Red Rock Resorts Inc

NASDAQ:RRR

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon and welcome to Red Rock Resorts First Quarter 2020 Conference Call. All participants will be in listen-only mode. Please note this conference is being recorded.

I would now like to turn the conference over to Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead.

[Stephen Cootey, EVP, CFO and Treasurer]

Thank you, operator, and good afternoon everyone. Thank you for joining us today on Red Rock Resorts first quarter 2020 earnings conference call. We hope that all of you and your families are staying safe and healthy.

Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; Bob Finch, Executive Vice President and Chief Operating Officer; and Robert Tamian, Executive Vice President of Development and Strategy.

Before we get started, 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 the definitions and complete reconciliation of these figures to GAAP, please refer to our financial tables in our earnings press release and Form 8-K, which were filed this afternoon prior to the call. Also, please note that this call is being recorded.

The impact of COVID-19 has been swift and severe and our thoughts and well wishes go to all of those who have been directly or indirectly impacted by this profound crisis. We would also like to recognize and offer a heartfelt thank you to all of our medical professionals and first responders serving on the frontline of this battle. Most importantly, we would like to thank our team members for their commitments, patience and understanding, as we navigate together through this period of uncertainty.

As you’d expect this call will be different from the ones we’ve had before. While, we’ll briefly discuss our first quarter results, most of our time today will be spent reviewing the decisive actions we have taken to prepare for a new operating environment, with a focus on the health, safety cost reductions and liquidity.

So let's begin with the first quarter. 2020 was off to our strongest start since 2008 at our core properties. In January and February, we experienced very solid growth on both the top and bottom lines, carrying over the momentum from Q4 of last year. During the two month period net revenues at our Las Vegas operations, excluding the Palms increased 5.5% and adjusted EBITDA excluding the Palms increased 9.9%.

All that changed though in March, with revenues gradually slowing in the first-half of the month, and then stopping entirely on March 17, when the governor of Nevada ordered a state-wide shutdown of all non-essential businesses, including casinos in an effort to reduce the spread of COVID-19, similar to the Graton resort which is managed by the company closed on March 17.

What originally began as a 30-day shutdown on March 17, here in Nevada has now been extended to at least May 31. While the shutdown a Graton Resort has now been extended to at least June 15. When those shutdowns are finally lifted, what our business will look like is highly uncertain, as we have no real visibility regarding the impacts that this crisis will have on our company moving forward.

Despite the complete loss of revenue, we have remained committed to supporting our team members and our community during this period of uncertainty. On the team member front, just as we did after September 11, we retained our entire team for as long as we could. To that end, we are proud to have been one of only three companies in Las Vegas that continue to pay all full-time team members regular pay and health benefits, from the March 17 shutdown date through May 16, at the cost of the company of over $72 million.

Ultimately, though, between the shutdown, the need to reopen our business in phases and the expected impact of the state mandated occupancy and social distancing restrictions we were forced to lay off a significant portion of our team members. This was an extremely difficult and painful decision, and the one we did not take lightly as we understood the impact that it would have on the affected team members and the community.

We remain hopeful that Las Vegas and our business will rebound quickly, and allow us to rehire many of these valued team members, when we emerge on the other side of this crisis. We're also hopeful the state and federal unemployment safety net together with the extension through September 30, at our expense of health benefits for all those impacted team members, with those team members through the worst of this crisis. And for those who are not impacted by the layoffs, we've extended their regular pay and benefits through at least the end of May.

We've also maintained our involvement on the community front. In early April, we were among the first to support the COVID-19 emergency response fund, by contributing $1 million to purchase personal protective equipment, and critical medical supplies including test kits, for those used by first responders and healthcare professionals throughout Nevada.

In addition, we have expanded our partnership with Three Square Food Bank during this crisis, by donating over 120 pallets of food and allowing our properties be used for emergency food distribution throughout the Las Vegas Valley. And just today, Clark County began using our Fiesta Henderson property to provide COVID-19 testing to residents of the Las Vegas Valley.

