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Good afternoon and welcome to Red Rock Resorts Third Quarter 2021 Conference Call. [Operator Instructions] Please note this conference call 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.
Thank you, operator and good afternoon everyone. Thank you for joining on today's for Red Rock Resorts third 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 Form 8-K and investor deck which were filed this afternoon prior to the call. Also, please note this call is being recorded.
Now, let's take a look at our third quarter results. On a consolidated basis our third quarter net revenue of $414.8 million up 17.4% from $353.2 million in the prior year's third quarter. Our adjusted EBITDA was $184.5 million up 14.7% from $160.9 million in the prior year's third quarter. Our adjusted EBITDA margin was 44.5% for the quarter a decrease of 107 basis points from the third quarter of 2020.
With respect to our Las Vegas operations, excluding the impact from our foreclosed properties, our third quarter net revenue was $407.4 million up 28.9% from $316 million in the prior year's third quarter. Our adjusted EBITDA was $200.5 million, up 37.2% from $146.1 million in the prior year's third quarter. Our adjusted EBITDA margin was 49.2%, an increase of 296 basis points from the third quarter of 2020. On a same store basis, we achieved the highest third quarter net revenue, adjusted EBITDA and adjusted EBITDA margin in the history of our company.
During the quarter, we continue to prioritize free cash flow, converting 70% of our adjusted EBITDA to operating free cash flow, generating $126.3 million or $1.10 per share. This brings operating free cash flow generated by the company for the first three quarters of 2021 to approximately $365 million or $3.18 per share with virtually every dollar being returned to our stakeholders.
Taking a look behind the numbers, the third quarter saw impressive growth versus the prior third quarter with increased visitation, time on device and spend per visit experience across our database, which allowed the company to deliver record gaming revenue in the quarter.
The reimplementation of the mask mandate across the state of Nevada on July 30, as well as return of customary third quarter seasonality did have a modest impact on our visitation and time and device metrics in the latter half of the quarter. But we expect those trends reverse as COVID-19 restrictions are eventually lifted.
Turning to the non-gaming segments we saw considerable strength in food and beverage and hotel as both segments built upon their strong second quarter performance to deliver their best third quarter results in the history of the company. But the [indiscernible] group sales and catering business segments while these business lines have been slower to recover post-pandemic, we are seeing our lead pipeline grow into the back half of 2022 and into 2023.
Finally, as mentioned on prior earnings calls, our financials are still carrying approximately $2.4 million of COVID-19 mitigation costs for the quarter and approximately $2.6 million 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 and sustain higher profitability and drive more free cash flow.
On the technology front, we are making substantial progress on several initiatives. With regard to cashless gaming, we have entered into a field trial with IGT at Red Rock and Green Valley Ranch properties with the initial focus of introducing cashless payments in the slot floor with the eventual goal to allow our customers to play and pay from one mobile digital wallet across all of our amenities at each for Las Vegas properties. There are more to come as we proceed with our field trial in this exciting project.
Also in October, we entered into a partnership with GAN Limited to build and deploy the next generation infrastructure stations STN Sports Online Sports platform, mobile applications and retail over the counter and kiosk based sports betting throughout Nevada. While the product launch is subject to regulatory approval, we are excited about the partnership and building upon our lien race and sports franchise.
Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the third quarter were $89.9 million, and the total principal amount of debt outstanding at quarter end was $2.68 billion. In the third quarter we paid down $37.5 million in debt, bringing total debt reduction for the first three quarters of 2021 to approximately $265 million. Additionally, the company used $85.5 million during the third quarter to purchase approximately 2.1 million Class A shares at an average price of $41.44 per share under a previously disclosed 150 million share repurchase program bringing total shares repurchased for the first three quarters of 2021 to over 3.2 million Class A shares at an average price of $39.08. That's reducing our share count to approximately 114.7 million Class A and Class B shares combined.
