Red Rock Resorts Inc (RRR) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to Red Rock Resorts Third Quarter 2017 Conference Call. (Operator Instructions) Please note this conference call is being recorded.

I would now like to turn the conference over to Daniel Foley, Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Nova. Good afternoon, and welcome to Red Rock Resorts Third Quarter 2017 Earnings Conference Call. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; Steve Cootey, Executive Vice President, Chief Financial Officer and Treasurer; and Joe Hasson, Executive Vice President and Chief Operating Officer. 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. 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 were 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 Steve Cootey.

Thank you, Dan, and good afternoon, everyone. Prior to getting into our third quarter numbers, we would like to take a moment to touch on -- touch upon the terrible events of October 1.

Like everyone in our community, we are all deeply saddened by the tragedy, and our thoughts are with the victims and their families as well as the countless others both inside and outside of Las Vegas whose lives were affected by this horrific and senseless act. The response following the tragedy was nothing short of remarkable. From the incredible bravery of our city's first responders to those concert-goers who risked their lives to help out complete strangers. The list of heroes goes on and on.

In addition, approximately $21 million has been raised to date to assist those impacted by this devastating event, which included a $1 million commitment from our company.

This outpouring of support has only served to demonstrate what we already knew, that Las Vegas is a strong, resilient city that will rise to overcome this adversity, and we are extremely proud to be a member of such a community.

Now let's take a look at our third quarter results. The continued strength of the Las Vegas economy as well as the initial impact of our ongoing revenue and efficiency initiatives were both evident in the third quarter, as we experienced a very strong revenue and EBITDA growth as a company. For the quarter, consolidated net revenues, inclusive of the Palms, increased 15.3% to $400.4 million, while adjusted EBITDA increased 8.5% to $118.3 million. Margins for the quarter were 29.6% on a consolidated basis and 27.5% for Las Vegas operations. Notably, when viewing our performance on a same-store basis, excluding the Palms, we recorded our highest third quarter consolidated net revenue, highest adjusted EBITDA and highest adjusted EBITDA margin since 2008, even while experiencing significant construction disruption at Palace Station.

In Las Vegas, net revenues, including the Palms, increased 16.1% to $369.5 million, and adjusted EBITDA increased 7.9% to $101.8 million. These results continue to be negatively impacted by the significant construction disruption at both Palace Station and the Palms as well as the costs related to enhance our food and beverage offerings and investments made in our team members.

As discussed in our last call, $3.5 million of those costs will anniversary in the fourth quarter. In addition, with our operating and strategic initiatives continuing to gain traction, we expect to return to expanded margins and historical flow-through levels of 50% to 70% on a same-store basis, excluding disruptive properties.

From an ongoing constructions' disruption standpoint, we expect Palace Station to experience disruption at the high end of our previously estimated $10 million to $15 million annual disruption range through the completion of the project.

With respect to the Palms, the construction disruption is very extensive right now and is expected to continue through the completion of the planned redevelopment of the property.

Even with those negative impacts, we are pleased to report that we saw growth across almost every segment of our business. Of particular note, same-store gaming revenues were up a robust 6.2%, driven by strong volumes across every gaming category.

As we look forward, the Las Vegas economic story continues to be an extremely compelling one. The population in Las Vegas is at an all-time high and climbing, as Nevada was the second fastest-growing state in the nation last year. Moreover, nearly 1/3 of the new residents arriving every month are retirees, which is a key demographic for our business. On the employment front, the number of jobs are also at an all-time high, and Las Vegas is forecasted to be the third fastest growing job market in the United States through 2019.

Wage growth also remains very solid, with average weekly earnings up 4% on a year-over-year basis for the trailing 12 months.

As for housing, September home prices were up 14% year-over-year and are now up 135% from the trough. Despite our city's economic success, Las Vegas is still one of the most affordable and tax-friendly Sun Belt cities, attracting both new residents and businesses alike.

In addition, there is over $14 billion of development planned or underway in Las Vegas, which will further fuel this economic expansion. And with our best-in-class assets, market-leading distribution and scale, strong development pipeline and favorable supply-demand dynamics, we are uniquely positioned to take advantage of this continued growth in what we believe is the best and fastest growing gaming market in the United States.

