Good afternoon, everyone. Thank you for joining us today for Red Rock Resorts Q2 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 a complete reconciliation for 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. The Q2 represented another strong quarter for the company by any measure.
In terms of same-store net revenue, adjusted EBITDA, and adjusted EBITDA margin, the Q2 of 2022 was our second-best quarter in the history of our company, only surpassed by last year's record-setting Q2. On a consolidated basis, excluding Graton management fees, our Q2 net revenue was $422.2 million, down 1.4% from $428.2 million in the prior year's Q2. Our adjusted EBITDA was $190.1 million, down 9.5% from $210.2 million in the prior year's Q2. Our adjusted EBITDA margin was 45% for the quarter, a decrease of 406 basis points from the prior year's Q2.
With respect to our Las Vegas operations, excluding the impact from our closed properties, our Q2 net revenue was $419.9 million, effectively flat when compared to prior year's Q2. Our adjusted EBITDA was $205 million, down 8.6% from $224.8 million in the prior year's Q2. Our adjusted EBITDA margin was 49.9%, a decrease of 450 basis points from the prior year's Q2. When we look at our Las Vegas operations on a quarter-over-quarter basis, excluding the impact from our closed properties, we note the continued stability of our business as well as our continued confidence that our team can deliver adjusted EBITDA and adjusted EBITDA margin well in excess of our pre-pandemic levels.
Our Q2 net revenue was up 5.1% when compared to the Q1 of this year. Our adjusted EBITDA was up 4.5% when compared to the Q1 this year. Our adjusted EBITDA margin was 48.9% flat when compared against the Q1 of this year and represents the 8th quarter in a row the company delivered same store adjusted EBITDA margin in excess of 45%. We continue to prioritize free cash flow, converting almost 50% of our adjusted EBITDA to operating free cash flow, generating $90.4 million or $0.87 per share. This brings our 2022 year-to-date cumulative free cash flow to $226 million or $2.16 per share, with virtually every dollar being reinvested into our Durango project or returned to our stakeholders.
During the quarter, we remained operationally disciplined and stayed focused on our core local customers as well as our regional and out-of-town guests. When comparing our results to last quarter, we saw a rise in visitation as well as strong spend per visit across our portfolio, allowing the company to enjoy near record profits across our gaming segments. The trends across our database in the Q2 were similar to those we saw in the Q1, and those trends remain consistent throughout the beginning of the Q3. Turning to the non-gaming segments, we saw continued growth in food and beverage and hotel as both segments delivered one of their most profitable quarter results ever fueled by the strength of our regional and out-of-town business.
With regard to group sales and catering business segments, the recovery of these business lines continues as we saw sequential growth in the business line for the sixth quarter in a row, and we continue to see our lead pipeline grow throughout the back portion of 2022 and into 2023. 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.
While we recognize there are some headwinds in the economy and the adverse impact inflation has on both the company and our customers, we feel that the actions taken over the past nine quarters to streamline our business, coupled with our team's ability to deliver best-in-class service and amenities to our guests, has allowed us to continue to drive same-store revenue, which exceeds 2019 pre-pandemic levels, while driving higher adjusted EBITDA, higher adjusted EBITDA margin, and returning over $1 billion in capital to our shareholders since we reopened in June of 2020.
Moving forward, while we remain vigilant to macroeconomic 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 recent opening of the Boulder Station Food Court and the recent announced transformation of our Red Rock properties buffet space into a new VIP high-limit table room, a new casino bar, and two new exciting restaurant concepts. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the Q2 was $256.3 million. The total principal amount of debt outstanding at quarter-end was $2.88 billion, resulting in net debt of $2.62 billion.
As of the end of the Q2, the company's et-debt-to-EBITDA and interest coverage ratios were 3.5 times and 7.5 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 planning and titling of our seven owned strategically located properties, as well as take a balanced approach to returning capital to our stakeholders as we move forward. Also, during the Q2, we made distributions of approximately $78.1 million to the LLC unit holders of Station Holdco, which included a distribution of approximately $45 million to Red Rock Resorts.
The company used the distribution to make its Q2 estimated tax payment, pay its previously declared dividend of $0.25 per Class A common share, as well as partially fund the purchase of approximately 3 million Class A shares at an average price of $37.42 per share under its previously disclosed $300 million share repurchase program. In August, the board authorized an increase of $300 million to our existing share repurchase program, giving us $332 million of availability for future share repurchases.
The Q2 purchases bring the total number of shares purchased under the program and through our 2021 tender to approximately 13.7 million Class A shares at an average price of $45.37 per share, reducing our share count at the quarter-end to approximately 104.4 million shares. When combined with our Q2 dividend, we returned approximately $140.7 million to our shareholders during the Q2. Capital spend in the Q2 was $62.4 million, which included approximately $45.5 million in investment capital, inclusive of our Durango Project, as well as $16.9 million in maintenance capital.
