Golden Entertainment Inc

NASDAQ:GDEN

Earnings Call Analysis

Golden Entertainment's Transformative Year and Q4 Performance

Golden Entertainment wrapped up a transformative year marked by strategic portfolio streamlining and leverage reduction. The company divested non-core businesses at attractive multiples and favorably refinanced credit facilities while rewarding shareholders with a special dividend and share repurchase strategy. In the fourth quarter, they saw a consolidated revenue of $231 million and EBITDA of $48.8 million, despite divesting several operations which, if excluded, would show a 1.6% dip in revenue and an 11% decrease in EBITDA for the quarter due to rising costs.

Improving Casino and Tavern Operations Amid Economic Pressures

For the continuing Nevada Casino Resorts, Q4 showed a slight uptick in revenue, although EBITDA fell by 8.8%. Attendance from the Las Vegas Formula One race did not boost profits as hoped. However, increased occupancy at STRAT and completion of major renovations signal potential growth, especially as evidenced by the boost in revenue during major events like the Super Bowl. The Nevada Taverns also enjoyed a revenue increase of 3% from the previous year, boosted by acquisitions and stable same-store performance, projecting the potential for 90 to 100 tavern locations in the future.

Divestitures and Financial Outcomes Enhancing Shareholder Value

Strategic divestments have generated over $600 million in proceeds, greatly improving leverage and adding liquidity. This fiscal maneuvering enabled the company to reduce its debt significantly, simplifying the capital structure and establishing a low net leverage scenario. The company plans to repay outstanding bonds soon, maintaining a full $240 million revolver availability. A newly established quarterly cash dividend at $0.25 per share is part of their commitment to consistently returning value to shareholders, coupled with leveraging a stock repurchase authorization for further capital return.

A Narrow M&A Focus and Leveraging Position for Growth

Golden Entertainment has set narrow M&A focus parameters, favoring single asset or small portfolio acquisitions propped up by owned real estate, mainly in the West, that provide returns surpassing shareholder capital return alternatives. The company remains under a self-imposed 3x leverage cap for these endeavors and prizes strategic flexibility, confirming that the dividend policy does not impair this stance. The sale of non-core businesses has aligned the company to further concentrate on boosting STRAT's performance and expanding its Nevada Tavern footprint.

STRAT's Prospects, Midweek Performance, and F1 Event

The STRAT is expected to capitalize on investments now that major disruptions from construction are over, with Atomic Golf anticipated to enhance midweek traffic. Although the Formula One race underperformed in terms of direct financial benefit to Golden Entertainment, the company acknowledges the event's significance for Las Vegas and plans to engage more effectively in future F1 related activities through collaboration with other operators.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Golden Entertainment, Inc. Fourth Quarter Results Conference Call. [Operator Instructions] Please note that today's call is being recorded today, February 29, 2024.

I would now like to turn the call over to Mr. Joe Jaffoni, Investor Relations. Please go ahead, sir.

[Joseph Jaffoni]

Thank you very much, operator, and good afternoon, everyone. On the call today is Blake Sartini, the company's Founder, Chairman and Chief Executive Officer; and Charles Protell, the company's President and Chief Financial Officer. .

On today's call, we will make forward-looking statements under the safe harbor provision of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that could cause actual results to materially differ from these forward-looking statements is contained in the press release and our filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise.

During today's call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation of GAAP financial measures in our press release, which is available on our website.

We'll start the call with Charles reviewing details of the quarter and a business update. Following that, Blake and Charles will take your questions.

With that, it's my pleasure to turn the call over to Charles Protell. Charles, please go ahead.

[Charles Protell, executive]

Thanks, Joe. The fourth quarter concluded a transformative year for Golden Entertainment. During the year, we streamlined the portfolio by divesting noncore businesses at attractive multiples, reduce leverage to favorably refinance our credit facilities and return capital to shareholders through a special dividend and opportunistic share repurchases.

To begin 2024, we completed the sale of our Nevada distributed business in January and established a quarterly dividend to initiate regular returns of capital to shareholders. In the fourth quarter, our operations generated revenue of $231 million and EBITDA of $48.8 million, bringing our total annual revenue to $1.1 billion and annual EBITDA to $222.5 million.