Within the quarter, our board authorized an increase of 150 million to our existing share repurchase program, giving us over 173 million of the availability for future share repurchases. When combined with our debt repayment, we returned 123 million and 391.1 million to our stakeholders during the third quarter and to the first three quarters of 2021 respectively. As mentioned on our prior call, we are well on our way to having one of most solid balance sheets in the industry which gives us the ability to focus on longer term growth opportunities, including the development of our six owned strategically located gaming and title properties, and the ability to consider additional ways of returning capital to stakeholders as we move forward.
Since the close of the third quarter, the company's consolidate subsidiary station casinos issued a notice a redemption for the remaining $280.3 million 5% Senior notes due 2025. The company used cash on hand and borrowings under its revolving credit facility to pay the redemption premium, accrued and unpaid interest in any fees or expenses related to the redemption. Transaction closed on October 29, as expected to save the company approximately $14 million per annum for the life of the senior notes while further deleveraging the balance sheet increasing our financial flexibility. Capital spend for the third quarter was $14.7 million. As mentioned in our previous earnings call, we anticipate our 2021 maintenance capital spent to be between $65 million and $75 million. Also during the third quarter, we made a tax distribution of approximately $51.1 million to the LLC unit holders as nation [Hoko] which include the distribution of approximately $33.5 million to Red Rock resorts.
Now throughout a short update on our 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 the southwest Las Vegas Valley. The project is located within the fastest growing area of Las Vegas Valley, very favorable demographic profile. The project site provides favorable ingress egress on the two feet 15 expressway which handles over 166,000 vehicles per day as one of the five mile radius to approximate 350,000 people.
Further, there are no unrestricted gaming competitors within a five mile radius of the project site. We are working to the planning and budgeting phases of this project with a goal and expectation to have a shovel in the ground in the first quarter of 2022. Once a project is started, we anticipate construction will take approximately 18 to 24 months. When complete the project will be approximately 533,000 square feet and include over 73,000 square feet of casino space with over 2000 slots and 46 table games, over 200 hotel rooms and suite product, over 21,000 square feet of convention meeting and catering space, four full service food and beverage outlets, a state of the art sports book at a resort style pool. But we are still refining the final budget. We expect to spend approximately $750 million which includes all design costs, construction hard and soft costs, pre-opening expenses and any financing costs associate with the project.
We expect to enter into guaranteed maximum price contract for approximately 70% of the total project costs. The company expects the return profile this project to be consistent with past greenfield projects in our portfolio. While the funding of this project is expected to come from a combination of cash flow from operations and the sale of a portion of the current Durango cite to multifamily development projects for approximately $24 million.
Turning now to North Fork. Since we last spoke we received a positive opinion from the federal district court of the Eastern District of California which ends all federal court litigation affecting the project. With respect to the California State courts while we were disappointed by certain other results of the California State courts, we do not believe that any of those state court decisions will ultimately affect North Fork tribe’s ability to conduct gaming on their trust property.
We have continued to progress our efforts with respect to this very attractive project including development design and initial talks with our prospective lending partners. We will continue to provide updates on our quarterly earnings calls.
Lastly, and as previously disclosed on our prior earnings call on May 3 we entered into definitive agreements to sell Palms Casino Resort and Palms Place for an accurate price of $650 million in cash to an affiliate of the San Manuel Band of Mission Indians. The closing of this transaction is subject to customary closing conditions including regulatory approvals, and it's expected to be completed before the end of this year.
In conclusion, while the third quarter presented some headwinds, our disciplined approach to running our business allowed the company to enjoy record high EBITDA, EBITDA margin and free cash flow conversion. With our best in class assets and locations, unparalleled distribution scale and our own pipeline of six strategically located gaming and title properties we believe that we are uniquely positioned to capitalize on the very favorable long term demographic trends and the high barriers to entry that characterize the Las Vegas locals market.
