Red Rock Resorts Inc

NASDAQ:RRR

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon and welcome to Red Rock Resorts Second Quarter 2021 Conference Call. [Operator Instructions] 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]

Thank you, operator and good afternoon everyone. Thank you for joining us today for Red Rock Resorts second quarter 2021 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta as well as our executive management team.

I’d like to remind everyone that our call today will include forward-looking statements under the Safe Harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. During this call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release and Form 8-K, which were filed this afternoon prior to the call. Also, please note this call is being recorded.

Before we get started, I’d like to note that we will be comparing our 2021 second quarter results against our 2019 second quarter results. Given that our properties were closed for a portion of 2020 second quarter due to COVID-19 pandemic, we believe this financial comparison provides clear insight into our performance this past quarter. Please also note that in 2019, we had all 10 of our large properties open, whereas in the second quarter, only 6 of the 10 were operating.

Now, let’s take a look at our second quarter results. On a consolidated basis, our second quarter net revenue was $428.2 million, down 11.3% from $482.9 million in the second quarter of 2019. Our adjusted EBITDA was $210.2 million, up 82.4% from $115.2 million in the second quarter of 2019. Our adjusted EBITDA margin was 49.1% for the quarter, an increase of 2,522 basis points from the second quarter of 2019 and up 466 basis points from the first quarter of 2021.

With respect to our Las Vegas operations, excluding the impact of our foreclosed properties, our second quarter net revenue was $420.7 million, up 32.1% from $318.5 million in the second quarter of 2019. Our adjusted EBITDA was $224.8 million, up 108.7% from $107.7 million in the second quarter of 2019. Our adjusted EBITDA margin was 53.4%, an increase of 1,964 basis points from the second quarter of 2019 and up 450 basis points from the first quarter of 2021. On a same-store sales basis, we achieved the highest net revenues, highest adjusted EBITDA and highest adjusted EBITDA margin in the history of our company. During the quarter, we continue to prioritize free cash flow converting 72% of our adjusted EBITDA to operating free cash flow, generating $150.1 million or $1.29 per share. This brings cumulative free cash flow generated by the company since our June 2020 reopening to the end of the second quarter to almost $500 million or $4.28 per share, with virtually every dollar being returned to our stakeholders.

Taking a look behind the numbers, the overall customer trends we saw in the second quarter were consistent with the trends we’ve seen since our reopening in June 2020. We continue to see strong and consistent visitation from our younger demographic, increased spend per visit, more time spent on device plus the continued return of our core customer. And as the government mandated capacity restrictions rolled off during the quarter, we began to see the return of our non-gaming segments as both hotel and food and beverage revenue ex buffet has returned to pre-COVID levels.

Our sales and catering business continues to ramp up as we continue to build out our book of business in the back half of this year into 2022. These trends were all positively impacted by the continued rollout of the COVID-19 vaccination program, the removal of capacity restrictions for Clark County on June 1 and federal stimulus money. These positive trends were offset by approximately $3.2 million of COVID-19 mitigation costs for the quarter and approximately $2.2 million in carry costs associated with our closed properties for the quarter.

On the expense side, we continue to expect to achieve approximately $200 million per annum of cost savings compared to our pre-pandemic cost structure. The company continues to benefit from the actions we took to streamline our business, optimize our marketing initiatives and renegotiate a number of vendor and third-party agreements. These initiatives, along with maintaining a disciplined operational focus, have enabled the company to achieve a sustained higher profitability and drive more free cash flow.

Now, let’s cover a few balance sheet and capital items. The company’s cash and cash equivalents at the end of the second quarter were $91 million, and total principal amount of debt outstanding at quarter end was $2.72 billion. In the second quarter, we paid down $150.5 million in debt. And since the end of the second quarter, we paid down an additional $31 million, which represents the repayment of all drawings under our revolving credit facility. Since our June 2020 reopening, we have reduced our net debt levels by approximately $518.8 million from a peak level of $3.1 billion.

Capital spend in the second quarter was $12.1 million. And as mentioned in our previous earnings call, we anticipate our 2021 maintenance capital spend to be between $65 million and $75 million. Also during the second quarter, we made a tax distribution of approximately $55.8 million to the LLC unitholders of Station Holdco, which included a distribution of approximately $32 million to Red Rock Resorts. The company elected to use $26.6 million of its distribution to purchase slightly over 682,000 Class A shares at an average price of $38.92 per share under its previously disclosed $150 million share repurchase program. When combined with our debt repayment, we’ve returned $177.1 million to our stakeholders during the second quarter. With the huge reduction in our net debt level over the past few year, we are well on our way to having one of the most solid balance sheets in the industry, which gives us the ability to focus on longer-term growth opportunities as well as consider additional ways of returning capital to our stakeholders as we move forward.