Our fourth quarter excludes the operations of the Rocky Gap Casino Resort and the Montana distributed operations that we sold in the third quarter which created the majority of our reported declines in consolidated revenue and EBITDA. Adjusting for these sales, revenue was down 1.6% and EBITDA was down 11% in the fourth quarter, with margins impacted by increases in labor and other costs over last year.

Moving to the results of our continuing operations. For the quarter, revenue at our Nevada Casino Resorts was up slightly to last year, while EBITDA declined 8.8%. Unfortunately, we did not see any benefit from the Formula One's initial race in Las Vegas with distressed November EBITDA down about $800,000 year-over-year.

Despite the disappointing F1 experience for us, STRAT occupancy in Q4 was 79%, up 2% over last year, with the weekends full and the midweek occupancy improving, but still lower compared to 2019. We are still missing 125,000 room nights at the STRAT when compared to 2019, which we see gradually returning as we complete renovations and add amenities to the property.

In October, we completed the renovation of STRAT's original 118-room tower, the last of our major upgrades to the property, bringing our total renovated rooms to 1,300. Recently, we saw tremendous pickup during Super Bowl, resulting in approximately $1 million in incremental room revenues over that weekend.

After a few weeks of construction delays, Atomic Golf should be open in March, and we are excited to welcome this new amenity to the STRAT. In Laughlin, fourth quarter revenue was up [ 70 ] despite having 1 less major concert. While EBITDA declined 9%, primarily due to higher labor costs.

In December, Laughlin revenue and EBITDA showed positive growth over the prior year, and we continue to see signs of margin stabilization to start 2024. Entertainment is a big driver of performance for our Laughlin properties, and we are working to optimize our offerings to create more cost-effective traffic drivers to our venues over the coming year.

In addition, our new bingo room, which caters to local residents has been successful in growing midweek revenue at our Edgewater property. Q4 revenue was down 4%, and EBITDA was down 10% for Nevada local casinos. The majority of the EBITDA decline was at our Arizona Charlie's Boulder property, where we experienced reduced room nights due to the loss of a meaningful group contract relative to last year. This led to lower margins in the fourth quarter compared to last year. However, sequentially, over third quarter, the operating margin of our local casinos has improved.

For Nevada Taverns, fourth quarter revenue was up 3% compared to last year and EBITDA was up 4% as we acquired 4 new taverns under a new brand and same-store performance remained stable. As of year-end, we had 69 tavern locations in Nevada with 66 of them in Las Vegas. We believe it could create a portfolio of 90 to 100 taverns without meaningful increases in corporate overhead and have targeted 3 to 4 additional locations to be added in 2024. The tavern model continues to generate attractive returns with the last 8 taverns we have built or bought creating an average ROI of over 25%.

In January of this year, we completed the sale of our Nevada Distributed Gaming business for approximately $240 million, including purchase cash. In Q4, our total distributed operations are down meaningfully, given that our divested Montana distributed gaming operations are included in last year's results.

Between the sale of our Nevada distributed operations this January and the third quarter sales of our Rocky Gap property and Montana distributed operations, we received total proceeds of over $600 million, generating over $500 million of liquidity after taxes and transaction expenses. These proceeds have significantly improved our leverage profile and enhanced our strategic flexibility. We reduced our debt by over $60 million in Q4, bringing our total debt repayments to nearly $240 million for the year.

Our outstanding debt at year-end consisted primarily of $398 million floating rate term loan and a $276 million of fixed rate bonds. We will repay the outstanding bonds in April, leaving us with a simplified capital structure less than 2x net leverage and full availability under our $240 million revolver. Given our low leverage and liquidity profile, we are establishing a quarterly cash dividend of $0.25 per share the first of which is payable on April 4.

In addition, we have over $90 million remaining under our stock repurchase authorization that we will use opportunistically to further return capital to shareholders. Divesting our noncore businesses has concentrated our portfolio to wholly owned casinos and branded taverns in Southern Nevada, where we see some of the most favorable macro trends in the country.

Going forward, our primary organic opportunities will come from improved performance at the STRAT and increased Tavern footprint and the entire portfolio benefiting from the continued strength of Nevada's economy.

