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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon and welcome to Red Rock Resorts' Fourth Quarter and Full Year 2018 Conference Call. All participants will be in a listen-only mode. Please note this conference is being recorded.
I would like to turn the conference call over to Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead.
Thank you, operator. Good afternoon everyone and welcome to Red Rock Resorts' fourth quarter and year end 2018 earnings conference call. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; and Joe Hasson, Executive Vice President and Chief Operating Officer.
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. The risks and uncertainties related to these statements are detailed in our filings with the SEC.
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.
Let's turn now to our excellent fourth quarter results. On a consolidated basis, net revenues increased 7.8% to $431.5 million, adjusted EBITDA increased 10.1% to $135.1 million, and margins increased 66 basis points to 31.3%.
With respect to our Las Vegas operations, top line and bottom-line growth was very strong. As net revenues for the quarter increased 10.4% to $409.5 million, adjusted EBITDA increased 14.4% to $121 million and margins increased 103 basis points to 29.5%. Notably this represents our highest fourth quarter net revenue and adjusted EBITDA performance on a same-store basis since 2007.
When viewing our fourth quarter of Las Vegas performance, excluding our two disrupted properties, Palms and Palace Station, the results are very impressive and demonstrate the ongoing strength of both, our Las Vegas locals market and our core business.
Measured on that basis, net revenues increased approximately 6%, adjusted EBITDA increased approximately 10%, and margins increased over a 120 basis points to nearly 34%.
In addition flow-through on that basis was within our historical range of 50% to 70% even as we continue to make meaningful investments in technology initiatives across the company.
These robust fourth quarter numbers were driven by solid growth across both gaming and non-gaming segments of our business. At the same time, we continue to take profitable market share and have now seen gaming revenues at our non-disruptive properties grow at more than twice the rate of the remainder of the locals market for each of the past two years.
Turning to our full year performance, consolidated net revenues increased 2.4% to $1.68 billion. The increase in net revenues was primarily driven by a $69 million increase in Las Vegas operations, partially offset by a $31 million decrease in Native American operations due to the expiration of a Gun Lake management agreement in February of last year.
Full year consolidated adjusted EBITDA increased 2.4% to $509 million. The increase was primarily driven by a $23 million increase in Las Vegas operations, partially offset by a $15.1 million decrease in Native American operations due to the expiration of the Gun Lake management agreement.
These full year consolidated results were negatively impacted by substantial construction disruption at the Palms and Palace Station throughout the year. With respect our full year at Las Vegas operations, even with the construction disruption at these two properties, net revenues increased 4.6% to $1.59 billion, adjusted EBITDA increased 5.5% to $457.4 million, and margins increased 28.8%.
Looking at the full year performance of our Las Vegas operations excluding these two disruptive properties the power of the market in our core business once again became -- becomes clear. When measured on that basis, we experienced net revenue growth of over 5%, EBITDA growth of nearly 9% and margin growth of nearly 120 basis points to over 33%.
As we begin 2019, the fundamental economic data for Las Vegas remains supportive of continued growth. Population is at an all-time high and Las Vegas is now the second fastest-growing MSA in the nation. Also, Las Vegas is currently forecasted to add nearly 200,000 new residents by 2022 an increase almost 10% from today. Employment is also at record levels and we've now seen 91 consecutive months of broad-based employment growth.
Moreover, we saw the growth accelerate in the back half of 2018 with December employment up an impressive 3.6%. There will be a 9% increase in construction job growth. Wage growth as measured by weekly earnings is also robust with Las Vegas reporting an increase of 3.6% for the year. In addition, discretionary spending has accelerated as evidenced by a 6.4% increase in taxable sales during the trailing 12 months ended November 2018.
Housing remains very solid as medium home sales were up more than 10.5% in December well above the national average. More importantly, 95% of homeowners now have positive home equity as compared to a low of 22% during the downturn. Since that time, more than $64 billion of home equity value has been created in the Las Vegas market. And as we look into 2019 and beyond there were over $18 billion of new capital investment projects planned or underway in Las Vegas, led by the new Raiders’ stadium, Project NEON, the Convention Center expansion and multiple Strip developments all of which will further expand the local economy.
These strong economic fundamentals combined with extremely favorable supply-demand dynamics, a stable regulatory environment and the lowest gaming tax rate in the nation only serves to support our thesis that the Las Vegas locals market is most attractive gaming market in The United States. And given our best-in-class assets and locations unrivaled distribution and scale and deep organic development pipeline, we remain uniquely positioned to take advantage of the ongoing growth in this extremely vibrant market.
