Red Rock Resorts, Inc. Q3 FY2023 Earnings Call

Thank you, operator, and good afternoon, everyone. Thank you for joining us today on Red Rock Resorts' third quarter 2023 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreeger, 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. Definitions and a 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. Before we get into any of the details, similar to our financial and operating results in the first half of the year, the third quarter represented another strong quarter for the company. The quarter represented our third best third quarter in the history of the company in terms of same-store net revenue, adjusted EBITDA, and adjusted EBITDA margin only surpassed by the unprecedented third quarters of 2021 and 2022. The team continued to validate our core strategy of reinvesting in our properties to deliver fresh and relevant amenities to our guests, while remaining focused on best-in-class customer service. In executing this strategy, the team delivered another strong quarter across all business lines, this quarter, marking the 13th consecutive quarter that the company delivered adjusted EBITDA margins in excess of 45%. And through the first nine months of the year, the company remains on pace to have the best financial year in the history of our company. Now let's take a look at our third quarter results. With respect to our Las Vegas operations, third quarter net revenue was $408 million, down $3.6 million from the prior year's third quarter. Adjusted EBITDA margin was $191.4 million, down $8.5 million year-over-year. Our adjusted EBITDA margin was 46.9%, a decrease of 69 basis points year-over-year. On a consolidated basis, the third quarter net revenue was $411.6 million, down $2.8 million from the prior year’s third quarter. Adjusted EBITDA was $175.2 million down $6.7 million year-over-year. Our adjusted EBITDA margin was 42.6% for the quarter, a decrease of 132 basis points year-over-year. In the quarter, we converted 53% of our adjusted EBITDA to operating free cash flow, generating $91.9 million or $0.88 per share. When looking at our year-to-date cumulative free cash flow, we converted 53% of our adjusted EBITDA to operating free cash flow, generating $290.5 million or $2.78 per share. This significant level of free cash flow was reinvested in our long-term growth strategy, including our Durango project, were return to our stakeholders via debt paydown and dividends. Throughout the quarter, we remained operationally disciplined and focused on our core local guests as we continue to grow our regional and national segments. When comparing our results to last year's third quarter, we continue to see upside from strong visitation in our regional, national, and VIP segments. This strength, coupled with strong spend per visit across the majority of our portfolio, allowed us to enjoy near record third quarter revenue and adjusted EBITDA results across our gaming segments. Turning to the non-gaming segments, both hotel and food and beverage continue to grow year-over-year and delivered near record profitability in the third quarter. Our hotel division experienced its highest third quarter revenue and profit in our company's history driven by our team's success on continuing to drive higher occupancy and ADR across our hotel portfolio. Food and beverage experienced near record third quarter revenue and profitability, driven by higher average check across our food and beverage outlets and the continued strength of our catering business. Our catering revenue continues to remain strong, as this quarter represented the ninth consecutive quarter of double-digit year-over-year growth in this business segment. In regard to our group sales business, we continue to see positive momentum driven by the growth of room nights, ADR, and our catering revenue as our pipeline continues to grow into the rest of this year and into the beginning of 2024. As we begin the fourth quarter, we like what we see so far as our business across both our gaming and non-gaming segments remain stable, consistent with what we've seen throughout this year, though we will continue to face challenging year-over-year comparisons over the next several quarters. On the expense and labor side, we remain operationally disciplined and continue to look for ways to become more efficient while providing best-in-class customer service to our guests and continue to be the top employer of choice in Las Vegas Valley. Despite a tougher year-over-year comparable, the company was able to manage its expenses and generate near record financial performance and continue to return capital to our shareholders. These results demonstrate the resilience of our business model, the sustainability of our operating margin, and the ability of our management team to execute on a long-term growth strategy and take a balanced approach to returning capital to our shareholders. During the quarter, we remain committed to strategically investing in our core strategy, which includes expanding our footprint in Las Vegas and offering new amenities to our guests at our existing locations. Over the past several months, we successfully opened Stoney's North Forty bar, a new poker room, and a new high limit slot room in our Santa Fe Station property, as well as Game On sports bar at our Boulder Station property. We are pleased with the early results from all of the amenities we've opened up in 2023 and expect to continue to invest in additional amenities, which will include our new high-limit slot and table room at our Green Valley Ranch properties opening later this year. 