Red Rock Resorts Inc (RRR) 2016 Q3 法說會逐字稿

Good afternoon, and welcome to Red Rock Resorts third-quarter 2016 conference call.

(Operator Instructions)

Please note, this conference is being recorded.

I would like to introduce your host for today's conference, Daniel Foley, Vice President of Finance and Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Red Rock Resorts third-quarter earnings conference call.

Joining me on the call today from Red Rock Resorts are Rich Haskins, President; and Marc Falcone, Executive Vice President, Chief Financial Officer, and Treasurer. Our call today will include forward-looking statements under the Safe Harbor provisions of the Federal Securities laws. Developments and results may differ from those projected. The risks and uncertainties related to these statements are detailed in our filings with the SEC.

During this call we will also discuss non-GAAP financial measures. For definitions and a complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release and Form 8-K, which we filed this afternoon prior to the call. Also please note that this call is being recorded. I would now like to turn the call over to Marc Falcone.

Thank you, Dan, and good afternoon. I'm pleased to welcome everyone to our third-quarter 2016 earnings call. The third quarter was a strong operating quarter for Red Rock Resorts as evidenced by our highest third-quarter EBITDA in eight years. The Las Vegas market continues to demonstrate solid and steady growth, as we achieved our highest revenue growth in over 16 quarters.

In addition, in October we successfully completed our acquisition of the Palms Casino Resort and began the exciting process of integrating the Palms into Station Casinos premier portfolio of assets. We will provide additional detail on the significant progress we've made to date later in the call.

I would also like to take a minute to thank our 13,500 team members who make Station Casinos a leading provider of guest entertainment. Your hard work, dedication and exceptional service over the last 40 years continues to be one of the most important factors in driving our guest loyalty and satisfaction, which in turn has helped us achieve outstanding results. We're especially excited to welcome all of the Palms team members to the growing Station Casinos family.

Now turning to some more specifics on our third-quarter results. Our net revenues increased 7.3% to $347.1 million. Adjusted EBITDA grew 13.7% to $109 million, and our adjusted EBITDA margin grew 180 basis points to 31.4%. This marks the 14th consecutive quarter of year-over-year net revenue growth, the 23rd consecutive quarter of EBITDA improvement and the 16th consecutive quarter of EBITDA margin improvement.

In Las Vegas, net revenues were up a very strong 6.2%. Gaming revenues were up 5.8% as we experience growth in every major gaming category, particularly in slots and tables. Non-gaming revenues increased an equally impressive 7.5%, as we continue to benefit from investments in our non-gaming areas driven by strength in both hotel revenues, up 8.5%, and food and beverage revenues, up 6.8%.

RevPAR for our Las Vegas properties was up 11.7% for the quarter. Our Las Vegas adjusted EBITDA grew 8.2% to $94.3 million for the quarter, the highest level of third quarter adjusted EBITDA since 2008, and our margins grew approximately 50 basis points to 29.6%.

While margins increased in both our gaming and hotel segments, food and beverage margins declined this quarter. As we discussed on our last quarterly call, the opening of several new restaurants in our portfolio have had a negative impact on margins. In addition, margins were impacted by our strategy to enhance our overall food and beverage offerings and service levels. These enhancements have already resulted in additional cover counts and higher guest satisfaction.

As a result of these enhanced offerings, we have incurred additional costs associated with the higher volumes. While we expect these cost to continue to have an impact on flow-through over the next few quarters, we believe the long-term benefits should outweigh the short-term negative impact on margins.

We remain excited about several other key initiatives that we believe will have a meaningful impact and drive both gaming and non-gaming revenue growth. First, we continue to make excellent progress on our IGT system upgrade, with nearly 100% of the phase I system installation now complete across our 20,000 citywide slot machines. We will begin phase II later this quarter and expect the project to be complete in mid-2017.

When this system is in place it will provide a robust upgrade to our current marketing, bonusing, and player communication. Players will be able to receive customized real-time marketing and bonusing in a new state of the art on-device service window. We believe this feature will drive increased visitation, longer time on device, higher guest retention, and increased player profitability.