For the full year 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 an update on our development pipeline. Starting with our Durango development, as we've mentioned before, we're extremely excited about this project, which is situated on a 71-acre parcel ideally located off the 215 Expressway and Durango Drive in the southwest Las Vegas Valley. The project is located within the fastest-growing area of the Las Vegas Valley, with a very favorable demographic profile and no unrestricted gaming competitors within a five-mile radius of the project site. The project is progressing nicely, and we expect to top out later this fall.
The project continues to remain on schedule with an anticipated opening in the fall of 2023. 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, and are currently operating under a guaranteed maximum price contract, which represents approximately 70% of the total project cost. As the project stands now, approximately 77% of the project, including the purchase of long- lead FF&E, has been secured. 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 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 also noted last quarter, we do not believe that any decision by the California State Court could deprive North Fork of its ability to game on its federal trust land. We continue to work with the tribe to progress our efforts with respect to this very attractive project, including working towards approval of a management agreement, continuing our work on development and design, and having preliminary talks with prospective lending partners. We will continue to provide updates on our quarterly earnings calls. Subsequent to quarter-end, we announced the permanent closure of our Texas Station, Fiesta Rancho, and Fiesta Henderson properties.
The facilities at these properties, other than the ice rink at Fiesta Rancho, are anticipated to be demolished and repositioned for sale on a deed-restricted basis. While these properties have been an important part of our business over many years, our team's ability to recapture the majority of the gaming play from these properties has made the reopening of these properties uneconomic. While the decision was difficult, it was the correct one and will enable the company to move more quickly to develop and deliver the next generation of Station Casinos Resorts to the residents of and visitors to North Las Vegas, Henderson, and the rest of Las Vegas Valley.
To that end, we are proud to announce we have closed on 127.7 acres of additional land south of our existing parcel on Cactus Avenue and Las Vegas Boulevard South for $172 million. We are excited about the potential of this site as a local and regional destination casino resort and look forward to sharing our plans for this parcel in the future. We've also signed a purchase and sale agreement and are conducting due diligence on a 67-acre gaming site that is master planned for a casino resort in North Las Vegas at Losee and the 215 Expressway. These two acquisitions are a continuation of our 46-year history of growth through the purchase of gaming sites located in high-growth areas with superior ingress and egress along the major beltways in the Las Vegas Valley.
We are currently working through the planning, entitlement, and zoning processes for these properties, which will be strong additions to the robust development pipeline, which will fuel the next chapter of growth at Station Casinos. Lastly, on August 9, 2022, the company announced that its board of directors had declared a cash dividend of $0.25 per share payable for the Q3 of 2022. The dividend will be payable on September 30 to all shareholders of record as of the close of business on September 15.
With our current best-in-class assets and locations, coupled with our development pipeline of seven owned development sites 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 high barriers to entry that characterize the Las Vegas locals market. While the quarter presented some economic uncertainty and record inflation, our disciplined approach to running our business, coupled with our unparalleled distribution and scale, allowed the company to enjoy near 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. Lastly, we'd 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 who make our properties special. We'd also like to add a special note of thanks to them for voting us a top casino employer in the Las Vegas Valley for the second year in a row. A special thanks also 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.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone 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 Joe Greff with J.P. Morgan. Please go ahead.
Good afternoon, everybody. We often have been focusing on sort of the lower-end consumer to give us a sense of consumer sensitivity to, however you want to describe the mixed signal macroeconomic environment. But maybe we can switch gears and maybe can you talk about sort of the higher end of your database and how that higher-end consumer trended throughout the 2Q, maybe in relation to 1Q. Then is there anything noticeable, from your drive in Southern California consumer, any impact there from obviously higher gas prices and higher costs overall?
Sure. I mean, quarter-over-quarter, Joe, I mean, I think overall across the entire portfolio, we showed consistent trends throughout the database compared to Q1. That includes the higher end as well as the locals, and to point on the locals, while it represents a small portion of our overall business, we've actually seen stability and consistency quarter-over-quarter and actually a slight uptick in the lower end of our database.
Great. Obviously you guys are building for the future and acquiring sites. Can you talk about the timing of the planned divestiture of the three closed properties? Is that under any kind of preliminary agreement or any kind of letter of intent with a potential purchaser under a non-gaming entitlement structure? Or is that sort of the process is kind of beginning on that front?
Yeah, we just announced this just, literally within the month, so that process is just beginning. That said, we're seeing an extraordinary amount of inbound, calls and demand for those three properties.
Great. Thanks, guys.
Hey, thanks, guys. Steve, Frank, Lorenzo, whoever kind of wants to address the two parcels that you guys bought, the 128 and the 67 acres. As you think about kind of the timeframe and acknowledging it's kind of planning for the future, much like the sales, how do you guys kind of think about when you go into the ground? Does Durango need to open, or could you kind of start some of that stuff earlier?
