Good afternoon, and welcome to Red Rock Resorts Q1 2022 Conference Call. All participants will be in a listen-only mode. 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 Resorts. Please go ahead.
Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts Q1 2022 earnings Conference Call. Joining me on the call today are Frank Fertitta 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 Q1 results.
On a consolidated basis, excluding management fees, our Q1 net revenue was $401.6 million, up 16.6% from $344.5 million in the prior year's Q1 . Our Adjusted EBITDA was $178.7 million, up 19.9% from $149 million in the prior year's Q1 . Our Adjusted EBITDA margin was 44.5% for the quarter, an increase of 13 basis points from Q1 of 2021. With respect to our Las Vegas operations, excluding the impact from our closed properties, our Q1 net revenue was $399.5 million, up 18.1% from $338.4 million in the prior year's Q1 .
Our adjusted EBITDA was $196.7 million, up 18.8% from $165.6 million in the prior year's Q1 . Our adjusted EBITDA margin was 49.2%, an increase of 29 basis points from Q1 of 2021. On the same-store sales basis, we achieved the highest Q1 net revenue, adjusted EBITDA, and adjusted EBITDA margin in the history of our company. This marks the seventh quarter in a row that the company has achieved record same-store adjusted EBITDA and adjusted EBITDA margin. We continue to prioritize free cash flow, converting 75% of our adjusted EBITDA to operating free cash flow, generating $134.7 million or $1.25 per share.
During the quarter, we remained operationally disciplined and stayed focused on our core mid to high-end local customers as well as our regional out-of-town guests. This core strategy allowed us to generate record revenue and profitability within our gaming segment in Q1 . While a combination of Omicron and inflationary pressures offset by the lifting of the mask mandates across the state of Nevada on February tenth resulted in a quarter-over-quarter reduction in visitation, this trend was more than offset by increased time on device as well as strong spend per visit across our entire portfolio, allowing the company to enjoy record profits within the segment.
Moving forward, while we remain vigilant to these trends, we will continue to stay disciplined and focused on executing and investing in our core strategy, including offering new amenities to our guests, such as the new VIP high-limit table room at our Red Rock property opening later this week. Turning to our non-gaming segments, we saw continued growth in food and beverage and hotel as both segments delivered one of their most profitable Q1 results ever. With regard to group sales and the catering business segments, the recovery of these business lines was further delayed by the impact of Omicron in January. At this point, while we are seeing our lead pipeline grow, business has been pushed into the back half of 2022 and into 2023.
Finally, as mentioned on prior earnings calls, financials are still carrying approximately $2.1 million in carry costs associated with our closed properties for the quarter. On the expense side, we remain operationally disciplined and continue to look for ways to become more efficient while providing best-in-class wages and benefits to our team members and delivering best-in-class customer service to our guests.
The company's actions taken over the past eight quarters to streamline our business, optimize our marketing initiatives, and renegotiate a number of vendor and third-party agreements has led to a significant transformation of our business, which resulted in same-store revenue, which now exceeds 2019 pre-pandemic levels, higher adjusted EBITDA, higher adjusted EBITDA margin, strong free cash flow conversion, and the return of over $875 million in capital to our shareholders since we reopened in June 2020. On the technology front, with regard to cashless gaming, we continue to roll out this product. We are now live at all of our properties with the exception of our Wildfire Taverns and Sunset Station, which we expect to happen over the next two quarters.
While the initial focus is introducing cashless payments on the slot floor, the ultimate goal is to allow our customers to play both cash and credit from one mobile digital wallet across all of our amenities at each of our Las Vegas properties. There'll be more to come as we roll out this exciting product. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of Q1 was $336.6 million. The total principal amount of debt outstanding at the quarter end was $2.8 billion, resulting in net debt of $2.55 billion. As of the end of Q1 , the company's net debt to EBITDA and interest coverage ratios were 3.4 times and 8.1 times respectively.
Given our low- leverage, low- cost of capital, and no short-term debt maturities, our best-in-class balance sheet will allow us to focus on executing on both our longer-term growth opportunities, including the development of our six owned strategically located gaming and hospitality properties, as well as take a balanced approach to returning capital to our stakeholders as we move forward.
During Q1 , we made a distribution of approximately $52.4 million to the LLC unit holders of Station Holdco LLC, which included a distribution of approximately $30.6 million to Red Rock Resorts. The company used the distribution to make its Q1 estimated tax payment, pay its previously declared dividend of $0.25 per Class A common share, as well as purchase approximately 185,000 Class A shares at an average price of $47.77 per share under its previously disclosed $300 million share repurchase program, of which we still have $146 million remaining to spend.
