Red Rock Resorts, Inc. (NASDAQ:RRR) Q4 2022 Earnings Call Transcript

Red Rock Resorts, Inc. (NASDAQ:RRR) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Good afternoon, and welcome to Red Rock Resorts Fourth Quarter and Full Year 2022 Conference Call. All participants will be in a listen-only mode. Please note, this event 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’ fourth quarter and full year 2022 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. Before we get into any details, we are pleased and proud to say that our fourth quarter represented another strong quarter for the company by any measure. In terms of same store net revenue, we had the best fourth quarter in the history of our company, and in terms of adjusted EBITDA and adjusted EBITDA margin, this quarter represented our second best fourth quarter ever, only surpassed by last year’s strong quarter. As we look at our results for the year in terms of same store revenue and adjusted EBITDA, we had the best year in the history of our company, while also achieving our second best adjusted EBITDA margin, only surpassed by last year’s record high margin. To sum things up, despite facing challenges such as COVID-19 restrictions, historically high inflation and the disrupted supply chain, the company was able to generate record financial performance.

This demonstrates the resilience of our business model, the sustainability of our margins and the ability of our management team to execute on our strategy even in an extremely challenging — even in an extremely challenging macro environment. Now let’s take a look at our fourth quarter and full year results. On a consolidated basis, our fourth quarter net revenue was $425.5 million, up $3.1 million from $422.4 million in the prior year’s fourth quarter. Our adjusted EBITDA was $194.4 million, up 2.5% from $189.7 million in the prior year’s fourth quarter. Our adjusted EBITDA margin was 45.7% for the quarter, an increase of 78 basis points from the prior year’s fourth quarter. With respect to our Las Vegas operations, excluding the impact from our closed properties, our fourth quarter net revenue was $419.7 million, up 1.9% from $411.7 million in the prior year’s fourth quarter.

Our adjusted EBITDA was $206.9 million, down 1.1% from $209.3 million in the prior year’s fourth quarter, and our adjusted EBITDA margin up 2.8% from $1.6 billion in the prior year. Our 2022 and — full year adjusted EBITDA was $743.9 million, up $2.9 million from $741 million in the prior year. Our full year adjusted EBITDA margin was 44.7%, a decrease of 109 basis points from the prior year. With respect to our Las Vegas operations, excluding the impact from our foreclosed properties, our full year 2022 net revenue was $1.64 billion, up 4.7% from $1.57 billion in the prior year. Our full year 2022 adjusted EBITDA margin was $813.4 million, up 1% from $805.9 million in the prior year and our full year adjusted EBITDA margin was 49.7%, a decrease of 184 basis points from the prior year.

As always, we continue to prioritize free cash flow, converting 55% of our adjusted EBITDA to operating free cash flow, generating $106.6 million or $1.03 per share. This brings our 2022 cumulative free cash flow generated by the company to $448.2 million or $4.31 per share with virtually every dollar either being reinvested into our long-term growth strategy or being returned to our stakeholders. Throughout the year and in the quarter, we remained operationally disciplined and stayed focused on our core local customers as well as continued to grow our regional and out-of-town customer base. When comparing our results to last year, we continue to see benefit from strong visitation in our regional and out-of-town customer segments. This strength coupled with strong spend per visit across our entire portfolio allowed us to enjoy near record revenue and profits across our gaming segments.

The trends in the fourth quarter were similar to those we saw in our recent — in our most recent quarters and have remained consistent so far this year. Turning to the non-gaming segments, we saw continued growth in food and beverage and hotel, as both segments delivered near record revenue and profitability in the fourth quarter, driven by higher occupancy in ADR across our hotel portfolio and higher average check across our food and beverage outlets. With regard to group sales the — and catering business segments, the recovery of these business lines continued as we saw the fourth quarter represents the sixth consecutive quarter of double-digit year-over-year growth in this business line, and we continue to see our lead pipeline grow into 2023.

On the expense side, we remain operationally disciplined and continue to look for ways to become more efficient, providing best-in-class wages and benefits to our team members and delivering best-in-class customer service to our guests. While 2022 posed certain economic challenges, such as inflation and higher interest rates, our constant focus on our core operations and our actions taken over the past two years have allowed us to generate strong adjusted EBITDA, maintain adjusted EBITDA margin and return over $1.1 billion in capital, over $10 per share to our shareholders since we reopened in June of 2020. And while we remain vigilant to macroeconomic trends, we will continue to stay disciplined and focused on executing and investing in our core strategy, including strategically expanding our footprint across the Las Vegas Valley and offering new amenities to our guests at existing locations.

