RiverNorth Opportunities Fund, Inc.
Q3 2007 Earnings Call Transcript

Published: 2 Nov 2007

[Operator:]

Welcome to the third quarter 2007 Riviera HoldingCorporation earnings conference call. Today we have Mr. Bill Westerman,Chairman and CEO, Mr. Mark Lefever, Chief Financial Officer and President ofBlack Hawk, and Mr. Bob Vannucci, Chief Operating Officer of Riviera Las Vegas.Once the Company has made its comments, we will open the call up for questions. Information that Riviera Holdings Corporation represents onthis call may contain forward-looking statements as that term is defined inSection 27A of the Securities Act of 1933, and Section 21E of the SecuritiesExchange Act of 1934. Forward-looking statements include the words may, would,could, likely, estimate, intend, plan, continue, believe, expect, projection,or anticipate, and similar words, and they include all discussions aboutRiviera's ongoing and future plans, objectives, or expectations. Forward-looking statements involve significant risks anduncertainties, including hotel and casino market conditions, financingrequirements, interest rates, proposals for the acquisition of Riviera,increases in energy costs, general economic and political conditions,expansions and modernization objectives and timetables, regulatoryrequirements, planned capital expenditures, and other risks and uncertainties detailedfrom time to time in Riviera's filings with the Securities and ExchangeCommission. Riviera's actual results may differ materially from what isexpressed or implied in the forward-looking statements. Riviera does not planto update its forward-looking statements, even though Riviera's situations orplans may change in the future, unless applicable law requires it to do so. Mr. Westerman, please go ahead, sir.

[Bill Westerman:]

Thank you, operator, and thank you everyone for joining ustoday. After I discuss general overall view of Riviera Holdings Corporation,Mark will review the consolidated financials, Bob will discuss the Las Vegasoperations, Mark will comment on the Black Hawk operations, and I will comeback to make some closing remarks and entertain questions. Our Company once again has generated record adjusted EBITDAof $10.3 million for the quarter ended September 30th, 2007, and a recordedadjusted EBITDA of $36.1 million for the nine-month period. Additionally, weredeemed our 11% bonds on July 9th, and now have a debt structure that consistsof a $225 million 7-year term floating rate loan, which we have swapped for afixed rate of 7.5%. Plus we have a $20 million revolver, which is currently notutilized. The new credit facility is generating approximately $7.5 million inannual interest savings, and increased cash flow compared to our previous debtfinancing. Our swap agreement that fixed the company's rate on substantiallyall of the $225 million, generated a non-cash charge for the nine months endedSeptember 30, 2007 of $6.6 million. This coupled with the $12.9 million charge to redeem thecompany's previous debt has resulted in a net loss for our company for thequarter and the nine months. Please keep in mind that our current operatingresults continue to post increases, and they are the true measure of ourcompany's operation and continued financial stability. The $25 million capital expenditure plan, which wasannounced on our last call is in process. We expect 500 refurbished rooms to bein service by January of 2008. They will have flat paneled 32 inch Philips TVs,Euro beds, and new upgraded bedding ensembles. The renovation of our Black Hawk facility to meet therequirements of the smoking ban in Colorado has begun, with a targetedcompletion date of December 20th of this year. We believe that we will have themost customer friendly environment for smokers and non-smokers in that market. Two weeks ago our General Manager in Black Hawk resigned.Since then and until we find a new General Manager, Mark Lefever in his role asPresident of Black Hawk will provide the day-to-day leadership, in addition tohis current duties. We do not anticipate any disruptions to the tremendousmomentum that we are currently enjoying in Black Hawk. Now I will turn the call over to Mark Lefever to discuss thefinancial results.

[Mark Lefever:]