The good news is that the gradual reopening of Nevada is now underway with Phase 1 having begun on May 9. Well, the first phase did not include casinos based on everything we are hearing, we remain hopeful that the casinos will be permitted to reopen in the coming weeks. And we are also hopeful that Graton Resort will be permitted to open by late June or early July.

As expected, the loss of revenue beginning in mid-March had a substantial negative impact on overall quarter. On a consolidated basis, first quarter net revenues decreased 15.6% to $377.4 million, adjusted EBITDA decreased 48.8% to $74.3 million and margins decreased 1277 basis points and 19.7%.

With respect to our first quarter Las Vegas operations, net revenues for the quarter decreased 15.6% to $356.5 million, adjusted EBITDA decreased 49.2% to $68.5 million and margins decreased 1269 basis points to 19.2%.

These numbers reflect the number of onetime charges related to the impact of COVID-19 on our business. The charges include a $27 million accrual in the quarter related to our commitment to provide regular pay and benefits to all full-time team members after the quarter end, from April 1 to April 30, which was offset in part by an approximate $20 million payroll tax benefit we received under the CARES Act.

Let's now turn to what we've been doing during the closure. As noted earlier, we've taken a number of decisive steps to prepare for a new operating environment with a focus on health safety, cost reductions and liquidity. As recently announced we will be reopening our properties in phases. First to reopen will be our Red Rock, Green Valley, Santa Fe, Boulder Station, Palace Station, Sunset Station and our Wildfire properties. If you exclude Palms from both 2019 net revenue and EBITDA, these first-to-reopen properties generated over 80% of our Las Vegas net revenue, and over 90% of our Las Vegas EBITDA during that same period.

Based upon the anticipated mix of gaming and nongaming revenues of these properties and our dramatically reduced cost structure moving forward, which we'll discuss in a minute, we believe we can reach EBITDA breakeven at 35% to 45% of our overall 2019 ex-Palms Las Vegas revenues.

As for other four properties, Palms, Fiesta Henderson, Fiesta Rancho, Texas Station, we will look at reopening these properties once we've had a chance to fully assess, how our first three opened properties are performing post-crisis, as well as the recovery of the Las Vegas market and economy as a whole.

As we prepare for the reopening of our properties, our number one priority has been and will continue to be the health and well-being of our team members, guests, and the entire Las Vegas community. To that end, and working closely with outside medical experts, we have put together a very comprehensive health and cleanliness guidelines for our properties moving forward. Something put, we are committed to providing the most safe and secure environment possible for both our team members and guests.

Here are a few highlights of what we have planned. All team members are currently undergoing FDA authorized COVID-19 testing, which testing will be completed in full prior to reopening, and such team members will also be tested at regular intervals thereafter. All guests and team member entrances at our resort properties will be equipped with state of the art thermal scanners. All team members will be required to wear PPE consistent with health authority guidelines and masks will be available to guests upon entering the property.

Touch free hand sanitizing stations will be installed throughout the property. Enhanced cleaning technology, such as electrostatic sprayers and hospital grade disinfectants will be utilized throughout the property. The visibility and frequency of cleaning will be significantly increased throughout the public and non-public areas of the property. And all team members will receive rigorous training on the company's new health and cleanliness standards and protocols.

Importantly, our new guidelines will meet or exceed the highest standards by federal, state and local authorities, and will be adapted as circumstances require. When our guests walk through our reopened doors, we want them to know that their health and safety is our first priority. At the same time, we also want our team members to know that these changes will help safeguard their health as well as, whether interacting with guests or each other. For those who are interested, a copy of these guidelines are available on our website.

Another primary focus of the company during this closure was to re-examine and challenge every aspect of those things we can control including our cost structure. Based upon that review and the uncertain business environment we face going forward, we had to make some very difficult but necessary decisions in order to manage the size of our workforce for expected business levels, in addition to instituting other cost mitigation measures that we outlined in the moment.

