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…

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.