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

Red Rock Resorts, Inc. (NASDAQ:RRR) Q4 2023 Earnings Call Transcript February 7, 2024

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Operator: Good afternoon. And welcome to Red Rock Resorts Fourth Quarter and Full Year 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 Resort. 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 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. Definitions and complete reconciliation for 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 of the details, we are proud to say that the fourth quarter represented another strong quarter for the company by any measure. In terms of adjusted EBITDA, our Las Vegas operations had the best fourth quarter in the history of our company. And in terms of net revenue and adjusted EBITDA margin, our Las Vegas operations experienced its second best fourth quarter ever. As we look at our results for the full year, our Las Vegas operations experienced near record net revenue and adjusted EBITDA margin, while achieving our best adjusted EBITDA in the history of our company. In addition to showing strong financial results, 2023 was a year in which we continued to validate our long-term growth strategy across the Las Vegas Valley by welcoming our Durango and Wildfire Fremont properties to the Red Rock family.

The successful openings of these properties not only validates our long-term growth strategy within the Las Vegas Valley, it also demonstrates the power of our own development pipeline and real estate bank, which now consists of over 441 acres of developable land positioned in highly favorable areas across the Las Vegas Valley. Not only do we expand our physical footprint across the valley in 2023, we continue to execute on our core strategy of reinvesting in our existing properties to deliver fresh and relevant amenities to our guests. All while remaining focused on best-in-class customer service. In executing this strategy, the team delivered another strong quarter across all business lines, with this quarter marking the 14th consecutive quarter that the Las Vegas operations delivered adjusted EBITDA margins in excess of 45%.

Now, let’s take a look at our fourth quarter and full year results. With respect to our Las Vegas operations and with our Durango Resort only open 27 days in the quarter, our fourth quarter net revenue was $459.4 million, up 9.5% from the prior year’s fourth quarter. Our adjusted EBITDA was $220.3 million, up 6.5% from the prior year’s fourth quarter. Our adjusted EBITDA margin was 48%, a decrease of 134 basis points from the prior year’s fourth quarter. On a consolidated basis, excluding a one-time benefit received in the fourth quarter last year from Graton, our fourth quarter net revenue was $462.7 million, up 9.3% from the prior year’s fourth quarter. Our adjusted EBITDA was $201.3 million, up 6.1% from the prior year’s fourth quarter. Our adjusted EBITDA margin was 43.5% for the quarter, a decrease of 133 basis points from the prior year’s fourth quarter.

Let’s turn to our full year performance. With respect to our Las Vegas operations, our full year net revenue was $1.7 billion, up 3.6% from the prior year. Our full year adjusted EBITDA was $818.8 million, up 1% from the prior year. Our full year adjusted EBITDA margin was 47.9%, a decrease of 134 basis points from the prior year. On a consolidated basis, excluding the one-time benefit we received last year from Graton, our full year net revenue was $1.7 billion, up 3.8% from the prior year. Our full year adjusted EBITDA was $746 million, up 0.4% from the prior year. Our full year adjusted EBITDA margin was 43.3%, a decrease of 143 basis points from the prior year. In the quarter, we converted 73% of our adjusted EBITDA to operating free cash flow, generating $147.1 million, or $1.41 per share.

When looking at our 2023 cumulative free cash flow, we converted 59% of our adjusted EBITDA to operating cash flow, generating $437.6 million, or $4.18 per share. This significant level of free cash flow was either reinvest in our long-term growth strategy, including our Durango and Wildfire Fremont projects, existing property investments, or return to our stakeholders via debt paydowns and dividends. As in past quarters, we continue to remain operationally disciplined and focused on our core local guests as well as continue to grow our regional and national segments. When comparing our results to last year’s fourth quarter, we continue to see upside from strong visitation and play in our local, regional and national segments. A strength coupled with strong spend per visit across the majority of our card to play allowed us to enjoy record fourth quarter revenue and profitability across our gaming segments.

Turning to the non-gaming segments, both hotel and food and beverage continued to grow year-over-year and deliver record revenue and profitability in the fourth quarter. Our hotel division experienced its highest quarterly revenue and profit in our company’s history, driven by our team’s success on continuing to drive higher occupancy and ADR across our hotel portfolio. Food and beverage experienced its highest quarterly revenue and profit in our company’s history, driven by higher average check and cover counts across our food and beverage outlets and the continued strength of our catering business. Our catering revenue continues to remain strong as this quarter represented the 10th consecutive quarter of double-digit year-over-year growth in this business line.

With regard to our group sales, despite a difficult year-over-year comparison, we continue to see positive momentum in this business, driven by growth in both room nights and ADR as our pipeline continues to grow into 2024. As we begin the new year, we remain confident in our business, particularly with the addition of our Durango property, though we will continue to face challenging year-over-year comparisons throughout 2024 as well as face continuing disruption in our Palace Station property due to ongoing traffic work around the property during the first half of 2024. On the expense and labor side, we remain operationally disciplined and continue to look for ways to become more efficient while continuing to provide best-in-class customer service to our guests and remaining the top employer of choice in the Las Vegas Valley.