Last week, we'd like to recognize and extend our thanks to all of our team members for their hard work and to our guests for their support throughout this pandemic, and respect to our team members a special note of thanks for voting us at top casino employer in the Las Vegas Valley. Operator this concludes our prepared remarks today and we are now ready to take questions from participants on the call.
Thank you. We will now begin the question and answer session. [Operator Instructions] And the first question comes from Joe Greff with JPMorgan. Please go ahead.
Good afternoon, everybody. I have a question I think probably more for Frank Lorenzo on strategic issues in terms of how your thoughts and views on monetizing casino real estate have evolved, particularly given where valuation multiples are for real estate EBITDA streams. You have $740 million run rate of EBITDA, mid teens on half of that mid and multiple on half of that either does like 80% of your float that kind of did a lot of interesting things for you. How do you think about those things?
Well, I think the value should be an applied into the fact that we own all of our real estate, whether we have a prop-co or an op-co. I mean, I think we said in the perfect position by controlling all the real estate, owning all the real estate, owning the growth pipeline. We kind of liked it. But we also liked looking at what people are willing to pay for that kind of two times coverage on the Red stream. But there's no reason that that shouldn't be implied into our stock price as well. That's how we look at it.
Yes, I mean, look, we looking at the cosmopolitan transaction, I think that was applied at about 20 times multiple-ish. Certainly, that's we like that valuation. I think right now is, as you can see, we're kind of in the development mode, we've got six undeveloped pieces of property that we think are very attractive and based on our historical returns, we've been able to generate. We really like the idea of doubling the size of our essentially doubling the size of our current operating platform here in Las Vegas by developing those properties, and we've always got that option down the road once we build that out to consider an op-co, pre-co structure, if we think it makes sense at the time we're going to be focused on what's the best way to maximize shareholder value. So we're always going to look at the options.
Okay. Great. And then Steve SG&A and was up 10% quarter-over-quarter and that drove an EBITDA variance versus consensus. Was there anything one time in there or? And if you could explain that sort of sequential trend and then how do you think SG&A and corporate expenses trend from here?
Yes, we could start with corporate and corporate mainly, I mean, in corporate SG&A the majority of that is payroll and bonus expense. We've performed really well. We recruit higher bonuses so we can pay our ways. There's also a lot of IT expense, mainly related to the cashless initiatives that were taking place. But there's nothing unusual or one time SG&A corporate.
Great. Thank you very much.
The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, guys, good afternoon. Thank you, Steve, just a follow up on Joe's question talking more about just kind of Las Vegas specifically, it looks like if you just kind of do the simple net revenue less EBITDA and kind of get your implied OpEx in there it looks like that's up about 5%. Could you comment at all about maybe the exit rate coming out of the quarter? Was it pretty consistent throughout the quarter in terms of staffing and expense run rates? Or do we or should we perhaps expect that to tick up a little bit more as we move forward?
I think from an operational expense we were pretty consistent throughout the quarter as we talked about we fully staffed up in June last year. So we have all of our amenities open, we are completely staffed. What you're seeing quarter-over-quarter is it really is a tale of two halves. The first half of the quarter was very consistent with the second half of the quarter. And then upon the mask mandate, we did see some degradation in volume. And we expect that to reverse once those get a COVID mitigation restrictions get reversed.
But that being said the Las Vegas operations margins were higher this Q3 than they were a year ago.
We were able to increase margin by about 300 basis points for Q3 of ‘20. But like Steve said it was really more of a revenue issue relative to the margins.
Right. So that kind of takes me to my next question. As you guys look out to 2022 and 2023 how much have the ability to keep margins kind of in these high 40s band that you've kind of been in since the start of this year and obviously north of that, and the 2Q North 50 and the 2Q how much of that boils down to the revenue run rate that we're currently looking at remaining where it is, or even perhaps growing versus being able to continue to control costs as you think about maybe some of the things that are out there that could perhaps, impact kind of the expense line as we move forward?