As we talked about earlier, our plan is to reopen in phases. That approach along with the expected impact of state mandated occupancy and social distancing restrictions meant that we had to make meaningful staffing level reductions, both at the property and corporate level. All told, these workforce reductions reduced our number of full-time team members by just under 40%.

In addition to these workforce reductions, we've also taken a number of other proactive steps to streamline our cost structure and reduce cash outflow, including significant salary cuts for senior executives across the company, led by Frank and Lorenzo Fertitta volunteering to forego 100% of their salaries for the duration of the crisis, suspending our quarterly dividend, eliminating non-essential CapEx spending for the remainder of the year and reducing general overhead expenses, and significantly reducing costs related to our outside services through the termination or renegotiation of vendor and other agreements.

We are confident that these actions will position us to as a much leaner and more efficient company that is better able to manage the uncertainty as we move forward. By the time this exercise is over, we expect to have reduced our operating expenses by approximately $150 million on an annualized run rate basis.

Notably, that amount does not include any labor expense savings related to those properties that will not open as part of our first opening phase, nor does it include savings related to any amenities that will not be initially provided. But we estimate that those additional labor expenses are approximately $175 million on an annualized run rate basis. That amount would decline to the extent that our closed properties were to come back online, or those amenities were to again be provided.

These cost mitigation efforts will enhance our already inherently resilient business model, as over 60% of our costs are variable in nature. Importantly, that operational flexibility will allow us to quickly adjust to increases and decreases in business levels, as we move into the recovery phase.

Let's now turn to liquidity. As a precautionary measure, we drew down almost the entirety of our $1 billion credit facility in mid-March and as of May 18, we had approximately $950 million in cash on our balance sheet. As such, we believe that we have ample liquidity to withstand an extended 0 revenue environment.

Our estimated cash burn including corporate and operating expenses, cash interest expenses, prorated principal repayment and prorated CapEx is approximately $49 million a month. Keep in mind that this number includes fully loaded labor costs for our first three open properties and corporate labor expenses.

In an event that we are required to continue in or return to an extended 0 revenue environment, the vast majority of our continued laboring expenses would fall away. And our go-forward burn rate could be reduced by approximately $24 million a month. And that reduced burn rate and our current cash on hand will allow us to operate without need for additional capital for over 36 months in 0 revenue state, giving us one of the longest runways in the gaming industry.

In addition, we believe we'll be in a position to continue to comply with all of our financial covenants for the foreseeable future, and we have no significant debt maturities until 2025. For all these reasons, we believe we will be well-positioned financially to handle the uncertain times ahead.

Finally, two Native American items, first, as you will recall, our plan to develop the casino in North Fork Tribe have installed the last several years by litigation brought by opponents of this project. We are pleased to share that the Supreme Court of California has scheduled oral arguments for June 2, 2020 in a very similar case involving an enterprise tribe, which we will hope will result in a decision that clears the way to finally develop this very attractive project on behalf of the North Fork Tribe.

Also, with respect to the great management agreement, while the extension has not been determined yet, the management agreement does provide for an extension of the term of the agreement as a result of the current shutdown.

Throughout our 40 year plus history, we have weathered a lot of challenges and we will weather this one as well. Although, these are unprecedented times, we feel very confident in our ability to manage through this crisis and succeed thereafter.

Operator, this concludes our prepared remarks for today, and we’re now ready to take questions from participants on the call.

[Operator]

[Operator Instructions] Our first question comes from Joe Greff with JP Morgan. Please go ahead.

[Joe Greff, JPMorgan]

Good afternoon, everybody. Steve, thanks for providing us an EBITDA breakeven metric. I just wanted to take that one sort of operating sensitivity a step further. When we think of free cash flow breakeven or free cash flow usual levels as a percentage of prior year revenues, where would you peg that roughly?

[Stephen Cootey, EVP, CFO and Treasurer]

So you have – when I started at EBITDA breakeven about 35%, you'd have basically 10% to that to cover interest costs.