Last quarter, we saw the successful execution of the strategy to the openings of our high-limit slot room and Lotus of Siam at our Red Rock property. These amenities at Red Rock will soon be joined by the highly anticipated opening later this quarter of Naxos Taverna, a new restaurant concept focusing on coastal Greek seafood cuisine, and the Rouge Room, a sophisticated European-inspired cocktail lounge. Additionally, this quarter, we will be strategically expanding our company’s footprint in the Downtown Las Vegas area to the opening of our Wildfire property on Fremont later this week. Now let’s cover a few balance sheet and capital items. The company’s cash and cash equivalents at the end of the fourth quarter was $117.3 million. The total principal amount of debt outstanding at quarter-end was $3 billion, resulting in net debt of $2.9 billion.

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As of the end of the fourth quarter, the company’s net debt to EBITDA and interest covered ratios were 3.9x and 6.6x, respectively. As we have discussed on previous earnings calls, our leverage is expected to continue to trend upward as we complete the construction of our Durango project. Upon the completion of Durango, we expect leverage to begin to trending down towards our long-term leverage target of 3x net debt. On November 14, 2022, the company announced that its Board of Directors had declared a special cash dividend of $1.00 per Class A share. The special dividend was payable to shareholders of record on November 30 and was paid on December 9. The dividend reflects our Board and management team’s continued confidence in our business model as we — and our commitment to returning capital to our shareholders in addition to executing on our long-term growth strategy.

When we combine our special dividend with our regularly declared fourth quarter dividend, we returned approximately $130 million to our shareholders in the fourth quarter and over $353 million for the full year of 2022. Also, during the fourth quarter, we made distributions of approximately $22.8 million to the LLC unitholders of Station Holdco, which included a distribution of approximately $13.1 million to Red Rock Resorts. The company used the distribution to make its fourth quarter estimated tax payment and to pay a portion of its previously declared special dividend of $1.00 per Class A common share. Capital spend for the fourth quarter was $130 million, which included approximately $108.4 million in investment capital, inclusive of our Durango project, as well as $21.6 million in maintenance capital.

For the full year 2022, our capital spend was approximately $328.6 million, which includes $258.1 million in investment capital inclusive of our Durango project, as well as $70.5 million in maintenance capital. For the full year 2023, we currently expect to spend between $70 million and $90 million in maintenance capital, and an additional $550 million to $600 million in growth capital inclusive of our Durango project. Now let’s provide an update on our development pipeline. Starting with our Durango development, as we mentioned before, we are extremely excited about this project, which is situated on a 50-acre site ideally located off the 215 Expressway in Durango Drive in the Southwest Las Vegas Valley. The project is located in the fastest-growing area in the Las Vegas Valley, with a very favorable demographic profile and no unrestricted gaming competitors within the five-mile radius of the project site.

The project is progressing nicely, as we topped out in nearly October and expect to have the structure fully enclosed by mid-April. The project continues to remain on schedule with an anticipated opening in the fourth quarter of 2023. As mentioned on our prior earnings calls, we expect to spend approximately $750 million, which includes all design costs, construction, hard and soft costs, pre-open expenses and any financing costs associated with the project, and are currently operating under a guaranteed maximum price contract, which represents approximately 70% of the total project costs. As the project stands now, approximately 88% of the project, including the purchase of long-lead FF&E items has been secured. And as stated in previous calls, the company expects the return profile for this project to be consistent with past greenfield projects within our portfolio.

As we’ve already mentioned, we are also very excited about the opening of Wildfire Fremont on February 10. This 21,000 square foot casino is the newest addition to our Wildfire gaming family that is conveniently located in the Downtown Las Vegas area. The casino will offer over 200 slot machines, STN Sports as well as two restaurant options to our guests. We’re excited to be bringing our best-in-class service and amenities to the downtown area of Las Vegas and look forward to welcoming our first customer in the coming days. Turning now to North Fork. As we noted last quarter, after favorably resolving all its other litigation, the tribe has only one pending case in the California courts. As we have also noted last quarter, we do not believe that any decision by a California State Court could deprive North Fork of its ability to game on federal trust land.

We continue to work with the tribe to progress our efforts with respect to this very attractive project, including working toward approval on a management agreement, continuing our work on development and design and having preliminary talks with prospective lending partners. We will continue to provide updates on the next quarter — quarterly earnings call. Lastly, this quarter, you have seen our long-term development plan in action as we’ve been very busy upgrading our real estate portfolio. We purchased a 67-acre gaming site at Losee in the 215 Expressway in North Las Vegas for $55 million, and funded the purchase using a tax-efficient 1031 exchange as a result of successfully closing on our sale of 56.6-acre site north of Cactus and Las Vegas Boulevard for $60.8 million.