I mean Carl, I mean, that question gets asked every quarter of our margins sustainable. So let's just let's go back and be take a history lesson, Q3, going back to Q3, ‘20 moving forward, right same store margins of 46.2%, 45.5%, 48.9%, 53.4%. And then this quarter was 49.2%. So what I'm seeing is a seismic change in the way we're running a business from an operational focus. And we see a lot of these cost savings that we've put in place, and all the processes we put in place are permanent. And while we have no crystal ball in terms of a revenue standpoint, we do expect several high margin lines of business to come back in ‘22 and ‘23, to help grow the top line named catering sales in the theater business. So we have we do expect to maintain these margins.
Great. Thanks, everybody.
The next question comes from Shaun Kelley with Bank of America. Please go ahead.
Hey, good afternoon, everyone. Steve, maybe just want to follow up on that last point about some of the non-gaming entities coming back on board. I think we look at your sort of non-gaming revenues were almost virtually the same in the third quarter between the second. We were expecting that today to ramp up a little bit just as things. Some of the restrictions were lifted. And obviously, there were restrictions that were put back in place. But can you talk about that the non-gaming amenity openings? And I think I heard in the prepared remarks something about looking out a little later in 2023, for I think some of the banquet and catering side, but you just talked about how you expect at the non-gaming piece to ramp up over the next couple of quarters?
Sure, I mean, right now, I mean, have you seen we've had quite a successful quarter in Q3 from a non-gaming perspective, hotel, food and beverage also all returned, built up their second quarter growth all return, record growth and we continue to expect the hotel to deliver that performance as we get sales and group coming back. With the restrictions going on in July 30 we did see a slowdown in bookings throughout 2021 in the first half of 2022. But as I mentioned in our remarks, from a lead generation perspective, we're starting to see return of that corporate business and late the back half of ‘22 and into ‘23. So expect good things from there. And on the theater side, which is also non-gaming, the slate continues to get better.
And it continues sequentially each month tends to be better than the last month. So we expect good things from there. And again, the hotel from what the team is doing, not only we had record occupancy and record ADR yielding the hotel in a much better way. So there are more casino guests in the hotel so much more profitable holistically. And they're less wholesale business, which is a change that we put in place at the beginning of this year, when we're starting to see the fruits of that labor.
Great, and I'm not sure where exactly you're in Las Vegas is recovery yet. But we did see many years ago when this trip was kind of as hot as it probably is now. We did see some spillover into the locals more of your destination oriented property like a GVR, Red Rock. Do you think you're seeing that I guess yet? Or can how would you characterize again, a little bit of a crossover from maybe the strip customer kind of pulling down into locals properties as the strips own occupancy and pricing continue to push higher?
Yes, we are starting to see that regional out of town guests kind of push over particularly into their higher end properties.
Thank you very much.
The next question comes from Steven Grambling with Goldman Sachs. Please go ahead.
Hi, thanks. Realizing you're still in the early stages for development for Durango. But in your initial conversations, have you seen any color on procurement pressures given some of the supply chain concerns we've heard out there? Have you been able to think about ways to control construction costs between now and when you start to break ground?
Yes. I think the planning process for this has been quite extensive. As you've probably heard in some of the calls we've delayed giving the budget until just now. And so through that we've identified all the long lead procurement items that need to be done and bought prior to us breaking ground in Q1 and we've procured them or if we've at least put those under contracts. We feel pretty good from a pricing perspective. And frankly from its construction costs have risen but we feel we've captured that in the $750 million number.
That's helpful. And then separately, maybe I missed this too. But how do you think about capturing the value of some of the still undeveloped land that you still have that maybe won't be utilized?
Well, we're planning on monetizing the back 23 acres of the Durango site. So we're taking the front 50 acres to develop will monetize the back, probably resulting in multifamily residential, behind the property, which will be good for the property. And we're going to continue to look at each one of the development sites here in Vegas, as we roll forward try to build out the portfolio, doubled the footprint here in Las Vegas. We will take basically the heart of each of the properties and sell off the remaining real estate surrounding those development sites.