In addition, on November 1 we launched our My Rewards program, the next evolution to our multi-year award-winning boarding pass loyalty program. This exciting enhancement will allow our guests to now earn points when they spend money on non-gaming activities, in addition to their gaming activities.

And this is inclusive at all of our Company-owned food and beverage outlets, as well as our hotels, spas, bowling centers, pools, and other non-gaming outlets. My Rewards have been completely rolled out to all of our properties in Las Vegas, including the Palms, and we believe we are the first Company in the Las Vegas locals market to roll out such a comprehensive loyalty program. Overall, we expect this program to drive incremental spend at our properties, and investors should continue to expect Red Rock Resorts to be an industry leader in these types of important innovations in our business.

In October, the Company broke ground on an approximately $115 million expansion upgrade at Palace Station, which recently celebrated its 40th anniversary. The expansion will include a completely new exterior facade, bingo room, buffet, two new restaurants, additional gaming space, improved parking and a new porte-cochere with improved ingress and egress for our guests.

These upgrades will substantially replace the original building from 1976, and will give the low-rise portion of the building a fresh exterior and notable upgrades to its amenity offerings. We expect the property to experience disruption over the next 12 months while we make these improvements. The project is scheduled to be complete in the fall of 2018, and we believe it will drive significant additional guest visits once finished.

Now turning to the Palms. As we mentioned, we closed on the acquisition of the Palms on October 1. Since the closing, we have already executed on several areas of immediate opportunity. We completed the conversion of all of our major operating systems including hotel, food and beverage, and accounting.

We also converted the Palms slot system to the new upgraded IGT slot system technology, that incorporates My Rewards. In addition, we have replaced the third-party operator of the cafe, buffet and room service and have seen significant increases in cover counts to date through these outlets as a result of this change. Perhaps most importantly, we have completed the process of integrating the Palms into our Boarding Pass loyalty program, which will allow the property to participate in all Companywide promotions, direct mail, and other marketing initiatives.

While we have made substantial progress in our first full month of ownership, we continue to work on our first phase of property enhancements. These enhancements will include the renovation of the cafe and buffet, and an upgrade to the gaming floor which will include the addition of a new VIP gaming area. We're still in the early stages of analyzing the property operations and examining potential areas for capital improvement. Over the next several quarters we will update investors on additional strategic initiatives and planned capital projects at the property. As the property's current EBITDA run rate remains approximately 60% below its peak, we are confident that through various initiatives and improvements we will be able to drive revenue, margin, and EBITDA improvement at the Palms over the next several years.

Turning to the current state of the Las Vegas market, we believe that population growth, job growth and wage growth remain the major components that drive our overall business. Other key indicators that we view as important to growth in Las Vegas continue to show strength and include a steadily improving housing market, record consumer spending, vibrant visitation levels in Las Vegas and a robust construction pipeline. Some of the key indicators we monitor include population where total driver license renders a key indication that people moving to the valley are up 11.6% year to date, and electric meter hookups remain at an all-time high.

On the job front, total employment in September reached a record 945,000 jobs, a 2.3% increase from the prior year, and Las Vegas employment is now above the peak job market of 2007. Diversification of the job base continues with over 21,000 jobs added in the last 12 months in a variety of industries, and the increased employment counts contributed to an improving unemployment rate, down 90 basis points year over year to 5.8%.

Other key economic indicators remain strong as well. Total weekly earnings, the combination of jobs and earnings have increased 4.7% year to date. Housing prices have more than doubled from the trough and taxable retail sales in southern Nevada reached a record high of nearly $40 billion for the last 12 months ended August 2016. Visitation to Las Vegas is also at an all-time high and approaching 44 million visitors, nearly 9% above prior peak levels, driven by strength in convention and meeting attendance, which in turn is driving improving RevPAR growth in Las Vegas.

The pace of construction in Las Vegas remains healthy and broad based. Construction has been more diversified, including development and commercial, industrial and logistics, information and technology, healthcare, stadium and leisure and infrastructure improvements as well as several other new projects.

In our Native American segment, we reported another strong quarter generating $21.6 million in EBITDA and bringing year to date EBITDA to $62.2 million. Both the Graton and Gun Lake properties currently have expansions underway which should drive additional revenue and EBITDA growth upon completion.