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 $122.8 million, and the total principal amount of debt outstanding was $3.3 billion, resulting in net debt of $3.2 billion. As of the end of the third quarter, the company's net debt to EBITDA and interest coverage ratios was 4.37 times, and 4.5 times, respectively. As we stated on previous earnings calls, our leverage will continue to tick upwards as we complete the construction of our Durango project. And upon the completion of Durango, we will expect to deleverage towards our long-term net leverage target of three times net leverage. Capital spend in the third quarter was $135.4 million, which includes approximately $119.4 million in investment capital inclusive of Durango, as well as $16 million in maintenance capital. For the full year 2023, we now expect to spend between $70 million and $90 million in maintenance capital and a total of $550 million to $600 million in growth capital inclusive of Durango. Now let's provide an update on our development pipeline. We continue to prepare for the scheduled opening of our Durango Resort, which we've now moved to December 5 in order to ensure a first-class opening of the resort. As we've mentioned before, we are extremely excited about the addition of this resort to the Red Rock family, which is situated on a 50-acre site ideally located off the 215 Expressway and Durango Drive in the Southwest Las Vegas Valley. The resort is located in the fastest-growing area in the Las Vegas Valley with a very favorable demographic profile and no unrestricted gaming competitors in the 5-mile radius. As we look at opening Durango, we expect some movement in the budget, but we do not expect the budget to be materially different than the $780 million we disclosed in our prior earnings call. The company still anticipates the return profile for Durango to be consistent with our prior greenfield developments. Turning now to North Fork. As we noted in our last quarter, after favorably resolving all of its other litigation, the tribe has a single remaining case in the California courts. We do not believe the case will interfere with the right or ability of North Fork to conduct gaming on its federal trust land. And we continue to work with the tribe to progress our efforts with respect to this project, including working toward the approval of a management agreement, continuing our work on the development and design, and having preliminary talks with prospective lending partners. We are making good progress on these fronts and will continue to provide updates on our quarterly earnings calls. On the real estate front, as noted on our last earnings call, we have made significant progress with respect to the sale of our former Texas station and Fiesta Rancho properties. While we cannot disclose the terms, we anticipate the closing of these two real estate parcels later this quarter. These potential transactions represent a continued execution of our long-term real estate development strategy as we look to reposition and upgrade our real estate portfolio for the next chapter of growth at Station Casinos. Lastly, on November 6, the company's board of directors declared a cash dividend of $0.25 per Class A common share, payable on December 29 to Class A shareholders of record as of December 15. With our best-in-class assets and locations coupled with our development pipeline of seven owned development sites, located in the most desirable locations in the Las Vegas Valley, we have an unparalleled growth story that will allow us to double the size of the portfolio and capitalize on the very favorable long-term demographic trends and high barriers to entry that characterize the Las Vegas locals market. We would 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 like to thank them for voting us the top casino employer in the Las Vegas Valley for the third consecutive year. We are also very proud to share that Forbes selected our Red Rock Casino Resort and Spa as the top overall casino resort hotel in Las Vegas, which we consider a tremendous recognition of our efforts and those of our team members. Finally, we would like to thank our guests for their loyal support each of the last six decades. Operator, this concludes our prepared remarks today, and we are now ready to take questions.

