Red Rock Resorts, Inc. (RRR) Q2 2016 Earnings Report, Transcript and Summary

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

Thank you, Vince. Good afternoon, and welcome to Red Rock Resorts' Second Quarter Earnings Conference Call. Joining me on the call today from Red Rock Resorts are Richard Haskins, President; and Marc Falcony 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 a complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release and Form 8-K which we 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, Danny, and good afternoon. I'm pleased to welcome everyone to our second quarter 2016 earnings call and our first quarter reporting operating results as a public company. The second quarter was truly an exciting quarter for Red Rock Resorts. We successfully completed our initial public offering, announced that our consolidated subsidiary station casinos has agreed to acquire the Palms Casino Resort and finally refinanced a new $2.4 billion credit facility. In addition, and perhaps most importantly, we continued to see strong overall trends in our core business. For the quarter, our net revenues increased 4% to $351.5 million. Adjusted EBITDA grew 6.8% to $117.4 million and our adjusted EBITDA margin grew 90 basis points to 33.4%. This marks the 13th consecutive quarter of year-over-year net revenue growth, the 21st consecutive quarter of EBITDA improvement and the 15th consecutive quarter of EBITDA margin improvement. In Las Vegas, net revenues were up 2.3%, driven by a 3.8% increase in non-gaming revenues as we continue to benefit from investments in non-gaming areas, driven by strength in both hotel revenues, which were up 5.5%, including beverage revenues, which were up 5.6%. Gaming revenues were also up 1.8%, led by strong results in both slots and table games, which were offset by lower sports hold. Adjusted for sports hold, net revenues would have been up 3%, and gaming revenues would have been up 2.7% for the quarter. Our Las Vegas adjusted EBITDA grew approximately 2.7% to $104.6 million for the quarter and our margins grew approximately 10 basis points to 32.4%. Adjusted for the lower hold in sports an additional costs associated with the 10-year anniversary of Red Rock, Las Vegas adjusted EBITDA and adjusted margin would have grown 6.2% and 100 basis points, respectively. As we stated in our earnings release, strong operating results in April and June were partially offset by a challenging May due in large part to difficult comparisons to last year. In particular, there were several city-wide events in May of 2015, including the Pacquiao-Mayweather fight and 2 Rock in Rio weekends, which had a significant positive impact in our business. Notably, the strong operating results we experienced in both April and June with double-digit EBITDA increases continued into July. During the second quarter of 2016, Las Vegas continued to show strong momentum across all major metrics. Despite the difficult event calendar comparison to last May, visitation in Las Vegas was still up 1.6% to a record 21.3 million visitors in the first half of the year. RevPAR in the Strip grew an impressive 5.5%, convention attendance grew double digits at 14.2% and a number of conventions and meetings held grew over 8.4%, which highlights the continued strong group demand throughout the city. Clearly, these trends support an overall positive outlook for our portfolio of properties. In addition, the overall Nevada economy continued to demonstrate strong and steady growth. Population growth remains a key driver, as a recent U.S. Census Bureau release showed Nevada as the third among states in percentage growth of population, and Las Vegas is the fifth fastest-growing MSA in the United States. The overall job market in Southern Nevada also remains vibrant. Total employment in June reached 941,000 jobs, an increase of 2.9% or 26,200 jobs from the prior year, and Las Vegas employment is now above the peak job market of 2007. Las Vegas has experienced 5 consecutive years of job growth, which highlights the sustained economic expansion the city has experienced. Diversification of the job base has also continued this year, with strong growth in education, health services, construction, transportation and utilities, leisure and hospitality, professional and business services and government jobs. The increased employment counts contributed to an improving unemployment rate, down 70 basis points year-over-year to 6.4% in June, and nearly 800 basis points below peak levels. Taxable retail sales in Southern Nevada reached a record high of $39 billion for the last 12 months ended May 16, a clear indicator that Las Vegas consumers continue to feel positive about their current situation and increased discretionary spending. The housing market also continued its steady recovery, with medium existing home prices in June up 8%, and the number of new home starts up 42% year-to-date. Total weekly earnings have increased 5.1% year-to-date. As we have previously emphasized, we believe growth in earnings is a key contributor to driving more discretionary spending. The pace of construction in Las Vegas remains healthy and broad based. While there have been announcements related to the construction of resorts and development housing projects, this cycle has seen a more diversified outlive capital to very large projects in the commercial sector, industrial logistics, information and technology, healthcare and infrastructure newbuilds and improvements. These projects will not only create construction jobs for area residents, but will also provide a significant number of full-time employment opportunities upon opening that will have a multiplier effect on overall jobs in the region. We're also encouraged by the improving trends in the Las Vegas locals gaming market as revenues were up 2.4% in 2015 and are currently up 2.9% for the first half of 2016. In our Native American segment, we achieved another strong quarter, generating $20.1 million in management fees and $40.5 million in fees year-to-date. Both the Graton and Gun Lake properties currently have expansions underway, which should drive additional revenue and EBITDA growth upon completion. Graton Resort and Casino continues to report record operating results, with another double-digit EBITDA increase in the second