And any sense for where some of that land value kind of sits from your standpoint, at this point?
What do you have for the value on the back 23 acres?
That we just talked about in release the back half we have under contract for about $23 million. So though a little bit over 1.1 million an acre.
And when you do anything, some of the other land that you have that's undeveloped would you characterize that as equal, more or less valuable?
We land prices in Las Vegas. They really have been trending up. I think you're seeing a real supply demand dynamic there. There's a lot of demand for multifamily builders, industrial I mean, a lot of different uses. So the trends seem to be in our favor as a big landowner in this valley.
Great, thanks so much.
The next question comes from Steven Wieczynski with Stifel. Please go ahead.
Yes guys, good afternoon. So it sounds like from Steve's remarks in his prepared remarks, the promotional environment in the local markets still seems pretty rational if I read into your comments. So I guess the question is, the Palms deal does close and you see a new competitor come into the market and operate the Palms. Do you think there's any risk that a new competitor comes in and tries to steal some share initially and if so how would you guys react in that situation?
I think you can see a complete pivot and basically, our approach to the market is relying on our A plus locations, A Class buildings, A Class employees, relationship marketing. We basically pretty much gotten out of the promotional business of the mask market here. And we're relying on personal relationships. And our intent is to stick to that strategy even if you're going to get a one off player or someone maybe come in and want to be promotional spend money. I mean, you have a couple of them on the market right now. But at the end of the day, we are the leader in the market. We have the eight locations and the suburban locations, and we just really don't see the need to return to where things were.
Okay, got you. I think question would be around you mentioned the mask mandate a couple times in your remarks. And now, I guess the question is what conversations have you had with your customer base, in terms of folks that aren't coming back again? Is it something where they're just sitting on the sidelines waiting for that to be removed? Or is there something else going on and then the second part of the question is have you heard anything in terms of potential timing around the removal of that mandate?
Look, I think it varies by age group on how people react to the news cycle, Delta variant, mask mandates, and I think the older the segmentation of the population, the more adverse they are to deal with mask and we actually new [cycle] so I think the younger demographic is not as impacted by mask mandates but I don't know if you guys have anything you want.
I think the other area where we're seeing a little bit of dialogue is in groups that are looking to book whether it's conventions, meetings, social events. I think that impact the mask mandate definitely impacts that line of business. As Steven mentioned, we're starting to see that pipeline kind of come back into late ‘22, ‘23. I think as people are presuming that mask will be a thing of the past. We don't have really any updates from the governor of the state relative to exactly what they're thinking on the mask mandate. We know tracking the numbers, they seem to be going in the right direction. So we're hopeful that sometime in the near future that can be lifted. I think we're one of six states that they still have a mask mandate in place. So certainly we think when the mask mandate, hopefully, and it should be relatively positive from a psychological and just an overall for our business.
Okay, great. Thanks, guys. Thanks for the color.
The next question comes from Chad Beynon with Macquarie.
Hi, thanks for taking my question. Regarding the four properties that remain closed, can you help us think about what you need to see in the existing business or the market to allow you to open up one or all these properties going forward? Thanks.
Well, the Palms is going to be sold. So it's down to three properties. And I think what we have to look at is that those three properties represented less than 10% of the cash flow, even though they were one third of the casinos. And we've been very successful at moving a lot of the business at those close properties to the six open properties which has resulted in the higher margins. So we're seeing 49%, for Las Vegas operations before allocation. I don't know if you have anything to add at the end, until we're confident that we can deliver incremental absolute profitability, we're not going to go and open something and cannibalize our other properties and end up making the less money.
Yes I think just to add to Frank's points, because he nailed them all here with [SB 386] in place, it really makes it administratively hard to open up a brand new property.
