Good afternoon, and welcome to Red Rock Resorts third quarter 2021 conference call. All participants will be on a listen only mode. Please note this call is being recorded. I would now turn the call 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. Thanks for joining us on today's Red Rock Resorts Q3 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 United States federal securities laws. Developments and results may differ from those projected. During the 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 was filed this afternoon prior to the call. Also, please note that 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 was $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 34.5% 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 continued to prioritize free cash flow, converting 70% of our adjusted EBITDA to operating free cash flow, generating $126.3 million or $1.10 per share.
This brings the operating free cash flow generated by the company for the first three quarters of 2021 to approximately $365 million, or $3.18 per share, with virtually every dollar being returned to our stakeholders. Taking a look behind the numbers, the third quarter saw impressive growth versus the prior third quarter, with increased visitation, time on device, and spend per visit experienced across our database, which allowed the company to deliver record gaming revenue in the quarter. The re-implementation of the mask mandate across the state of Nevada on July 30, as well as the return of customary third quarter seasonality, did have a modest impact on our visitation and time on device metrics in the latter half of the quarter. We expect this trend to reverse as COVID-19 restrictions are eventually lifted.
Turning to the non-gaming segments, we saw considerable strength in food and beverage and hotel as both segments built upon their strong second quarter performance to deliver their best third quarter results in the history of the company. As regards to group sales and catering business segments, though these business lines have been slower to recover post-pandemic, we're seeing our lead pipeline grow into the back half of 2022 and into 2023. Finally, as mentioned on prior earnings calls, our financial statements carry an approximately $2.4 million of COVID-19 mitigation costs for the quarter and approximately $2.6 million in carry costs associated with our closed properties for the quarter. On the expense side, we continue to expect to achieve approximately $200 million per annum of cost savings compared to our pre-pandemic cost structure.
The company continues to benefit from the actions we took to streamline our business, optimize our marketing initiatives, and renegotiate a number of vendor and third-party agreements. These initiatives, along with maintaining a disciplined operational focus, have enabled the company to achieve and sustain higher profitability and drive more free cash flow. On the technology front, we are making substantial progress on several initiatives. With regards to cashless payment, we have entered into a field trial with IGT at our Red Rock and Green Valley Ranch properties. The initial focus is on introducing cashless payments on the slot floor, with the eventual goal to allow our customers to play and pay 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 proceed with our field trial on this exciting product.
Also in October, we entered into a partnership with GAN Limited to build and deploy their next-generation infrastructure to Station STN Sports' online sports platform, mobile applications, and retail over-the-counter and kiosk-based sports betting throughout Nevada. While the product launch is subject to regulatory approval, we are excited about the partnership and building upon our leading race and sports franchise. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the third quarter were $89.9 million, and the total principal amount of debt outstanding at quarter end was $2.68 billion. In the third quarter, we paid down $37.5 million in debt, bringing total debt reduction for the first three quarters of 2021 to approximately $265 million.
Additionally, the company used $85.5 million during the third quarter to purchase approximately 2.1 million Class A shares at an average price of $41.44 per share under its previously disclosed $150 million share repurchase program, bringing total shares repurchased for the first three quarters of 2021 to over 3.2 million Class A shares at an average price of $39.08. This positions our share count to approximately 114.7 million Class A and Class B shares combined.
Within the quarter, our board authorized an increase of $150 million to our existing share repurchase program, giving us over $173 million as availability for future share repurchases. When combined with our debt repayment, we returned $123 million and $391.1 million to our stakeholders during the third quarter and through the first three quarters of 2021 respectively. As mentioned on our prior call, we are well on our way to having one of the most solid balance sheets in the industry, which gives us the ability to focus on longer-term growth opportunities, including the development of our six owned strategically located gaming and titled properties, and the ability to consider additional ways of returning capital to our stakeholders as we move forward.
Since the close of the third quarter, the company's consolidated subsidiary, Station Casinos, issued a notice of redemption of the remaining $280.3 million 5% senior notes due 2025. The company used cash on hand and borrowings under its revolving credit facility to pay the redemption premium, accrued unpaid interest, and any fees or expenses related to the redemption. The transaction closed on October 29 and is expected to save the company approximately $14 million per annum through the life of the senior notes, while further deleveraging the balance sheet, increasing our financial flexibility. Capital spend for the third quarter was $14.7 million. As mentioned in our previous earnings call, we anticipate our 2021 maintenance capital spend to be between $65 million and $75 million.
