Red Rock Resorts, Inc. (RRR) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Red Rock Resorts' First Quarter 2016 Conference Call. [Operator Instructions] Please note this conference is being recorded. I would like to turn the conference over to Daniel Foley, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Karen. Good afternoon, and welcome to Red Rock Resorts' First Quarter Earnings Conference Call. Joining me today on the call from Red Rock Resorts are Rich Haskins, President; and Marc Falcone, Executive Vice President, Chief Financial Officer and Treasurer. Our call today will include forward-looking statements under the safe harbor provisions of the 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 that this call is being recorded. I would now like to turn the call over to Marc Falcone.

Thank you, Dan, and good afternoon. I'm pleased to welcome everyone to our first quarter 2016 earnings call. As many of you are now aware, we successfully completed the initial public offering of Red Rock Resorts on May 2, 2016. We offered 27 million shares and raised approximately $531 million, making it the largest non-REIT IPO of the year. The shares trade on the NASDAQ Exchange under the ticker symbol, RRR. We're excited about our return to the public markets and are extremely focused on providing shareholder value and driving long-term growth for the company. On Tuesday of this week, we took the first step in this regard as we announced the acquisition of the Palms Casino Resort for $312.5 million. With this acquisition, we gained a leading gaming asset in Las Vegas with key strategic benefits in the Las Vegas locals market and close proximity to the Las Vegas Strip, all at a very attractive price. As a hybrid gaming property that appeals to both Las Vegas residents and tourists alike, the Palms is uniquely positioned to benefit from the strong economic trends in Southern Nevada as well as record visitation and visitor spending in Las Vegas. It is a compelling strategic addition to our portfolio of properties. As discussed in our release, after factoring in anticipated synergies, we estimate that the Palms will generate over $35 million in EBITDA during the company's first full year of ownership, resulting in an implied multiple of 8.8x EBITDA for the transaction. We also estimate the we acquired the property at approximately 50% of replacement costs. We expect the acquisition to be accretive to earnings per share and free cash flow positive in our first full year of operation. We believe this acquisition will provide significant shareholder value going forward and it underscores our belief in the strength of Las Vegas locals market, which we continue to believe is the best gaming market in the country on a risk-adjusted basis. The Palms opened in November 2001 and has undergone several expansions. Located directly across Interstate 15 from the core of the Las Vegas Strip, the Palms features approximately 1,250 slot machines, 48 table games, 710 hotel rooms, 15 fine dining and casual restaurants, the 2,500-seat Pearl theater and several other resort amenities. Notably, the property's current EBITDA run rate remains approximately 60% below its peak level. As such, we believe there is significant upside from current business levels based on our experience operating similar properties. In addition, the Palms is located in one of our most underpenetrated areas in the Las Vegas Valley from a Boarding Pass member standpoint, and this should provide another high-quality distribution point for our rewards members to earn and redeem points. The acquisition of the Palms should not materially impact our balance sheet or leverage profile. Pro forma for the transaction, leverage will be approximately 4.8x, inside of our stated target leverage of 4 to 5x, and we anticipate returning to pre-acquisition leverage levels within 2 to 3 quarters. We also believe there are a number of opportunities to invest targeted strategic capital into the property over time that should drive even higher returns, and we will evaluate these options in a disciplined manner over the next several quarters. Now turning to our first quarter results, which reflect a continuation of the strong trends we have experienced in our core Las Vegas business as well as our Native American business. We experience broad base revenue improvements in all of the major areas of our business, including gaming, hotel and food and beverage. For the quarter, our consolidated net revenues increased almost 5% to $359 million, while adjusted EBITDA grew over 11% to $133 million, driven by a combination of both strong Las Vegas results and continued growth in our Native American business. On a consolidated basis, our adjusted EBITDA margin grew an impressive 210 basis points to 37.1%. This marks the 12th consecutive quarter of year-over-year net revenue growth, the 20th consecutive quarter of EBITDA improvement and the fifth consecutive quarter of double-digit EBITDA growth. In Las Vegas, we saw improvement in both our gaming and non-gaming revenues, which resulted in a 3.1% increase in net revenues, led by growth in both slots and table games. Hotel occupancy was the highest since the first quarter of 2006 at 94%, and hotel revenues and RevPAR were up 10% and 9%, respectively. Las Vegas adjusted EBITDA grew approximately $8 million in the quarter or 7% to $119 million, and our margins grew approximately 130 basis points to nearly 36% on continuing strong flow through. Our Native American management business had another strong quarter as well, generating fees of over $20 million for the quarter or an increase of nearly 42%, driven by strong operating trends at both Graton Resort & Casino and Gun Lake. During the first quarter, many of the key economic indicators in Las Vegas continued to show positive momentum as we've seen over the last several years. Strong tourism trends and continued population growth helped lead to job creation and wage growth, while the housing market continued to show steady improvement. For the fourth -- first quarter, visitation to Las Vegas was up 3.5%, reaching 10.5 million visitors, a record