Thank you, Bill, and thank you everyone for joining ustoday. Net loss for the three months ended September 30, 2007, was $18.3million, compared to a net loss of $432,000 in 2006. The significant increasein the net loss for the quarter was a result of the write-off of $5 million ofnon-cash charges, which included the remaining deferred financing costs anddiscounts related on the 11% bonds, plus a cash charge of $7.9 million for thepremium for the extinguishment of that debt. The company also recorded a non-cash charge for $7.5million, to reflect the change in the interest rate environment on our swapagreement on the $225 million term loan. These items were offset by increasesin adjusted EBITDA of $847 million, and a $1.5 million decrease in net interestexpense for the quarter. With the term loan, we swapped substantially all of our termloan-floating rate, for a fixed rate, and now at 7.5% fixed. The loss on theeffect of the derivative is a non-cash charge, which reflects the amount ofmoney the company would have had to pay at September 30, 2007, if the companywas to break its swap agreement at that time. The continued effects of this derivative will be recordedover the life of our term loan, depending on interest rates, and will result insignificant swings in either non-cash income, or non-cash losses for thecompany in any given quarter. For three months ended September 30, 2007, the company's netrevenue was $52.4 million, or $2 million ahead of the net revenues for thethree months ended 2006. Company-wide we had increases in casino revenues of$673,000, an $816,000 increase in room revenue in Vegas, and a $477,000increase in entertainment revenues to Las Vegas. The increase in casino revenues resulted from a $1 millionincrease in Black Hawk, offset by a $332,000 decrease in Las Vegas. Theincrease in Black Hawk is related to the continued favorable impact of ourdirect marketing programs, and the effects of the continued increases in thatmarket. The increase in room revenues was a result of the increasein the average daily rate, offset slightly by a decrease in rooms occupied, aswe continue to maximize the yield on our rates with the decrease of rooms inour competitive set. The increase in entertainment revenue in Las Vegas was aresult of the effects of the show Ice, direct from Russia, which opened inApril of this year. The company's adjusted EBITDA for the third quarter 2007was $10.3 million, compared to $9.5 million in 2006, a 9% increase andprimarily a result of the increases in revenues described above, offsetpartially by an increase in G&A costs, which reflect increases in employeebenefits, consisting mainly of health insurance and performance-based bonusaccruals. The company uses adjusted EBITDA as a measure of operatingperformance, and included in our earnings release is the reconciliation betweennet income and adjusted EBITDA. In addition to interest, taxes, depreciation,and amortization, the company eliminates other costs, such as equity-basedcompensation, the effects of our swap agreement, the loss on the retirement ofthe bonds, and merger costs. Beginning in 2007, the company has included costs related toSarbanes-Oxley compliance in adjusted EBITDA. The 2006 period has been restatedfor this presentation. The net loss for the nine months ended September 30,2007 was $12.1 million, compared to net income of $1.3 million in 2006. The significant increase in the net loss for the nine monthswas a result of the costs related to the retirement of the company's bondsdescribed earlier, and a non-cash charge of $6.6 million for the accountingeffects on the company's swap, offset partially by an increase in adjustedEBITDA of $4.2 million, and a decrease of $1.8 million in net interest expense. For the nine months ended September 30, 2000, the Company'snet revenue was $158.1 million, or $3.6 million ahead of net revenues for thenine months ended September 30, 2006. Company-wide we had increases in casinorevenues of $2.7 million, a $3.2 million increase in room revenue in Vegas. These increases were offset by decreases in entertainmentand food and beverage in Las Vegas. The decrease in entertainment in Las Vegasof $1.2 million, relates to the closing of Splash on September 30, 2006, whenwe opened Ice in April of 2007. The decrease in food and beverage revenues of$817,000, relates primarily from the decrease in banquet revenues in Las Vegas,as a result of less groups with full meal banquet events in 2007. The company's adjusted EBITDA for the nine months endedSeptember 30, 2007, was $36.1 million, compared to $31.9 million in 2006, a 13%increase. The increase was the result of the increase in net revenues of $3.6million described above, and the decrease in overall costs of $795,000, whichwere a result of decreases in casino and entertainment expenses, offset byincreases in room and G&A costs, primarily a result of the increase inpayroll and benefit expenses. As of September 30th, the company had unrestricted cash of$33 million and the entire amount of our $20 million revolving line of creditavailable. Capital expenditures for the nine months ended September 30th were$6.5 million, with $4.7 million related to Las Vegas and $1.8 millionattributed to Black Hawk. We expect CapEx for 2007 to be $12.5 million, with $9million in Vegas and $3.5 million in Black Hawk. Of which $3.5 million of thatis considered renovation capital for the company. I will now turn the call over to Bob to discuss Vegas inmore detail.