The Graton Resort and Casino continues to report record operating results, and the tribe is putting the finishing touches on its $185 million expansion. The expansion will add 200 hotel rooms and a variety of other resort amenities, and is scheduled to open as planned on November 15. Our management fees at the Gun Lake Casino were also strong, and the tribe continues to make progress on its $85 million expansion, which is scheduled to open in the summer of 2017.

For our North Fork Rancheria project, we have made considerable progress and are pleased to report some significant developments. On July 29, the Department of the Interior issued secretarial procedures pursuant to which the tribe will be allowed to conduct Class III gaming on its lands north of Fresno. The Federal District Court with jurisdiction over this case entered judgment in favor of the tribe, no appeal was filed, and this case is now closed.

In another significant advancement for the project on September 6, the Federal District Court in Washington, DC issued a ruling dismissing all of the opponents claims against the Department of Interior contesting the Secretary's decision to take the land into trust for the tribe. Although the opponents have filed a notice of appeal, we do not expect the judge's well reasoned decision to be overturned. There are other cases still pending that were filed challenging aspects of the approval of this project, but we continue to remain optimistic about moving forward.

We will continue to work closely with the tribe to clear the last few legal obstacles in order to be in a position to commence construction of the project. We anticipate the cost of the North Fork project to be between $250 million and $300 million, and will include approximately 2,000 slots, 40 table games, several restaurants and other entertainment amenities.

I will now cover some balance sheet and capital items. As of September 30, 2016 the Company's cash balance was $96.3 million, and the principal balance of outstanding debt was $2.4 billion, which excludes a nonrecourse land loan of $115.9 million. At September 30, the Company's $685 million revolving facility had an outstanding balance of $130 million, which includes borrowings associated with the purchase of the Palms. As of September 30, net debt net of excess cash to adjusted EBITDA was 4.6 times and interest coverage was very strong at 4.3 times.

Capital spending year to date was approximately $120 million, which consists of approximately $50 million of maintenance CapEx and $70 million of growth CapEx. We estimate total capital expenditures for the year will be between $165 million and $175 million.

In November, the Company announced that its Board of Directors declared a cash dividend of $0.10 per Class-A common share for the fourth quarter. The dividend will be payable as of the close of business on November 15, 2016 to all stockholders of record. Station Holdco will make the distribution to all unitholders of record for a total distribution of approximately $11.6 million, approximately $4.1 million of which is expected to be distributed to Red Rock Resorts shareholders, and approximately $7.5 million of which is expected to be distributed to other unitholders of record of Station Holdco.

In conclusion, the third quarter was very strong for Red Rock Resorts. With a record employment base, a healthy construction pipeline and strong visitation growth, the overall Las Vegas economy lined up well for our ability to capture strong top-line, and bottom-line growth this quarter. We continue to execute on a number of major initiatives, as described herein, which are enhancing our overall operations as well as the guest experience, and we believe these numerous enhancements and investments in our assets will yield meaningful results going forward.

Operator, this concludes our prepared remarks, we are now ready to take questions from participants on the call.

Thank you.

(Operator Instructions)

Carlo Santarelli, Deutsche Bank.

Hi, guys. Thanks. Nice quarter. Congratulations. Marc, just in terms of the Palace Station project, and I know it was one of several things you guys have talked about and thought about, but when you thought about returns on that potential $150 million spend relative to some of the other opportunities that you have at your fingertips, whether it is Reno or some of the Las Vegas land parcels, how did you get comfortable that, that was the best bang for your buck?

Well, Carlo, first off just to make sure -- I want to make sure -- it is $115 million. I thought I heard you say $150 million. I just want to make sure. It's $150 million. Second, listen, we continue to look at the Reno opportunity the Durango opportunity, but we feel that the positioning of Palace in close proximity to the Strip, some of the benefits we are seeing in other properties from enhancing food and beverage offerings, improving access and creating a better overall product improvement, that was kind of where we felt that was a better opportunity to invest our capital in the near term.

It doesn't prevent us from looking at Reno or pursuing or moving forward with Durango and we are also very focused, obviously, on the opportunity we see at the Palms as well. But we continue to believe that Palace has still got substantial upside given its market positioning.