quarter. Work continues on the Tribe's expansion which will add 200 hotel rooms, a luxurious spa, outdoor pool area and 20,000 square feet of event and convention space. The expansion is scheduled to open on November 15, and we believe this expansion will create a premier gaming resort asset in Northern California market. We began the process of hiring new employees on August 6 and are currently taking room reservations for the new hotel. We expect the expansion to grow property revenue by allowing casino guests to extend their gaming stay, particularly on weekends, and drive increased mid-week business through both corporate and social group demand. Our management fees at the Gun Lake Casino are also strong, achieving double-digit growth for the quarter. The Tribe broke ground on an $85 million expansion earlier this year, which is scheduled to open in the second quarter of 2017. The expansion will include additional casino space, a new 300-seat multi-station buffet, and the relocation and expansion of the entertainment venue. Moving on to the North Fork Rancheria project. We continue to make good progress and are pleased to report some significant developments. On July 29, the Department of Interior issued secretarial procedures pursuant to which the Tribe will be allowed to conduct class re-gaming on its land north of Fresno. And as some of you may have read, the U.S. District Court issued a ruling last week rejecting a legal challenge to those secretarial procedures. While this clears a few of the last major hurdles for the project, we're still awaiting a decision in the litigation contesting the Secretary's decision to take the land trust for the Tribe. We'll continue to work closely with the Tribe to clear these last few legal obstacles in order to be in a position to commence construction of the project. I will now lastly cover some balance sheet and capital items. In May, the company successfully completed its initial public offering, issuing 29.5 million Class A shares and generating total net proceeds of $541 million. Currently, there are approximately 41 million Class A shares outstanding, which represents 36% of the approximately 116 million outstanding LLC units at Station Holdco. The Fertitta family and management own approximately 43% of Station Holdco and Deutsche Bank owns approximately 17% of Station Holdco, following the offering and the exercise of the underwriter's over-allotment. We're excited to once again be a public company, and we'll be intently focused on delivering shareholder value. Also in May, Station Casinos announcement that it entered into an agreement to acquire the Palms Casino Resort for $312.5 million, which represents a purchase price multiple of approximately 8.8x based upon our estimated EBITDA of $35 million in the first full year of operations. We continue to expect the acquisition to close by the end of the third quarter of 2016, subject to gaming approvals. The acquisition of the Palms will provide us with a leading gaming asset, with key strategic benefits in the Last Vegas locals market and in close proximity to the Las Vegas Strip. Over the past few months, we have been fully examining the opportunities that exist at the Palms. The property's current EBITDA run rate remains approximately 60% below its peak level. In addition, the property sits in one of the most under-penetrated market areas for our Boarding Pass program. We are focused on the necessary steps of integration and remain very encouraged about the potential upside we see with the asset. We expect to provide additional guidance on this investment during our third quarter conference call. In June, we successfully refinanced our revolver and term loan B facility and entered into a new $2.4 billion credit facility comprised of a $225 million term loan A facility, $1.5 billion term loan B facility, and an expanded revolver of $685 million. In addition, we extended the maturities of the term loan A facility and revolver by 3 years to 2021, and the term loan B facility by 3 years to 2023. Going forward, these refinancings will result in approximately $8 million of annual interest expense savings and provide us greater flexibility to pursue potential high-return growth projects. The company's cash balance as of June 30 was $251.4 million. Total outstanding debt was $2.26 billion, which excludes the non-recourse land loan of $116 million. At June 30, the company's $685 million revolving credit facility was undrawn. And as of June 30, debt net of excess cash to adjusted EBITDA ratio was 4.5x leveraged, and our interest coverage ratio was 4.4x, excluding the land loan. We expect leverage to be approximately 4.6x pro forma for the Palms transaction. Capital spending year-to-date was approximately $88 million, which consisted of approximately $30 million of maintenance capital and $58 million of growth capital. In July, the company announced its Board of Directors declared a cash dividend of $0.10 per Class A common share for the third quarter. The dividend will be payable on August 30, 2016 to all stockholders of record as of the close of business today. Station Holdco will make a cash distribution to all unitholders of record for a total distribution of approximately $11.6 million, $4 million of which is expected to be distributed to Red Rock Resorts shareholders and approximately $7.5 million of which is expected to be distributed to the other unitholders of record of Station Holdco. In conclusion, we are extremely pleased with the significant accomplishments we achieved in this very busy quarter for Red Rock Resorts. The key economic indicators that we monitor continue to show that the Las Vegas economy is growing steadily in a broad-based manner when compared to other markets in the U.S. economy as a whole. We believe this growth should translate into an increase in consumer spending in the second half of 2016. We are confident that our high-quality assets, market-wide distribution, ongoing investment in our properties, award-winning Boarding Pass loyalty program and substantial gaming and title landholdings in Las Vegas and Reno position us well to benefit from the continued economic growth of Las Vegas and the state of Nevada. Operator, this concludes our prepared remarks for today. We are now ready to take questions from participants on the call.