This brings the total number of shares purchased under the program and under the tender we completed in Q4 of 2021 to approximately 10.7 million Class A shares at an average price of $47.84 per share, reducing our share count at quarter end to approximately 107.5 million shares. When combined with our Q1 dividend, we returned approximately $36.4 million to our shareholders in Q1 . Capital spend in Q1 was $38.9 million, which included approximately $29.2 million in investment capital inclusive of our Durango Project, as well as $9.7 million in maintenance capital.
For the full- year of 2022, we continue to expect to spend between $75 million and $100 million in maintenance capital and an additional $300 million-$400 million in growth capital inclusive of our Durango project. Now let's provide a short update on our development pipeline. Starting with our Durango development, as we've mentioned before, we are extremely excited about this project, which is situated on a 71-acre parcel, ideally located off the I-215 expressway and the Durango Drive in the southwest Las Vegas Valley. The project is located within the fastest-growing area in the Las Vegas Valley, with a very favorable demographic profile and no unrestricted gaming competitors within a 5-mile radius of the project site. The project is progressing nicely and continues to remain on schedule, with anticipated construction taking approximately 18-24 months.
When complete, the project will include over 73,000 sq ft of casino space with over 2,000 slots and 46 table games. Over 200 hotel rooms and suite product, 4 full-service food and beverage outlets and a food hall with many exciting options, a state-of-the-art experiential race and sportsbook and a resort-style pool. As mentioned on our prior earnings calls, we expect to spend approximately $750 million, which includes all design costs, construction hard and soft costs, pre-opening expenses and any financing costs associated with the project. We are pleased to announce today that we have entered into a guaranteed maximum price contract for the project, under which approximately 70% of the total project costs are now under GMP. As the project stands now, approximately 72% of the project, including the purchase of long lead FF&E items, has been bid out.
We will continue to execute on our early procurement strategy in a manner which seeks to minimize supply chain and inflation-related issues. As stated on prior previous calls, the company expects the return profile for this project to be consistent with past greenfield projects within our portfolio. Turning now to North Fork. As we noted last quarter, after favorably resolving all of its other litigation, the tribe has only one pending case in the California courts. As we've also noted last quarter, we do not believe that any decision by a California state court could deprive North Fork of its ability to game on its federal trust land.
We continue to work with the tribe as we progress our efforts with respect to this very attractive project, including working toward the approval of a management agreement, continuing our work on the development design, and having preliminary talks with our prospective lending partners. We will continue to provide updates on our quarterly Earnings call. Lastly, on May 3rd, 2022, the company announced that its board of directors had declared a cash dividend of $0.25 per share payable for Q2 of 2022. The dividend will be payable on June 30th, 2022 to all shareholders of record as of the close of business on June 16th, 2022.
With our current best-in-class assets and locations, coupled with our development pipeline of six owned gaming and tribal development sites and parcels located in the most desirable locations in the Las Vegas Valley, we have an unparalleled growth story that will allow us to double the size of our portfolio and position us to capitalize on the very favorable long-term demographic trends and the high barriers to entry that characterize the Las Vegas locals market. While the quarter presented some headwinds, our disciplined approach to running our business, coupled with our unparalleled distribution and scale, allowed the company to enjoy record high EBITDA and EBITDA margin and has allowed the company to continue to execute on its long-term growth opportunities while continuing to return capital to our shareholders.
Last, we would like to recognize and extend our thanks to all of our team members for their hard work. We understand and appreciate that the guest experience starts with them, and they are the ones that make our property so special. We would also like to add a special note of thanks to them for voting us top employer of the Las Vegas Valley for the second year in a row. A special thanks goes out to all of our guests for their loyal support over the past 46- years. Operator, this concludes our prepared remarks today, and we are now ready to take questions from participants on the call.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Joseph Greff with JPMorgan. Please go ahead.
Hi.
Frank, you've been in the locals market for as long as there's been a developed locals market. What's your view on higher gas prices and that relationship to visitation and spend in the locals market? Do you think that relationship historically is what's playing out right now?
I think the market is much more dynamic than it has been historically. Even as we look at the demographics here in town and the people moving to town, we're seeing much higher household income than we've seen in the past. You know, that has been a big focus of the company on player development, relationship marketing, and trying to cater to that end of the business. That being said, there's no doubt that inflation with, you know, food and groceries and even gasoline has an impact on the lowest segments in the database, for sure.
