Red Rock Resorts, Inc. (NASDAQ:RRR) Q1 2023 Earnings Call Transcript May 7, 2023

Operator: Good afternoon, and welcome to Red Rock Resorts First Quarter 2023 Conference Call. All participants will be in a 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: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts’ first quarter 2023 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreeger and our executive management team. I’d like to remind everyone that our call today will include forward-looking statements under the Safe Harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. During this call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release, Form 8-K and investor deck, which were filed this afternoon prior to the call.

Also, please note that this call is being recorded. On a consolidated basis, the first quarter net revenue was $433.9 million, up $32 million, or 8% from the prior year first quarter. Adjusted EBITDA was $194.2 million, up $15.4 million or 8.6% year-over-year. Our adjusted EBITDA margin was 44.8% for the quarter, an increase of 28 basis points year-over-year. This represents the best first quarter adjusted EBITDA and adjusted EBITDA margin results in the company’s history. With respect to our Las Vegas operations, the first quarter net revenue was $430 million, up $30.3 million or 7.6% from the prior year’s first quarter. Adjusted EBITDA was $214.1 million, up $15.9 million or 8% year-over-year. Our adjusted EBITDA margin was 49.8%, an increase of 19 basis points year-over-year.

This represents the second best quarter for Las Vegas operations in the company’s history in terms of both adjusted EBITDA and adjusted EBITDA margin, and marks the eleventh consecutive quarter that the company delivered adjusted EBITDA margins in excess of 45%. In the quarter, we converted 78% of our adjusted EBITDA to operating free cash flow generating $152 million, or $1.46 per share. This significant level of free cash flow continuously reinvested in our long-term growth strategy or return to our stakeholders via debt paid down dividends or share repurchases. Throughout the quarter, we remained operation disciplined and focused on our core local guests, as well as continued to grow our regional and national segments. When comparing our results to last year’s first quarter, we continue to see upside from strong visitation in our regional and national segments.

This strength coupled with strong spend per visit across our entire portfolio allowed us to enjoy record first quarter revenue and adjusted EBITDA results across our entire gaming segment. Turning to the non-gaming segments, both hotel and food and beverage delivered significant year-over-year and record profitability in the first quarter. Hotel revenue was $43.9 million, up $7.2 million or 19.5% year-over-year, driven by higher occupancy and ADR across our hotel portfolio. Food and beverage revenue was $78.1 million, up $12.4 million or 18.9% year-over-year, driven by higher average check across our food and beverage outlets and the strength of our catering business. Our catering revenue has surpassed 2019 levels and continues to grow as this quarter represents the seventh consecutive quarter of double-digit year-over-year growth in this business segment.

With regard to our group sales business, we continue to see positive momentum driven by growth in both room nights and ADR as our pipeline continues to grow into 2023. As we begin the second quarter, our business across both our gaming and non-gaming segments remain stable. On the expense side, we remain operationally disciplined and continue to look for ways to become the most efficient while providing best-in-class wages and benefits to our team members and delivering best-in-class customer service to our guests. Despite macroeconomic headwinds, which include inflation and increased interest rates, our focus on our core operations have enabled us to generate record adjusted EBITDA, maintain adjusted EBITDA margins, and return over $1.2 billion in capital or nearly $12 per share to our shareholders since we reopened in June of 2020.

While we remain vigilant to the macroeconomic picture, we are committed to disciplined investment in our core strategy, which includes expanding our footprint in Las Vegas and offering new amenities to our guests and our existing locations. Building upon the success, successful openings are a high limit table and slot rooms as well as Lotus of Siam at our Red Rock resort property last year, we welcomed Naxos Taverna Kallisto Oyster Bar and Rouge Room during the first quarter. These new amenities complement the existing offerings at Red Rock and have been well received by our guests. In addition, we successfully opened Wildfire Fremont located on the Boulder Highway on February 10; a 21,000 square foot casino featuring over 200 slot machines, sports boats, and two restaurants at a capital investment of $24 million.

Now let’s cover a few balance sheet and capital items. The company’s cash and cash equivalents at the end of the first quarter was $107.7 million, and the total principal amount of debt outstanding was $3.08 billion, resulting in a net debt number of $2.98 billion. As of the end of the first quarter, the company’s net debt-to-EBITDA and interest coverage ratios was 3.9 times and 5.6 times respectively. Our leverage is expected to pick upwards as we complete the construction of our Durango project. Upon the completion of Durango, we expect to deliver it toward our long-term net leverage target of 3.3 [phonetic] times. Capital spent in the first quarter was $175.5 million, which includes approximately $159.2 million in investment capital inclusive of Durango, as well as $16.3 million in maintenance capital.