Turning now to our technology initiatives. The new IGT slot system continues to play a pivotal role in accelerating gaming revenue growth and we are still seeing significant increases in key slot metrics such as card to slot win, time on device and spend per visit. In December, we introduced the latest system enhancement in the form of personalized on-device marketing and messaging which has been extremely well received by our guests.
We will also be introducing a number of other system enhancements including new companywide bonusing programs throughout 2019. We are confident that these additional system enhancements will provide an even more engaging and rewarding and convenient experience for our guests that will in turn further accelerate gaming revenue growth.
Turning next to our Palace Station and Palms redevelopment projects. We're pleased to report that the Palace Station project is now complete and that the Palms project is rapidly nearing the finish line with the entire project expected to be completed by the end of the second quarter of this year with the exception of our dim sum restaurant Tim Ho Wan, which will open in the third quarter. We remained very bullish on both of these opportunities based on their ability to appeal to both residents and tourists alike and expect them to generate significant returns for the company upon completion.
With respect to Palace Station redevelopment, the $191 million project was completed on time and on budget with the last component of the project in nine screen luxury movieplex having opened in December last year. Highlights of the redevelopment include a fully renovated and expanded gaming floor, 575 updated hotel rooms and suites, two new signature restaurants, San Francisco-based boathouse eatery and Chef Ralph Perrazzo’s New York-based BBDs restaurant, a new 14000-square-foot state-of-the-art feast buffet, a new resort style pool area; a new state-of-the-art bingo room, a fully renovated poker room, a fully renovated racing sports club and a 9-screen luxury Regal Cinebarre movieplex.
In total, the redevelopment adds 178,000 square feet of exciting new gaming and entertainment space to Palace Station together with a refreshed exterior look that includes two new LED marquee signs, improved access and 300 additional parking spaces. The guest response to the finished product has been extremely positive and we were already seeing the results of this investment.
With respect to the Palms redevelopment, the project remains on time and on budget and Phase II and III of our $690 million plan are completely reimaged and reposition the property are both well underway.
During the fourth quarter of last year, we opened numerous components of Phase II to rave guest reviews including Vetri, critically claimed Italian restaurant from James Beard award-winning chef, Marc Vetri; Mabel’s, a new twist on American barbecue from celebrity chef, Michael Symon; an additional 150,00 net square feet of completely renovated premium and meeting convention space with premier views of the Strip, and the completion of the vast majority of the unfinished rooms and luxury suites in the Fantasy Tower, the remainder of which should be completed this quarter.
In addition, toward the end of the first quarter of this year we expect to open almost all the remaining Phase II components including; Shark, a high-energy seafood restaurant with James Beard award-winning celebrity chef Bobby Flay; Green Street kitchen, a New York-inspired eatery developed in partnership with Clique Hospitality Group a leader in west coast hospitality and nightlife; and a KAOS, a spectacular new entertainment experience consisting of fully integrated 73000-square-foot day club and a 29000-square-foot nightclub which we believe will completely redefine the day life and night life experience in Las Vegas.
Lastly, a new wellness spa and salon with 16 treatment rooms and state-of-the-art fitness facilities is expected to open in late second quarter. With respect to Phase III of the project, the vast majority of these components are expected to be online by the end of the second quarter of this year including.
Casino floor expansion, featuring the addition of approximately 300 slot machines and 16 table games; a casino connector seamlessly integrating the adjacent 599 room Palms Place Tower directly into the properties newly expanded casino floor; an indoor connector to the pre-existing self-park garage with ingress directly into the newly expanded casino floor. Additional collaborations with world-class artists throughout the property and state-of-the-art digital signage on the hotel tower exterior.
And the final component of the Phase III, world renowned Chinese Dim Sum restaurant, Tim Ho Wan from Hong Kong is expected to be completed by the end of the third quarter. Once fully complete, this extensive renovation will touch nearly every aspect of the property and we are confident that will create one of the most exciting gaming and entertainment destinations in Las Vegas. We expect construction disruption at the Palms remain significant through the completion of Phase III of the project.
Turning now to our Native American segment, we reported management fees for the quarter of $19.9 million -- excuse me $19.1 million down to 22.1% from the prior year, primarily driven by the expiration of the Gun Lake management agreement in February of last year. That negative impact was partially offset by a 22.7% increase in fees from the Great management agreement as the properties’ performance remains at a very high level.