No, I think we want to get Durango open and see the operating results out of Durango. We're very optimistic given the location, the demographics, the gaming supply in that area. We want to get Durango open, and then we'll be ready to start on the next project after that. We expect to basically double the size of the portfolio, by 2030 is kind of what the plans are, and continue to roll out new properties, one after the other.
Just to add to what Frank said, we're, going to go forward with entitling and zoning all of these properties so that when we open Durango and we see how Durango is absorbed in the market, that we have optionality to, go to any one of the seven sites. But it's consistent with the strategy we've had for a long time. We've actually owned the Durango property for over 20 years. So for instance, on the piece of property that we have tied up on Losee, we think long-term, longer term, that's going to be a tremendous location because of the growth out in that way. Master plan communities, the population growth.
In order to kind of get these things to where they're in the pipeline, you have to step up and be willing to put them in the portfolio, in the real estate portfolio, so that it ensures that the company has this growth pipeline for years to come. Our strategy is very consistent with what we've done in the past.
Great. Thank you, guys. If I could just kind of more near-term, as you guys in acknowledging, you talked about kind of stability in the 3 key trends. From a seasonality perspective, the 3 Qs have been unusual over the weak period prior to the pandemic. As you think about kind of normal seasonality in Las Vegas, this year, is there anything that kind of would stand out to you as being notable?
The business seems very stable. We don't see anything at this point in time that would cause us to change our outlook on the business going forward.
Great. That's helpful. Thank you.
Mm-hmm.
Hi, good afternoon, everyone. I wanted to also ask about the sort of the capital development piece. I'm just intrigued as you think about the sites that you have and then of course, the incremental purchase here, maybe you're not ready to share it with us. Do you have a pecking order for, kind of what you think about is next behind Durango? Or do you let sort of the demographics and some of the changes in the valley there, kind of lead the way first, before you make that decision?
It's all really dependent on demographics and where we see the demand versus the supply. Obviously we're in the ground with Durango. We're expected to open that, call it around 4Q of 2023. We're currently working on plans right now on the Inspirada location, as well as what we call the Skye Canyon location up in the Northwest. So that, as Frank mentioned, the plan would be that we get Durango up and operating, stabilized, generating the returns that we're looking for. We'd be in a position where we could, the board can make a decision if they wanted to pull the trigger on those projects.
Just a matter of our team continually working on entitlements, making sure that we're completely up to date on what's going on in the real estate market in Las Vegas, where the growth is going, and whether it's a short-term view, or more importantly for me and Frank, what's the long-term view for where we see this company going and our ability to multiply the size of the company. The way that we're going to do it is the way that we built the company, which is through development of greenfield projects. In order to be successful there, you have to control the real estate, and you got to have the pipeline growth. We're just executing what we've always done so.
Thank you for that. As the follow-up to it, in order to achieve a goal as ambitious as doubling the size of the portfolio by 2030, would that imply that, the scope or scale of the next couple developments could be on par with Durango or what you've done with Red Rock in the past? Are we talking that level of development? I would think it would need to be large in size in order to have a big impact on the portfolio like you mentioned.
It's going to be dependent on the market size. I mean, some of the projects will be considerably smaller. We've got a couple of projects in the pipeline that will be at least on par with where Durango is. It's a little bit of a mix of both.
It's all site dependent.
It's all site dependent.
All the projects are planned to be able to expand over time.
Right.
Even though some of these projects may start out maybe smaller than Durango, they will be able to grow to Durango plus as the market demand is there.
Yeah. It's really hyper-focused on returns, right? designing these properties with the expectation that we can hit our historical return numbers of kind of that 20% unlevered return on invested capital. That's really what's going to determine the kind of the get in cost and the size of the project relative to the, what we project the demand to be in those different submarkets.
Thank you very much.
Yeah. Hey, guys, good afternoon. So obviously labor has been a big issue not only for, your company, the casino industry, but also the general entertainment industry as well. I guess, I'm wondering with the three assets now being closed permanently, does this, does this help your labor situation at all? Meaning, have you been able to bring a lot of those employees over to the, to the other operating assets?
Yeah. I mean, at the time when we closed the property back in June of 2020, so we closed the property just recently. There was a very small staff at all three properties, in which we were able to bring over all or at least the majority of the staff over.
Yeah. Steve, this is Scott. I think one of the important factors is, are we able to staff our properties appropriately to maximize revenue? We can tell you that we're very successful in being fully staffed and fully operational across the brand. Albeit we are seeing some wage inflation, we think that that's a relatively temporary phenomenon that will decrease over the next eight months or so.
Understood. Thanks. Steve or Scott, I guess, when we look at the 50, let's call it 52-ish% margin last year in Vegas, and I understand that level, wasn't probably sustainable long term. If you look at the, I think you called out a 450 basis point drop in margin this year, is there anything that you would kind of highlight as putting more pressure on that margin?