Got it. Okay, it sounds like I may have cut off before I interrupted. Thank you. Can you talk about the older demographic? Are they performing differently, better sequentially, maybe particularly, after masks were done away with in the middle of the quarter? Then also too, I'm presuming you, like everybody else, you know, have finished strongly, more strongly, towards the end of the quarter than at the beginning in January with the Omicron impact. I was hoping if you can talk about, you know, sort of margins by month and sort of how you exited, the quarter versus, you know, the blends of the quarter that you reported here today. That's all for me.
I can touch on the older demographic. I mean, Joe, as you'd expect, the older demographic tends to be a little bit more conservative, but you know, once the mask mandate was lifting, they are starting to come back. You know, we're still not all the way back from our you know, pre-pandemic levels. That said, that group you know, any difference of delta in that group being more than offset by the increase in the younger demographic, as well as our traction we've gained in new sign-ups.
In terms of the margin question, you know, as we've talked, we don't give month-over-month guidance, but I think you're spot on, and to say the trends as they moved on to January, which was Omicron affected, the trends of the company improved both gaming and non-gaming as we moved from January to February to March. As we're seeing in April, you're seeing trends that are very similar to what we saw in March, with the exception, remember, the lower end, we're seeing a little bit more resilience now than the lower end we had before.
Great. Thank you, guys.
The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, guys. Thanks. Steve, I just wanted to clarify something. In your prepared remarks, you kind of mentioned some challenges that you had to work around in Q1 . I'm assuming that comment was isolated to kind of January and the variant and some of the impacts that caused, or was there something else that kind of popped up?
No, Omicron, I think in January was the biggest hurdle we had.
Okay. Just again, in response to something that you just mentioned, you talked about kind of the lower end, a little bit more resilience. Is there something that's changed in the lower end consumer that you were referring to?
No, I think what you saw, but you know, we did see, and this is probably due to there was, you know, a lot of stimulus rolling off. You had some inflationary pressures. As Frank mentioned earlier, even the higher gas prices, it's going to clearly affect the lower end of the database. Last quarter, we did see some degradation in visitation on that lower end. This was more than offset by the increased visitation in the mid to high-end local customers, as well as the regional and out-of-town guests, which is what allowed us to achieve record profits on the gaming side.
Great. Then, just lastly for me, as you guys talked about earlier, some of the group and convention stuff or group business, I'm assuming you're referring to your in-house group and stuff and the impact that will have in the second half of this year into 2023. As it pertains to some of the larger events, you know, that have started, you know, albeit are stunted a little bit on the Strip, but have started, are you guys starting to see any changes in behavior from your customers or maybe customers who would be positively impacted by the trends of group convention business that's taking place on the Strip?
A little bit. Are you talking about the group business or customers on a whole? You know, from a group perspective, we are seeing positive traction, as I mentioned in the script. It was just slowed down dramatically by January. Once we passed January, the mask mandates were lifting. We're now seeing, you know, green shoots. The bigger group business, i.e., when you think of the draw of the biggest events, could only help kind of restore that luster to Las Vegas.
Great. Thank you, Steve.
Yeah.
The next question comes from Shaun Kelley with Bank of America. Please go ahead.
Hi. Good afternoon, everyone. Thanks for taking my question. Steve, just wondering if you'd give a little bit more color on the recovery in the non-gaming piece of the business. Obviously, some fits and starts there, but what are you seeing in maybe the theaters, some of the spending behavior out there, and specifically as some of the other entertainment options come back online as well, kind of what maybe are you seeing on spending or foot traffic? That'd be helpful.
Sure. I think it goes without saying that, you know, we're competing against all forms of entertainment, and that's been the case for quite some time now. Vegas has been wide open since January 2021. From a non-gaming perspective, as I mentioned during the script, you know, we're seeing, you know, near record profit across F&B and the hotel. We're seeing particular strength in our regional and out-of-town business because of that. In terms of the theaters and catering, as we mentioned before, I'll start with theaters. Theaters are slowly making their way back, and we're seeing a strong back half slate, which should only help, you know, the visitation return to the theaters.
Yeah, it's all product- related, content- related as to what studios are releasing. We expect that to get better going forward.
Right. As Shaun, as you saw from the release, you know, while you know, there has been inflation across many of the items- related to F&B and cost of goods sold, we were able to offset all, you know, the majority of, if not all of that, through price increases, thus you saw the increased margin year- over- year.
That's helpful. Pricing was sort of my second question, which can you talk a little bit about, you know, the hotel side and strip compression maybe as we get into, you know, Q2 here, you know, we've got you know, a lot of us have rate surveys and things that track how the strip is doing, but how is that translating into the locals market and what are you able to do with price on, you know, some of your hotel products?