Thank you. And then regarding your comment around Durango, your goal of generating returns that are similar to prior projects obviously with the cost of capital down at this point you can certainly get a positive IRR at a lower return. When you talk about consistent with prior projects, we think somewhere in the ballpark between kind of the 10% and 20% goalposts depending on what happens between now and ‘23 or is there a more finite number that you're willing to provide? Thanks.
I think that's the right range. And typically we've been able to get into the 20s type return on a stabilized basis.
If you look at just kind of where we sit today, you look at our trailing 12 EBITDA $730 million being generated by six properties that kind of comes out to an average per property, about $120 million to $122 million property. And looking at the demographics, we actually posted some information on the investor deck on our website. When you look at the demographics, the traffic flows, everything else, we certainly expect this to be an above average property relative to the rest of the quarter.
I mean, if you compare the adult population and a five mile radius per gaming position to Red Rock and Green Valley, Durango is two times the amount of adults per gaming position. So we feel pretty good about it.
Thanks for the additional color, appreciate it.
The next question comes from Barry Jonas with Truist Securities. Please go ahead.
Thank you, have you guys historically announced any impacts from higher gas prices and I guess I'd extend that any thoughts on the wider installation we're seeing either from the revenue or the cost perspectives?
On the cost side, you're definitely seeing cost of goods sold that's up year-over-year, but 12% on a cover-per-cover basis to go in the food standpoint. But on the revenue side that really haven't seen that impact. It's been more real. It's been tough to see because you're seeing you have the mask mandate in place.
Got it. And can you give any color I'm not sure if we talked about what you're seeing across the job base any color you can give on any segments or demographics if anything's performing better than others?
The higher end segments continue to perform outperform. No question about it. And then the other areas, the growth we've seen in the younger demographic, we were just looking at kind of where we sat in the 21 to 35 demo prior to COVID and now coming out of post-COVID I think there is theoretical win is about 75% versus pre-COVID. So we've been successful in driving that incremental kind of younger demo into our properties which we think is super healthy and good long term for the business.
Great. If I could just sneak one more it's been a few yours since you guys have issued a dividend. I'm just curious, where resumption the dividend would rank in terms of your capital allocation strategies?
I think the good thing is we're starting from a great place. We've got the probably the strongest balance sheet in the industry and about a month we're going to get about $650 million in the Palms closing. The good thing and what the board is considering is you got to balance return or capital verse also the six strategically located properties that we can start developing. So we are going to consider all, we have all options are on the table.
Helpful. Thanks so much, guys.
The next question comes from Dan Politzer with Wells Fargo. Please go ahead.
Hey, guys, good afternoon, and thanks for taking my questions. So most of them answered, but on the 55 plus 65 customer core customer in what inning are we have that customer base returning and as the broader reopening has occurred and you've seen any declines at all in that unrated higher margin player?
We definitely have some room to go. I mean, they're not, not all back yet. I don't know necessarily what anywhere in I think that –
If anything changes depending on [indiscernible].
Yes. They're definitely the most affected by kind of what's going on with COVID. We're hopeful that if the mask mandate comes off sometime in the near future, that segment will really start to kind of come back and move forth. The older portions of our databases, definitely where we're seeing that we have room to grow.
Can you [indiscernible] second part of the question?
It is the unrated, which I haven't really seen no change in unrated play, pre and post pandemic.
Got it. And then just in terms of the three properties that you guys have yet to open, I mean, is there any change in or pivot decision in your decision making process there? Have you had any conversations with potentially interested parties?
I mean there's all sorts of inbound calls coming in for those three properties, but I think I can pretty safe, we would never sell a property a gaming and title property, those three gaming entitled. So really no decisions been made, whether we're going to open or potentially scrape herself.
All right, understood. Thanks so much.
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
Well, thank you everyone for joining the call and we look forward to seeing you again in the next 90 days. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.