Great, thank you. And then with respect to Palms, I believe you talked about, and you guys have said it previously, just how far below the prior peak that asset is. What is a realistic level as to where you think you can get it to in terms of as a percentage of prior peak over the next, call it, 18 to 24 or 18 to 36 months?

Listen, I think as we continue to work and fine-tune our capital plans for the project, that will kind of determine the time frame, but I think we believe that it is a great opportunity for us. We'll certainly will start to close that gap to peak immediately in 2017. And I think a lot of what we do on the capital side will determine what we do and how quickly we can get that property back to peak, whether it is two years, three years, but I think we are confident that, that property has significant upside from current levels.

I appreciate it. Thanks, Marc.

Joe Greff, JPMorgan.

Hi, Marc. On the topic of the CapEx at Palace Station, do you anticipate much in the way of revenue and EBITDA disruption there? And maybe can you help understand how you are thinking about that or how you're managing through it?

Yes, so I think we anticipate probably 12 months of revenue and EBITDA disruption. A lot of what we are doing is going to impact the access to the main entrance and other areas of the property will be disrupted. As we work on all of this, we're going to close the buffet, move it, we are going to do the new bingo room. So there's things that will impact revenue and EBITDA. I don't think we have completed the total overall impact to what we think disruption will be, but we do think it could be significant in the next 12 months.

And can do remind us how much Palace contributes to total property level EBITDA?

We historically, Joe, as you know, don't break out individual property EBITDA for the portfolio. We think that we run the business as one business, not on individual properties.

Sure enough. Do you think you can shift those revenues and EBITDA to other properties?

It's something we're clearly looking at. Obviously, the Palace Station is not far from the Palms. We do see some opportunities with the strength of Asian play in the market overall at Palace Station and the Palms. And we could also work with Boulder as well, to kind of cross market and shift some of that business to that property.

Got it. And part of your earlier comments, Marc, you talked about the relationship that maybe some of these new investments, particularly on the restaurant side are having in terms of revenues better than expected in the flow-through or margins still in that ramp mode. And you talked about you'll probably have that similar dynamic for the next few quarters. Between now and the end of the next few quarters, would you expect sequential improvement though in the reported flow-through in Las Vegas?

There is a couple of different dynamics at play. I would say, generally, the answer would be yes. The one thing that is a little bit early stages for us to give you a more definitive answer is when you take the Palms and you include that into our Las Vegas portfolio, the Palms currently has one of the lowest margins overall, so we're going to see some natural decline in the overall margin, which could impact the overall flow-through levels. But as we continue to make improvements at the Palms, we would expect some consistency in improving the flow-through going forward. But I just want to emphasize that there will still be some pressure on flow-through over the next couple of quarters.

Okay. And just so we're prepared, three months from now I'm presuming you wouldn't give us same-store flow-through then?

No, we will just report Las Vegas operations, which will be inclusive of the Palms.

Good enough. Thanks guys.

Shaun Kelley, Bank of America.

Hey, good afternoon. Marc, you mentioned the commentary around the food and beverage and the impact on flow-throughs, and obviously this is a carryover from what you alluded to last quarter. Can you give us a sense, is this an issue or an expense base that will start to lap next year? Is at as simple as thinking that as we get into the second and third quarter next year, we will start to lap some of these expenses, and do you expect to normalize over time at that point?

Yes, I think that is very accurate, Shaun. We would expect that to anniversary in the second and third quarter of next year. And then you would kind of see some more consistency in terms of the publicly reported numbers. Where we have an opportunity as well is continue to refine all of our food and beverage programming from food quality to staffing and other areas where we are very focused on driving incremental property visits by having a superior food product and service standards, which helps drive our slot revenues longer term.

Great. And then my second question is, just as we look at the market overall, we do have some of the data although it does not line up perfectly with all of your properties, but as we look at the Las Vegas local market data, it looks like your casino revenues meaningful outperformed that. And when we look at your other big competitor in the locals market, it looked like they were probably closer to in line with that Do you think you -- based on your own analysis and what you're able to look at, do you think you took share in the market overall? And what do you think is driving that if you did?

