Good afternoon, and welcome to Red Rock Resorts Third Quarter 2023 Conference Call. All participants will be in a listen-only mode. Please note, this conference is being recorded. Please note, this conference 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 Resort. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today on Red Rock Resorts third quarter 2023 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreger, 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. Definitions and a 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 that this call is being recorded. Before we get into any of the details, similar to our financial and operating results in the first half of the year, the third quarter represented another strong quarter for the company. The quarter represented our third best third quarter in the history of the company in terms of same-store net revenue, adjusted EBITDA and adjusted EBITDA margin only surpassed by the unprecedented third quarters of 2021 and 2022. Team continued to validate our core strategy of reinvesting in our properties to deliver fresh and relevant amenities to our guests, while remaining focused on best-in-class customer service. In executing this strategy, the team delivered another strong quarter across all business lines, this quarter, marking the 13th consecutive quarter that the company delivered adjusted EBITDA margins in excess of 45%. And through the first nine months of the year, the company remains on pace to have the best financial year in the history of our company. Now let's take a look at our third quarter results. With respect to our Las Vegas operations, third…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Joe Greff with JPMorgan. Please go ahead.

Good afternoon, everybody. Just on Durango, not that it's a big deal, but the movement to December 5, can you talk about why? I know it's only a couple of weeks. And then Steve, you mentioned there might be some movement in the budget of $780 million, but it wouldn't be material. Do you define material as being within 5% of -- as a variance for that budget. And then I have a follow-up.

I'll go with the last one first and then I'll turn it to Lorenzo for the first one. Your answer is that you're correct in that 5% movement.

Yeah. That's accurate. This is Lorenzo, Joe. Relative to moving back to date, the reality is as we've -- you try to predict when a lot of these areas are going to be handed over. And as of right now, when we start to look at the calendar, certain areas that are critical to the opening just were not turned over in the time that we had originally anticipated, which in turn we didn't feel like gave us enough time to properly train our staff and our team members in venue to be able to have the appropriate load in days and then play days. Our operations are a little bit different from the strip in the sense that we're primarily a local property. And we're going to obviously have a lot of repeat customers. This isn't where you're just going to see a new face every day. And for me and Frank, the most important thing is that the level of service on the day we open is at the highest quality that it can be. So we think it's -- obviously the right thing to do to make sure that when the door is open.

For a long-term investment.

Fully ready, and we're going to own this asset for a very long time. And the first impression is very important. And quite honestly, we just have very high standards, and we want to make sure that we nail the opening.

Fair enough. And then my follow-up question and whoever wants to answer, go ahead. Can you talk about, I guess, following Boyd's report. Any potential on the income, operating expense pressures, particularly touching on labor wages? And if we're sort of looking at revenues consistent with past seasonality on a same-store basis? Would you expect operating expenses to move similarly?

Hi, Joe. This is Scott Kreeger. We are really comfortable with our expense structures right now. We think our expenses are in line. Our teams out at the properties are doing a great job to create efficiency. When we break down some of the major categories, let's start with labor first. As we've said in past calls, we really think between our wage, our benefits and our company culture, we're an employer of choice. And that's evidenced by the strong outcome we had with our hiring campaign at Durango. So while you have to stay competitive in the market has to be monitored. We feel like we're in the right spot when it comes to salaries and wages. And we're able to hire quality talent. We were able to get Durango hired very quickly with top quality candidates. We don't see that changing materially into the future. When we talk about cost of sales were actually down year-over-year in cost of sales. So the teams have been able to manage cost of sales, whether that's through creative menu, pricing or composition or other factors, we've been able to stay pretty consistent there. And as we've talked about in the past, acquisition cost remains rational and stable within the market. There are a couple of things that do weigh us down a bit that are less in our control. One of those is energy. It still remains high, specifically in electricity. And we believe in keeping our properties fresh and we spend quite a good amount of money on repairs and maintenance, making sure we have a first-class experience, but those spends are within our control. We think we have spent a good amount of repairs and maintenance. And we think our properties are top shape, and we can control the repairs and maintenance costs going forward if we feel the need to ratchet that down with it.

Thank you.

The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.

Hey everybody, good afternoon. Steve, just trying to kind of think from a modeling perspective and thinking about kind of the seasonality in Vegas, specifically the fourth quarter and how, generally speaking, historically, 1Q and 4Q were your best quarters. So putting that kind of within the framework and then thinking about how we should contemplate the impact that Durango will have over the 26 days. Any callouts for preopening type of expenses or things like that, that will be excluded from EBITDA and anything else you could share on that front?

I think on the pre-open, Carlo, as we've been ramping up the project over the past year, you've been gradually seeing an increase in those expenses and they just happen to be in the write-offs and other line item below the line. And so we do see that ramping up as we go right up to the opening of Durango when we start in those expenses slip to operational.