With respect to the North Fork project, we are progressing through the few remaining pieces of litigation related to the project. As we’ve previously noted, the California Supreme Court has granted the Tribe’s petition for review with respect to the key lower court decision involving the project, but has deferred taking any further action in that matter until, it's ruled on a very similar case before involving the Enterprise tribe which received a stable ruling from the appellate court level. We continue to anticipate that the court will schedule a hearing on the enterprise case in the near future.
I'll now cover a few balance sheet and capital items. The company's cash and cash equivalents at quarter-end was $114.6 million and total principal amount of debt outstanding at the end of the first -- the fourth quarter was $2.91 billion. At the end of the fourth quarter, net debt to EBITDA and interest coverage ratios were five times and 4.4 times respectively.
In addition, on February 8, the company entered into amendment to its existing credit facility, whereby the company increased the size of its results revolving credit facility by $115 million to $896 million, and certain lenders under the credit facility agreed to extend the maturity date of their possession on such facilities by an additional year and reduced their interest rate by 25 basis points.
Capital spend in the fourth quarter and full year 2018 was $172 million and $579 million respectively, inclusive of both Palace Station and Palms redevelopment projects. In 2019, we anticipate spending the remaining $260 million related to the Palms redevelopment project and approximately $115 million in maintenance and other capital, which includes the first phase of the Red Rock River model refresh Palace Station Cafe and high limit lounge as well as the exit fee related to the company leaving the NV Energy power grid.
As we complete this redevelopment cycle of Palace Station and the Palms, we expect to begin generating significant free cash flow in Q4 this year. And as we shift into harvest mode, our focus moving forward will be maximizing the financial performance of our existing properties, deleveraging the company -- and deleveraging our company with a target leverage ratio of four times or less.
Lastly, on February 12, 2019, the company announced that its order Board of Directors had declared a cash dividend of $0.10 per share payable to the first quarter of 2019. The dividend will be payable on March 29, 2019 to shareholders of record on March 14, 2019.
Operator, this concludes our prepared remarks today, and we are now ready to take questions from participants on the call.
[Operator Instructions] And our first question today comes from Joe Greff from JPMorgan. Please go ahead with your question.
Good afternoon guys. Congratulations on the very solid results here. You mentioned that x Palace and Palms in Las Vegas revenues and EBITDA were up 6% and 10% year-over-year respectively. Can you talk about how broad-based or how concentrated that is and how much of that relates to the new slot system and how much is that do you think contributes in this year in 2019?
Sure. Well, we don't comment on individual properties. We kind of look at everything in a basket, I can tell you that the performance was spread across the entire -- the positive performance was spread across the entire portfolio. And in terms of the slot systems as we said and we have seen since this launch in 2017, we have definitely seen an acceleration in gaming revenue growth, which we can attribute to that the IGT slot system. And we expect as we roll additional companywide bonuses and new features in the system, we expect to see the same in 2019.
Okay, great. And then I recognize you just said you don't want to comment on specific property performance, so I'll ask…
You’ll ask anyway, right Joe?
…property specific, I'll ask anyway, and then when you answer, I'll ask again it in a different way. But when you think about the Palms contribution in the fourth quarter, I know there's not much of a positive contribution, but would you characterize it as is generating incremental positive EBITDA in the quarter? And I would imagine -- when you look at it from a revenue perspective, I would imagine incremental revenue on a year-over-year basis was probably more substantial than whatever that EBITDA increase is. Is that -- am I right in thinking of it that way?
Yes. I mean you've pretty much answered the question for me which I appreciate, Joe, but maybe to add a little bit more color what you said. I think you're spot on, I mean, we're still early on the Palms. We're incredibly happy with its results.
As you would expect in the project of this nature, it's revenue has -- is almost close to 50% year-over-year growth which is quite substantial. It's -- from an EBITDA perspective, there is positive contribution. But right now we're actually in a mode of getting the Palms out there, getting it recognized, getting volume in there, driving demand, and then as we ramp-up, we'll start tightening up the cost structure and flow more to the bottom-line.
We still have significant construction disruption during the quarter. So, I don't think it's really something that you can look at and give that much from because we have a lot of room nights out, family room nights. What are we missing?
We had about 18,300 room nights out of service in Q4.
Got it. Okay. And then, Steve, the corporate expense in the quarter came in much lower. Anything one-time in nature there? And what is that run rate going forward from here?
I think the run rate is probably slightly below $30 million on an allocated basis. What you're seeing mainly is an adjustment in the bonuses accruals. We're probably over-accrued for the first three quarters and you drew up in Q4. But we are constantly looking at reducing corporate overheads. So, just that's going to be a constant kind of open pruning.
Great. That's all for me. Thanks guys.
Our next question comes from Carlo Santarelli from Deutsche Bank. Please go ahead with your question.