That concludes our prepared remarks. Blake and I are now available for questions.

[Operator]

[Operator Instructions] Today's first question comes from Carlo Santarelli with Deutsche Bank.

[Carlo Santarelli, analyst]

So guys, you obviously have endured some of the labor costs through the back half of this year. As you look out to next year and all things considered speaking towards specifically Nevada Casino, STRAT, et cetera, with the refurbishments with Atomic Golf coming on in March, with kind of lapping some of the labor expenses, is there a scenario where margins could be flattish with some of the revenue uplifts coupled with some of the presumably at least lapping of expenses?

[Operator]

This is the operator. Can you speak the question, Carl.

[Carlo Santarelli, analyst]

Sorry, yes. Everything went blank there. So I wasn't sure. You live.

[Blake Sartini, executive]

Can you hear us?

[Carlo Santarelli, analyst]

I do, yes.

[Blake Sartini, executive]

Okay. Sorry. So if I -- your question -- the answer is yes. We would anticipate the margin trend to be flat throughout the balance of '24. As you did reference, we did incur the renewal of the union contract at the Strat towards the end of this year, which provides some unique challenges to that property. But I think generally speaking, your comment is accurate. We would expect flat margin trends going forward.

[Carlo Santarelli, analyst]

Great. And then if I could, obviously, putting in the dividend, a nice touch. Just in terms of your thought process around uses of the incremental capital with the leverage where it is, was there anything else that you guys perhaps considered? Or do you feel like you're sacrificing any flexibility with the dividend policy?

[Blake Sartini, executive]

No. When we committed to the dividend, we did so with the expectation we could do the dividend as well as with our significant capacity remaining buyback stock. And ultimately, as we repositioned the company with this deleveraging, we've repositioned for additional significant optionality. So from our perspective, we did this with a very cognizant opinion that we could do both and then the company is positioned with optionality for whatever may potentially come about in terms of M&A or other.

[Operator]

Today's next question comes from Jordan Bender with Citizens JMP.

[Jordan Bender, analyst]

Great. In the slide deck, it says you guys are comfortable bringing the leverage up to 3 or you want to be under 3%. Can you just maybe update us on the parameters around what you would look like -- or sorry, what you look for on the M&A front? Is it more single assets or would you go a small portfolio of assets?

[Charles Protell, executive]

Yes. Jordan, it's Charles. So yes, that's obviously our target is to remain under 3%. I don't think we're going to take our leverage up just for the sake of taking our leverage up. We have to have, obviously, capital opportunities that earn in our mind a return that's better than those alternatives of returning capital to shareholders. So -- but in that context, we do look at M&A, we have looked at M&A, I think we're not, for us, looking at something that's $50 million EBITDA north probably makes the most sense. We're not going to spend a lot of time with things that are smaller just given the integration time and management effort and also in terms of moving the needle for the makeup of the company at this point.

So our focus is going to be fairly narrow from an M&A lens. We will want to find opportunities that are either single assets or portfolios that are in the West. We're the properties owned underlying real estate. So I think that, that in general is where it is. But again, I think as Blake was saying, our view is we've set up the portfolio now with these divestitures that we could be focused on returning capital to shareholders while we continue to invest in our assets and have positioned ourselves, I think, well, to look at potential M&A opportunities that are accretive to us and fit within those parameters.

[Jordan Bender, analyst]

Great. And then just on the back of the merger announced this morning from 2 suppliers, historically speaking, has there been any positive or negative impacts to your slot floor or you've been your purchasing budgets when M&A occurs in that space?

[Blake Sartini, executive]

No. No, I think that's, from our standpoint, stand-alone on their end and no effect on our end.

[Operator]

Today's next question comes from Chad Beynon with Macquarie.

[Chad Beynon, analyst]

Blake and Charles, congrats on simplifying the story and everything here. I wanted to start with the STRAT midweek opportunities. I feel like that's something we've been talking about for a couple of years in the prepared remarks you mentioned that again. For '24, what's the convention calendar look like? Do you think that just overall visitation to the strip, which remains strong, we'll finally see kind of an inflection point for that midweek, which obviously leads to margin improvement. So any visibility into '24 midweek?