Now, let’s provide a short update on development pipeline. Starting with our Durango development, we are extremely excited about this project, which is situated on a 71-acre parcel ideally located off the 215 Expressway and Durango Drive in Southwest Las Vegas Valley. The project is located in the fastest-growing area in the Las Vegas Valley, and there are no unrestricted gaming competitors within a 5-mile radius of this project site. We are working through the planning and budgeting phases of this project with the goal and expectation to have a shovel in the ground in the first quarter of 2022. Once the project is started, we anticipate construction will take approximately 18 to 24 months. When complete, the project will include over 100,000 square feet of casino space with over 2,000 slots and 40 table games, a state-of-the-art sports book, over 200 hotel rooms and suite product and 4 full-service food and beverage outlets.

Now, turning to North Fork, as you may know, not long after our last earnings call, the Tribe received an unfavorable decision from the same California state appellate court that had earlier ruled against North Fork in the state of California, a decision, which in August 2020, the California Supreme Court had effectively reversed and remanded to the lower court with the instructions to reconsider its prior decision against the Tribe. We believe that this lower court decision contravene the California Supreme Court instruction as well as California law. Both Tribe and the State of California have already filed and completed the briefing on their separate petitions for review with the California Supreme Court. We expect to hear whether these petitions will be granted in the next 5 to 9 weeks. In the meantime, we have continued to progress our efforts with respect to this very attractive project, including the development and design and initial talks with prospective lending partners. We expect to be in a position to provide an update at or prior to our next quarterly earnings call.

Lastly and as previously disclosed on prior earnings call, on May 3, we entered into definitive agreement to sell the Palms Casino Resort in Palms Place for an aggregate price of $650 million in cash to the affiliate of the San Manuel Band of Mission Indians. The closing of this transaction is subject to customary closing conditions, including regulatory approvals, and is expected to be completed before the end of the year.

In conclusion, as government-mandated restrictions fell away and more of our population became vaccinated, this last quarter, we saw the continued return of our core customer while continuing to retain our share of the younger customer demographic. A significant pent-up leisure demand led the company to historic revenues. This, coupled with our disciplined operating approach to running our business, allows the company to enjoy record high EBITDA, EBITDA margin and free cash flow conversion. We are happy with these results for the quarter.

Our primary focus continues to be the health and safety and wellbeing of our team members and guests. On both counts, we continue to believe that even brighter days are ahead. With our best-in-class assets and locations, unparalleled distribution and scale and our own pipeline of 6 strategically located gaming and title properties, we believe that we are uniquely positioned to capitalize on the very favorable long-term demographic trends and high barriers to entry that characterized the Las Vegas locals market. Lastly, we would like to recognize and extend our thanks again to all of our team members for their hard work and for their support to us and to our guests for their support throughout this pandemic.

Operator, this concludes the prepared remarks for today. And we are now ready to take questions from participants on the call.

[Operator]

[Operator Instructions] The first question comes from Joe Greff with JPMorgan. Please go ahead.

[Joe Greff, JPMorgan]

Good afternoon guys. Great results here. Given that the locals market is in this great scenario where demand is accelerating, capacity has gone the other way. Maybe, Frank, if you can give us an update on how you are thinking of some of these closed properties, the three properties that are closed. How you are thinking about potentially layering them on, reopening them? And then if you are thinking of opening one of the three, how challenging is it right now to find staff and just labor at your presently open properties as revenue keeps coming back?

[Frank Fertitta, Chief Executive Officer]

Look, the labor market is more challenging than it had been pre-COVID, but we got well ahead of the market in terms of wanting to be the preferred employer in the Las Vegas locals market and get ahead of what we saw coming with resorts world. So, we also kept all of our employees on during the crisis. So, it’s put us in a better position than if we would have closed the properties and had to reopen them. So overall, we have done very good and we haven’t had any problems having all of the amenities open seven days a week. That’s been good. I think we continue to evaluate these closed properties. We have come to no conclusion at this point in time, if and or when which property we would open. Our primary focus right now has really been on Durango, which we think is a great development opportunity in the most underserved part of the Las Vegas Valley. So, that’s really where our primary focus has been. But we will continue to evaluate the three properties that are closed and if and when we think they can add to the absolute profitability of the company going forward.