[Joe Greff, JPMorgan]

Got it. And then when you think about the locals market right now you have sort of two counterbalancing things. You have a large number of retiree, who spend in visitation levels are independent of job security, but then you also have potential for high unemployment for strip employees that might frequent your local establishment. How do you think about the mixed and how sensitive are you to that maybe that ladder at risk category?

[Frank Fertitta, Chairman and CEO]

Well, look, our business model is, as you know, very different than the Las Vegas strip. The majority of our revenues do come from a local gaming market. Most of our customers live within three miles of our properties. You are correct, that a big portion of our slot revenue does come from retirees and baby boomers that are not necessarily reliant on employment.

I think in the short to mid-term, the government has definitely been out there, bridging employees that don't have jobs right now, which in the short to mid-term we should be okay. Of course, in the long-term, the health of the Las Vegas strip is very important to the health of the overall Las Vegas economy. So we're hopeful that the government unemployment checks and all will be able to bridge to the other side of a good strong recovery on the Las Vegas strip.

[Joe Greff, JPMorgan]

Great, thank you for that Frank. And then Frank, well, I have you here, as you sit here now, what do you think the future of the Palms Casino is? I mean, do you reopen or do you keep close and try to monetize or sell later on? How are you presently thinking about that?

[Frank Fertitta, Chairman and CEO]

Sure. First, we can dispel the rumors that the Palms is for sale. That is a rumor, it's not correct. The way we're evaluating the foreclosed properties, is we felt that we took a very hard look at how much of our customer database we can cover in Phase 1, and be most efficient as possible to generate as much revenue as possible, right?

So the tourist part of the recovery is going to lag, the recovery in the local gaming market, which we think we should be able to lead the recovery in the local gaming market, given the geographic distribution of our properties, the quality of our properties. And frankly, the quality of our team members who are so important to have relationships with the repeat customers in our business that typically come to our properties, three plus times a week.

The Palms will be reopened based on what we see from initial demand with the six properties. And then what we're able to see in terms of tourists coming back to Las Vegas, how the strip is doing and everything else. But our plan is to reopen the Palms, but it's going to be dependent on what we see in the marketplace.

[Joe Greff, JPMorgan]

Thank you.

[Operator]

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

[Carlo Santarelli, Deutsche Bank]

Hey, guys, thank you. And Steve, thanks so much for all the color that you provided in the opening remarks. If I could, just in terms of how you are thinking about the six assets that you will open, and in terms of how you guys would kind of position the headwinds, i.e. what keeps you up in that a little bit more?

Is there tremendous concern or any concern at all about kind of the stipulation around social distancing in it? Or are you more thinking about this as what's going on in the local economy and even with some supply taken out of the market? What's the demand curve look like?

[Frank Fertitta, Chairman and CEO]

Look, I think there is definitely unknowns. We're not sure what this is exactly going to look like. On the other side, I think some of the new guidelines definitely will have friction in terms of the customer experience. We have gone out and done quite a bit of research with our customers, and I can tell you that about 80% of them were very positive about returning to visit our properties within two weeks of reopening.

But we also learned that they're very concerned about safety and health. And that's why we have gone to the greatest links that we possibly could in terms of testing all of our team members, installing thermal cameras, and all of our entrances and trying to reduce the amount of friction to the most that we possibly could to make for a good guest experience. There is going to be social distancing and there is going to be capacity restraints in terms of how many people can have in a restaurant, casino floor.

We're going to frankly have to work through that. And hopefully, as we get more testing and information, we'll see that the disease is under control, and slowly, but surely be able to return to a normal operating environment.

[Carlo Santarelli, Deutsche Bank]

Great, thank you. That's a helpful. And then if I could just double back to the comments on the cash burn. I just want to make sure I understood fully what you were saying. The $49 million a month run rate with fully loaded labor costs that includes Wildfire and the six other casinos. That's a $49 million just expense run rate with those properties open, but then you went on to say that if, in fact, those properties remained closed, that would then drop to a $24 million. So implying that the labor aspects and the aspects of opening those properties, again adds $25 million revenue agnostic. Is that correct?

