Red Rock Resorts, Inc.
Q2 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Good afternoon and welcome to Red Rock Resorts Second Quarter 2021 Conference Call. Please note this conference is being recorded. I would now like to turn the conference over to Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead.

[Stephen Cootey:]

Thank you, operator and good afternoon everyone. Thank you for joining us today for Red Rock Resorts second quarter 2021 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta as well as our executive management team.

[Operator:]

The first question comes from Joe Greff with JPMorgan. Please go ahead.

[Joe Greff:]

Good afternoon guys. Great results here. Given that the locals market is in this great scenario where demand is accelerating, capacity has gone the other way. Maybe, Frank, if you can give us an update on how you are thinking of some of these closed properties, the three properties that are closed. How you are thinking about potentially layering them on, reopening them? And then if you are thinking of opening one of the three, how challenging is it right now to find staff and just labor at your presently open properties as revenue keeps coming back?

[Frank Fertitta:]

Look, the labor market is more challenging than it had been pre-COVID, but we got well ahead of the market in terms of wanting to be the preferred employer in the Las Vegas locals market and get ahead of what we saw coming with resorts world. So, we also kept all of our employees on during the crisis. So, it’s put us in a better position than if we would have closed the properties and had to reopen them. So overall, we have done very good and we haven’t had any problems having all of the amenities open seven days a week. That’s been good. I think we continue to evaluate these closed properties. We have come to no conclusion at this point in time, if and or when which property we would open. Our primary focus right now has really been on Durango, which we think is a great development opportunity in the most underserved part of the Las Vegas Valley. So, that’s really where our primary focus has been. But we will continue to evaluate the three properties that are closed and if and when we think they can add to the absolute profitability of the company going forward.

[Joe Greff:]

And Frank, just adding on to your comment about Durango, I didn’t hear a project CapEx number there. So obviously, maybe you are not prepared to disclose it. What’s holding back on finalizing that estimate internally? Is it bringing in partners? Is it monetizing part of that 71-acre parcel to a partner? Is it monetizing other land bank or other parcels to net that cost down? I guess, what’s sort of the gating issue?

[Stephen Cootey:]

I mean, Joe, I think I will break that up into two pieces. The first, I think, is pretty straightforward going through the budgeting and planning process right now. So, we are going through detailed design drawings, completing those drawings and getting them out to our construction partners and are waiting to finalize bids. So, we should be…

[Frank Fertitta:]

We want to come to you guys with the right number. We want to get bids and GMPs and understand where we are. I think we will be there by hopefully the next earnings call.

[Stephen Cootey:]

Exactly. And I think the second piece, I think you touched on it, the 71-acre parcel of land there. We do believe there is an opportunity to parse off a portion of that land and look for development partners to help and help met that cost down.

[Joe Greff:]

Thanks, guys.

[Operator:]

The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.

[Carlo Santarelli:]

Hey guys. Good afternoon. Thank you. Obviously, Steve and Frank, when you guys look at kind of the free cash flow the business is throwing off right now and you kind of extrapolate out to the end of this year like something in times. At what point do you think you take a more firm view beyond kind of the pay for Durango and whatever that proves to be? And perhaps our capital return strategy? And how do you guys kind of think about what’s the buyback here in this world?

[Frank Fertitta:]

You broke up a little bit, but – you are breaking up a little bit, but I think your question was relative to start thinking about other ways to return capital to shareholders. Is that what it was?

[Carlo Santarelli:]

Yes. Sorry, I was just – I was noting that kind of at year-end leverage looks like it will be around 2x. And with the free cash flow you are throwing off, obviously, Durango will be able to be built, and you will probably have some optionality as well. So, just kind of how do you think about that?

[Frank Fertitta:]

Yes. So, I will let – I will say a few words, and I will let Steve and Lorenzo add in, if they want to. Going forward, I think we want to have a more conservative balance sheet. We want to have flexibility in the company to be able to take advantage of all of these high-return development opportunities that we have in the Las Vegas market, which we think is the best gaming market in the United States. And then we also want to have the ability to take a balanced approach to paying down debt, buying back stock and paying dividends. We want to have a balanced approach. I don’t know, Lorenzo, if you have anything to add.