[Operator Instructions] Our first question is from Shaun Kelley of Bank of America.

So first of all, I guess welcome back, and congratulations on all of the deal activity this quarter. There is a lot going on. So can we just start with a quick clarification? I think we caught it right, but you gave a little bit of detail on potential hold impact. We're estimating that based on what you said, I think that's probably around $3.5 million of EBITDA to the quarter. Is that right?

It's about a 3.5 percentage points, which is roughly $3.5 million when looked at. The lower sports hold and the higher cost related to the Red Rock 10-year anniversary. We also had lower results just given the difficult comparisons in May with respect to hotel and table games, but those 2 particular issues account for about 3.5 percentage of points of EBITDA growth.

Okay, that's helpful. And then just for those of us that are sort of new to the business is -- can you just tell us, is sports something that's going to be pretty regularly volatile from here on? Or was this really kind of an exceptional one-off given -- kind of relative to historical patterns that you've seen.

Well, I think there's a couple of components to the sports hold. Obviously, as we referenced, there is significant activity in and around the Pacquiao-Mayweather fight last May. That, I think, was a significant portion to the lower hold, but there is volatility in sports quarter-to-quarter. This quarter happened to be a particularly unusually low hold for us, I think, given the May challenges from last year as well as other areas where sports hold was just substantially lower than last year.

Okay, great. And last one for me. But you mentioned North Fork in the prepared remarks, and obviously, this is something that's sort of new to us as well. Obviously, if this remains in litigation, it's going to hard for you to comment too much, but can you give us any sense of sort of trajectory or timeline that we can think about as to at least when we might think about the next milestone or next incremental data point on the litigation there?

Sure. Shaun, this is Rich Haskins. As Marc touched on, that was a very important milestone for us to get the decision from the Department of Interior, with respect to the secretarial procedures, which in essence, replaced what would've been the compact had we gone through that state route. But we're waiting a litigation decision with respect to the land being taken into trust, the validity of that. It's been fully briefed with the court since April of last year. And there's no assurances with respect to court timing, but we're hopeful that we can get a decision in that case within the next 2 or 3 quarters, and that would be, obviously, a very important decision for us as well.

And is there anything else outstanding, Richard? Is that really the only thing that you guys -- the only thing outstanding that you would need before you could contemplate financing or construction?

Now really, Shaun, this one, it's all litigation-based. There's 2 or 3 other lawsuits that actually have been fairly recently filed by the neighboring tribe, which we obviously just view as a delay tactic, but we think the key piece of litigation is the piece that I referenced to earlier.

Our next question is from Carlo Santarelli of Deutsche Bank.

Marc, just on the Las Vegas flow-through. Obviously, in the quarter, it impacted, I would say more so on the flow-through side just by the extra cost. Is kind of that 60% to 70% still a good estimate to use going forward? Or are we seeing some cost creep in the business?