No, I think we've always been pretty consistent. It's, yeah, it's about the operating leverage and the gaming revenues and the revenues that flow through the system.
Yeah. I think if you
The outlier of last year.
Yeah. I think if you point out the new slide that you posted in the deck.
Yeah.
I think it's on page 40. It basically shows the margins since we opened in 3Q of 2020. I think there was a lot of doubt when we posted a 46.2% margin and a 45% margin, whether we could maintain those margins. I'll say that other than the 2Q of 2021 outlier with all the stimulus money in the system, our margins have basically been very tight, right on 49% in the Las Vegas operations for the last four quarters. I would say the only thing that has got a little bit of pressure is the wage inflation, of course. We've managed, I think, to maintain cost of sales in a pretty close range based on adjusting prices given what cost of goods are.
Again, last Q4's we've been ±49%, so we're pretty pleased with that.
Okay, great. Thanks guys, appreciate it.
Hey guys, Patrick Keough here for Barry Jonas. Two, if I may. One, The Street is assuming Las Vegas EBITDA will be down year-over-year in 2022 and 2023. Do you think that's an overly cautious view, even if you exclude Durango? Thanks.
If you look at 2022, for instance, you take the first half of 2022, I think we're ahead by $12 million in EBITDA.
Yeah.
versus 2021. As Frank mentioned, we don't have any change in our outlook for the business based on what we've seen in Q1 and Q2 so far this year. we've got a little bit of cushion or some cushion rolling into the second half of the year that from a business, volume standpoint, we feel pretty good. Looking out beyond 2023, it's impossible to know what the future holds. I can tell you that, we're obviously very bullish on Durango.
We think it's going to be a great project and it's going to get great returns and certainly will add some stub period to 2023, but more so we'll get a full year of it in 2024, which we would expect to be able to post pretty good growth in EBITDA with the addition of that.
I agree.
All right. That's great. Thank you. As a follow-up, are there any early trends or updates from cashless gaming that you saw in the quarter?
John?
Yeah, this is Scott, Patrick. Actually, we're encouraged. One of our goals was to get this rolled out to all of our properties and to have a very complete application that goes across all of our point-of-sale processes. As we start to market into the product, we're seeing two things. On a percentage basis, a pretty dynamic growth in the percentage of usage, and then also a pretty nice uptick in the average spend per customer that participates in the program over their previous spend.
[cross talk]
I think it's early days in the adoption, but we're encouraged by the product and its rollout.
That's great to hear. Thanks so much, guys. Congrats on the quarter.
Thank you.
Hey, good afternoon, everyone, and thanks for taking my questions. So just in terms of how you're thinking about building out the portfolio, it sounds like you have some pretty aspirational plans ahead. How do you think through your leverage ratio and financing that? And would you look to maybe alternative sources of financing such as gaming REITs as a possible source of funding? Thanks.
I think the intent is to. We have a very strong balance sheet right now. We have very low leverage with 3.5 times leverage, very low cost of capital, no long-term maturities. The idea here is to fund these resorts out of free cash flow.
Got it. I think you had $2.2 million of quarterly costs, give or take, for the three properties which you're demolishing and selling the land for. How should we think about the timing of when these costs might roll off and come back into the P&L?
Before the next earnings call.
All right. Thanks.
Good afternoon. Thanks for taking my question. With respect to the strong non-gaming trends that you posted in the quarter, particularly around food and beverage, in your prepared remarks, you talked about some of the things that you're doing within the four walls of your properties. Maybe just from a same store customer basis, are you still seeing opportunities for your customers to spend more at your properties, either, customers that have been holding back or just, inflationary opportunities that you're able to push down to the consumer and there's no pushback on that? Thanks.
Well, first of all, I think that, overall, we're seeing very dynamic growth in all the non-gaming sectors of the business. One of our strategies is to continue to invest in the amenities of the property. We have a pretty robust slate of new products coming online across all the properties. Not only do we see people continuing to spend into these non-gaming experiences, we're going to meet them with new amenities across all of our properties, which we think will increase even more of that spend per visit and visitation in those areas.
I think if you look for opportunities for growth, I think the one area that still we think we have a lot of room to recover is in banquets and catering. While it's up versus last year, it still hasn't fully recovered, but the pipeline, moving forward looks promising and we're confident that that will start to come back over the next 12-18 months.
Thanks. Is there any update on the North Fork opportunity or any other management opportunities in California or other markets?
Jeff, did you want to take that call? Maybe not.
Go ahead.
Right now we're still working through the management agreement process. Right now there's no further update, but hopefully soon we'll have a
Thanks. Appreciate it.
Thank you everyone for joining the call, and we look forward to talking to you in 90 days. Thank you.