In our Native American segment, we reported yet another strong quarter, with management fees of $25.3 million, up 17.2% from prior year, as both Graton and Gun Lake continued to deliver very strong results. As a reminder, our management agreement with the Gun Lake Tribe will be expiring in February 2018. At the same time, we would like to remind you that our management fee under the Graton management agreement increases from 24% to 27% this month.

We want to take a moment to address the wildfire tragedy in Northern California that catastrophically affected many of our colleagues, guests and friends. While we remain heartbroken over all those who were impacted by this tragedy, we also remain encouraged by the strength of the talented team of the people in Graton as well as the resiliency of the Bay Area gaming market and its ability to quickly rebound.

Lastly, regarding the North Fork project and, as previously reported, the California Supreme Court has granted the tribe petition for review. But it has deferred taking any further action and so it has ruled in a very similar case before involving the enterprise drive, which received a favorable ruling at the appellate court level. We continue to be hopeful that the court will schedule hearing on the enterprise case in the first quarter of 2018.

Turning now to some of our key strategic initiatives. On the innovation and technology front, we're extremely pleased with the progress we're making on our new IGT slot system upgrade. As previously noted, the upgrade has now been installed in over 20,000 slot machines located at our 20 properties across the Las Vegas Valley. Although we are still in the early stages of rolling out and testing the new system, we are very encouraged by the initial metrics and guest feedback, as we continue to evolve and refine the on-device bonusing capabilities, we're seeing increases in carded play, which will allow us to better understand, communicate with and reward our guests. We are extremely pleased with these preliminary results and, can you believe it, over time, this technology could prove to be a game-changer from a player perspective.

Now let's talk about our 2 development projects: Palace Station and Palms. We remained very bullish on both of these opportunities as we are big believers in the Las Vegas market and think we have very significant upside at both of these properties once the redevelopment projects are concluded.

With their appeal to both Las Vegas locals and out-of-town visitors, we believe these hybrid properties are extremely well positioned to benefit from a strong economic and tourism trends in Southern Nevada.

First, an update on the Palace Station renovation. As you may recall from our last call, highlights of the previously announced project include a complete renovation of the casino floor, which will include an expanded number of slot machines as well as a fully renovated poker room; a refreshed exterior look, including a new low-rise facade, porte-cochère and casino valet area; a state-of-the-art bingo room, which is already yielding positive return to our property. We're bringing San Francisco-based Boathouse Asian Eatery. It will be making its Vegas debut, offering an eclectic mix of Japanese and East Asian cuisine. Chef Ralph Perrazzo, a New York-based BBD's restaurant, will also be making his initial foray into Las Vegas, with his award-winning burgers and innovation -- innovative approach to the neighborhood burger bar concept.

Regal Entertainment will be bringing its premium cinebar concept to Vegas for the first time, which will include a boutique, 9-screen movieplex, featuring all luxury recliner seating and food and beverage offerings delivered right to your seat. And other property enhancements will include a new 14,000-square-foot buffet experience, new resort-style pool, 2 new bar concepts and an additional 300 parking spaces.

The Palace development project remains on time and on budget and is scheduled to be completed in late 2018.

Turning now to the Palms. We are very excited to announce today the second phase of our planned reimage and repositioning of the property. I'll provide some key highlights with respect to both phases 1 and 2 of our plan. The Palms is an iconic resort and was always known as the place to see and be seen in Las Vegas. Through our redevelopment of the property, we intend to not only restore it to that memorable status, but take it to the next level of excitement by crafting the perfect mix of classic Vegas hospitality and extraordinary new experiences delivered through world-class partnerships. Based on our experience of developing and operating high-end hybrid properties at Green Valley Ranch and Red Rock Resorts as well as our deep experience in the Palms and its potential having been a part-owner of the property for nearly a decade. We expect to generate a double-digit EBIDTA return on our overall investment in the property growing to mid-teens return after an appropriate ramping period.

Highlights of the previously announced Phase 1 of the Palms redevelopment include a complete renovation of the casino floor, with an expanded number of table games and upgraded slot product as well as an additional new high-limit room at both -- for both slots and table games; our vibrant new Lucky Penny Café, which opened in July to stellar reviews; an all new take on the all-you-can-eat buffet concept, which is currently scheduled to open this December; a new stylish and sophisticated steakhouse that will reset the standard for Las Vegas steakhouses; an intimate and authentic noodle bar restaurant; a new rooftop social club offered by Clique Hospitality Group, a leader in Las Vegas nightlife, which will offer unparalleled views of the city; an exclusive high-end casino lounge experience also managed by Clique Hospitality Group; a new iconic center bar; 18,000 net square feet of completely renovated meeting and convention space; a new hotel front-desk registration and VIP registration reception areas; a fully upgraded 14-screen movieplex featuring luxury recliner tiered stadium seating in every theater; and an all new exterior look, including a new marquee, modernized product, porte-cochère and new exterior facades and lush landscaping.