For the full year 2023, we expect to spend between $70 million and $90 million in maintenance capital, and a total of $600 million to $650 million in growth capital inclusive of Durango. Now, let’s provide an update on our development pipeline. Starting with our Durango development, as we’ve mentioned before, we’re extremely excited about this project, which is situated on a 50 acre site ideally located off the 215 Expressway and Durango drive in the southwest Las Vegas Valley. This project is located within the fastest growing area in the Las Vegas Valley with a very favorable demographic profile and no unrestricted gaming competitors within a five mile radius. This quarter, we completed the full enclosure of the low rise structure and are finishing the enclosure of the hotel tower.

Our tower service elevators are now fully operational and we expect to have a central plan online in the next couple of weeks. The project is on schedule with an anticipated opening in the fourth quarter of 2023. We now expect to spend approximately $780 million on the project, which includes all design costs, construction hardens, soft costs, pre-opening expenses, and any financing costs associated with the project. Most of the increase in this investment is attributed to our decision to expand the casino area and add an additional 360 gaming positions to the casino floor. We believe that a larger casino footprint will better align the product offering with the anticipated growth and favorable demographics in the area surrounding Durango. Additionally, there have been some smaller increases to our construction, labor and procurement costs, as we work to ensure the project opens later this year.

Despite the increase in investment, the company expects the return profile for Durango to be consistent with our prior Greenfield developments. Now turning to North Fork, as we noted last quarter, after favorably resolving all its other litigation, the tribe has a single remaining case in the California courts. We do not believe that this case will interfere with the right or the ability of North Fork to conduct gaming on its federal trust land and we continue to work with the tribe to progress our efforts with respect to this project, including working toward approval of the management agreement, continuing our work on the development of design and having preliminary talks with respective lending partners. We will continue to provide updates on our quarterly earnings calls.

On April 20, the Oakland A’s announced that they have entered into a purchase and sale agreement to buy 48.6 acres of land on our Viva site. In conjunction with the sale, the Oakland A’s were granted an option to acquire an additional eight acres of land on the site. Due to confidentiality the purchase price in this transaction has not been disclosed but the anticipated closing of the sale is anticipated to occur in the fourth quarter later this year. As a reminder, the entire Viva site consists of 96 acres. So if the A’s transaction closes, and they exercise their eight acre option, we still retain 39.3 acres for future monetization as we continue to execute on our strategy of repositioning our land portfolio for future growth. Last year, on May 4, the company’s Board of Directors declared a cash dividend of $0.25 per class a common share payable on June 30 to Class A shareholders of record as of June 15.

With our current best-in-class assets and locations, coupled with our development pipeline of seven own development sites located in the most desirable locations in Las Vegas Valley, we have an unparalleled growth story that will allow us to double the size of our portfolio and capitalize on the very favorable long-term demographic trends and high barriers to entry that characterize the Las Vegas locals market. Despite a challenging macroenvironment, our just disciplined approach to running our business resulted in record high EBITDA and EBITDA margin for the quarter. And while we remain vigilant to the overall economic environment, we are confident in the resilience of our business model, as well as our management team’s ability to execute our long-term growth strategy and take a balanced approach into returning capital to our shareholders, and improving upon our already strong balance sheet.

We’d also like to recognize and extend our thanks to all of our team members for their hard work. Our success starts with them and they continue to be primary reasons why our guests returned time after time. We are also proud to announce today that our employees have voted us the top casino employer in the Las Vegas Valley for the third year in a row. We’re also proud to share that Forbes recently selected our Red Rock Casino Resort and Spa as a top overall Casino Resort Hotel in Las Vegas, which we consider a tremendous recognition of our efforts and those of our team members. And finally, we’d like to thank our guests for their loyal support in each of the last six decades. Operator, this concludes our prepared remarks for today and we are now ready to take questions.

Q&A Session

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

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

Operator: Next question comes from Shaun Kelley with Bank of America. Please go ahead.

Operator: The next question comes from Jordan Bender with JMP Securities. Please go ahead.

Operator: The next question comes from Steve Wieczynski with Stifel. Please go ahead.

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

Operator: Next question comes from Dan Politzer with Wells Fargo. Please go ahead.

Operator: The next question comes from Chad Beynon with Macquarie. Please go ahead.

Operator: [Operator Instructions] The next question comes from David Katz with Jefferies. Please go ahead.

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

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

Stephen Cootey: Thank you everyone for joining the call and we look forward to talking again in 90 days. Take care.

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