
Project that was a factor in college station is complete at this point.
Let Scott address for you guys a lot of the interstates and everything around Las Vegas over the next several years, we're going to there's a lot of projects coming up and so current project is over with.
Yes, so things are back to normal at palace, we had quite a bit of traffic disruption now that's all freed up and our customers are finding their way back to the convenient location and we're seeing that start to come through in our financial performance.
Other disruption that we talked about with Suntrust.
So we've completed that race and sports book remodel.
And then the other big piece of that is a new yard house restaurants that will come online in the fall.
And so we're super excited about football season or at Sunset.
To look at the true benefit of the spend there and what Frank mentioned relative to traffic is that there is a lot of federal dollars coming into Las Vegas, and part of the great thing about Las Vegas being one of the fastest growing cities in the country as you have to keep up with infrastructure. So why while we.
We'll see some are major arterial freeway improvement in the long run it just makes it easier for people to get to and from our properties that are mostly located on that beltway.
Awesome. Thanks, so much.
Yeah.
Our next question comes from Dan well, what's there.
Wells Fargo. Please go ahead with your question.
Hey, good afternoon, everyone.
A question on in terms of the margins and maybe asking them, but a different way I think this is the first quarter and maybe seven or eight quarters work gaming revenues have actually outgrown non gaming and I think a piece of that.
Your point was the group piece and the comps there. So I guess the question is do we think about the back end of this year. So we expect that that dynamic to continue where were gaming revenues, maybe outgrow those non gaming revenues.
Well I can tell you about the.
When you kind of look at the gaming revenue I know you touched on it before like food and so food and beverage was there was as we mentioned we had a tough comp of catering.
And we mentioned those those tough comps will kind of continue into 2024 with green shoots appearing in 2025 and on the room side. There were some some win in expenses that we had to overcome as well as some of the group cancellation.
And again same along with the catering.
Were facing tougher comps in the back half of 'twenty four we expect some green shoots to happen in 2025.
Got it and then and just in terms of the overall environment It looks like weekly earnings.
So you started to tick higher.
Speaker Change: Just in the most recent months versus the first quarter in the fourth quarter. So you know.
Speaker Change: To what extent would you say if you look back the last couple of months versus last six or nine months do you think maybe feel like they are starting to get a little bit better in the market.
Speaker Change: I mean from a labor perspective, rightly I mean, Scott.
Scott touched on that with one of the fastest growing demographics in the United States and that supported by an incredibly diverse job market, which.
Speaker Change: Right now is growing about two three times faster than the United States average and last month marked the 38 consecutive year over year over year employment growth number so and to your point you did comment on the on earnings growth was up five 1% year over year, starting in June and we overall expect aggregate household income to continue to grow to grow over 11.
7% over the next five years, so things feel good from an economic standpoint.
Got it thanks, so much.
Our next question comes from Chad Beynon from Macquarie. Please go ahead with your question.
Afternoon, Thanks for taking my question.
Just in terms of the Durango 2.0, I think you mentioned 230 slot machines, which would add about 10% capacity 25000 square feet, that's significantly more in terms of space.
So it sounds like there'll be more spaced out for high limit et cetera, but.
Why was this the right number and do you think there will be cannibalization at the property or this will be additive to what you're currently generating on the slot floor.
We expect it to be additive otherwise.
I'd be doing it.
The additional parking everything's sets us up for long term Durango for.
Phase III.
And the ability to bring more amenities are more reasons to come to Durango long term I mean this is what we've done historically at all of our properties, we get phase one open.
Speaker Change: And then we continue to do master planned.
Expansions as we see the demand and as we see the amenities that our customers were looking for.
And I'll just add to that the addition of a new slot high limit room is just testament to our strategy to invest in higher net worth customers and we're seeing that in our highest daily.
Database segment in our out of town in the regional and the more we.
Invest in high limit experiences in VIP, where returns have been really good.
And then great returns and so we're just leaning into that.
Great. Thank you and then on the Tavern business I believe last quarter. You said first opening could be sometime around September has anything changed in terms of the target number of units the timing of that and kind of how that should look over the next year. Thanks.
No you got it right. So the first one will come online in September the second one in January as a third in June of next year.
No we.
Contracted seven units were always out there looking and trying to cut deals on new development opportunities. So that's an ongoing effort, but thats the timing of the first three.
Excellent. Thank you guys.
Our next question comes from Grant <unk> from Barclays. Please go ahead with your question.
Good afternoon, or good evening, everybody. Thanks for taking my questions. So on Durango phase two I realize its you are in the design phase. So it's probably a little bit early but I was curious if you could talk a little bit more about the non gaming aspect in and maybe just high level. The different avenues that you could take the build out assuming that there would be non gaming that is in.
Phase two it doesn't slip to phase III, but.
Would that skew more or are you thinking it could skew more group or perhaps more leisure.
In terms of in terms of the product and sort of what would be the risk return differentials between the sort of various avenues you could take that.
This is Scott let me take this in a couple of different directions, one when we look at the Durango zone growth.
It's the fastest area of growth in the valley.
And we've grown the market.
With our opening Theres two expansion opportunities they cater to different aspects of the business. So fully integrated resort like Red Rock has day part in the weekday day parts in the weekend that serve different purposes.
<unk>.
What we would call the north face.
Expansion would be more entertainment focused and day trip focused for the weekend.
So things like movie theaters things like.