Yes. If you adjust for the cost factors and the whole percentage, flow-through would've been 70% for the quarter on a normalized basis. So I still think we're comfortable in the 60% to 70% flow-through range.

Okay. And then if I could, just one follow-up. Within the segments, the one thing that I noticed that was a little bit softer in the quarter was on the F&B side. It looks like those margins have come in a little bit -- year-over-year as profit margins. Is that a mix issue more so than anything else? I know you guys have been doing some stuff with the restaurants. I'm just wondering if there is a little bit of a mix issue.

No, Carlos. I think you hit it. Basically, we had several new restaurants opened up in the second quarter. And obviously, the associated costs of preopening and training, getting the staff appropriately positioned to run those restaurants and some of the additional staffing costs for good service and good entertainment experience we want to provide with those restaurants probably had an impact on the costs, a little bit on flow-through on food and beverage. And we would obviously expect that these new restaurants have some sufficient time to ramp-up, particularly as we get through the summer months into the stronger fall period that we should see some more normalized costs out of those new restaurant operations.

Our next question is from Joe Greff with JPMorgan.

Marc, I missed some of your comments at the end of your prepared comments section. Can you talk about how you're thinking about CapEx at Palace Station? And how you're thinking about the timing of Reno? Obviously, there's been some news items on specifically those 2 projects.

So on Palace Station -- and what was the second one, Joe? You broke up a little bit?

Reno.

Reno. I'll let Richard address Reno, and then I'll address Palace Station.

Yes, sure. With respect to Reno, really, what we're doing is just getting the necessary entitlements, right? We've got 8 acres that we think is a great location across the convention center sites. And we're in the process right now of obtaining the necessary local and state approvals to be able to develop on that site, but we haven't made any final decision with respect to scope or timing yet.

With respect to Palace Station, we're pretty excited about the returns and some of the success we've had with renovations and improvements at several of our other properties. And then when you look at Palace Station, this is the original location where Station Casinos, now Red Rock Resorts, originated. It's got a great location in the heart of Las Vegas. It hasn't really had any meaningful capital investment dollars into the property since 1991. And we view what's going on in the locals market and particularly in that location, that part of town. There's a great opportunity to upgrade and add some amenities. So we are looking at a multiple-phase project. Phase 1a, which we anticipate will start in September, will be about $20 million to $25 million; adding a new bingo room and buffet as well as some additional improvements to the property and its appearance. So that's about as much that we're committed to at this point with respect to Palace, and we're pretty excited about that opportunity at this point.

[Operator Instructions] Our next question is from Cameron McKnight of Wells Fargo.

Marc, just wondering if you can talk about market share trends in the Vegas market and whether there's been any change in promotional levels or the promotional environment.

No. I think we're -- we've seen very consistent activity in the promotional side, both from us and our competitors. I think it's important to note that we've seen that acceleration of gaming revenue performance in 2016 versus 2015. But from a promotional standpoint, it's been pretty consistent.

Okay, great. Thanks and then just on the mix of revenue growth. Non-gaming has -- and I mean, during this quarter, non-gaming outstripped gaming revenue growth. Is that something we should expect to continue? Or was it more a function of some of the one-off factors in the quarter?

I think it's a bit of a combination of a little bit of both. I think like I said, we've seen that acceleration in gaming the first half of -- gaming revenues for the first half of 2016. If we adjust and we normalize, our gaming revenue growth would've been closer to 3% versus the 1.8%. I think contributing to some of the growth in non-gaming is obviously, we added several of these new restaurants in the comparable period to last year, so you're seeing a little bit stronger performance relative to non-gaming versus gaming. But we're very encouraged, particularly what we're seeing in the slots and the table side of the business as it pertains to gaming revenue growth, not only in the first quarter, but in the second quarter and similar trends as to what we're seeing -- what we saw in July.

Okay, got it. Thanks. And then finally, just on the sports side. Was there any one event that led to low hold on the sports books?

The most significant event was obviously the Mayweather-Pacquiao fight. We did have maybe some other impacts in other sports on a year-over-year basis, but that was one of the larger events on the sports hold.

Got it. So that was more of a comparison issue rather than something that happened this year?

Exactly.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Thank you, everyone. We'll talk to you in the third quarter earnings call.