[Bob Vannucci:]

Thank you, Mark. Our revenues in Las Vegas increased $1.1million or 1.2% for the third quarter, EBITDA line increased $419,000 or 7.3%,our EBITDA margin increased to 16.2% versus 15.5% in the same period last year. We continue to focus on our revenue centers that generate anincrease to our bottom line. A slight departmental profit of $5.7 million wasup $120,000 or 2.2%, as we continue to capitalize on the Westward Ho andFrontier list of customers, and new more efficient slot marketing programs. Cash room revenue of $12.6 million increased $926,000 or7.9% over prior year, driven by a cash ADR of $79.13 versus $74.28 in the prioryear. Our RevPAR was $74.28, up $3.76 or 5.3% over the prior year. Hotel occupancy was 93.9%, down slightly from prior years ofthe 94.9%. Convention cash room revenue of $5.4 million was equal to last year.Convention room nights represented 35.7% of total cash rooms sold and 44.3% oftotal cash room revenue. Entertainment revenues in the quarter increased $497,000, assales for the new Ice show increased. Departmental profits for entertainmentimproved by $123,000 or 17.9%. For the nine months ended September 30th, revenues were up,revenues of $116.6 million, increased $1.6 million or 1.4% compared to prioryear. EBITDA improved to $24.1 million, an increase of $1.6 million, or 7.2%. Our EBITDA margin improved 20.7% versus 19.6% in the sameperiod last year. For the nine months, slot revenues were $36.6 million, up$699,000 or 1.9%. Cash room revenue of $38.6 million, increased $2.7 million,or 7.7% over the prior year. Our cash ADR was $83.19, up $7.09 or 9.3% fromprior year. RevPAR was $78.24, up $5.10 or 7% over the same period lastyear. Hotel occupancy of 94.1% is up 0.2 of a point from prior year. Conventioncash room revenue was $17.7 million, up $366,000, an improvement of 2.1%, overthe prior year. Convention room nights for the nine months represented 36%of total cash rooms sold, and 47.3% of total cash room revenue. Entertainmentrevenues for the nine months were down $980,000. Departmental profits, however,remained flat with last year, primarily due to our revised show of agreementsand new Ice show, which opened in late April. We acquired the Frontier list of premium gaming customersand hired several marketing employees from the Frontier in late August. Andhave begun marketing to the Frontier players, as we did to the Westward Ho lastyear. Our strategy to focus on the middle market and increase ourpricing accordingly has worked well. Our performance continues to improve, inspite of the decline in walk-in business, attributable to the closures of theWestward Ho, Stardust, and Frontier. We are very excited about our room refurbishment program,which will upgrade our room product, and will likely provide an opportunity tocontinue to drive our ADR. Soon, we will see the benefit of the cross trafficcreated by all of the new development in our areas, as they open both towardsthe end of this year, next year and in 2010. Now I will turn over the call to Mark to discuss Black Hawkresults more in detail.

[Mark Lefever:]

Thank you, Bob. For the nine months ended September 30th,Black Hawk's net revenue was $14.4 million, an increase of $978,000 or 7%. Theincrease was primarily related to an increase in slot revenue, as a result ofour database marketing efforts, the continued increase in the Black Hawk marketand improvements we have made to our slot and video poker products. EBITDA for the third quarter was $5.4 million, an increaseof $570,000 or 12%. The increase was the result of effects of increases in netrevenues, offset slightly by an increase in casino and G&A expenses,relative to the increased volumes. The Black Hawk team continues to effectively market thisproperty to the Denver community and provide our shareholders with anexceptional return. For the quarter, the average total number of slot machinesin Black Hawk in Central City decreased 340 machines or about 3%. The combinedBlack Hawk and Central City coin in was down 1.1% for the quarter; howevergross slot revenues increased 4.3%. We define fair share, as total slot coin in, in Black Hawkdivided by the number of slot machines in that market compared to our slot coinin and the number of our slot machines. Our fair share for the quarter was132%. In addition, this property continues to generate anoutstanding return with an EBITDA margin for the quarter of 38%. For the ninemonths ended September 30th, Black Hawk's net revenue was $41.5 million, anincrease of $2 million or just over 5%. The increase was primarily related toincreases in slot revenues as a result of the factors described earlier. EBITDA for the nine months ended September 30th, 2007 was$15.1 million, an increase of $2.4 million, or 18%. The increase was the resultof the effects of the increases in net revenues and improved efficiencies inoperating expenses, primarily related to our floor now being virtually 100%(inaudible) and reduced marketing expenses relating to certain low marginrevenue streams. Year-over-year the average total number of slots for theBlack Hawk and the Central City market remain the same. Combined Black Hawk andCentral City coin in was again down for the nine months at 1.1% and therevenues had increased 4.3% for the region. Our Black Hawk property generated a fair share for the ninemonths ended September 30th of 136%, and EBITDA margin for the first ninemonths of 36.5%. As you are aware the smoking ban was amended by ColoradoLegislature and effective January 1, 2008, smoking will not be allowed in thecasinos. We have begun a renovation to comply with the smoking ban and webelieve, we have designed changes that will make the experience enjoyable aspossible for smokers and non-smokers alike. As Bill had mentioned earlier, our General Manager in BlackHawk has resigned and we wish him well in our future endeavors. I am handlingthe day-to-day operations of our property and thanks to a very dedicated BlackHawk team, the transition has been very smooth and somewhat enjoyable. I will now turn the call over to Bill for some finalcomments and questions.