Okay. Got it. And then just in terms of -- as you look out to next year, obviously, you guys talked a little bit about the cost headwinds that are present in the market. But from a demand standpoint from a health of Las Vegas standpoint, is there optimism that you could see top line flattish to slight growth in 2024 on a same-store basis?

Yes, this is Scott. Yes, for sure. It's our thesis, and we believe in Las Vegas. There's no one more bullish than us about the Las Vegas market. We're bringing on new product. We're entering markets that are underpenetrated. We're adding high-limit rooms across our brand, that have met with strong success in R&D at Red Rock. So we're optimistic about going into 2024. And I think the population migration into Nevada remains totally intact. I mean that's kind of our long-term thesis is net inflow growing population here. And the fact is that people are moving here, have higher annual income than they've ever had in the past. So we remain bullish on the Las Vegas story.

And it's not just people, it's businesses. So not only is the people that are moving here to Frank's point, getting wealthier, but the economy is getting more diverse. Job bodes well for our business.

Great. Thank you all very much.

The next question comes from Shaun Kelley with Bank of America. Please go ahead.

Hi good afternoon every. Thanks for taking my question. Two for me. First off, I just wanted to -- you already give us the answer, I believe, on the labor and cost environment. So I think we know the answer, but I kind of wanted the particulars around just any thoughts on the union progress and how that may impact prevailing wages more broadly around the Valley Again, it seems like you all are pretty insulated and very comfortable with where you sit. But I'm just kind of curious on your observations more broadly as those discussions sort of kick into high gear here in the next couple of weeks.

Yes, Shaun, this is Scott. I'll kind of take it from two angles. One, no one's really sure what the outcome will be on the negotiations. Certainly, it does have a knock-on effect to us. We don't mark ourselves to strip wage, but we certainly want to stay competitive in the market. So to the degree we have to look at those physicians and adjust, we're prepared to do that. But the flip side on the positive is any raises the pulmonary workers on the strip receive. Keep in mind that those are our customers when they come home at night. So there's a knock-on benefit in our business model for higher discretionary income for Las Vegas residents.

Great point. Thank you for pointing that out. And then my other question would just be sort of behavior kind of behind the scenes as you dig into what you saw in Q3. I think what we heard broadly speaking, around the casino landscape has been up in rated play. And I think you called out a couple of segments that were strong for you, down still a little bit as you see some normalization in unrated. Is that a fair characterization when we just sort of decompose your casino revenues I think were down roughly 3% year-on-year if we just look at that casino line? Is that still kind of the broad prevailing behavior? Any nuance to that?

Yes. Look, I think you nailed it. We see relative consistency in the trends. We did have some disruption impact at GVR. We have a new slot and a new table games high-limit room coming online. So we kind of had to move those customers to temporary locales within the property while we are bringing on those new products. So it did have a bit of impact. We think we outperformed the market in the quarter. And as we kind of take a peek into the fourth quarter, we like the trends so far.

Thank you very much.

Next question comes from Jordan Bender with JMP Securities. Please go ahead.

Thanks for taking my question. Nice acceleration hotel revenue during the quarter. Just kind of looking to the first half of the year, occupancy trending near pre-pandemic levels. I assume it kind of ticked up year-over-year as well here. But as we look forward, is there anything telling us that occupancy will grow off of this base? Or should we expect this to be more rate driven into 2024? Thank you.

Yes. I can take this one. I mean right now, I think we're right around 86% or 86.2%. It's still below our historical highs because we're still looking to get our group and sales business back.

Okay. And then just on the follow-up, I know there was quite a bit of weather, fires in hurricane in the Valley during the quarter was any operations impacted from those weather events? Thank you.

No. No. We operate as normal.

Thank you very much

Next question comes from Steve Wieczynski with Stifel. Please go ahead.

Yeah. Hey, guys. Good afternoon. So Steve, I just want to be clear here, I think you said this, but there were no operating expenses related to Durango that hit the income statement in the third quarter, meaning those -- those essentially were all in that write-down line. Just trying to make sure that margins here are on a like-for-like basis, and there's nothing we really need to strip out and then somewhat unrelated, Steve, just wondering what drove the corporate expense line down about 10% year-over-year?

Yes, I think you actually -- you kind of led me the question. So the one expense we recognized that was -- it probably shouldn't have been where it was, was in corporate. So there was some preopening expense that we reclassified from corporate this quarter into the Durango project, and that caused the reduction into corporate. But to your point, no other expense related to the Durango opening has led into the operations.

Okay. Got you. Thanks. And second question, Steve, in your prepared remarks, you talked about group sales -- you mentioned those. We're kind of pleased with how those are trending right now heading into next year, but they were pretty high-level remarks. Just wondering maybe if you could provide a little bit more detail about those group sales heading into next year?