Despite a tougher year-over-year comparable, the company continues to manage its expenses, generate record financial performance and return capital to our shareholders. These results demonstrate the resilience of our business model, the sustainability of our operating margins, and the ability of our management team to execute on our long-term growth strategy while taking a balanced approach to returning capital to our shareholders. Also during the quarter, we successfully opened our Durango Casino & Resort on December 5 to rave reviews from our customers. Our newest destination is located off the 215 Expressway and Durango Drive in Southwest Las Vegas Valley, within the fastest growing area in the Las Vegas Valley with a very favorable demographic profile and no unrestricted gaming competitors in the five-mile radius.

While we are still in early days, we are extremely pleased with the resort’s opening. As the property thus far has grown the surrounding market has attracted new customers to our brand and has been profitable since day one. As we have stated on past earnings calls, we expected to experience and have experienced some cannibalization across our core portfolio through the Durango opening, but this has been largely in line with our expectations and is expected to backfill given the strong long-term demographic growth profile of the Las Vegas Valley and our proximity of our properties to those high growth areas within the valley. 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 $137.6 million and the total principal amount of debt outstanding was $3.3 billion, resulting in a net debt of $3.2 billion.

As of the end of the fourth quarter, the company’s net debt-to-EBITDA and interest coverage ratios was 4.3x and 4.7x, respectively. As we stated on our previous earnings calls, our leverage is peaking as we wrap up our Durango project and is expected to ramp down as we look to delever to our long-term net leverage target of 3x. Capital spend in the fourth quarter was $187 million, which includes approximately $168.7 million in investment capital inclusive of Durango, as well as $18.3 million in maintenance capital. For the full year 2023, capital spend was $699.5 million, which includes approximately $615.4 million in investment capital inclusive of Durango, as well as $84.1 million in maintenance capital. As we look into our capital spending for 2024, we expect to spend between $140 million and $180 million spread between maintenance and investment capital.

During the quarter, along with the opening of Durango, we remain committed to strategically investing in our core strategy of offering new amenities to our guests, at our existing locations. Over the past several months, we have successfully opened a new high-limit table room at our Green Valley Ranch property. We are pleased with the early results from this room as well as all the other amenities we have opened up in 2023. We expect to continue to invest in our existing properties in 2024, including a new high-limit slot room as well as two new restaurant offerings at Green Valley Ranch and an upgraded race and sports book, a partial casino remodel and a new Yard House Restaurant at Sunset Station. We are very excited to move beyond the challenges created by the construction of these properties and introduce these new amenities to our customers later this year.

Like our other more recently introduced amenities, we expect these to be solid investments over the medium and long-term. Consistent with our balanced approach to investing in our long-term growth strategy and returning capital to our shareholders, we are pleased to announce the company’s Board of Directors has declared a special cash dividend of $1 per Class A share. The special dividend will be payable on March 4 to all shareholders of record as of the close of business on February 22. The dividend reflects our board and management team’s continued confidence in the resilience of our business model and the strength of the Las Vegas locals market. Lastly, in November 2023, we successfully completed the sale of approximately 73 acres at our former Fiesta Rancho and Texas Station properties for approximately $58 million.

Proceeds from this transaction were used to pay down debt and represent the continued execution of our long-term real estate development strategy as we look to reposition and upgrade our real estate portfolio for the next chapter of growth at Station Casinos. Turning now to North Fork, as you may be aware, our management agreement with the tribe was approved by the Chairman of the National Indian Gaming Commission in early January, clearing one of the last hurdles to the development of this project, which will be located on the tribe’s 305 acre parcel of trust land. The site is located north of Fresno, California, and offers convenient ingress and egress and excellent visibility from Highway 99. The design is near complete and we expect we are fully engaged in the process of retaining a general contractor and discussing the project with financiers.

We are very excited to be making great progress on this project and we will continue to provide updates on our quarterly earnings calls. In addition to our previously announced special dividend, on February 7, the company announced that the Board of its Directors has declared a regular cash dividend of $0.25 per Class A common share payable for the first quarter of 2024. The regular dividend will be payable on March 29 to all shareholders of record as of the close of business on March 15. When we combine our special dividend with our regularly declared first quarter dividend, we expect to return approximately $136.6 million to our shareholders during the first quarter of 2024. With our best-in-class assets and locations, coupled with our development pipeline of seven owned 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 capitalize on the very favorable long-term demographic trends and high barriers to entry that characterize the Las Vegas locals market.