[Joe Greff, JPMorgan]

And Frank, just adding on to your comment about Durango, I didn’t hear a project CapEx number there. So obviously, maybe you are not prepared to disclose it. What’s holding back on finalizing that estimate internally? Is it bringing in partners? Is it monetizing part of that 71-acre parcel to a partner? Is it monetizing other land bank or other parcels to net that cost down? I guess, what’s sort of the gating issue?

[Stephen Cootey]

I mean, Joe, I think I will break that up into two pieces. The first, I think, is pretty straightforward going through the budgeting and planning process right now. So, we are going through detailed design drawings, completing those drawings and getting them out to our construction partners and are waiting to finalize bids. So, we should be…

[Frank Fertitta, Chief Executive Officer]

We want to come to you guys with the right number. We want to get bids and GMPs and understand where we are. I think we will be there by hopefully the next earnings call.

[Stephen Cootey]

Exactly. And I think the second piece, I think you touched on it, the 71-acre parcel of land there. We do believe there is an opportunity to parse off a portion of that land and look for development partners to help and help met that cost down.

[Joe Greff, JPMorgan]

Thanks, guys.

[Operator]

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

[Carlo Santarelli, Deutsche Bank]

Hey guys. Good afternoon. Thank you. Obviously, Steve and Frank, when you guys look at kind of the free cash flow the business is throwing off right now and you kind of extrapolate out to the end of this year [Technical Difficulty] like something in times. At what point do you think you take a more firm view beyond kind of the pay for Durango and whatever that proves to be? And perhaps our [Technical Difficulty] capital return strategy? And how do you guys kind of think about [Technical Difficulty] what’s the buyback here in this world?

[Frank Fertitta, Chief Executive Officer]

You broke up a little bit, but – you are breaking up a little bit, but I think your question was relative to start thinking about other ways to return capital to shareholders. Is that what it was?

[Carlo Santarelli, Deutsche Bank]

Yes. Sorry, I was just – I was noting that kind of at year-end leverage looks like it will be around 2x. And with the free cash flow you are throwing off, obviously, Durango will be able to be built, and you will probably have some optionality as well. So, just kind of how do you think about that?

[Frank Fertitta, Chief Executive Officer]

Yes. So, I will let – I will say a few words, and I will let Steve and Lorenzo add in, if they want to. Going forward, I think we want to have a more conservative balance sheet. We want to have flexibility in the company to be able to take advantage of all of these high-return development opportunities that we have in the Las Vegas market, which we think is the best gaming market in the United States. And then we also want to have the ability to take a balanced approach to paying down debt, buying back stock and paying dividends. We want to have a balanced approach. I don’t know, Lorenzo, if you have anything to add.

[Lorenzo Fertitta, Vice Chairman]

No, that’s it.

[Carlo Santarelli, Deutsche Bank]

Alright. Thank you, guys.

[Operator]

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

[Barry Jonas, Truist Securities]

Great. Thank you. Maybe to start, can I – can we get your thoughts on the new indoor mask mandate in Nevada? I would love to get your perspective on what kind of impact that could potentially have on your business?

[Lorenzo Fertitta, Vice Chairman]

Obviously, it’s hard to predict the effect that it’s going to have. Any time that you see new headlines and people talking about COVID or COVID restrictions, it’s certainly not a positive…

[Frank Fertitta, Chief Executive Officer]

Although the last 12 months, we did have a lot mandate.

[Lorenzo Fertitta, Vice Chairman]

I would just say we navigated some much more difficult situations than we currently have in front of us here. And I will say that when the mask mandate came off, which I think was early June, we didn’t really see any change in our business. Meaning there was no significant upside when people didn’t have masks or didn’t have to wear masks. So, I can say that our employees, obviously, have all complied without any issues. And in Q1 and part of Q2, where customers were wearing masks, there didn’t seem to be an issue there either, but we will have to wait and see how that plays out.

[Stephen Cootey]

Yes. And if there is an impact, it’s most likely short-term, right. And long-term, we still feel very strongly about the long-term favorable trends in Las Vegas as well as the strength of our platform.