Yes. This is Scott. Let's take this year and the remainder of this year, if we snap the line and compare it to the same time last year, room nights are up roughly 20%, revenues are up nearly 40%, caterings up over 50%. In the quarter, you see similar performance. One thing to note, so that's super strong. We're really happy with the results across the board as it relates to hotel and hotel sales and catering. One note, as you go into 2024 and compare year-over-year, we're up against tough comps because we had latent bookings that were booked during the COVID period that turned off in the first part of the year. So while we like the pace of where we're going, when you start to look at next year on a year-over-year comp basis, it's going to be a pretty high comp.

Got you. Thanks, Scott. I appreciate it.

The next question comes from Barry Jonas with Truist Securities. Please go ahead.

Hey, guys. I appreciate the positive commentary for Q4. Just curious how trends are looking specifically for F1 and maybe for Super Bowl into Q1 as well? Thanks.

So this is Lorenzo. I mean we're not quite as tied to F1 as some of the properties on the scrip, so they can probably give a lot better color, just what we're seeing in the marketplace, looking at room rates and whatnot. It seems as though that there has been some steam come out of the people's expectations for maybe what they thought that event would be maybe a year ago. With that said, we do think it's still going to be a great weekend and a positive event. At least for us, I mean, we're not leading the charge there from an F1 standpoint, but we are getting the benefit of all the people coming into town and whatnot. But rumoring certainly, have come down from where people's expectations were even as recent as maybe three or four months, I guess.

And I think on Super Bowl, we would expect to have very strong demand.

Yes. We're super bullish on the Super Bowl. We're seeing very strong bookings there. That should be a pretty an outlier from a weekend to the positive, I think, for everybody in town.

Got it. And then just as a follow-up. You guys have a number of great options, but any updated thoughts on what's next in the development pipeline and I guess timing, specifically for Vegas post Durango? Thanks.

Well, I think as you know, as we said before, we're going to want to get the Durango open and get it stabilized. We've got a number of development opportunities waiting for us about six opportunities. I would say that from a design standpoint, as far as starting, we're probably furthest along with either Durango Phase 2 or the Inspirada project. And then after that, Sky Canyon is probably right behind that. We've been actively working on all those developments, but we just -- we want to get Durango open and stabilize before we make a decision on what's next, so.

Great. Thanks for answering my questions.

The next question comes from Dan Politzer with Wells Fargo. Please go ahead.

Thanks for taking my questions. I just wanted to follow-up on the Formula 1 topic. I mean, as you think about -- there's a lot of disruption as it relates to roads and construction in Las Vegas. Is there a scenario where you actually could be a net beneficiary just to the extent that there's less traffic into the strip and maybe to the peripheral areas where your casinos are located?

Yes, Dan, it's Scott. I think we would characterize as the first year of F1 is a learning experience. None of us really know. We can make assumptions of things. We thought that there would potentially be a benefit both from locals and also from out of town books that maybe aren't as interested in, all of the energy around Formula 1 and want something that's a little bit more of a relaxed resort experience and may choose us as an option. So that's just to be seen. So we'll learn from that. But we think there could be a positive effect.

Dan, this is just another step in the evolution of Vegas, right? It's just another large weekend in the scheme of large weekends, which seem to be now 52 weeks a year. There's going to be a lot of people visiting the town. That means there's going to be a lot of tips and those tipped employees on the strip are generally our customers. So Scott touched on it earlier, but there's kind of a two-pronged benefit there.

Got it. And then just for my follow-up, I know you guys have a well-documented set of opportunities within Las Vegas. But I guess as you think about the company as a whole, are there other opportunities that you've looked at or would consider outside of Nevada or even outside of the US?

Yeah. I mean, we're always looking at all opportunities that are out there, but for any opportunity, we really have a high benchmark of what it would have to be in terms of the opportunity and the risk reward profile. Lorenzo, do you got anything to add?

No, that's fair. I mean, it would have to be an exceptional opportunity given the fact that we do have the pipeline space.

Understood. Thanks.

Next question comes from Chad Beynon with Macquarie. Please go ahead.

Good afternoon and thanks for taking my question. I wanted to ask about the Durango EBITDA ramp and also how we should think about margins maybe compared to some of your other bigger resort properties in the market as it pertains to the mix of gaming versus non-gaming? Thanks.

Yeah. So I mean, I'll start and then Scott will chip in. But I think we've been pretty consistent in terms of the ramp. When we take a look at this property, there are no real loss leaders here. You have slots, you have tables, a little bit over 200 rooms. We're operating two restaurants with system-wide, we tend to operate very profitably in terms of the Osborn, the stake. And the rest of the restaurants are leased. So it's 100% profit margin. So we think the property would drop right out of the gate, it will reach what we view as stability, though we'll never be -- it will never reach – it will keep growing probably in the year three.