Hey guys. Thank you very much. Maybe to ask Joe's questions a little bit differently. When you guys think about the ramp period of Palms and acknowledging the revenues have shown a nice boost and you're trying to bring the cost in line. Longer term just given the structure of the property and the amenities of the property, how do you think about the margins of that asset when stabilized relative to the 34% I think you said Steve same-store margins that you guys experienced in the 4Q?
This is Joe Hasson. With regard to the Palms, it will take us a couple of quarters to dial the expenses to the right place, but at the same time, we expect that revenue will be contributing substantially to our ability to grow the dollars for the bottom-line.
Ultimately, when it comes to onetime margin contribution, as you may recall that Station Casinos was a long-term owner of the original concept of the Palms. We know what that business is capable of making -- completely invented now still we expect more than what we could do in the past as we move forward. It's an accretive growth spend.
Understood. Thank you very much. And then just if I could another follow-up there. Steve just to be clear you said net revenue at the Palms was up over 50% year-over-year, was that -- or was it up 50% year-over-year?
Little less than 50% Palms.
Okay, great. Thank you very much.
Our next question comes from Shaun Kelley from Bank of America. Please go ahead with your question.
Hi guess, good afternoon. Steve just kind of sticking with the Palms as being obviously the key project for the company right now. Any color you could share on just sort of what you guys are seeing on the ramp-up on the room side. Our sense is that there was some significant concern from investors in the fourth quarter around sort of the ramp-up of particularly probably the rooms product, just given some of the promotional activity in Vegas in the summer. So what you guys kind of seeing or what can you share on either sort of the kind of what you're seeing on the rate side or on the occupancy side or both, just to get people some comfort with how the product is being received by guests?
As Frank alluded to, we're still in the early days. We had about 18,000 rooms out of service yet, so I'm not sure Q4 is a real indication of the power of Palms rooms, but...
We don't have all the amenities online yet, but the light is at the end of the tunnel. All these new amenities are going to be coming online first week of April. So I think we'll get a much clearer picture on the ability to drive room rates based on all the amenities that are coming online.
Okay, great. And the other thing I wanted to touch on was in your prepared remarks Steve you mentioned the construction -- obviously the construction disruption is going to remain significant through Phase III of the project. Is that any different than sort of how you guys have been underwriting it previously or up till now or is this sort of just continuation of sort of the overall ramp plan that you guys have had for the asset? The question is with that specific phrasing, is there anything incremental people should be concerned at about or we should be modeling or is this is the expectation as it has always been?
Yes. No, Shaun, I wouldn't try to parse my words. This isn't a fed call. I would -- this is just business as usual.
Okay. It's very natural for us to do that. Congrats guys on very strong result.
The next question comes from Harry Curtis from Instinet. Please go ahead with your question.
Just one quick question follow-up for Frank on the Palms. The budget is $690 million and as you sit back now, do you think that there are additional amenities that you would like to tack on because it sounds like you're already pleased with it, but you think you can be more pleased with just a bit more incremental investment?
I don’t think we're going to have everything that we need. We are very excited about the project. Like I said, first week of April, we will get the new night club, the pool, the day club, two new restaurants that will come online all the rooms will be back online, all the suites will be back online. And I think people are going to be pleasantly surprised when they see the facility and all the amenities that we have.
Okay. And then shifting gears, it seems like nobody wants to ask a question about the much-maligned power station. Can you give us more color on since the renovation has been essentially complete, are there any details you can share with us on visitation lift, win per slot lift that gives you confidence that what you've seen in the fourth quarter is going to extend in the early -- in the first quarter and through 2019?
Yes, I think it’s, I mean, well, again, Harry just because we talk, we don’t break-up the properties, and going back to Joe's point, we did give some additional color on the Palms, so we will do so on Palace. And I think we're very happy the way Palace lift has been taking place. So I look forward -- look for all -- all the key four metrics, they're all positive. So everything from slot handle, to casino drop, to hotel revenue to ADR lift you're seeing exactly what the $191 million can do. And I think we're still at beginning stages.
Okay. And one last one for you Steve, with respect to the comments that you made on your target leverage ratio, seems to us that you don’t really have to pay down debt to get there is that a fair statement? And -- or do you want to get to that 4 times faster?
No. I mean – I think what we're saying is that, we're coming through the development cycle and like any prudent owners, we want to manage the balance sheet effectively. And so whether we get there on and -- by paying down debt or where you are going and I think you're not wrong as we grow into it through the Palace and the Palms ramp-up or we are equally fine with the either approach.