Phase 1 remains on schedule and to be fully completed in the second quarter of 2018.

And today, we are pleased to provide for the first time highlights of Phase 2 of the Palms redevelopment plan. These highlights will include 282 fully redesigned and renovated hotel rooms and luxury suites in the Fantasy Tower as well as the construction of 60 new hotel rooms in what was previously unfinished space in the tower; a spectacular 29,000-square-foot nightclub developed in partnership with TAO Group, one of the most successful nightlife and restaurant companies in the world; a new world-class 73,000-square-foot pool club also developed in partnership with the TAO Group, which will redefine the day club experience in Las Vegas and will be able to accommodate up to 5,000 guests at a time and will be open on a year-round basis; the highly acclaimed Vandal Restaurant brought to the Palms from New York City by the TAO Group; a new high-energy restaurant, with James Beard award-winning celebrity chef, Bobby Flay, featuring seafood and raw fish preparation in a style that he has become internationally known for. Michael Symon, a James Beard and Iron Chef award winner and cohost of ABC's The Chew, will be making his Vegas debut with his special take on American barbecue; another James Beard award-winning chef, Marc Vetri, the founder of the famed Vetri Restaurant in Philadelphia, will also be bringing his inaugural restaurant to Las Vegas, which will feature his critically acclaimed Italian fare; spreading an additional 15,000 net square feet of completely renovated premier meeting convention space with premier views of the strip; a new 20,000 square foot wellness spa and salon, with 16 treatment rooms and state-of-the-art fitness facilities; a complete refresh of the 2,600-seat Pearl Theater, which will be operated in partnership with Live Nation, the country's preeminent provider of live entertainment; and an additional 525 covered parking spaces.

Phase 2 is expected to be completed in late 2018 and early 2019. As you can see, this transformation will touch virtually every aspect of the property and, once complete, we're confident the Palms will become the ultimate gaming and entertainment destination for both locals and tourists alike.

The total budget for phases 1 and 2 of our redevelopment plans for the Palms, including construction costs, capitalized interest and preopening expenses, is now expected to be approximately $485 million. Notably, our planned investment in the Palms, including the original purchase price paid for the property, will have us positioned right where we want to be with the asset at approximately 50% replacement costs.

I will now cover some balance sheet and capital items.

The company's cash and cash equivalents at September 30, 2017, was $222.4 million and total principal amount of debt outstanding at the end of the third quarter was $2.69 billion, excluding $250 million in aggregate principal amount of 7.5% senior notes that were redeemed in October 2017, with restricted cash consisting of a portion of the proceeds from the issuance of the $550 million in principal amount of the 5% senior notes in September 2017.

At September 30, debt-to-EBITDA and interest coverage ratios net of excess cash and the $250 million in principal amount of the 7.5% net senior notes that were redeemed was 5x and 4.6x, respectively.

Capital spend in the third quarter was $66 million, which included the Palace Station expansion and a previously discussed project at Palms. For 2017, we estimate that total capital expenditures were between $250 million and $275 million inclusive of the Palace Station and Palms projects. In 2018, we anticipate capital expenditures will be between $550 million and $570 million inclusive of the Palace Station and Palms projects.

Lastly, on November 3, the company announced that its Board of Directors declared a cash dividend of $0.10 per Class A common share for the third quarter to be payable November 30 to shareholders of record as of November 15.

Operator, this concludes our prepared remarks for today, and we're now ready to take questions from participants on the call.

(Operator Instructions) Our first question comes from the line of Joe Greff of JP Morgan.

Obviously, the first question is with respect to the Palms. Obviously, the Phase 2 CapEx is sort of higher than maybe what we all expected. When you look at the $800 million plus of all-in investment that you'll have at that property and you look at a stabilized mid-teens return that you referred to before, Steve, what property in the Las Vegas market do you look at as legitimate benchmark? And does this property have to be significantly more resort Las Vegas Strip type of patrons versus Las Vegas local patrons to get to those returns?