[Lorenzo Fertitta, Vice Chairman]

We are feeling the positive trends in the growth in the population. Particularly, we are seeing a lot of new faces and growth in our VIP and higher-end segments. We have seen growth in Q2 over Q1, even in our younger segmentation. So, general trajectory of those areas have been positive to us. And we are seeing the effects of the overall supply-demand dynamics that we have been talking about for decades now.

[Frank Fertitta, Chief Executive Officer]

I think minus the mask and the new cycle of the Delta variant in all the business, it feels very good. And I think we have no crystal ball in terms of short-term revenue. But I can tell you from a long-term perspective, we think that we have the best locations and the best gaming market and control six great development sites in the market. So, we are pretty bullish on the long-term viability of the platform.

[Barry Jonas, Truist Securities]

That’s incredibly helpful. Maybe just tackling that in a more direct way, another outstanding quarter, EBITDA margins in Vegas record levels, just curious to get your thoughts on whether these levels are sustainable?

[Frank Fertitta, Chief Executive Officer]

I think that we believe that the margins can be sustained within the ZIP codes that we are in. Quarter-to-quarter, you may have a little variation on a few hundred basis points one way or the other. We think the cost out of the business has made a permanent shift, and then it really is dependent on where the revenues come from. And every incremental dollar that we get through in existing property, the flow-through is extremely high. So, I don’t know if you guys have anything to add to that.

[Stephen Cootey]

You still got, I mean, some margin-enhancing items coming down the pipe, right. We are still bearing about $3.2 million of COVID costs. We’ve got $3.6 million inclusive of the Palms, $1.4 million of closed company costs. We’re just starting – we’re still – the sales and catering business as well building up are still lagging as well as the theater businesses. So we expect those high-margin businesses to contribute positively. And I think as we touched on earlier, we’ve opened up all of our amenities June 4, with the exception of the buffet, which we don’t think will ever open again. So every dollar of incremental volume, as Frank said, will be – should have a positive impact given we’re already carrying the fixed cost of those amenities.

[Lorenzo Fertitta, Vice Chairman]

Yes. That’s why we’re pretty confident on the margins going forward. We don’t see any other business lines that are not already online that would be coming online that would be taking away from margin, only areas that could potentially at least stay where they are now.

[Barry Jonas, Truist Securities]

Great. Apologies, just one quick follow-up, if 50% to 70% flow-through was historically what you guys guided, are we structurally like at the higher end or even beyond that now?

[Frank Fertitta, Chief Executive Officer]

Yes.

[Lorenzo Fertitta, Vice Chairman]

It depends where the revenue is coming from. Obviously, if it’s from slots, it’s going to be at a much higher rate. If it’s from food and beverage, it will be lower than that, so.

[Barry Jonas, Truist Securities]

Helpful. Thank you so much guys and congrats on a great quarter.

[Frank Fertitta, Chief Executive Officer]

Thank you.

[Operator]

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

[Shaun Kelley, Bank of America]

Hey, good afternoon everyone. Maybe keeping along with the last comment, I just wanted to get a little bit more color on some of these amenities that were – I guess, when we started the second quarter not fully online, but definitely reopened once you were allowed to in June. Could you just give us any sense of either how quickly some of those are coming back, be it on the hotel side, the theater side, the convention side? Did those go from $0 to $100 million? Or do we have room for some of those to ramp sequentially as we move through the third and fourth quarters, even from what we saw in Q2 on a revenue basis?

[Stephen Cootey]

I’m going to start with theaters. Theaters just really ramped up in May when you had – you’re just starting to get a film slate, which has really been the big item that’s held them back. The theaters are ramping, but they are ramping up slowly, Shaun. So we expect there is a lot of room to run in the theaters going forward. And sales and catering, same thing, while we’re building up a big book of business, building up that book takes some time. So we’re seeing on the social side most likely in the back half of this year. And then the group business is starting to come back in ‘22 and ‘23. In terms of the other amenities, the hotel business, as I mentioned in the remarks, the hotel has really snapped back very well. So I think we have – we’re getting our rate back. Rate back is pre-COVID levels giving us for this quarter. We’re slightly behind occupancy. So there is a lot of room to run in terms of filling the rooms. I think that goes hand-in-hand with the sales and group business because we really do need that midweek room to kind of boost that occupancy.