I mean Red Rock is still ramping after opening up in 2006. So we would expect the same thing for Durango moving forward.

And then we think, to answer your second question at stability, we think this will most likely be one of our highest, if not our highest margin property in the system.

And I think on the early side of it, we just want to make sure that the customer experience is as good as it can be. So while efficiency is important out of the gates, we want to make sure that the customer experiences the best it can be. And then as we level out, we can slowly bring efficiency into the business as we go forward.

Perfect. Thank you. And then as it pertains to the cash that you'll be bringing in from Texas Station and Fiesta Rancho, how should we think about the use of that capital? Is that kind of earmarked for 2024 CapEx? Or should we think about that being used potentially for additional dividends or share repurchases? Thanks.

I think it went out the balance sheet has we do anything. And the first priority is to pay down the revolver.

Great. Thank you very much guys. Best luck on the opening.

Thank you.

Next question comes from Joe Stauff with Susquehanna. Please go ahead.

Thank you. Scott, you had mentioned the kind of the second derivative, call it benefit from Union Culinary negotiation. I was wondering is there any like history you could share with us or possibly frame the size of that consumer group for you guys. And then, second question was maybe in the quarter or current trends, if you see any difference maybe in customer behavior, say, within your six larger portfolio or your six larger properties? Thank you.

Yeah. The first one, I think I'm going to answer you appropriately with the information we have. I think that the size and scale or the quantum of culinary workers is somewhere around 60,000 culinary workers. Now how that monetizes within the company, we couldn't measure that. It's more anecdotal. And then, I think you had asked in your second question, just if there's any changes in the four, six properties from a financial perspective?

Yeah, just in customer behavior and trends.

Yeah. Look, I think it's been pretty consistent with what we've said in the past. The higher end of our database is doing better than the lowest end of our database. Some of that may be macroeconomic pressures, which we've been living with for a while. And part of it is by design within our operating strategy to focus on higher-profit customers and bring on amenities that are catered to higher profit customer base or higher spend per visit. But I don't think there's anything in the database right now that would give us any cost for a while or would say is off trend from where we've been.

Thanks.

The next question comes from John DeCree with CBRE. Please go ahead.

Yeah everyone. Maybe just one question related to North Fork, some comments in the prepared remarks. But with one case left, would that preclude you from -- and your partner from going full speed ahead and if not, any thoughts on timing or how we should think about getting started or pick up the pace on the North Fork project.

Yeah. I don't think the court case, as we said in the prepared remarks, has any bearing on timing of when we start for finance this project.

Okay. So we -- I guess, should assume getting started construction is kind of a priority at this point?

100% in the first -- we're waiting on the management agreement, that's the linchpin. John, so as soon as we get that, we are out raising money and then starting construction.

Yes, to the management agreement gets approval from ITC

Okay. And I guess, any guess as to when that's done is probably a tough one to handicap, but I don't know if you guys have a--

Now, listen, we feel like we're close, it's tough to handicap, but we did make a couple of changes to those North Fork remarks. So, we're making good progress.

Sounds good. Appreciate guys. Thanks again.

[Operator Instructions] The next question comes from David Katz with Jefferies. Please go ahead.

Afternoon. Apologies if we're over discussing the F1 issue, but you commented earlier that room rates have come down a little bit. First, did you -- is that specific to your own portfolio? Or did you intend that, that might be more of a broader market comment? And then how instructive is this F1 in terms of -- right, you said Super Bowl is going great or looking great, but this one has backed off a little bit. How can that help us in the future figure out which events are good versus great for you?

Look, I think that was more of a broader market commentary, and similar just looking at rates on Expedia or kind of what hotels are being booked for now versus kind of maybe where rates were published going back months to a year ago. So, it's all public data.

I think the other one is, as you said it, so I don't want to speak for you, but I think we kind of know that sports works in the town. They used to starting to become a sports town. And whether that's the NFL or hockey or any other professional sports that are coming to down, we're seeing that it's got great success. It's probably a little less complex than the equation of F1. We haven't seen F1 come into the city or what the impact is. So, I imagine--

My expectations at the F1 weekend will still be fantastic. I think it's going to be great for the guys on the strip. I think it's going to be a huge success. It was just a matter of, on a relative basis to maybe where expectations and where people were hanging rates in the early days. But that happens that's happened before Las Vegas. It happens all the time.

And as Scott said, this is going to be a learning experience for the Sur Bowl, you have 55 years of Super Bowl history where it's always good in Vegas and now it happens to be here.

Perfect. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Stephen Cootey for any closing remarks.

Well, thank you, everyone, for joining the call, and we look forward to talking to you about 90 days. Take care.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.