[Blake Sartini, executive]

Yes, Chad, I think you're right. We have been talking about that. And we are beginning to see some green shoots in the fourth quarter of that midweek trend. Obviously, as I've talked about before, given 65% of our room occupancy comes from the OTA sites. We are dependent a lot on those citywides for some of that midweek -- the calendar looks pretty robust for citywides. But as you know, some of these larger hotel casinos have added or increased size of their casino of their own convention areas, particularly some of the new properties that have just come on that may put some pressure on the citywides. But as I would bring into this conversation last year, we had significant disruption in the spring and fall from construction of the rooms. So I think we've said in the past that aggregated to around $5 million we felt in hotel revenue. That disruption has gone. And we have this $75 million atomic.

These are things we can control is what I'm getting at. The Atomic Range Golf facility coming on which we believe will greatly enhance our ability to generate additional midweek traffic with that wholly owned facility outside of what these citywides are looking like. But we remain bullish on our prospects for midweek. Weekends were full primarily. Our rate is getting better. And we believe this midweek begins to fill in, both through our own efforts, Atomic and other as well as the robust citywide calendar.

[Charles Protell, executive]

And Chad, I would just add to that, we have seen improvement. If you look over the course of all of 2023, our midweek occupancy was around 66% in our Q4 mid-week occupancy, even despite F1 was at 72%. So we are seeing that improvement. That being said, in '19, our mid-week occupancy was around 85%. And so that 125,000 missing room nights for the STRAT relative to '19, that's worth about $40 million in revenue to the property at just current spend levels that we're seeing. And so that's about $20 million in EBITDA. So that's where we really see the opportunity of the property. That's the reason we're making the investments we are and forming the partnerships we are with folks like Atomic and others. So we're excited now that we've got the bulk of construction behind us, Atomic opening to really see what the property does as we go through this year.

[Chad Beynon, analyst]

And then with respect to eventually getting to a goal of 90 to 100 taverns, we've heard of increased competition in the market. Charles, you talked about the returns. So it certainly sounds like a business. If you know how to do it well, it sounds like a good business to be in. But the new opportunities, the 3 to 4 in '24 and then beyond that, are these conversions from other operators that just don't have kind of the best practices that you have? Are you getting into new housing markets that are expanding in the valley? Maybe just a little bit more color around the competition and kind of where these new opportunities can come from?

[Blake Sartini, executive]

Yes, Chad. We -- as we divested of, call it, the third-party route side of the business, we were continuing to focus on our wholly owned tavern business. And by virtue of that simplification, if you will. We are, I would say, pretty humbly at the top of the pyramid in terms of new sites that are coming about and what we would call AAA locations, we tend to get the first phone call on those sites because of our size, scale, scope and our success in operating taverns. So we are very dialed into new tavern sites around the Valley. These would be greenfield sites that we're very good at building. We're very good at building boxes that have solid returns, as Charles mentioned.

We do see opportunity at times for acquisitions, which this year we have -- I think we have 4 coming on, [ 4.1 ] in the north that were prior owners that we felt locations met our criteria and that their demographic matter criteria. There are going to continue to be those opportunities, but we're focused on mostly new sites at this point going forward, and we believe that the landscape can provide the amount of sites over the years that will get us to that 90 to 100 number.

[Operator]

Our next question is from John DeCree with CBRE Securities.

[John DeCree, analyst]

I wanted to revisit your comments about F1. I think it's fairly common. We've heard from a number of your peers, not on center strip. We're positioned to the ultra high end. Curious your thoughts as to that event for next year and going forward, if there are some opportunities that you think could either change for the city overall or that you might be able to do differently to maybe maximize the contribution to the STRAT for next year and future periods?

[Charles Protell, executive]

Yes. I think it's a good question. We've had some discussions with other operators. We think there's, quite frankly, a lot of things that they could do to broaden the appeal and the audience for F1, not only to our customers but to local tier in Las Vegas. So things like selling individual day tickets instead of a package, potentially making the start times a little bit earlier allowing for dedicated casino areas, so it's easier access for our guests. So those are just a few things that we shared with the folks at F1, and we've talked about with other operators. But I think there is a general acknowledgment that the event needs to appeal to more than just high-end properties at the center strip that are connected to the event to make it a real success for all of Las Vegas.