[Shaun Kelley, Bank of America]

And maybe one other high level, and you’ve covered plenty of ground on the call. But I would say if we rewind the kind of history lesson here, there was a tie back last cycle, and there are probably parts of the good times where you get compression or spillover from the Strip. Do you see that on weekends at some of your core properties, let’s say, whether it’s Green Valley or Red Rock? Are you seeing that? Are you seeing on weekends? Can you just describe a little bit about that environment or that fact? And where do you expect it to go from here?

[Lorenzo Fertitta, Vice Chairman]

I would say that – a couple of things. One – this is Lorenzo. We have taken – we have been less reliant upon what the Strip has done recently. Meaning we have kind of set our own tone and our own sales rate. And relative to rates that we’re publishing and that we’re able to get...

[Frank Fertitta, Chief Executive Officer]

And casino segment...

[Lorenzo Fertitta, Vice Chairman]

And yes, the casino segment has been higher than it ever was really historically and the OTA segment has been lower. So we’re kind of getting a nice double whammy that where we’re getting nice rate and we think getting a better customer in our rooms as well.

[Shaun Kelley, Bank of America]

Thank you very much.

[Operator]

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

[Chad Beynon, Macquarie]

Hi, good afternoon. Thanks for taking my question and congrats on the quarter. Given some record cap rates that we’ve seen, particularly in Southern Nevada, has anything changed in terms of your thoughts around owning all of your assets versus selling a ranch stream at near-record multiples?

[Lorenzo Fertitta, Vice Chairman]

I don’t think anything has changed. I mean, certainly, we take notice of some of the cap rates and we like it. We think the fact that we own all of our real estate continues to be a very compelling investment opportunity for people who want to own our name. We’re one of the few companies left that provides that structure that’s completely intact. And I don’t know me and Frank as large shareholders kind of like owning the real estate over the long haul. So that’s where we think the value is.

[Stephen Cootey]

It’s good. I think, Chad, I think it’s good to note that you’re right, we’re at near record cap rates. And it seems that since the birth of the gaming REIT several years ago, every quarter has been near record cap rate. So it’s benefited us from waiting because it seems like cap rate...

[Frank Fertitta, Chief Executive Officer]

We like the fact that we own the real estate, and we also own the upside as Las Vegas market continues to grow on the upside. So we like to have them both.

[Chad Beynon, Macquarie]

Great, thanks. And then just in terms of seasonality, normally, Q3 in the Valley, people start to head out of town for vacation. And I think seasonally, it comes down by about 3% or 4% on a sequential basis. I know you’re not giving guidance for the back half of the year, but do you expect normal seasonality to kind of set in? Or do you think this year could be a little bit more pronounced, given the lack of vacations people were taking and now they might be out of town more this year than in prior periods?

[Stephen Cootey]

We think it’s going to be about the same. But it’s tough to tell. We don’t have – that’s one where we don’t have a crystal ball in terms of what our guests are going to be doing.

[Chad Beynon, Macquarie]

Okay, thank you very much.

[Operator]

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

[John DeCree, CBRE]

Good afternoon everyone. Thanks for taking my questions. Just two perhaps on the database and customer segmentation, over the past 3 or 6 months, have you seen a significant increase in new customer sign-ups? I guess how is your database growth trend being recently through the reopening compared to maybe historical pre-COVID?

[Stephen Cootey]

From a new sign-up perspective, it’s been not only just extremely – we’ve done extremely well. We’ve focused on this from an operation standpoint. It’s up quarter-to-quarter as well as, let’s call it, now based on pre-COVID levels. Not just in terms of the number of new sign-ups, but how active they are with the card. So when they get a card, more and more of them are using it immediately. And then when they use it, they are much more valuable to the casino.

[John DeCree, CBRE]

That’s helpful. And Steve, I think in your prepared remarks, you mentioned that the older customer segment has started to come back more meaningful. Could you give us a sense of how close to normal that customer segment has returned perhaps exiting the quarter? And how much more room there could be ahead?

[Stephen Cootey]

That’s – I mean, a good question. We’ve all made – we made headway not only just across the older demographic, but all age segments. I think from a customer standpoint, probably 55% to 65% of our customers have returned, but our most valued customers have returned. So there is still wood to chop on bringing our older customers back.

[John DeCree, CBRE]

Got it. Thanks for the additional color and congratulations on the quarter guys.

[Frank Fertitta, Chief Executive Officer]

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]

I’d like to thank you for taking the time to join our call, and we look forward to talking to you next quarter. Thank you very much.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.