Well, I think clearly the numbers would suggest that. I can't specifically comment on our large competitor's revenue performance, but we are very pleased with our gaming performance in the third quarter and we are excited about what we have been able to deliver on the gaming side of the business. Obviously, helped fueled by the very strong fundamental macroeconomic environment to which we are operating in today.

And I guess the last question on that would just be -- and I don't know if you can really provide insight, but it did seem like a pretty meaningful delta to what we were able to see out of that data. Any reason why given how much of the market you guys actually make up? Or any color or insight you can provide on that?

I have to say, I don't have any incremental insight on that particular aspect.

Fair enough. We can take it off-line. Thanks a lot.

Cameron McKnight, Wells Fargo.

Thanks very much. Good afternoon.

Hi Cameron, how are you?

Good, thanks. Marc, would you mind talking about trends that you're seeing in the convention and meeting side of the business at Red Rock and Green Valley Ranch, in particular?

I think consistent with what MGM was saying today about their outlook for group and convention business, we are seeing very positive trends into 2017, particularly those two properties, which are strong group properties for us. We've got some -- the ConAgra citywide event coming here in the first quarter. You just had a very strong SEMA in town in the fourth quarter. And from what we are seeing on our booking patterns, our booking trends, we are encouraged by the group business outlook for 2017.

Okay, great. Thanks. And then just moving on to the expense side of things, SG&A was down about 3% year on year. Outside of food and beverage can you talk to what you are doing on the cost side of things?

Yes, some of the things that we've been doing, which are helping that particular area, we have been investing a lot of time on doing various energy programs. We've done some LEED certification initiatives across a handful of our properties, as well as focusing on energy consumption, water consumption and the like. So we are doing a lot on the energy front.

We continue to manage every aspect of our business on a regular basis. And that will be a key focus for us going forward. So food and beverage -- I mean we did see hotel margins and casino margins up in the quarter. But obviously, the food and beverage part was challenged a little bit. A lot of what we benefit from is our positioning in the market overall and the size and scale of our business. So we try to leverage that to reduce costs as much as we can across the portfolio.

Got it. Thanks. And then one last one if I may. You mentioned the strength of Asian play at Palace Station in particular. Can you give us some thoughts on the Lucky Dragon opening, which I think is scheduled for December 3, and that part of the market?

Yes, listen, similar to when other properties open here in the market in Las Vegas, similar to -- not entirely different from the scenario when SLS opened, we would expect there will be some trial from our customers to Lucky Dragon. But again, I think we feel the offerings we have, the loyalty of our customers, the positioning of our properties, we should continue to probably get our customers to return after a trial basis.

We think there's some bit of a challenge to the location, coming down Sahara and having to make a U-turn into the property, from anywhere west of the 15, but we are encouraged about the opportunity to work hard to keep our business.

Okay, got it. Thanks very much, Marc.

Chad Beynon, Macquarie.

Hi, great, thanks for taking my questions. First, just want to ask about the Boarding Pass announcement that you mentioned at the outset, Marc. This has always been rated as one of the best gaming loyalty programs in the country, so could you just help us think about some of the refinements that you are making to the program, any new partners, anything that could help or hurt your loyalty? Thanks.

Yes, so as you know, our Boarding Pass program has been rated, the last 15 years, as the best one in the market. I think we just won our 16th straight year in the last couple of weeks. So obviously it is a loyalty program that has worked very effectively and the customers, clearly, in the market have spoken about that.

What we thought we would do is enhance that program by allowing customers who probably may not have as large of a gaming budget that spend in other non-gaming areas, such as our restaurants. We have over 140 restaurants and bars in the portfolio, for example, or are using our hotel product or local spa visits or anything that we could to generate incremental loyalty from the non-gaming customer as well as gaming customers who spend on non-gaming amenities. We think that is a pretty important improvement and upgrade to the overall loyalty program, and that is what we launched on November 1.

Okay, helpful. And then on the topic of capital allocation you announced some good and high ROIC projects today. And you also said that there may be some more things to come with respect to Palms. Two questions here, A, how do you think about leverage targets over the next 12 to 18 months; and then secondly, where does this put Reno on the map? Thanks.