We will now begin the question-and-answer session. The first question today comes from Joe Greff with JPMorgan. Please go ahead.

Good afternoon, everyone. Regarding Durango, it's not a major issue, but can you explain the reason for the shift to December 5? I understand it's just a couple of weeks. Also, Steve, you mentioned potential adjustments to the budget of $780 million, though you suggested it wouldn't be significant. How do you define significant in terms of variance for that budget? I have a follow-up as well.

I'll go with the last one first and then I'll turn it to Lorenzo for the first one. Your answer is that you're correct in that 5% movement.

Yeah. That's accurate. This is Lorenzo, Joe. Relative to moving back the date, the reality is as we've tried to predict when a lot of these areas are going to be handed over. And as of right now, when we start to look at the calendar, certain areas that are critical to the opening just were not turned over in the time that we had originally anticipated, which in turn, we didn't feel like gave us enough time to properly train our staff and our team members in venue to be able to have the appropriate load-in days and then play days. Our operations are a little bit different from the strip in the sense that we're primarily a local property. And we're going to obviously have a lot of repeat customers. This isn't where you're just going to see a new face every day. And for me and Frank, the most important thing is that the level of service on the day we open is at the highest quality that it can be. So we think it's obviously the right thing to do to make sure that when the door is open.

For a long-term investment.

Fully ready, and we're going to own this asset for a very long time. And the first impression is very important. And quite honestly, we just have very high standards, and we want to make sure that we nail the opening.

Fair enough. And then my follow-up question and whoever wants to answer, go ahead. Can you talk about, I guess, following Boyd's report. Any potential on the income, operating expense pressures, particularly touching on labor wages? And if we're sort of looking at revenues consistent with past seasonality on a same-store basis? Would you expect operating expenses to move similarly?

Hi, Joe. This is Scott Kreeger. We are really comfortable with our expense structures right now. We think our expenses are in line. Our teams out at the properties are doing a great job to create efficiency. When we break down some of the major categories, let's start with labor first. As we've said in past calls, we really think between our wage, our benefits, and our company culture, we're an employer of choice. And that's evidenced by the strong outcome we had with our hiring campaign at Durango. So while you have to stay competitive in the market has to be monitored, we feel like we're in the right spot when it comes to salaries and wages. And we're able to hire quality talent. We were able to get Durango hired very quickly with top quality candidates. We don't see that changing materially into the future. When we talk about cost of sales, we're actually down year-over-year in cost of sales. So the teams have been able to manage cost of sales, whether that's through creative menu pricing or composition or other factors, we've been able to stay pretty consistent there. And as we've talked about in the past, acquisition cost remains rational and stable within the market. There are a couple of things that do weigh us down a bit that are less in our control. One of those is energy. It still remains high, specifically in electricity. And we believe in keeping our properties fresh, and we spend quite a good amount of money on repairs and maintenance, making sure we have a first-class experience, but those spends are within our control. We think we have spent a good amount on repairs and maintenance. And we think our properties are top shape, and we can control the repairs and maintenance costs going forward if we feel the need to ratchet that down with it.

Thank you.

The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.

Hey everybody, good afternoon. Steve, just trying to kind of think from a modeling perspective and thinking about kind of the seasonality in Vegas, specifically the fourth quarter and how, generally speaking, historically, 1Q and 4Q were your best quarters. So putting that kind of within the framework and then thinking about how we should contemplate the impact that Durango will have over the 26 days. Any callouts for preopening type of expenses or things like that, that will be excluded from EBITDA and anything else you could share on that front?

I think on the pre-open, Carlo, as we've been ramping up the project over the past year, you've been gradually seeing an increase in those expenses. And they just happen to be in the write-offs and other line items below the line. And so we do see that ramping up as we go right up to the opening of Durango when we start in those expenses slip to operational.

Okay. Understood. As you look ahead to next year, you've mentioned some cost challenges present in the market. From a demand and health perspective in Las Vegas, is there optimism for seeing the top line remain flat or experience slight growth in 2024 on a same-store basis?

Yes, this is Scott. Yes, for sure. It's our thesis, and we believe in Las Vegas. There's no one more bullish than us about the Las Vegas market. We're bringing on new product. We're entering markets that are under-penetrated. We're adding high-limit rooms across our brand that have met with strong success in R&D at Red Rock. So we're optimistic about going into 2024. And I think the population migration into Nevada remains totally intact. I mean that's kind of our long-term thesis is net inflow growing population here. And the fact is that people are moving here have higher annual income than they've ever had in the past. So we remain bullish on the Las Vegas story.

And it's not just people, it's businesses. So not only is the people that are moving here, to Frank's point, getting wealthier, but the economy is getting more diverse. Job growth bodes well for our business.