During the third quarter, we made a tax distribution of approximately $51.1 million to the LLC unit holders of Station Holdco, which included distributions of approximately $33.5 million to Red Rock Resorts. Now to provide a short update on the development pipeline. Starting with our Durango development, we are extremely excited about this project, which is situated on a 71-acre parcel ideally located off of the 215 Expressway and Durango Drive in the southwest Las Vegas Valley. The project is located within the fastest growing area of Las Vegas Valley with a very favorable demographic profile. The project site provides favorable ingress and egress off the 215 Expressway, which handles over 166,000 vehicles per day, as well as within a five-mile radius of approximately 350,000 people.
Further, there are no unrestricted gaming competitors within a five-mile radius of the project site. We are working through the planning and permitting phases of this project with the goal and expectation to have the shovel in the ground in the first quarter of 2022. Once the project is started, we anticipate construction will take approximately 18-24 months. When complete, the project will be approximately 533,000 sq ft to 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, almost 21,000 sq ft of convention meeting and catering space, four full-service food and beverage outlets, a state-of-the-art sportsbook, and a resort-style pool.
While we are still refining the final budget, 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 expect to enter into a guaranteed maximum price contract for approximately 70% of the total project costs. The company expects the return profile of this project to be consistent with past greenfield projects in our portfolio. The funding of this project is expected to come from a combination of cash flow from operations and the sale of a portion of the current Durango site to multi-family development projects for approximately $24 million. Turning now to North Fork. Since we last spoke, we received a positive opinion from the United States District Court for the Eastern District of California, which ends all federal court litigation affecting the project.
With respect to the California state courts, while we were disappointed by certain of the results of the California state courts, we do not believe that any of those state court decisions will ultimately affect North Fork Tribe's ability to conduct gaming on their trust property. We have continued to progress our efforts with respect to these various active projects, including development design and initial talks with our prospective lending partners. We will continue to provide updates on our quarterly earnings calls. Lastly, as previously disclosed on our prior earnings call on May third, we entered into definitive agreements to sell Palms Casino Resort and Palms Place for an aggregate price of $650 million in cash to an affiliate of the San Manuel Band of Mission Indians.
The closing of this transaction is subject to various closing conditions, including regulatory approvals, and is expected to be completed before the end of this year. In conclusion, while the third quarter presented some headwinds, our disciplined approach to running our business allowed the company to enjoy record high EBITDA margin, and free cash flow conversion. With our best-in-class assets and locations, unparalleled distribution and scale, and our own pipeline of six strategically located gaming and titled properties, we believe that we are uniquely positioned to capitalize on the very favorable long-term demographic trends and the high barriers to entry that characterize the Las Vegas locals market. Lastly, we'd like to recognize and extend our thanks to all of our team members for their hard work and to our guests for their support throughout this pandemic.
With respect to our team members, a special note of thanks for voting us a top casino employer in the Las Vegas Valley. Operator, this concludes our prepared remarks today, and we are now ready to take questions from participants on the call.
Thank you. We will now begin the question and answer session. To ask a question, please press star then one on your touchtone phone. If you are using a speakerphone, please pick up the handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Joseph Greff at JP Morgan. Please go ahead.
Good afternoon, everybody. I have a question I think probably more for Frank or Lorenzo on strategic issues in terms of how your thoughts and views on monetizing casino real estate have evolved, particularly given where valuations multiples are for real estate EBITDA streams. You have $740 million run- rate of EBITDA, mid-teens multiple on half of that EBITDA is like 80% of your total. You know, that kind of does a lot of interesting things for you. How do you think about this, Steve?
Well, I think the value should be implied into the fact that we own all of our real estate, whether we have a PropCo or an OpCo. I mean, I think we sit in the perfect position by controlling all the real estate, owning all of the real estate, owning the growth pipeline. You know, we kind of like it, but we also like looking at what people are willing to pay for that kind of 2x coverage on the rent stream. There's no reason that shouldn't be implied into our stock price as well. I mean, that's how we look at it.