From hotel, you know, this was almost a record quarter. We almost hit $170 ADR across the system, which is up almost $50 quarter- over- quarter. That's on an occupancy of roughly 77%, which again, was up about 17 points, but is still about, you know, 15 points below our historical norm, all of that related to having midweek group business. As we get that group business back, we can expect to yield even better. Fortunately, the team has done such an amazing job. With the lack of the group business, they've been able to fill and yield the hotel with high-spending gaming customers. This is one of the big initiatives- related to, you know, our moving into the mid to high- end in player development.
Thank you very much.
The next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.
Thanks. I know you've addressed this a bit on prior calls, but what are you looking for to reopen the other properties that were still closed during the quarter, and are there any limitations still as we think about maybe monetizing those as potentially non-casino properties? Thanks.
We're still in the process of evaluating those properties. I mean, what we look for, there's a couple things we look for. You know, obviously, the current economic environment, and we also look at, you know, how much play we're able to capture from those existing properties, in which we've mentioned before between 92% and 94% of the fee we're able to capture. As we feel pretty good right now with the state we are, but that's something we're closely evaluating across all three properties.
Maybe one more follow-up on Joe and Carlo's question on consumer behavior. I guess, what would you typically regard as, effectively, a canary in the coal mine regarding the broader health of the consumer in the locals market?
That's, I mean, that's a great question. I mean, look, I mean, some of the things, I mean, you talked, I mean, I think Joe mentioned the first thing. We watch gas prices, we watch discretionary spend.
Population growth.
Population growth.
Probably something we can track.
Right. Not just the population growth, but also the descriptive.
Let me talk a little bit about what we're seeing. The, you know, the 2% is, you know, population, but when you look at the household income, that's actually growing much faster at the high- end.
Yeah, what slide was that on that?
Yeah. There was a slide in the deck we posted regarding the health of the Las Vegas demographic market. On average, when what Frank's referring to is between 21 and 26, we're expecting Las Vegas to grow at roughly 2%. When you really break that out, when you break out the households, you know, the households with an income over $150,000 annual growth is expected to grow 32% per year.
I saw that exhibit, which is interesting. I mean, do you think that your... I mean, I guess historically, do you feel like your penetration was where it needed to be of that upper income consumer? You alluded to trying to capture more of that, but maybe if you could just elaborate on, you know, maybe where you think your penetration was of those customers and how you're evolving to try to capture more of them.
Well, first of all, it goes to the location of our properties. Being out in the suburbs, I think we have A-plus locations where the majority of the growth in Las Vegas is taking place. I think if you go back, you know, 5 or 10- years ago, a lot of these customers weren't in Las Vegas. I think the market overall has changed pretty dramatically with people moving from California to Las Vegas, and it's just, it's a different customer profile than what we were seeing 10- years ago.
I think we've really focused at the properties primarily, call it Red Rock and Green Valley, at making sure that we have the amenities on the food and beverage side to attract those customers. As Steve mentioned in his remarks, we're gonna open up a new high- limit table games room on Thursday of this week. One of the things that we noticed or we had been successful at post-COVID is we've been able to attract a lot of customers that traditionally would have gone to the Strip from a table game standpoint. We've been able to attract them up to our properties at both Red Rock and Green Valley. We're just gonna continue to build on that as well.
Thanks so much. I'll hand back in the queue.
The next question comes from Steve, Steven Wieczynski from Stifel. Please go ahead.
Yeah. Hey, guys. Good afternoon. Steve, in the past, you know, I think if I remember correctly, you talked about how margin movement moving forward would be, you know, more tied to revenue growth versus anything else. I'm wondering, you know, if that still remains the case at this point or if there's anything else, you know, you've discovered that could or we should be thinking about either from a positive standpoint or a negative side of things, you know, on the expense side that could impact, you know, your margins moving forward.
Yeah, as you can see the pass-through rate, of course, I'm still sticking to our guns that, you know, revenue and operating leverage are gonna be the biggest driver of margin going forward. I think as all companies are seeing, you know, we're in a very unique labor market right now. We're all experiencing, you know, inflationary pressure. If there's one thing that we're keeping a focus on, you know, is payroll. In general, our payroll quarter- over- quarter was up $9.7 million roughly, but let's call it 9%. If you break and parse that number down, about $3.7 million of that are just more workers to the system.