[Bill Westerman:]

Our team continues to focus on the daily operations at bothproperties, as shown in our record EBITDA results. With our capital expenditureplan in process, we believe these improvements will enhance our guest's overallexperience, while generating stronger long-term financial results for ourcompany. Our investment adviser, Jefferies and Company is continuingit's strategic process to maximize shareholder value. The process is ongoingand as soon as we have something to report, we will. However on advice ofcounsel, we will not take any questions with respect to the process. Operator, we will now take any other questions.

[Operator:]

(Operator Instructions) Your first question is coming fromJane Pereira (ph) of Lehman Brothers.

[Jane Pereira:]

Good afternoon, everyone.

[Bill Westerman:]

Hi, Jane.

[Jane Pereira:]

Hi! I just had a couple questions. Can you be more specificwith respect to what you are doing for the smoking and what is actuallyallowed? Are you allowed to have indoor enclosures or do you have to dosomething that is actually outdoors?

[Bill Westerman:]

Mark just came back from there last night, so he can giveyou an update on exactly what we are doing.

[Mark Lefever:]

The Colorado Legislature, it has to be outdoors and wesubmitted our plans to the City of Black Hawk, which have been approved, andthe construction has started, but we are going to have three smoking areas thatwill be outside. One will be off the front right side of the property, andthe other two will be balconies and areas off of either side of the casinofloor that will be open. One will be to the Isle, and the other to the street.But they have to be outside.

[Jane Pereira:]

And then will you have heating out there for the wintertime?

[Mark Lefever:]

Yes, absolutely. And ice melt on the floor, and someseating, and that kind of thing.

[Jane Pereira:]

Okay. And then…

[Bill Westerman:]

It's about a $1 million project, just to accommodate this.

[Jane Pereira:]

Okay. And then my other question is, are there nativecasinos nearby? And I am wondering, if so, do they have to comply with thesmoking ordinance as well?

[Bill Westerman:]

There are no native casinos within a reasonable drivingdistance of Black Hawk, and I doubt that they would comply with anything thewhite man tells them to do.

[Jane Pereira:]

Okay. So I guess that’s good they are not nearby. The otherquestion I had is, due to the fires, the wildfires in California, have you seenany drop-off this far in leisure spend, and if you do, what other spigot wouldyou turn on that’s available to you?

[Mark Lefever:]

Well we rely very little on the California for most of ourbusiness. Most of our business comes from the Midwest and market, and throughour marketing programs. We have seen very little impact on the Californiabusiness coming to us. That may not be true with other operators, but ours hasbeen minimal.

[Jane Pereira:]

Okay, that's good. And I am just wondering if you can clearup some of the data that we are looking at out of LVCVA that’s indicating thatthe convention attendance this year is flat, but the economic impact isactually up 6%. Are the conventions, you are just trading up in terms of thequality of conventions, or can you explain that anomaly?

[Mark Lefever:]

I think part of it is the increase in room rateyear-over-year that conventions are paying. And I would say that the peoplecoming to the convention, the attendees are spending a little bit more in thesurrounding areas, with food and beverage, and that kind of expendituresbecause those prices have increased as well.

[Jane Pereira:]

Okay. Thank you. That’s very helpful, that is it from me.Thanks.

[Mark Lefever:]

Thanks.

[Operator:]

Thank you. Your next question is coming from Joseph Stark ofMerrill Lynch.

[Joseph Starke:]

Hey, guys. How are you?

[Bill Westerman:]

Great.

[Joseph Starke:]

Great, great. How you doing, Mark? Real quick question, Iknow we are not supposed to ask about the acquisition or anything like that,but I have got a quick question regarding the adjacent property. Have you guysput any thought into considering having talks about the Conrad/Waldorfproperty, just because it seems like that Strip frontage is very valuable andmost valuable probably to the Riviera?

[Bob Vannucci:]

That property recently changed hands.

[Joseph Starke:]

It did?

[Bob Vannucci:]

Yes. A local company here purchased it, and we are unsurereally what they are planning on doing with it at this point. They have told usthey have some plans of developing a shopping center there, and perhaps a hoteldownstream.

[Joseph Starke:]

Okay, thank you.