Yeah, I mean, look, we've looking at the Palms transaction, I think that was implied at about a 20x multiple-ish. Certainly that's, you know, we like that valuation. I think right now as you can see, we're kind of in the development mode. We've got two under development pieces of property that we think are very attractive. Based on our historical returns we've been able to generate, we really like the idea of doubling the size of our current operating platform here in Las Vegas by developing those properties. We've always got that option down the road. You know, once we build that out to consider an OpCo, PropCo structure, if we think it makes sense at the time.
You know, we're gonna be focused on what's the best way to to maximize shareholder value. We're always gonna look at the options.
Great. SG&A was up 10% quarter-over-quarter, and that drove an EBITDA variance versus consensus. Was there anything one-time in there or if you could explain that sort of sequential trend and then how do you think SG&A and corporate expense will trend from here?
Yeah, we can start with corporate. Corporate mainly, I mean, in corporate and SG&A, the majority of that is payroll and bonus expense. You know, we've performed really well. We've accrued higher bonuses, so we can pay our employees. There's also a lot of IT, you know, there's IT expense mainly related to the cashless initiative that's taking place. But there's nothing unusual or one time in the SG&A or corporate.
Great. Thank you very much.
Our next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, guys. Good afternoon. Thank you. Just to 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, I think, 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 rates coming out of the quarter? Was it pretty consistent throughout the quarter in terms of staffing and expense run rates? Or should we perhaps expect that to creep 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. You know, 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, you know, it really is a tale of two halves. The first half of the quarter was very consistent with the second half of the quarter. Then upon, you know, the mask mandate, you did see some degradation in volume. We expect that to reverse once those, you know, COVID mitigation restrictions get reversed.
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 versus Q3 of 2020. Like Steve said, it was really more of a revenue.
Yeah.
issue really just to the margins.
Right. That kind of takes me to my next question. As you guys look out to 2022 and 2023, how much of 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 in the 2Q, north of 50% in the 2Q. How much of that boils down to the revenue run rate, you know, that we're currently looking at remaining where it is or even perhaps growing versus, you know, being able to sort of 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?
Carlo, I mean, that question gets asked every quarter of, you know, are margins sustainable. Let's just, you know, let's go back and we can just take a history lesson. You know, Q3 2020 moving forward, right? You know, same story margins of 46.2%, 45.5%, 48.9%, 53.4%, and then this quarter was 49.2%. What I'm seeing is a seismic change in the way we're running the business from an operational focus. We see a lot of these cost savings that we've put in place and a lot of the processes put in place are permanent. While, you know, we have no crystal ball in terms of a revenue standpoint, we do expect several high margin lines of business to come back in 2022 or 2023 to help grow the top line, namely catering sales and the theater business. Yes, 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 amenities coming back on board. I think we looked at your sort of non-gaming revenues were almost virtually the same in the third quarter between the second. You know, we were expecting that to maybe ramp up a little bit just as, you know, things, some of the restrictions were lifted and obviously there were restrictions that were put back in place. Can you talk about the non-gaming amenity openings? I think I heard in the prepared remarks something about coming out a little later in 2023 for, you know, I think some of the banquet and catering side. Can you just talk about how you expect maybe the non-gaming piece to ramp up over the next couple quarters?
Sure. I mean, right now, I mean, you've seen, we've had quite a successful quarter in Q3 for the non-gaming segments. The hotel, food and beverage also returned or built off the second quarter growth, you know, record growth. We continue to expect the hotel to deliver that performance as we get sales and group coming back. With the restrictions going on in June, July 30, we did see a slowdown in bookings throughout 2021 and the first half of 2022. As I mentioned in our remarks, you know, from a lead generation perspective, we're starting to see return of that corporate business in the latter half of 2022 and into 2023. We expect, you know, good things from there.
On the theater side, which is also non-gaming, you know, the slate continues to get better and continues to sequentially trend. You know, each month tends to be better than the last month, so we expect good things from there. The hotel, what the team is doing, not only are we seeing record, you know, occupancy and record ADR, yielding the hotel in a much better way. There are more casino guests in the hotel, so much more profitable holistically, and there's less wholesale business, which is a change that, you know, was put in place at the beginning of this year. We're starting to see the fruits of that labor.
Great. I'm not sure where exactly you're in Las Vegas in recovery yet, but you know, we did see 20 years ago when the Strip was kind of as hot as it probably is now, we did see some spillover into the locals' more destination-oriented property like a DDR or Red Rock. Do you guys seeing that just yet or kind of how would you characterize you know, again, a little bit of crossover from maybe the Strip customer you know, kind of filtering down into locals properties as the Strip's own occupancy and pricing continue to push higher?