[Stephen Cootey, EVP, CFO and Treasurer]

That's right. But in addition, I just want to make sure that it's clear that that just doesn't include just labor it’s also OpEx, interest costs and CapEx. That's correct. The $49 million to $24 million, effectively, that implies about $20 million of labor would fall away.

[Carlo Santarelli, Deutsche Bank]

Understood. Okay, great. Thank you both very much.

[Operator]

The next question is from Barry Jonas with SunTrust. Please go ahead.

[Barry Jonas, SunTrust Robinson Humphrey]

Hey, guys. Any sense what the promotional environment could be as the casinos are reopened? I just want to get a sense if you think it'll be elevated given potentially less demand or if folks will be more focused on costs and margins. Thanks.

[Frank Fertitta, Chairman and CEO]

Look, I think this is a very unique situation in a very unique environment. And, fortunately or unfortunately, we’ll all find ourselves in a similar situation all at the exact same time. And while we had been focused on eliminating redundant marketing expenses and being more efficient in our marketing spend, I mean, the crisis is definitely accelerated and made us much more focused on what a reopen business would look like. And the fact that we're going to have to be much more disciplined in what's important to our customers. And we believe the market is going to be rational because it's going to have to be that way for people who survive in this new environment. So I don't know if you have anything to add to that Steve?

[Stephen Cootey, EVP, CFO and Treasurer]

No. I think that was perfect, Frank.

[Barry Jonas, SunTrust Robinson Humphrey]

Great. And last quarter we talked a little bit about exploring land sales. Presumably, the world is a lot different now. But where is that -- those processes? Is that something you're still entertaining? Or is the market just turned and that's on a hold?

[Frank Fertitta, Chairman and CEO]

No. Look, I think we had gotten some fairly good traction on several of the pieces of land that we have. We have a significant amount of value in undeveloped real estate. And, we were making pretty good progress. But as you know, in this environment everybody's pretty much gone on pause, I think until people see what happens in the economy and where things settled out.

So we're hopeful if things get going again and everything, we can restart that process.

[Barry Jonas, SunTrust Robinson Humphrey]

Great. And then the last one for me, as we think about reopening strategies and likely reduce gaming supply for social distancing and reduced occupancy. Maybe just talk about what the impact ultimately to gaming could be, given the fact I'm guessing you're not at 100% occupancy on your gaming floor? Maybe just help frame what a reduced supply ultimately could translate to on the revenue line item.

[Frank Fertitta, Chairman and CEO]

Look, let's go through it a little bit. I think that in the slot department, we're going to be reduced to 50% of capacity. I think the reality of getting over 50% capacity is really a peak period short window situation. So I think for the most part on swap machines, you typically have people social distancing anyway. We have pretty good sized casino floors and slot operations.

I think when you come to table games, which is more labor intensive and you cut the occupancy down to, say three positions per table, I think we're going to be a little bit more challenged on table games to actually be profitable there. We're going to do our best. And then I think when you look at restaurants and bars and things like that, again, it's going to be a bit more challenging. The restaurant business is a very thin margin business at the end of the day. And to be reduced to 50% capacity in restaurants and bars is not going to be helpful.

But I think the good news is that our primary profit generator, which is slot machines, other than short periods of time on peak occupancy, we should be okay.

[Barry Jonas, SunTrust Robinson Humphrey]

It's really helpful. Thank you so much, guys.

[Operator]

The next question is from Harry Curtis with Instinet. Please go ahead.

[Harry Curtis, Instinet]

Hello, everyone. Just a couple of follow-up questions on the same issues. Can you go back to the mix, maybe it'd be helpful to get a sense of what percentage of your frequent player cards or card system you believe would be retirees and maybe less exposed to the risk of job loss?