We brought people on either more hours, more labor, and there was a revenue associated with that labor. Really the inflationary mark is $6 million, which is about 5%, you know, a little above five, 5.5%, which is in line with the valley. It is something that we are keeping an eye on. Still going back to the first point, you know, revenue is gonna be the main driver in that operating leverage to consistent margins.
We've been in a pretty tight band.
The past 7 quarters.
Okay. Gotcha. Thanks, guys. The second question, in terms of locals market there, have you guys seen any, I don't know if I'd use the word material, but any, you know, major changes in terms of market share shifts, you know, there in the market? I guess what that's kinda getting to is, you know, is the promotional environment there steady, you know, still pretty, you know, rational?
Promotion market is incredibly rational. We haven't really seen any big, massive shifts in the market.
Okay. Thanks, guys. Appreciate it.
The next question comes from Chad Beynon with Macquarie. Please go ahead.
Hi, good afternoon. Thanks for taking my question. Just wanted to ask about capital allocation, you had the dividend in the quarter in addition to, I guess, the small special. Just wondering with leverage at these levels, how should we think about capital allocation, I guess, dividends and share repos, through the remainder of the year? Thanks.
Sure. I mean, I think going back to what we said last quarter, I mean, everything's on the table. As you know, we take a very balanced approach. We gotta balance, you know, returning capital through investing in longer term growth opportunities, i.e., the Durango project, as well as our six other strategically located properties, as well as returning capital to stakeholders. As you saw by the dividend, we're committed to the $0.25 dividend. There was a slight slowdown in our share repurchases. We only purchased 185,000 shares this quarter. A lot of that was just being prudent with the Durango project staring us in the face. We wanted to make sure we wrapped up the GMP before it really kinda refocusing our efforts on the share repurchase program.
I think over the quarter, especially given the strong nature of our balance sheet, and as you mentioned, the low- leverage, I mean, everything is on the table, and we have a lot of financial flexibility to execute both on our longer term opportunities and returning capital to our stakeholders.
Great. Thanks. Just on the last question regarding not much in terms of promotional environment now that Palms has reopened, I think you've said in the past that you don't expect any impact. If there was an impact, should it be more on the non-gaming side or the gaming side? Or again, it could be, you know, negligible in terms of how you see the business. Thanks.
Yeah. We think it's gonna be negligible, but to be fair, the team just opened up on April 27th, so it's early days.
Okay. Thank you very much.
The next question comes from Barry Jonas of Truist Securities. Please go ahead.
Hey, guys. You've been successful with the GMP on Durango. Just curious, what do you think the risks are here relating to the budget or I guess more so timing for the project?
I mean, with the GMP, we were fortunate to get about 70% of the project de-risked. Now, you know, our focus is in making sure, I think you hit on it, that our FF&E and construction materials are delivered on time when the teams need to build and the operators need to hand over. So, we've executed what we call a long-term procurement strategy, in which we've identified all the long lead time items and are starting to purchase those now. So items that in a normal build, we'd purchase six months out, we're starting a year out. We're hoping we use that to mitigate any potential delays in the supply chain.
Gotcha. Okay. I noticed that there were about $2.2 million of Native American losses. Just curious what that is and how should we be thinking about future losses from here.
The $2.2 million is related to the Graton arbitration case, which we've mentioned in the past. We can assume that those losses will go away.
At some point.
Perfect. Thank you.
As a reminder, if you would like to ask a question, please press star then one to be joined to the question queue. The next question comes from Daniel Politzer from Wells Fargo. Please go ahead.
Hey, good afternoon, Frank, Lorenzo, and Steve. Most of my questions have been answered, but just in terms of the customers you're seeing come back, I know the locals market, I think it's around 20% of the population is retirees. Have you seen any impact from that segment of the database, just given they're more reliant on a fixed income?
No, I think the question may have been touched a little bit earlier where, you know, you're seeing the older demographic being more conservative, but they're coming back. When you think of the Omicron virus, really what that affected more the younger generation, as those are the folks that got sick. From a spend perspective, we're seeing no change in the older demographic spend habits.
Got it. I know it sounds like you're further along in terms of rolling out the cashless gaming across your properties. I mean, given the reduction in friction costs, have you seen higher spend per visit from those customers that have adopted it or any kinda early takeaways there?
Yeah. I mean, this is gonna be a slow migration to the technology and, you know, and given that we're not in all of our properties, we haven't started the big marketing push, but the group that has executed, we have seen a rise, you know, we have seen more gaming velocity.
Got it. 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.
Well, thank you everyone for joining the call, and we look forward to talking to you in about 90 days. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.