first quarter in terms of market visitors. RevPAR in the Strip grew an impressive 7%, which highlights the strong demand being experienced throughout the city. Convention attendance grew double digits at nearly 15%, and the number of conventions and meetings held grew over about 10%. Clearly, these trends support an overall positive outlook for all of our properties. Similarly, the overall Nevada economy continue to demonstrate strong and steady growth. Population influx continued as a recent U.S. Census Bureau released showed Nevada was third among states in percentage growth of population. The retiree population of Southern Nevada also continues to grow, and retirees now make up approximately 17% of the adult population in Las Vegas. This is an important shift in Las Vegas demographics as retirees have more disposable income and time and are a strong customer segment for Red Rock Resorts and Station Casinos Properties. With respect to the job market in Southern Nevada, the pace of growth remains strong in 2016. Total employment in March reached 932,000 jobs, an increase of 23,400 from the prior year. Las Vegas has experienced almost 5 years of consecutive year-over-year job growth, which highlights the sustained economic growth we are experiencing. Diversification of that job base has also continued this year, with strong growth in construction jobs, professional and business services and education and health services. The increased employment counts have contributed to an improved unemployment rate, now at 6% in March. Total weekly earnings also increased 7% in the quarter. As we have emphasized previously, we believe growth in earnings is a key contributor to driving more discretionary income. Taxable retail sales in Southern Nevada, a key measure of consumer spending, was up 3.2% and remains at a record high of $38.2 billion for the trailing 12 months. Finally, based on public announcements, over $13 billion of new projects and infrastructure investments are either in the planning stages or under active development in Southern Nevada and across the diverse set of industries, including technology, health care, infrastructure and gaming, just to name a few. These projects will not create only construction jobs for area residents, but will also provide a significant number of full-time employment opportunities upon opening and will have a multiplier effect on overall jobs in the region. In our Native American business, we generated $20 million in quarterly management fees and anticipate continued strong results from both properties, given their strong competitive positions. In addition, both properties currently have expansions underway, which should drive additional revenue and EBITDA growth at both properties upon completion of those expansions. Graton Resort & Casino continues to report record operating results with double-digit EBITDA increases. Progress continues on its expansion, which will add 200 hotel rooms, a luxury spa, outdoor pool area and 20,000 square feet of event and convention space. This expansion is largely being funded through free cash flow, and we anticipate the expansion will allow the property to grow revenue by allowing casino guests to extend their gaming stay and drive increase mid-week business through both corporate and social group demand. This expansion is anticipated to still be completed in the fall of 2016. The Gun Lake Casino also had a strong first quarter result, resulting in management fees from this property increasing double digits. The Gun Lake Casino expansion broke ground in the first quarter and will include additional casino space, a new 300-seat multi-station buffet and expansion of the entertainment area. This expansion is scheduled to open in the summer of 2017. Lastly now, I will cover some balance sheet and capital items. Capital expenditures in the quarter were $31 million, and we estimate that full year capital expenditures will be between $120 million to $140 million. We anticipate the maintenance capital expenditures will be approximately $50 million for the year, with the balance targeted towards investment projects throughout our portfolio in both gaming and non-gaming areas, including our recently announced slots system upgrade. Our outstanding principal balance of long-term debt as of March 31 was $2 billion on a consolidated basis, which excludes the $115 million nonrecourse land loan and other debt associated with Fertitta Entertainment. As of March 31, our consolidated leverage ratio, excluding the land loan in Fertitta Entertainment and net of excess cash, was 4.3x, and our interest coverage ratio was 4.2x. Pursuant to the terms of our credit agreement, we made our annual cash flow payment of $44 million to our term loan lenders on March 10, 2016. As stated previously, 27 million shares of Class A common stock were sold in our initial public offering for total proceeds of approximately $531 million. Post-IPO, there are approximately 39 million Class A shares outstanding, which own 33.6% of the outstanding LLC units of Station Holdco. The Fertitta family and company executives will own approximately 43%, and Deutsche Bank will currently own approximately 18% following the IPO. In conclusion, we are very pleased with our overall performance in the first quarter of 2016. The Las Vegas economy continues to improve and is now growing at a healthy rate. We remain optimistic about the momentum we are seeing in our business and believe that key economic indicators we monitor should continue to translate into increased consumer spending and strong operating results. We also believe that our acquisition of the Palms Casino Resort enhances our ability to benefit from these strong economic trends. We believe our high-quality asset portfolio, market-wide distribution, award-winning Boarding Pass loyalty program and the embedded assemblance of gaming [indiscernible] in Las Vegas and Reno position us well to benefit from the continued economic growth of Las Vegas and the State of Nevada overall. Operator, this concludes our prepared remarks for today, and we'll now take questions from participants on the call.