Great. Thank you all very much.

The next question comes from Shaun Kelley with Bank of America. Please go ahead.

Hi, good afternoon everyone. Thank you for taking my question. I have two inquiries. First, I believe you have already addressed the labor and cost environment, so I understand that part. However, I would like to know more about the union discussions and how they might affect prevailing wages in the Valley. It seems that you are in a strong position, but I am curious about your broader observations as these discussions progress in the coming weeks.

Yes, Shaun, this is Scott. I'll kind of take it from two angles. One, no one's really sure what the outcome will be on the negotiations. Certainly, it does have a knock-on effect to us. We don't mark ourselves to strip wage, but we certainly want to stay competitive in the market. So to the degree we have to look at those conditions and adjust, we're prepared to do that. But the flip side on the positive is any raises the union workers on the strip receive. Keep in mind that those are our customers when they come home at night. So there's a knock-on benefit in our business model for higher discretionary income for Las Vegas residents.

Great point. Thank you for pointing that out. And then my other question would just be sort of behavior kind of behind the scenes as you dig into what you saw in Q3. I think what we heard broadly speaking, around the casino landscape has been up in rated play. And I think you called out a couple of segments that were strong for you, down still a little bit as you see some normalization in unrated. Is that a fair characterization when we just sort of decompose your casino revenues? I think were down roughly 3% year-on-year if we just look at that casino line? Is that still kind of the broad prevailing behavior? Any nuance to that?

Yes. Look, I think you nailed it. We see relative consistency in the trends. We did have some disruption impact at GVR. We have a new slot and a new table games high-limit room coming online. So we kind of had to move those customers to temporary locales within the property while we are bringing on those new products. So it did have a bit of impact. We think we outperformed the market in the quarter. And as we kind of take a peek into the fourth quarter, we like the trends so far.

Next question comes from Jordan Bender with JMP Securities. Please go ahead.

Thanks for taking my question. Nice acceleration in hotel revenue during the quarter. Just kind of looking to the first half of the year, occupancy trending near pre-pandemic levels. I assume it kind of ticked up year-over-year as well here. But as we look forward, is there anything telling us that occupancy will grow off of this base? Or should we expect this to be more rate driven into 2024? Thank you.

Yes. I can take this one. I mean right now, I think we're right around 86% or 86.2%. It's still below our historical highs because we're still looking to get our group and sales business back.

Okay. And then just on the follow-up, I know there was quite a bit of weather, fires, and hurricanes in the Valley during the quarter. Was any operations impacted from those weather events? Thank you.

No. No. We operate as normal.

Next question comes from Steve Wieczynski with Stifel. Please go ahead.

Good afternoon, everyone. Steve, I want to clarify that there were no operating expenses related to Durango reflected in the income statement for the third quarter; they were all included in the write-down line. I want to ensure that margins are on a comparable basis and that there’s nothing we need to adjust. Also, could you explain what caused the corporate expense line to decrease by about 10% year-over-year?

Yes, I think you actually guided me to the question. The one expense we recognized that may not have been classified correctly was in corporate. We reclassified some preopening expenses from corporate this quarter into the Durango project, which resulted in a reduction in corporate expenses. However, as you pointed out, no other expenses related to the Durango opening impacted operations.

Okay, thanks. For my second question, Steve, you mentioned group sales in your prepared remarks. We're quite pleased with the current trends as we head into next year, but your comments were somewhat general. Could you possibly share more detailed information about the group sales as we look ahead to next year?

Yes. This is Scott. Let's take this year and the remainder of this year, if we snap the line and compare it to the same time last year, room nights are up roughly 20%, revenues are up nearly 40%, catering is up over 50%. In the quarter, you see similar performance. One thing to note, so that's super strong. We're really happy with the results across the board as it relates to hotel and hotel sales and catering. One note, as you go into 2024 and compare year-over-year, we're up against tough comps because we had latent bookings that were booked during the COVID period that turned off in the first part of the year. So while we like the pace of where we're going, when you start to look at next year on a year-over-year comp basis, it's going to be a pretty high comp.