[Stephen Cootey, EVP, CFO and Treasurer]

Hey, Harry. Just for competitive reasons, we're not going to go parse the database on the call.

[Harry Curtis, Instinet]

I mean, can you give us a sense of a broad brush – I’m not -- I guess where I'm going with this and this is -- I mean it might be encouraging. Or is there anything encouraging that would lead you to believe that the mix of your business is more retirees or ex-retirees that are less likely to be hunkering down more? I'm giving you an opportunity to…

[Stephen Cootey, EVP, CFO and Treasurer]

I agree. No, I understand Harry. I think a large chunk of our database is boomers and retirees. And we feel those folks are fairly insulated from the downturn.

[Harry Curtis, Instinet]

All right. You mentioned how well you guys were doing across the portfolio ex Palms in January and February. Can you give us some perspective on how the Palms was doing relative to not only your expectations but also in the last couple of quarters? And what trends were moving in the right directions, so that we can get a sense of if and when it does or when it does reopen? What the expectations ought to be?

[Stephen Cootey, EVP, CFO and Treasurer]

Sure. I mean, when I break down the Palms, and again, we’ve disclosed the numbers in the past, and so from a revenue perspective, we had about $37 million in net revenue in the quarter, which we thought was pretty good. On the EBITDA front, actually EBITDA up right negative 47, but what you have to take into consideration when you adjust for negative hold, we actually showed a positive EBITDA of $1.8 million for those first two months. So we were trending in a very positive manner.

[Harry Curtis, Instinet]

Got it. And my last question is, can you speak to amenities that really weren't all that profitable that could be slow to come back, and at the end of the day it actually could lead to a higher margin on a lower comparable level of gaming revenue?

[Frank Fertitta, Chairman and CEO]

Sure. I mean, for one, we will be opening none of our buffets. Buffets did generate traffic, but they were definitely lost leaders. Those will not be operating in Phase 1 as well as some other specialty restaurants. So we're going to narrow it down to basically the restaurants that were the most popular and had the most throughput, but we're going to leave some of the other ones unopened in Phase 1. We're not going to open poker rooms in Phase 1, we just didn't think it made sense with only three players per table or so that that would be a profitable venture. So that'll be on hold.

And then movie theaters which actually are good for our business, those are going to probably lag, what would be a Phase 1 opening only because I don't think there's a lot of product out there right now, Harry. So we're going to have to wait for the distribution of the movie houses to have good product out there that people wanting to see.

[Harry Curtis, Instinet]

Got it. All right, that's helpful and good luck. Thank you everyone.

[Operator]

The next question is from Jared Shojaian with Wolfe Research. Please go ahead.

[Jared Shojaian, Wolfe Research]

Hi. Good afternoon, everyone. Thanks for taking my question. So you touched on Graton a little bit, but can you just talk more about how we should be thinking about the November expiration date? The opportunity to extend that, how you're thinking about that?

[Stephen Cootey, EVP, CFO and Treasurer]

Well, I mentioned on the remarks, right, we know it's going to be extended due to closure, but at this time we don't know the length of that extension.

[Jared Shojaian, Wolfe Research]

Okay. Thank you. And then you talked about the 35% to 45% of ex Palms revenue to get to breakeven. You've taken out a lot of costs, some of which will come back as demand returns. Do you have a sense for how much of prior peak revenue you need to get back to the prior EBITDA level, because presumably, some of these costs are true permanent reductions? Is that a fair way to think about it?

[Stephen Cootey, EVP, CFO and Treasurer]

Yes, that's right. As I mentioned on the call, I'd say about $150 million we would view is something pretty permanent.

[Jared Shojaian, Wolfe Research]

Okay, thank you. And I guess just one last one for me. Has your thinking on the sale leaseback model changed at all, whether you have a more favorable less favorable view of it after this crisis? How are you thinking about that?

[Stephen Cootey, EVP, CFO and Treasurer]

Well, I think -- I mean, arguably, it’s just another way to raise capital. I think the fortunate thing unlike 2008, all capital markets are open to the company, whether it's the debt markets or equity markets.