[Blake Sartini, executive]

Yes, there is an organized non mid-strip co-op that is working together, if you will, significant -- there are significant numbers of people involved and operators involved working with F1 to do just what Charles said, trying to activate more of the city during the event, even though we didn't participate in what we expected to be the upside, I personally think it was a great event for the city, a worldwide event for the city, the way it was packaged on TV, particularly internationally. So I think taking one for the team last year was probably something that knowing what we know now, we would do again.

But going forward, we want to work with them to be more involved in the activities around that week or 10 days. It's not just the weekend. It's a week or 10 days. And this co-op of these non-midstrip operators, I think, is going to be successful in gaining some traction, certainly better than last year.

[John DeCree, analyst]

Great. That's good to hear. I think we've heard similar, Blake. I appreciate your thoughts on that as well. And then maybe as a follow-up question, bigger picture at the STRAT. So quite a bit of reinvestment lately, you've mentioned construction disruption last year. What's left in the near term to do at the STRAT. And then perhaps I ask that in a bigger context of some of the land that you have around, obviously, Atomic Golf is activating some of that. But I think you've got quite a bit more that you could maybe utilize or monetize. You've talked in the past about maybe third-party partners. Curious if you've had any updated thoughts or further conversations on those opportunities since the last we kind of talked about it.

[Blake Sartini, executive]

Yes, we have. There's no major disruptive additional capital programs planned to the STRAT at this point. As Charles mentioned, we have 1,300 of our 2,400 room inventory pretty much brand new. The other 900 or 1,100, let's call it, rooms are within 7 to 9 years and in pretty good shape. So the hotel itself is situated pretty well. We are and we have embarked on a slot floor upgrade, which is, we think will be meaningful this year, which we anticipate being done here by mid-March. And the -- there are other projects, small bar design projects and things like that designed to capture more of that traffic coming through the casino. So in terms of disruption, I think we're pretty much done with that certainly this year.

On the adjacent property, we own approximately 6 acres across the street that we've had significant conversations with many different types of uses that ultimately, we want to land on something that clearly brings more inertia to the STRAT in terms of whether it's a non-gaming hotel. We have apartment condo type discussions and frankly, some out-of-the-box entertainment type discussion. So we are very active in trying to activate that property in and around the STRAT. And in addition, by the way, we have property around our other facilities that we're having the same conversation about how we can energize our other properties with adjacent property that we currently own.

[Operator]

And the next question comes from David Katz with Jefferies.

[David Katz, analyst]

I wanted to go back to the M&A landscape and ask it a bit of a different way, which is the last time we talked about this 90 days ago, is just given how quickly the landscape has improved in a lot of areas for consumers, capital markets, et cetera. Is the market different today than it was 90 days ago and how so?

[Charles Protell, executive]

I think improving is definitely the word to be using, and I think you'll see it continue to improve as the financing market gets better. So I think that's all predicated, obviously, on interest rates. And so as we see the spend rate coming in people's anticipation of that. And plus, I think once folks settle into somewhat of the new margin environment, it's easier to predict cash flows of the businesses that we all have and where the consumer demand is. And so as long as that is stable and rate is starting to come down, I think ultimately, you'll see more consolidation, not only in our industry but others.

[David Katz, analyst]

Got it. So if I can follow-up a bit more specifically, are there more deals? Is the bid-ask different narrower or the same? In what way would we note improvement?

[Charles Protell, executive]

So I think it's certainly narrowing. But again, it's about the expectations. So we've had situations in the past where people are trying to market assets off of 2021 numbers and people are buying assets up of 2025 numbers. So that bid ask is now narrowed in terms of the discussion. But so I think again, it comes down to where are the financing markets, and I think those ultimately only get better. I think the REITs play a large part also in M&A. And to the extent that they're cost of capital improves as rates come down, I think that they will play a big part in advancing consolidation in the sector. And I'd anticipate that to happen over the course of this year.

[Operator]

At this time, we are showing no further questioners in the queue, and this does conclude both our question-and-answer session as well as our conference. Thank you for attending today's presentation, and you may now disconnect.