Got you. Thanks, Scott. I appreciate it.

The next question comes from Barry Jonas with Truist Securities. Please go ahead.

Hey, guys. I appreciate the positive commentary for Q4. Just curious how trends are looking specifically for F1 and maybe for Super Bowl into Q1 as well? Thanks.

So this is Lorenzo. I mean we're not quite as tied to F1 as some of the properties on the Strip, so they can probably give a lot better color, just what we're seeing in the marketplace, looking at room rates and whatnot. It seems as though that there has been some steam come out of the people's expectations for maybe what they thought that event would be maybe a year ago. With that said, we do think it's still going to be a great weekend and a positive event. At least for us, I mean, we're not leading the charge there from an F1 standpoint, but we are getting the benefit of all the people coming into town and whatnot. But rumors certainly have come down from where people's expectations were even as recent as maybe three or four months ago.

And I think on Super Bowl, we would expect to have very strong demand.

Yes. We're super bullish on the Super Bowl. We're seeing very strong bookings there. That should be a pretty strong weekend to the positive, I think, for everybody in town.

Got it. And then just as a follow-up. You guys have a number of great options, but any updated thoughts on what's next in the development pipeline and I guess timing, specifically for Vegas post-Durango?

We aim to open and stabilize Durango as a priority. We have about six development opportunities lined up. Currently, we are advanced in design for either Durango Phase 2 or the Inspirada project, with Sky Canyon not far behind. Although we are actively working on all these developments, our focus will remain on getting Durango operational and stabilized before making decisions on future projects.

The next question comes from Dan Politzer with Wells Fargo. Please go ahead.

Thank you for taking my questions. I wanted to follow up on the Formula 1 discussion. Considering the significant disruption from roadwork and construction in Las Vegas, is there a possibility that you could actually benefit from reduced traffic to the Strip and nearby areas where your casinos are situated?

Yes, Dan, it's Scott. I think we would characterize it as the first year of F1 being a learning experience. None of us really know. We can make assumptions of things. We thought that there would potentially be a benefit both from locals and also from out-of-town bookings that maybe aren't as interested in all of the energy around Formula 1 and want something that's a little bit more of a relaxed resort experience and may choose us as an option. So that's just to be seen. So we'll learn from that. But we think there could be a positive effect.

Dan, this is just another step in the evolution of Vegas, right? It's just another large weekend in the scheme of large weekends, which seem to be now 52 weeks a year. There's going to be a lot of people visiting the town. That means there's going to be a lot of tips, and those tipped employees on the Strip are generally our customers. So, Scott touched on it earlier, but there's kind of a two-pronged benefit there.

Got it. And then just for my follow-up, I know you guys have a well-documented set of opportunities within Las Vegas. But I guess as you think about the company as a whole, are there other opportunities that you've looked at or would consider outside of Nevada or even outside of the US?

Yeah. I mean, we're always looking at all opportunities that are out there, but for any opportunity, we really have a high benchmark of what it would have to be in terms of the opportunity and the risk-reward profile. Lorenzo, do you have anything to add?

No, that's fair. I mean, it would have to be an exceptional opportunity given the fact that we do have the pipeline space.

Next question comes from Chad Beynon with Macquarie. Please go ahead.

Good afternoon and thanks for taking my question. I wanted to ask about the Durango EBITDA ramp and also how we should think about margins maybe compared to some of your other bigger resort properties in the market as it pertains to the mix of gaming versus non-gaming? Thanks.

I’ll start, and then Scott will add his thoughts. We've been consistent regarding the ramp-up. Looking at this property, there aren’t any significant loss leaders. There are slots, tables, and just over 200 rooms. We operate two restaurants profitably, particularly the Osborn steakhouse, while the other restaurants are leased, contributing to a 100% profit margin. We believe this property will perform strongly from the start and will attain stability, although we expect continued growth, particularly in the third year.

And I think on the early side of it, we just want to make sure that the customer experience is as good as it can be. So while efficiency is important out of the gates, we want to make sure that the customer experience is the best it can be. And then as we level out, we can slowly bring efficiency into the business as we go forward.