Joe, this is Frank. Basically, we're partners in this property for nearly 10 years. We have a history of understanding what the property is capable of doing. It lacks a lot of tender loving care. It's going to, basically, be a completely new property, with all these new amenities and offerings. And we know, with our experience at Dream Valley Ranch at the Palms and the Red Rock how to triangulate what we believe our returns are going to be, given the location of this property.

Okay. Great. And it sounds like you're likely going to experience significant disruption at the Palms. Does that disruption accelerate from here before it levels out? In other words, are we looking at any EBITDA contribution over the next few quarters from the Palms? And was there much EBITDA contribution in this third quarter that you just reported? And that's it from me.

I'll take the second part and then I'll hand it off to Joe. I mean, from EBIDTA disruption, Joe, we've actually given you the numbers. You can fairly -- you can pretty easily triangulate on what the Palms contributed this quarter through the press release. But it was a de minimis amount of positive EBIDTA.

Also, from a disruption point of view, we've now reached the point where, from this point forward, it should get better. We've got the casino pretty much torn apart at this point. About 50% of the floor is disrupted. From this point forward, we are in the final stretch of turning it back on by Q2 '18. And that should put us in a terrific place to both add table games capacity and to yield the slot floor in a way that we've not had the opportunity to do it up to yet.

Our next question comes from the line of Carlo Santarelli from Deutsche Bank.

Guys, to follow up just a little bit on Joe's question, obviously, the $485 million for the redevelopment, I think, as Joe mentioned, maybe a bigger number. But clearly, you guys have better sightlines than most of us into how to make the return on that. That project, overall, looked like a low double digit moving to mid-teens. But I guess, I'll ask the question a little bit differently. When you look around at some of the different other opportunities that may be present for you just in terms of greenfield in some of the land that you own, are you comfortable that the $800 million-ish investment in the Palms return is better than maybe what you could do or what you could conceivably do down the road from a greenfield perspective with some of your Vegas land?

Look, I think we're very confident with what we're doing at both Palace Station and the Palms, given their location on the I-15 corridor in the middle of Las Vegas. With what's going on at the Las Vegas Convention Center, the new Raider Stadium, I mean, Las Vegas tourism is outperforming almost every domestic gaming market there is, same with the locals market. And these properties are going to be able to cater to both the tourist market and the locals market. And we feel good about the capital commitment we're making there. There's a lot of properties in Las Vegas that have not been reinvested in, and these 2 properties are basically going to be redone from head to toe going into 2019, with a great economy, growing population. And guess what, we still own and control the Durango site, the Wild, Wild West site. We have 4 entitled development sites here in the Las Vegas market, 2 in Reno, a native American opportunity in the pipeline in Fresno, California. So I think the company is well positioned that, going into 2019, we have these 2 fully renovated properties in the center of Las Vegas and still control our own destiny in terms of great development opportunities.

Great. That's certainly helpful. And then on the -- on a slightly different topic. Obviously, the top line story and clearly the Las Vegas macro story, very strong backdrops. You guys continue to drive top line growth. As you look out to '18 and '19, is there anything kind of on the cost side that gives you concern and/or pause? Obviously, labor and certainly competition in the market for labor is one thing I would kind of highlight. But is there anything that you guys are concerned about from that perspective in terms of cost inflation?

I mean, I think you hit the nail in the head. (inaudible) the largest cost of the business is obviously labor, and we're doing our best to manage that cost. But other than labor, I think it's -- our average cost is running about $2.5 million a day, with a 3% increase. We probably expect something very similar next year.

I was just going to say, we're super encouraged to see the same-store growth at our properties, given the disruption of Palace Station. And I think that's a combination of both what we're seeing in the population growth in Las Vegas, the demographics, the economic activity in the Valley. But I think it's also this new technology that we've deployed on these 20,000 slot machines. We're feeling really good about what we're seeing with that to date. And we're in the early stages of being able to roll out, I think, other phases of this that should give us further benefit.

Frank, let me piggyback on that just a little bit. Again, you're correct, we're in the very early stages of developing and deploying new technology, and there's a pipeline of it. The good news is, already we are very confident that some of our top line growth demonstrated in Q3 is coming from that pipeline right now, with far more to come.

Our next question comes from the line of Shaun Kelley of Bank of America.