Additionally, we sold 21 acres of excess land on our Durango project site for $23.8 million to a group of multifamily developers, which will bring additional visitation to our project at Durango. Lastly, we successfully completed the sale of our 35.3-acre site of our former Fiesta Henderson property for almost $33 million. In total, we sold approximately 113 acres for $118 million in proceeds in 2022. And with the purchase of our Losee site and our earlier purchase south of Cactus and the Las Vegas Boulevard, we’ve substantially upgraded our pipeline of land held for development. With the completion of these transactions, our strategic landholdings amount to over 522 acres, a bulk of which will serve as the foundation for the future growth of the company.

We are actively looking to divest or under contract on almost 120 acres of land as we continue to reposition and upgrade our real estate portfolios for the next chapter of growth at Station Casinos. Lastly, on February 7, 2022, the company announced that its Board of Directors had declared a cash dividend of $0.25 per common — Class A common share payable to the first quarter of 2023. The dividend will be payable on March 31 to all shareholders of record as of the close of business on March 15. With our current best-in-class assets and locations, coupled with our development pipeline of seven-owned development sites located in the most desirable locations in the Las Vegas Valley, we have an unparalleled growth story that will allow us to double the size of our portfolio and position us to capitalize on the very favorable long-term demographic trends and high barriers to entry that characterize the Las Vegas locals market.

While the macroeconomic environment through the year was challenging, our disciplined approach to running our business resulted in record high EBITDA and near record high EBITDA margin for 2022. As we begin 2023, we will remain vigilant to macroeconomic trends. We are confident in the resilience of our business model and our management team’s ability to execute our long-term growth strategy and take a balanced approach to returning capital to our shareholders. As we do every quarter, we’d like to recognize and extend our thanks to all of our team members for their hard work. 2022 was a very challenging year, and our team members rose to the occasion as they always do. Our success starts with them, and because of them, our guests come back time and after time.

We would again like to thank them for voting us top casino employer in the Las Vegas Valley for the second year in a row, and making us the employer of choice in Las Vegas Valley. And finally, special thanks goes out to all of our guests for their loyal support over the past 46 years. Operator, this concludes our prepared remarks today, and we are ready to take questions from participants on the call.

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Q&A Session

Operator: We will now begin the question-and-answer session. First question today comes from Joe Greff with J.P. Morgan. Please go ahead.

Joe Greff: Hi, everybody. Looking back at the 4Q, casino revenues were down a little bit year-over-year and the non-casino revenues were up mid-single digit year-over-year. It’s sort of similar to the 3Q. Can you talk about how your Las Vegas locals consumer is spending? What’s driving that? And then, what are you seeing in the 1Q to-date?

Frank Fertitta: Well, thanks, Joe. Let’s kind of take it from the top and look at casino revenues first. We continue to look at casino revenues as stable and healthy. When you look at the database, we see good signs of stability across the database. That’s everything from the low end to the higher-end customer. We also see growth in the out-of-town market as well. So, we continue to offer good products in the slot machine realm and then also work on our table games. And we think that what you’re seeing in casino revenues is stability and the opportunity to grow. When we switch gears and look at the non-gaming food and beverage and hotel revenues, we’re seeing outsized growth from regional and out-of-town. So, when you look at all metrics, whether that’s food and beverage, hotel, ancillary, entertainment options like bowling, solon and spa, all of them are up double digit, and we’re really encouraged by that.

And so, when we look forward into this year, we’re seeing strength in all of those areas, specifically the return of convention guests and also strong catering revenues as we go forward.

Joe Greff: And what you’re seeing in 1Q to date, how would you characterize that?

Frank Fertitta: Very stable.

Stephen Cootey: It’s stable and consistent, Joe, I mean, as we talked about in the remarks. So, we like the position (ph) at this point.

Joe Greff: Great. And then, my follow-up question is, maybe can you talk a little bit about how you’re thinking about development, following Durango, how are you thinking about the timing of Inspirato, Skye Canyon and others? Specifically, I guess, what do you need to see in the locals market? What do you need to see in the ramp of Durango? And how do you factor in balance sheet considerations?

Frank Fertitta: Think we want to see continued stability in the Las Vegas market. Everything we see right now continues to back up with our long-term thesis of the macro environment with population migrating into Las Vegas, continue to grow limitations on supply where all the rooftops are being built, which is part of the thesis. Inspirato fits right into that. And basically, what we’re doing is working on being in a position to have a ready-to-go project. But to green light the project, we’re going to have to prove out Durango before we would green light it. That being said, we’re very confident in Durango, its location, the product that we’re going to build there. I think the market is going to really, really like what we’re doing.

So, we’re excited about it. And once we believe that we have stability, whether it be over two, three, four quarters, we’ll decide that based on the strength of the business. And Steve, you can address kind of where we are relative to the balance sheet, but we would expect with Durango opening to rapidly be deleveraging on the balance sheet.