Yes, so I think from a leverage target perspective, we are pro forma, right now, for the Palms transaction at 4.6 times. I think we would expect that leverage level to go down with continued growth in our business and some natural deleveraging through amortization. So I would anticipate we will be in the low to mid 4s. Our target range is 4 times to 5 times as we've said previously.

So I think we're still in a strong position over that perspective. With respect to Reno, it is something obviously we continue to evaluate, continue to look at. We probably need about 18 months to 24 months of lead time before we were in the ground on that project, but we are very -- continue to evaluate it and there is no definitive timeline.

Okay, thanks, Marc. Good quarter.

Stephen Grambling, Goldman Sachs.

Hi, thanks. Just a quick follow-up on Joe's earlier question on the Palms. Can you just provide a little bit more detail on how the property is gaming, versus lodging, versus food and beverage mix compares to the average, and if you think there's any difference in the seasonality of that business that we should be aware of?

In terms of the seasonality of the business, we don't really see much change from what the rest of our portfolio is. If you recall, the Palms property has a very strong locals component as well as the proximity and Strip benefit, so I think you're going to see little seasonality overall to the business. In terms of its food and beverage, gaming to non-gaming mix, it is pretty similar to what we experience at some other properties in our portfolio like Red Rock and Green Valley Ranch.

Okay, thanks. And then one other broader topic. Can you just talk about how you would weigh the impact of sports teams coming to Las Vegas and the impact on your business.

We think it's great. We think it's very exciting for the local community. Obviously, you are well aware of the hockey team that will start its first season here in 2017. Obviously, we are encouraged by the progress made on the stadium. And we are looking forward to seeing how the NFL determines the potential move for the Raiders from Oakland to Las Vegas. The market should benefit from higher room prices, higher occupancies, more spent on food and beverage. It's just a great opportunity to have real professional sports organizations relocate to Las Vegas.

Thanks so much.

Steve Wieczynski, Stifel.

Good afternoon, guys. Marc, I don't know if you said this or you didn't say it, but did you give any color on how October trended in Vegas?

No, Steve, we don't generally comment on months in between on the quarter, so we just -- all I can tell you is that the macroeconomic environment here continues to be quite strong.

Okay. Got you. And then second question, still staying in Vegas, obviously the casino revenues there continue to be pretty healthy. Can you give us any color in terms of what you're seeing from your typical customer? Is that more frequency in terms of visit to the property, or are they coming with more money in their wallet, or is it additional new players that are starting to show up?

It's really a combination of all three. We have very strong Boarding Pass sign-ups on a monthly basis, which would be an indication of new players. We have visits where (inaudible) provisions generally trending in the consistent right direction. So all three of those are impacting our strength in gaming revenues.

Okay, great. Thanks, guys, appreciate it.

James Kayler, Bank of America.

Hi Marc. How are you doing?

Good, James. How are you?

Good, good. Just a couple boring balance sheet questions.

I like those.

Just on the bonds, obviously the call price steps down in March, I'm just curious what your current thinking is on potentially refinancing in the bond or bank market?

Yes, we continue to look at that very closely. As you pointed out, there is a step down on March 1, 2017. We obviously know how strong the credit markets are right now. We will see how post-election things are, but we are continuing to take a close look at what we do with the bonds as we get into 2017.

Okay. And then just on North Fork, are there certain hurdles, in your mind, before you can move forward with financing? Have those hurdles been overcome? And I guess more broadly, how should we think about potential timing for financing raise, construction, and opening?

Yes, hi James. It is Rich Haskins. Marc alluded to in his comments that we cleared a couple of major legal hurdles in the third quarter. There's a few other remaining court cases we are hopeful that we will have decisions in a couple of the key ones remaining by the end of the year. Assuming we receive a favorable decision in those cases, which as we have in all the cases to date, we anticipate that we may be able to commence construction of the project in the second quarter of 2017.

Great, thank you.

At this time I'm showing no further questions. I would like to turn the call back for any closing remarks.

That will do it for us. Thank you, everyone, for your time today. I know it is a busy day. We look forward to talking to you soon. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a good day.