I think the positive here throughout this crisis and what we've learned is we own all our real estate, so we as a company have maximum flexibility in what to do with it.

[Jared Shojaian, Wolfe Research]

Okay. Thank you.

[Operator]

The next question is from Chad Beynon with Macquarie. Please go ahead.

[Chad Beynon, Macquarie]

Hi, afternoon. Thanks for taking my question. Against the competitive Las Vegas locals market during the last downturn, can you talk about how your, I guess, Phase 1 portfolio performed against that group? Just looking for if you gained some market share. And then secondarily on that, and I think I know the answer, but was it more of just kind of a spend per visitor situation where you actually were getting the visits? Your customer just was coming with a smaller wallet. Thanks.

[Stephen Cootey, EVP, CFO and Treasurer]

You're going back to 2008. In 2008, I think your second point is absolutely correct in terms of -- I'll have to go back and take this offline in terms of how those companies actually -- those individual six properties performed during the crisis and get back to you Chad.

[Chad Beynon, Macquarie]

Okay. On the Red Rocks refurb, could you give us -- I don't know if I missed this an update in terms of where that is from a spend standpoint and just a finishing standpoint.

[Stephen Cootey, EVP, CFO and Treasurer]

Well, it's complete. It’s just waiting now for a guest to occupy them. We have probably about $8 million retainage left to spend but the work has been done.

[Chad Beynon, Macquarie]

Okay, great. Thank you very much.

[Operator]

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

[Shaun Kelley, Bank of America Merrill Lynch]

Good afternoon, everybody. Just two quick ones. Steve, you mentioned on the Graton extension. But could you just, let us know, is it really just a -- what's the mechanic? Is it a just a kind of a extension based on the amount of time that the property is closed kind of thing? Is that the basic idea that you just don't know how long it's going to remain closed? Or how does mechanic work? If you can share.

[Frank Fertitta, Chairman and CEO]

Yes. I'm going to have Jeff Welch, our general council answer that question for you.

[Jeff Welch, EVP and Chief Legal Officer]

Hi, Shaun. The management agreement provides that the period of the closure will effectively measure what the business was doing when it closed, and does it get back to substantially all of the business that it was doing prior to closure. So it's actually not a defined period that can be measured by date of closing to date of reopening to determine the extension.

[Shaun Kelley, Bank of America Merrill Lynch]

Great. So if I'm understanding it correctly, then that actually means that it's almost like a business interruption style kind of make hole for the amount that you would have been making in that period that was lost, if I understand that correctly.

[Jeff Welch, EVP and Chief Legal Officer]

I'm not sure I would characterize it as working exactly that way. I think, you should think about the closure effectively being ending at the time when the Graton resort gets back to the level that it was offering before it closed.

[Frank Fertitta, Chairman and CEO]

Basically when it gets back to a substantially able to operate the facility the way it was operated before.

[Shaun Kelley, Bank of America Merrill Lynch]

Okay, understood. Thank you for the extra detail on that. And then a second question, and it's fairly high-level. I think you've tackled this in a few different ways. But just broadly, could you speak maybe about during your experience during the last downturn what does tend to happen out there on the strip? And we've seen, I think, some major operators already removing things like parking fees and whatnot.

Do you expect to see some enhanced competition from the strip for some of the marginal local dollars and just maybe a sense of how that played out, how successful some of those initiatives were or were not during 2008, 2009? You probably saw some very similar behaviors back then as well.

[Frank Fertitta, Chairman and CEO]

I mean, look, we've been doing this for over 40 years, and it's no secret that from time to time, whatever the strip decides to try to go after a local business. And it's not to say that locals never go down to the strip, they do, once in a while. But the reality is local gaming is based on, number one, convenience, number two, the quality of the product. Our product is specifically designed to cater local customers ingress egress convenient parking, the way the slot floors are laid out, the value of the slot floor, value proposition.