Maybe just a touch on the last point about the core growth that you're seeing in Vegas. Could you just help us break that down a little further in terms of the initiatives? And if I'm reading it correctly, is this something that we could actually pull forward or extrapolate for the next couple of quarters here, meaning this is really the first quarter that we've seen some of the initiatives you've had underway actually starting to play out on the top line?

This is Joe Hasson, again. As I mentioned just a moment ago, we're very confident that Q3 demonstrated top line growth, in part, stemming from some of the technological initiatives that we've rolled out. And we see a full pipeline of that on a go-forward basis. It's also fair for me to say, much like I said a quarter ago, that we see good volume and velocity strength in our slot business across all work segments of our business. It's not isolated in one particular place. It permeates all segments of our business. And I think that speaks ultimately not only to our technological capabilities and our operating expertise, I think it also speaks to the strength of the locals Las Vegas market and the terrific destination called Las Vegas that's enjoying the benefit of the economy.

I think to add to that, Shaun, and maybe the idea of actually including the disruption of the Palace, we're still carrying a 4.2% same-store sales growth, which is huge.

And I'm very pleased on the operating side of the business to reiterate that we have some of the best maintained properties, certainly in the locals market. And for anyone seeking a destination opportunity with us, we know how to operate destination resorts. You look at Green Valley Ranch, you look to Red Rock and, in the very near future, we'll be very proud of what we do at the Palms parallelling what we've done in the past at those destination-style hybrid properties.

And maybe just to follow up or to dig a little deeper. Just to be clear, was there any like hold impact? I know last year, there were some sports book hold bouncing around in the latter part of the year. Is that benefit or neutral or anything that we should be aware of just to not get too excited about extrapolating these forward in our model?

No, we actually held normal. We were actually a couple -- yes, couple of basis points lower than last quarter, actually.

Okay. And last one for me. It will just be, as I was looking through the different partners that you announced for the Phase 2, a lot of these do center around nightlife and celebrity chef-type things that can probably draw up a lot of excitement. Just kind of curious, could you just explain to us at least strategically, was there any design here in terms of trying to pull people, knowing that the Palms location is a little off strip that you need to have some attraction to pull people here? How did you kind of pick the partners that you chose and the types of features that you're really spending the capital on? Because it seems like it was well thought out. But I'm just curious for your thoughts on some of that.

We took the better part. I guess, we closed on the Palms about a year ago, really trying to go through and thoughtfully put together a curated experience of different amenities that would attract a broad demographic of both locals and tourists to the property. And we believe that when we get done with this, if you look at the Palms when it opened in 2001, and for a very good run before the downturn in the economy around 2008, it was a place that was all about not only locals on the west-end of the building and movie theaters and parking and the buffet and the café, but it was really well known around the world as an entertainment destination for great live entertainment acts, for great restaurants, for nightlife, for pool and the day club. And we basically go back looking at what made the Palms successful when it originally opened, and we're making it better than it ever was. And I think people are going to be very surprised to see when they see -- it's going through a lot of pain right now, but about 4 quarters from now, a little over a year from now, the property is going to be completely redone as a brand-new facility. And I think it's going to be a must-see place when people come to Vegas, and that's what the idea was, give people a lot of reasons to come over to Palms.

Our next question comes from the line of Stephen Grambling of Goldman Sachs.

I guess, another follow-up on the Palms. You mentioned this ramp period for returns. Are there any expectations you can provide for that time line based on the types of changes you are planning? And at the end of that investment cycle, what would you characterize as kind of the maintenance CapEx levels?

We still anticipate maintenance CapEx for the entire company to be around $100 million. I don't think that has changed. Arguably, the ramp-up period is going to be very typical to an integrated resort. Ultimately, the bones are actually built here. So we're thinking probably a couple of years before we get fully ramped.

And I may have missed this, and I think you mentioned that you're touching virtually every aspect of the property. Is there going to be any change in the room count? Or any color you can provide on what's being done on a room basis?

As we added, we actually added 60 new rooms. So the new -- room count is roughly 776 rooms, excluding Palms place, which would give us the -- it would give us access to another 600.

Also for clarity, those new 60 rooms came from preexisting space. That was unfinished space as part of the original design and development of the Palms. So we're simply finishing that out to take advantage of the extra lodging.

(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the call back to Stephen Cootey for closing remarks.

Well, thank you, everyone, for joining us on the call, and we look forward to seeing you in about 90 days. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may now disconnect. Everyone, have a wonderful day.