We would 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 the primary reason why our guests return time after time. We’d like to thank them again for voting us the top casino employer in Las Vegas Valley for the third consecutive year. 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.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Joe Greff with JPMorgan. Please go ahead.

Joe Greff: Good afternoon, guys. Thanks for taking my questions. Obviously the results were better than we and consensus were expecting from an EBITDA perspective of EBITDA $13 million – a little over $13 million year-over-year. I’m assuming there is net cannibalization or cannibalization ex-Durango in there. I was hoping you can maybe sort of quantify maybe same-store EBITDA performance and then maybe also frame it with same-store EBITDA margin performance in the quarter or in December as we think about kind of modeling the ramp or the anticipation of a ramp throughout the balance of 2024 between Durango and the rest of the portfolio.

Stephen Cootey: Yes. This is Steve. Before I hand over to Scott, I just want to say, we haven’t broken out properties in the past, and so I don’t think we’re going to be doing so in the future. But just for general note on cannibalization and how Durango is doing, I’ll turn it back over to Scott.

Scott Kreeger: Yes, hi, Joe. As far as Durango goes, we’ve opened up and the property is performing above our expectations. We’re super happy with how we opened up the team’s effort across the whole employee base of the company. We want to extend our thanks for all of the support and things are going great. When we talk about cannibalization specifically, we’re not experiencing any different levels of cannibalization than we forecasted in previous calls. So we think that it’s right on track. And I think that it’s important to note that we’ve always said that these properties ramp and that our focus in the early days with Durango is to provide great quality service, quality product and we’re working through the efficiencies of Durango and everything is really trending as we expected.

Joe Greff: Great. Thanks. And I was hoping maybe you can give us some sort of perspective for the locals market and the benefits from, I guess, the festivities that have started around the Super Bowl and continuing through the weekend. How much of a lift do you think that is for the properties surrounding the strip?

Lorenzo Fertitta: This is Lorenzo. I think everybody around here is pretty positive and pretty excited about the Super Bowl event. It feels like it’s shaping up to be one of the, if not maybe the best weekend, biggest weekend from a big event standpoint that Las Vegas has seen, which is obviously quite a statement. We’ll say that we’re definitely feeling the impact from a regional standpoint, inbound from guests that are coming in. We’re seeing it in the hotel side and also on the casino side relative to people wanting to come in for the game. So even more so, obviously, Super Bowl is always a big weekend in Las Vegas, but I would say that this seems to be shaping up to be bigger than a normal Super Bowl weekend for the city and for us, per se.

Joe Greff: Got it. And then one final question, if I may. Steve, you mentioned about some disruption in the first half of this year at Palace Station. Can you sort of help us understand and maybe think about an impact there? And was there anything that commenced in the fourth quarter that generated some disruption that obviously we couldn’t see in the aggregated reported results?

Scott Kreeger: Hey, Joe this is Scott again. We’ll break it down by property, Palace is undergoing around its perimeter road work. That roadwork was expected to be done by the end of the year and it has now been extended into all the way to May based on complications of underground and different scheduling issues. So we continue to try to mitigate the impacts to Palace, but it is pretty disruptive getting in and out of the property. On another note, as we see this as positive, we continue to reinvest in the properties. We’ve seen great success with our new high limit rooms and new amenities. And GVR has a slight impact when it comes to the slot high limit room, the table high limit room, which we’ve opened up the table high limit room, we’re a couple of weeks away from opening up the slot high limit room and then offering two new restaurants.

So while there is some short-term disruption, the upside is we’ve been very successful with this formula in other properties like Red Rock. So we look forward to the upside of that. Same token, at Sunset, we basically have gone in and we’re finding huge success in the race and sports book being reformatted to more of a viewer style format than the traditional race and sports book were about over the counter wagering. And so reconfiguring our race and sports books to be more experiential has been a huge success. So…

Frank Fertitta: Yes. And the great success we’ve seen at Durango with what we did there and trying to bring Sunset up to that level.

Scott Kreeger: Yeah. So we’re investing in a new race and sports book, a new casino bar and new high limit room area for Sunset. So in the interim, through the remainder of the spring, we’ll be under construction there. We also are adding a Yard House restaurant in that expansion and remodel. So once we get through that, it’s going to be a great add to the property.

Joe Greff: Thank you, guys.

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

Carlo Santarelli: Hey, guys. Understanding you don’t want to get into property level metrics, I guess my question was less around numbers and more maybe around experience, so to speak. If you kind of look at your margin profile throughout 2023 from a same-store basis, margins were kind of down in that 100 to 200 basis point range over the 2Q and the 3Q. 4Q actually improved despite the opening. So is it fair to assume at this stage that kind of in those 27 days, that property, Durango specifically, did not necessarily have a meaningful drag on your margins. And is there anything, perhaps one-time in nature that we need to be cognizant of as we look out to 2024 as it pertains to the margin profile of that asset?