Okay. Very good, thanks a lot.
Our next question comes from Stephen Grambling from Goldman Sachs. Please go ahead with your question.
Thanks. Maybe another follow-up on the revenues ramping up at Palace and Palms, I guess, do you have a sense of type of customers you’re currently attracting and specifically delineating between Strip and then the kind of local customer?
Those guests at both Palace and Palms fit the hybrid model that we've described many times. Those are designed to take great care of locals at the same time with renovated hotel products and many amenities are added to the business, they are terrific destinations as well. So as long as we get the balance of both taking good care of locals loyal guests, high visitation, high repeat visitation and out town guests, those models work nicely.
I guess as a follow-up, would you say that, given the amenities having come online have you seen a greater response from locals relative to Strip customers to-date?
I don't know that I can break it with specificity other than to tell you, we're taking good care of both guests.
Great. And then maybe changing gears, at the beginning of the call you mentioned their continued investment in technology and you talked about the slot system, but maybe are there other opportunities that you see out there that can drive the business that could be material? Thanks.
Really our focus, so if you think about the core of our business, we are slot-centric business. We do many things, we run great restaurants, we do bond hotels that are entertainment, destination-centric as well. But the end of the story, we are slot-centric. So our technology focus is making certain that we stay ahead of the curve with regard to what we can deliver in terms of promotions and better experiences that make for a longer-lasting slot experience and a more fulfilling slot experience for our guests.
Great. Thanks look forward to seeing the Palms.
Our next question comes from Chad Beynon from Macquarie. Please go ahead with your question.
Hi, good afternoon. Thanks for taking my question. As you come to the end of the development here with Palms and you've talked about free cash flow growing and a deleveraging. You still have some non-operating assets; Durango, Reno and in the quarter you made an acquisition for Skye Canyon, so can you kind of rank these or just talk about where they are from a priority standpoint. If we should be thinking about these as potential 2020, 2021 projects or things that we should be talking about or these just there for rainy day? Thanks.
Yes. I mean I'll start with Skye Canyon, I mean that’s just following the strategy that Frank and Lorenzo started since they started the company right? We want to be in control of our own destiny and we see that area as potential area for growth in the future.
Our first and foremost priority is to make sure we maximize the profitability, our existing properties including the Palms and the Palace. And I can’t say that enough on this call that is our first focus. Then it’s managing the balance sheet making sure we are within that four-time striking or four-time leverage striking distance. And then because of the way we can generate, we're going to be generating cash flow, we have absolute flexibility to what – either develops our projects or return capital to stakeholders.
The only caveat to that would be the Native American, Steve, you might want to talk about North Fork, if we get a positive decision on North Fork, we will move forward to develop that.
Yes. 100%, Frank, you’re right. I mean, isn’t that -- I should have raised that early, my apologies. And North Fork is kind of the exception to the rule, as soon as we get a favorable ruling, we are going.
Okay. Great. Thank you. And then just from a cash tax perspective, I believe 2018 you paid almost nothing. Should we expect 2019 should have a similar result just based on what you're expecting for CapEx and depreciation at this point? I know you're not giving guidance, but that will just kind of help us think about cash flow? Thank you.
Yes. At this juncture in time, we do not expect to be a taxpayer in 2019, cash taxpayer.
Okay. Thank you very much. Appreciate it.
And our next question comes from Barry Jonas from SunTrust. Please go ahead with your question.
Hi. Thanks. Just following up on North Fork. The project has been in legal limbo for a little bit. Just curious if there been any tweaks to the potential offerings? And how quickly could the project be built online once if and when you get a go ahead? Thanks.
I mean, no, there’s been no tweaks to the design. And so it's really just waiting on -- again, it’s just waiting on the court and then as soon as the court goes, we can start building, designing and building.
Got it. And just remind me was that an 18-month, I think in the past maybe you had mentioned when you think it how long the construction phase will take?
18 to 24.
Yeah. I'd say 18 to 24.
Got it. And then just last quarter you talked a little bit about increasing marketing spend to drive awareness at the Palms and Palace. Wondering what if any has there been any competitive response to that. Just wanted to be sure that the markets still relatively rational? Thanks.
No, hopefully, you’ll hear the same thing from Keith and company later on, about the market, the local market is incredibly rational from a promotional standpoint.
Okay. Great. Thank you.
[Operator Instructions] And ladies and gentlemen at this time, I'm showing no questions. I would like to turn the conference call back over for any closing remarks.
Well, thank you, everyone, for joining the call. And we look forward to talking with you in about 90 days. Thank you.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.