Yes, we are starting to see that regional out-of-town guests kind of push over to the higher end properties.
Thank you.
The next question comes from Stephen Grambling with Golden Sachs. Please go ahead.
Hi. Thanks. We know you're still in the early stages of 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 figure out ways to control construction costs between now and when you break ground?
Yeah. I think the planning process for this has been quite extensive. You know, as you've probably heard in some of the calls, we've delayed giving a budget until just now. 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 secured them or we've at least put those under contract. We feel pretty good from a pricing perspective. Frankly, you know, construction costs, you know, have risen, but we feel we've captured that in the $750 million number.
That's helpful. Secondly, maybe I missed this too, but how do you think about capturing the value from the still undeveloped land that you still have that some of you want to utilize?
We're planning on monetizing the back 23 acres of the Durango site. We're taking the front 50 acres to build. We'll monetize the back, probably resulting in multifamily residential behind the property, which will be good for the property. We're gonna continue to look at each one of the development sites here in Vegas as we roll forward to try to build out the portfolio, double the footprint here in Las Vegas. We'll take basically the heart of each of the properties and sell off the remaining real estate surrounding the development.
Any sense to where some of that land value you're trying to stitch from your standpoint at this point?
What do you have for the value on the back 23 acres?
As I talked about in the release, the back half, you know, we have under contract about $23 million. About, you know, a little bit over $0.1 million an acre.
With Durango, I think some of the other land that you have undeveloped, you know, would you characterize that as equal, more or less valuable?
The land prices in Las Vegas.
They're not coming down.
They're trending up. They really have been trending up. I think you're seeing a real supply demand dynamic there. There's a lot of demand from multifamily builders, industrial, I mean, a lot of different uses. So, you know, the trends seem to be in our favor as a landowner in the valley.
Great. Thank you much.
The next question comes from Steven Wieczynski, with Stifel. Go ahead.
Yeah. You guys, good afternoon. It sounds like from Steve's remarks in the opening prepared remarks, the promotional environment in the locals market still seems pretty rational, if I read your comments. I guess the question is, if Palms, Rio does close and we see a new competitor come into the market right out of the Palms, do you think there's any risk that a new competitor comes in and tries to steal, you know, some share initially? If so, you know, how would you guys react in that situation?
I think you can see a complete pivot in basically our approach to the market. It's relying on our A-Class locations, A-class buildings, A-class employees, relationship marketing. We basically pretty much gotten out of the promotional business of the mass market here, and we're relying on personal relationships. You know, our intent is to stick to that strategy, even if you're gonna get, you know, a one-off player or someone maybe come in and wanna be promotional and spend money. I mean, you have a couple of them on the market right now. At the end of the day, we are the leader in the market. We have the A locations and the suburban locations, and we just really don't see the need to return to where things were.
You mentioned the mask mandate in your remarks. I guess my question is, you know, what conversations have you had with, you know, with your customer base in terms of, you know, folks that aren't coming back in? Is it something where they're just sitting on the sidelines waiting for that to be removed or is there something else going on? Then the other part of the question is, you know, 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. I think the older the segmentation of the population, the more adverse they are to deal with mask and, you know, react to the news cycle. I think the younger demographic is not as impacted by mask mandates, but I don't know if you guys have anything you wanna add.
I think the other area where we're seeing a little bit of dialogue is in, you know, groups that are looking to book, you know, conventions, meetings, social events. I think that just the mask mandate definitely impacts that line of business. As Steve had mentioned, we're starting to see that pipeline kind of come back into 2022, I think 2023. I think that people are presuming that masks hopefully by then will be a thing of the past. We don't have really any updates from the governor of the state relative to, you know, exactly what they're thinking on the mask mandate. We know tracking the numbers, they seem to be going in the right direction. We're hopeful that, you know, sometime in the near future that that can be lifted.
I think we're one of six states that still have a mask mandate in place. Certainly, you know, we think when the mask mandate hopefully ends, it should be relatively positive from a psychological and just an overall for our business.
Okay, great. Thanks for that insightful color.
Mm-hmm.
The next question comes from Chad Beynon with Macquarie. You can go ahead.