[Operator:]

Thank you. Your next question is coming from Derrick Stevensof Desert Rock Enterprise.

[Derrick Stevens:]

Hi, Bill, hi, Bob, hi, Mark, how you doing?

[Bob Vannucci:]

Great.

[Derrick Stevens:]

So, I wanted to ask you a question really as a follow-up towhat just came up. That property that was originally going to be the Waldorf,is it fair, or do you know if it is true that that 5.4 acre site just to thesouth of Riviera Las Vegas, that the actual selling price was $180 million, orabout $33 million an acre?

[Bob Vannucci:]

That is what we have heard, that it was in the mid-30s. Andit actually turns out to be about 6.5 acres, because they acquired thePeppermill portion of it also. The same buyer also acquired about 11 acres ofland behind it, which was the shopping center, and the apartments, and the onemotel back there. So he has got about a 17 or 18-acre parcel.

[Derrick Stevens:]

And is the number -- there is a number somewhere in the $30to $33 million an acre area overall?

[Bob Vannucci:]

It appears to be the number for the front end piece, the oldLa Concha. I’m not sure what he appeared for the other sites.

[Derrick Stevens:]

Okay. Thanks much.

[Operator:]

(Operator Instructions) Your next question is coming fromPaul Pilowsky, Individual Investor.

[Paul Plowski:]

Hi. On the 6.6 million swap charge, does that come due inany sale?

[Bill Westerman:]

Well, it would come due if the buyer needed to take the debtdown. If they had to refinance, then they would have to pay that. A year fromnow, they might be able to gain a profit, as this thing swings wildly. It is hard to tell what it would be at the time of salewould close. It would all depend on the interest rate gap between treasurybills and the LIBOR rates.

[Paul Plowski:]

As the interest rate LIBOR goes down, that’s a benefit, andas LIBOR goes up, the swap charge would increase?

[Bill Westerman:]

Actually, it’s backwards, and it’s tied, the swap was donewith Treasuries, so we’ve fixed for the seven years of the loan, we are fixedat a rate of 7.489%, I said 7.5. So no matter what happens with rates, that’swhat we will be paying, if rates LIBOR should go up and rates should go up to10% or 11%, we still pay 7.5. If Treasury bills, if LIBOR goes down, we stillpay 7.5. The swap is affected by the Treasury bill rate, as it ischanged from the time we entered into the LIBOR agreement. It’s present valued,it’s very complicated, it took me days to understand it. I think Mark, maybe ifI said anything, at the end of the day in seven years, it will be zero, nomatter what happens in the interim, assuming that there is no winding down ofthe debt.

[Mark Lefever:]

So the answer, Paul, is if there was, if the loan was, the swapwas to be broken, than whatever date that’s broken, whatever the affects of theTreasury rate and LIBOR rate on our fixed, would either be an income or anexpense to breaking the deal.

[Paul Plowski:]

So the Treasury rate goes down, is that a benefit to.

[Mark Lefever:]

That hurts us.

[Paul Plowski:]

That hurts you. All right.

[Mark Lefever:]

Okay?

[Paul Plowski:]

All right. Thank you.

[Mark Lefever:]

Thanks.

[Operator:]

Thank you. Your next question is coming from Louis Sarkes ofChesapeake Partners.

[Louis Sarkes:]

Hey, Bill. I know that you said that you weren't or couldn'tanswer any questions related to the specifics of the process to maximize value,but I was wondering if qualitatively you could help us out like you did lastquarter on the call, where my question is, do you feel that given the time andthe upset that we are seeing in the capital markets, obviously it’s somewhat ofa less than opportune time to be out there, but is that having a marked affecton the process?

[Bill Westerman:]

I think that if the situation in the credit and the capitalmarkets is having an effect on all the merger and acquisition activitythroughout the world, and I think obviously it is having an effect on ourprocess.

[Louis Sarkes:]

Okay. Thank you very much.

[Operator:]

Thank you. There appear to be no more questions at thistime. I will turn the floor over back to your host, Mr. Bill Westerman for anyclosing remarks.

[Bill Westerman:]

Well, thank you again. We look forward to speaking with youat our next quarterly earnings call. As always, you are welcome to visit theRiviera Las Vegas or Riviera Black Hawk. Especially those of you, who may becoming out to attend G2E this month, try to stop by and we would like to showyou around the property, and show you what we are doing with our rooms, andanything else you might be interested in. Thank you all again for your interestin Riviera!

[Operator:]

Thank you. This concludes the third quarter 2007 RivieraHoldings Corporation earnings conference call. You may now disconnect.