[Operator Instructions] Our first question comes from the line of Joseph Greff from JPMorgan. He may have stepped away from his phone. We can move on. Our next question comes from the line of Steven Kent from Goldman Sachs.

A couple of questions. Just Marc, a little bit more on the Palms acquisition. It's interesting you mentioned that it's close to the Strip, but it also is not in the area where you have previously had a property. I just wanted to understand what the rationale is. Because my recollection of the Palms was really targeted more towards the visitors rather than locals. So is that what you're talking about when you said you mentioned investments like -- I don't even know, but does it have a movie theater? Does it have some of these locals things that you add in? So I wanted to ask that question. Then the other is, with Boyd's recent foray into North Las Vegas, the Aliante, Cannery, does that add competition to the board -- against your Boarding Pass? How are you viewing that versus where you stand?

So let me start with the first question, Steve. Station Casinos was one of the original investors in the Palms casino, going back to 2001. And we're actively involved with that property for nearly 10 years. So we're extremely familiar with the asset. It was largely positioned as a locals asset. It does have a 12-theater movie screen. It does have a lot of the other components to what makes the locals property successful. Where we're positioned in this particular asset is we don't have a significant presence of a large portion of our Boarding Pass members. So we feel it's uniquely positioned to capture back a lot of the lost business that, that property has experienced over the last several years, but also continue to benefit from increasing ADRs and RevPARs on the Strip's strong convention business. And overall, I think it's a really good solid mix of both Las Vegas locals business and tourism, not too dissimilar from some of the trends we experienced out of properties like Red Rock and Green Valley Ranch. With respect to the impact or any potential impact for Boyd in the North Las Vegas marketplace, I think, listen, we actually think it's probably a really good situation, overall, because you're consolidating separate ownership in the market under one umbrella, and we think that will create a more rational marketing and promotional environment, which we think could benefit, not only Boyd, but to us as well.

And just one quick one, I'm not sure if you mentioned it, but CapEx in the quarter, how much of it was the IT new system versus other spend? How should we start to think about the cadence of CapEx?

Yes, no problem. So the $31 million did not include anything for the new system. You'll see the new system CapEx spend starting in the second quarter, and which will continue through the second quarter of next year. So it's about a 12-month spend to complete the upgrade of the system and complete the installation and the programming that goes along with it.

[Operator Instructions] And I do have a question from the line of John DeCree from Union Gaming.

Just wanted to ask regarding the type of play that you're seeing at your property. We've heard from other regional operators, more broadly, that they're seeing a pickup in the unrated play on the gaming floor. Wondering if you guys had seen similar trends or if you could talk more broadly about where you're seeing some of the best performance on the casino floor as it relates to your customers.

John, well, I think there is some consistency with what we're experiencing in terms of unrated play at our properties, not dissimilar from what other regional operators have commented on their earnings call. So it's an encouraging sign to see that type of play kind of recover. I think it's a testament to the strength of the local economy where you're starting to see that lower-end play or the unrated play come back. Clearly a sign of the economic environment here stronger. People have more disposable income and are coming back, spending that money in gaming, on the casino floor in our properties.

And that concludes our question-and-answer session for today. I would like to turn the conference back over to Red Rock Resorts' management for any closing comments.

Thank you, everybody. We look forward to reporting second quarter earnings as our first quarter as a public company. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.