Essentially our country Western Dance Hall of these types of things tend to drive weekend visitation that type of programming on the other side of the property its more resort driven and drives midweek visitation for the property things like a resort hotel expansion.
Spa meeting space and so what you end up with after all of these phases are truly integrated resort that has different.
Activities in different day parts during the week.
That's really helpful and maybe just a quick follow up I think the comment earlier was that it was possible to do joint development with a greenfield I mean, maybe you could just talk high level about the different factors that would go into that macro and or micro whether it's.
A fed rate cut or if it's the health of the locals consumer what would be the primary things that wood wood.
That would factor into that.
Yeah I think the first is the first step is really getting the that the garage down and said because that is going to help us with the lay down area and be able to go to either the north or south as Scott said, but I think in terms of doing multiple projects. I think there are a couple of things to consider and you touched on them the economic health of Las Vegas.
Absolutely critical making sure the health of our customers are there the absorbs the continued absorption of Durango as well as the backfill of Red Rock and then lastly, really the balance sheet and it's about capital allocation as we as we said in the past and we take a balanced approach to capital long term growth reinvesting in our properties, but also returning capital our shareholders. So we're cognizant that we need to keep make sure.
The balance of the balance sheet remains flexible.
Excellent thanks, everyone.
Our next question comes from John Decree from E. B R. E. Please go ahead with your question.
Good afternoon, guys. Thanks for taking my question maybe.
Maybe just one for me I think we covered a lot of ground, but.
Go back to a stat I think I heard Steve in your prepared remarks about 55000, new customers signed up at Durango.
That kind of stood out to us I mean, we kind of think about almost everyone in the valley.
He is already a boarding pass members. So curious how that lined up at Durango with your expectations and kind of what it tells us about some of the untapped markets, where you have development side does that is that number that was something in line with your expectations or.
These tests it kind of sounds like maybe there is theres quite a bit more of untapped demand.
So I'm just curious your thoughts on.
New customer sign ups, and where you're seeing incremental demand and how.
How that how that fit with your expectations.
Well. This is Scott I think Steve and I will comment on one of the things I'll pick a pivot a bit but most impressive thing that I see is that the growth of our existing known customers in that zone is in the high 70 percentile and then when you look at new to brand.
Both in the area to nearly 90% so Frank talks about this a lot.
Lorenzo when we come into an area, we grow the market. So those stats coupled with the 13% to 15% growth in the area over the next five years really kind of support that and new members signing up as a piece of that.
Just kind of points the importance of location and proximity to your customers John and so to add to what Scott was saying the spend per visit visits. These are all positive trends or trends that can be improved upon and grown in all near all of our development properties and as Frank talked about earlier on.
These development areas tend to be in the highest growth areas with Las Vegas Valley.
Understood, maybe maybe one follow up guys.
So on the.
Similar topic, but on the cannibalization that you'd expected and you've seen it.
Speaker Change: Red Rock is that cannibalization I don't know if you.
Kind of have that granularity in front of you, but is that customers that are just living closer to durango going to Durango more frequently than and red rock.
Is it red rock customers, just maybe taking a trip or two at the new property I guess, how would you characterize it or you're definitely seeing is it a proximity seeing those who was closer to the wrangler just going there more frequently or you're seeing something else as it relates to the cannibalization that you that you expected and how the customer is behaving.
I think it's very similar to what we've seen over the last 30 plus years of developing new properties in Las Vegas.
And that's where we gave guidance that we expected year one to b.
Plus or minus 10% cannibalization of Red rock given proximity to Durango alright. Thanks.
Actually starting to see things, maybe giving a little bit better than our initial guidance.
But yeah I think it's both both things that you said the people that are more proximate to Durango or number one we're growing the visits that we got from that customer before the frequency of that customer and there's people still want to go over and the Red Rock zone and Looker Durango So Luca.
Or a combination of both but the good news is for the long term strategy of where our properties are located is where all the new rooftops are and Thats why the guidance that we gave is what we've seen historically, where you're one is down about 10% and by year to year or two and three it's already backfill and you're off to the races.
Growing again so.
Speaker Change: Awesome. Thanks for taking all the questions guys really appreciate it.
Okay.
Once again, if you'd like to ask a question. Please press star and one.
Our next question comes from David Katz from Jefferies. Please go ahead with your question.
Hi afternoon, everyone.
Just want to double back on some of the discussion earlier about sort of that next project, but I'm not sure. If we named it specifically as it's broader than whether you said anything about that one in particular, but you didn't necessarily have to get back to that three times level before you would start to spend on it.
Or is that more of a long term leverage target.
Specifically, how youre thinking about leverage and all of that context. Please.
Hi, David This is Steve So it's a good question, we do not have to get to the three times we start.
Our next project.
And if I can just follow that up I'm not sure if you talked about sort of where your.
Collective Mentality's are about <unk> and how soon we could start to talk about that in a more substantive way.
Thanks.
Yeah. This is Scott David I think as we always say we.
We've been actively entitling all of our development sites, we are in the process of entitling and sporadic.
We would imagine that that process could be concluded in a little bit less than a year. If we were to <unk>.
To push as we are and that would give us optionality at that point to decide if it was the right time to pull the trigger.
That'll work thank you.
Yeah.
And ladies and gentlemen at this time in showing no additional questions I'd like to turn the floor back over to management for any closing remarks.
Well. Thank you very much for joining the call and we look forward to talking about 90 days.
Take care.
Hello, Ladies and gentlemen that does conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.