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 gonna be sold, so it's down to three properties. I think what we have to look at is that those three properties, you know, represented less than 10% of the cash flow, even though they were one third of the machines. We've been very successful at moving a lot of the business at those closed properties to the six open properties, which has resulted in the higher margins that we're seeing. You know, 49% for Las Vegas operations before allocation. I don't know if you have anything to add, Steve. Until we're confident that we can deliver incremental absolute profitability, we're not gonna go and open something and cannibalize our other properties and end up making less money.
Yeah. I think just to add to Frank's points, because he nailed them all, is, you know, with SB386 in place, it really makes it, you know, administratively hard to open up a brand new property.
Thank you. Regarding your comment around Durango, your goal of generating returns similar to prior projects, obviously with the cost of capital down at this point, you know, you can certainly get a positive IRR at a lower return. When you talk about competing with prior projects, can you think somewhere in the ballpark between kind of the 10%-20% hold cost, depending on, you know, what happens between now and 2023 or is there a more finite number that you're willing to provide? Thanks.
I think that's the right range. Typically we, you know, we've been able to get into the 20 type return on a stable customer basis. If you look at just kind of where we sit today, you look at our trailing twelve, we've got $730-ish million being generated by six properties. You know, that kind of comes out to an average per property of about $120 million-$122 million a property. You know, 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 return property relative to the rest of the portfolio.
I mean, if you compare the adult population in a five-mile radius per gaming position to Red Rock and Green Valley, Durango is two times the amount of adults per gaming position. We feel pretty good about it.
Thanks for the additional color. Appreciate it.
Next question comes from Barry Jonas with Truist Securities. Go ahead.
Thank you. I'm just curious, more clearly now seeing an impact from higher gas prices. I guess like and that any call from the wider inflation we're seeing either from the revenue or the cost perspectives.
On the cost side, you're definitely seeing in cost of goods sold, you know, that's up year-over-year about 12% on a per cover basis, particularly on the food standpoint. On the revenue side, it really haven't seen that impact. It's been more, you know, it's been tough to see because you have the mask mandate in place.
Got it. Can you give any color? I'm not sure if you talked about what you're seeing across the database. 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 there.
And the younger-
The other area is the growth we've seen in the younger demographic. We were just looking at kind of where we sat in the 21-35 demo prior to COVID and now coming out of post-COVID. I think their theoretical spend is up about 75% versus pre-COVID. We've been successful at 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 in. You know, it's been a few years since you guys have issued a dividend. I'm just curious where resumption of the dividend would rank in terms of your capital allocation strategies.
Yeah, I think the good thing is we're starting from a great place. We have probably the strongest balance sheet in the industry, and in about a month we're gonna get about $650 million from the Palms closing. We're going to end up with the board considering it. You got to balance return of capital versus also the six strategically located properties that we can start developing. We're gonna consider all. We have all options.
We'll take a balance for those.
All options are on the table.
Awesome. Thanks so much, guys.
Next question comes from Daniel Politzer with Wells Fargo. Go ahead.
Hey, guys. Good afternoon. Thanks for taking my questions. Most have been answered, but on the 55+ 65 customer, core customer, in what inning are we of that customer base returning? As broader REITs occur, have you seen any declines at all in that unrated or margin player?
We definitely have some room to go. I mean, they're not all back yet. I don't know necessarily what inning we're in. I think that, you know.
The timing changes depending on Delta variant, the mask mandate.
Yeah. They're definitely the most affected by kind of what's going on with COVID-19. We're hopeful that if the mask mandate comes off sometime in the near future, that segment will really start to come, kind of come back and forth. The older portions of our database is definitely where we're seeing that we have room to grow.
What was the second part of your question?
It was on the unrated.
Got it.
Have you really seen some change in unrated play pre and post-pandemic? Got it. Just in terms of the three properties that you guys have yet to open, I mean, is there any change in your pivoting 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, you know, coming in for those three properties. I think I can pretty safely say simply, we, you know, if we could ever sell a gaming property, those three, you know, gaming properties. Really no decision's been made whether to open or potentially scrap or sell.
All right, understood. Thanks so much.
That concludes the question and answer session. I would like to turn the conference back over to Stephen Cootey for any closing remarks.
Thank you everyone for joining the call, and we look forward to seeing you again in the next 80 days. Take care.
The conference is now concluded. You may disconnect at this time. You may now disconnect.