And most importantly, these are repeat customers. They want people to know them, recognize them, know what they want. And that's why our team members are really our most valuable thing that we have there. They're the most valuable asset that we have. And that's why we have gone to extra lengths to keep our team members on that have the relationships with all these customers.

I can tell you, I know when I go places and I'm sure you guys know as well. You go to where you recognize and people take care of you, and they know you, and it's convenient. And it's the same thing here. So I mean, we're in the suburbs, our primary customers live within three miles of where we are. So I would not anticipate any material change.

[Shaun Kelley, Bank of America Merrill Lynch]

Thank you everyone.

[Operator]

The next question is from Stephen Grambling with Goldman Sachs. Please go ahead.

[Stephen Grambling, Goldman Sachs]

Thank you. Two quick follow-ups. First, I realized perhaps early to fully think through this, but how do the recent events alter your thinking about the right capitalization of the business in a more normalized environment? You generally anticipate holding more or less cash and/or carrying rough levels of leverage?

[Frank Fertitta, Chairman and CEO]

Look, I think it’s apparent to everyone that unforeseen events, mean that you need to have flexibility and you need to have runway. And less leverage is better and more flexibility is better.

[Stephen Grambling, Goldman Sachs]

Fair enough. And then second, what are you watching to get comfortable with to open the Palms relative to the other assets? Is there a specific milestone related to visitation on the strip or more the read from those other properties and your ability to get your other properties and your ability to get higher value players?

[Frank Fertitta, Chairman and CEO]

It's going to be number one dependent on what we see at the six properties, what we see in terms of profitability at the six properties. And we will be looking at whether we think we can be profitable on any additional properties that we reopen. I think that's going to be the metric.

[Stephen Grambling, Goldman Sachs]

Fair enough. Thanks so much.

[Operator]

The next question is from John DeCree with Union Gaming. Please go ahead.

[John DeCree, Union Gaming]

Good afternoon, everyone. Thanks for taking my questions. Steve, I think you've answered this one in a couple different ways, but to ask it a little bit more directly perhaps. When you think about getting revenue back to 35% and breaking even on EBITDA, how are you thinking about to flow through beyond that 35%? Is there kind of a range? It probably depends on mix and what amenities are open. But is there a broad range that you're thinking about for flow through?

[Stephen Cootey, EVP, CFO and Treasurer]

I mean, I think in the past we've given 50% to 70%. We expect a little bit higher. But you've answered your own question. Really, I mean, a lot of it's going to depend on how the business opens once we're open up we’ll see where the revenue is.

[Frank Fertitta, Chairman and CEO]

We’ll see where the revenue is.

[John DeCree, Union Gaming]

Yes. Fair enough. That's helpful. And lastly, you've talked about the $20 million receivable from the CARES Act and it may be a little soon and probably still waiting for some guidance. But have you been able to quantify any additional benefits that you might get from CARES Act in the future?

[Stephen Cootey, EVP, CFO and Treasurer]

Yes. I think the CARES Act has been very helpful for us. We expect to get if all goes well another additional $15 million through the payroll retention. There's also the ability to defer about $10 million, what I would call from FICA, from a FICA [indiscernible].

And then we also have a QIP came back. As you know, that was a -- we were a big beneficiary of that for the Palms. There was a technical correction in the bill. And the CARES Act that allowed us to get another $28 million related to the acceleration of depreciation. And then there's also adjustable taxable income deductible moved from 30% to 50%. So those main four benefits are the big ones right now.

[John DeCree, Union Gaming]

Great. Thanks, Steven. Good luck on the reopening everyone.

[Stephen Cootey, EVP, CFO and Treasurer]

Thanks.

[Frank Fertitta, Chairman and CEO]

Thank you.

[Operator]

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

[Stephen Cootey, EVP, CFO and Treasurer]

Thank you everyone for joining us. And please be healthy and safe, and look forward to hearing from you -- talking to you again in 90 days. Take care.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.