Perfect. Thank you. And then as it pertains to the cash that you'll be bringing in from Texas Station and Fiesta Rancho, how should we think about the use of that capital? Is that kind of earmarked for 2024 CapEx? Or should we think about that being used potentially for additional dividends or share repurchases? Thanks.

I think it went out the balance sheet has we do anything. And the first priority is to pay down the revolver.

Great. Thank you very much guys. Best luck on the opening.

Next question comes from Joe Stauff with Susquehanna. Please go ahead.

Thank you. Scott, you had mentioned the kind of the second derivative, call it benefit from Union Culinary negotiation. I was wondering is there any history you could share with us or possibly frame the size of that consumer group for you guys? And then, second question was maybe in the quarter or current trends, if you see any difference maybe in customer behavior, say, within your six larger portfolio or your six larger properties? Thank you.

Yeah. The first one, I think I'm going to answer you appropriately with the information we have. I think that the size and scale or the quantum of culinary workers is somewhere around 60,000 culinary workers. Now how that monetizes within the company, we couldn't measure that. It's more anecdotal. And then, I think you had asked in your second question, just if there's any changes in the four or six properties from a financial perspective?

Yeah, just in customer behavior and trends.

Yeah. Look, I think it's been pretty consistent with what we've said in the past. The higher end of our database is doing better than the lowest end of our database. Some of that may be macroeconomic pressures, which we've been living with for a while. And part of it is by design within our operating strategy to focus on higher-profit customers and bring on amenities that are catered to a higher profit customer base or higher spend per visit. But I don't think there's anything in the database right now that would give us any cause for alarm or would say it is off trend from where we've been.

The next question comes from John DeCree with CBRE. Please go ahead.

Yeah everyone. I have a question about North Fork based on some comments in the prepared remarks. With one case left, will that prevent you and your partner from moving forward? If not, what are your thoughts on the timing or how we should approach starting or accelerating the North Fork project?

Yeah. I don't think the court case, as we said in the prepared remarks, has any bearing on timing of when we start financials project.

Okay. Should we assume getting started construction is kind of a priority at this point?

We are fully prepared to proceed as soon as we finalize the management agreement, which is crucial. Once we have that in place, we will begin raising funds and initiate construction. Yes, to the management agreement gets approval from ITC.

Now, listen, we feel like we're close, it's tough to handicap, but we did make a couple of changes to those North Fork remarks. So, we're making good progress.

The next question comes from David Katz with Jefferies. Please go ahead.

Good afternoon. I apologize if we're focusing too much on the F1 issue, but you mentioned earlier that room rates have decreased slightly. Is this decrease specific to your own portfolio, or were you suggesting it reflects a broader market trend? Also, how instructive is the F1 situation in understanding the dynamics of events, considering you mentioned that the Super Bowl looks promising, while F1 has seen a slight decline? How can this assist us in determining which events are beneficial versus exceptional for your business in the future?

Look, I think that was more of a broader market commentary, and similar just looking at rates on Expedia or kind of what hotels are being booked for now versus kind of maybe where rates were published going back months to a year ago. So, it's all public data.

I think the other one is, as you said it, so I don't want to speak for you, but I think we kind of know that sports works in the town. They used to start to become a sports town. And whether that's the NFL or hockey or any other professional sports that are coming to town, we're seeing that it's got great success. It's probably a little less complex than the equation of F1. We haven't seen F1 come into the city or what the impact is. So, I imagine—

My expectations at the F1 weekend will still be fantastic. I think it's going to be great for the guys on the Strip. I think it's going to be a huge success. It was just a matter of, on a relative basis to maybe where expectations and where people were hanging rates in the early days. But that happens that's happened before Las Vegas. It happens all the time.

And as Scott said, this is going to be a learning experience for the Super Bowl. You have 55 years of Super Bowl history where it's always good in Vegas, and now it happens to be here.

This concludes our question-and-answer session. I would like to turn the conference back over to Stephen Cootey for any closing remarks.

Well, thank you, everyone, for joining the call, and we look forward to talking to you in about 90 days. Take care.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.