[Lorenzo Fertitta:]

No, that’s it.

[Carlo Santarelli:]

Alright. Thank you, guys.

[Operator:]

The next question comes from Barry Jonas with Truist Securities. Please go ahead.

[Barry Jonas:]

Great. Thank you. Maybe to start, can I – can we get your thoughts on the new indoor mask mandate in Nevada? I would love to get your perspective on what kind of impact that could potentially have on your business?

[Lorenzo Fertitta:]

Obviously, it’s hard to predict the effect that it’s going to have. Any time that you see new headlines and people talking about COVID or COVID restrictions, it’s certainly not a positive…

[Frank Fertitta:]

Although the last 12 months, we did have a lot mandate.

[Lorenzo Fertitta:]

I would just say we navigated some much more difficult situations than we currently have in front of us here. And I will say that when the mask mandate came off, which I think was early June, we didn’t really see any change in our business. Meaning there was no significant upside when people didn’t have masks or didn’t have to wear masks. So, I can say that our employees, obviously, have all complied without any issues. And in Q1 and part of Q2, where customers were wearing masks, there didn’t seem to be an issue there either, but we will have to wait and see how that plays out.

[Stephen Cootey:]

Yes. And if there is an impact, it’s most likely short-term, right. And long-term, we still feel very strongly about the long-term favorable trends in Las Vegas as well as the strength of our platform.

[Lorenzo Fertitta:]

We are feeling the positive trends in the growth in the population. Particularly, we are seeing a lot of new faces and growth in our VIP and higher-end segments. We have seen growth in Q2 over Q1, even in our younger segmentation. So, general trajectory of those areas have been positive to us. And we are seeing the effects of the overall supply-demand dynamics that we have been talking about for decades now.

[Frank Fertitta:]

I think minus the mask and the new cycle of the Delta variant in all the business, it feels very good. And I think we have no crystal ball in terms of short-term revenue. But I can tell you from a long-term perspective, we think that we have the best locations and the best gaming market and control six great development sites in the market. So, we are pretty bullish on the long-term viability of the platform.

[Barry Jonas:]

That’s incredibly helpful. Maybe just tackling that in a more direct way, another outstanding quarter, EBITDA margins in Vegas record levels, just curious to get your thoughts on whether these levels are sustainable?

[Frank Fertitta:]

I think that we believe that the margins can be sustained within the ZIP codes that we are in. Quarter-to-quarter, you may have a little variation on a few hundred basis points one way or the other. We think the cost out of the business has made a permanent shift, and then it really is dependent on where the revenues come from. And every incremental dollar that we get through in existing property, the flow-through is extremely high. So, I don’t know if you guys have anything to add to that.

[Stephen Cootey:]

You still got, I mean, some margin-enhancing items coming down the pipe, right. We are still bearing about $3.2 million of COVID costs. We’ve got $3.6 million inclusive of the Palms, $1.4 million of closed company costs. We’re just starting – we’re still – the sales and catering business as well building up are still lagging as well as the theater businesses. So we expect those high-margin businesses to contribute positively. And I think as we touched on earlier, we’ve opened up all of our amenities June 4, with the exception of the buffet, which we don’t think will ever open again. So every dollar of incremental volume, as Frank said, will be – should have a positive impact given we’re already carrying the fixed cost of those amenities.

[Lorenzo Fertitta:]

Yes. That’s why we’re pretty confident on the margins going forward. We don’t see any other business lines that are not already online that would be coming online that would be taking away from margin, only areas that could potentially at least stay where they are now.

[Barry Jonas:]

Great. Apologies, just one quick follow-up, if 50% to 70% flow-through was historically what you guys guided, are we structurally like at the higher end or even beyond that now?

[Frank Fertitta:]

Yes.

[Lorenzo Fertitta:]

It depends where the revenue is coming from. Obviously, if it’s from slots, it’s going to be at a much higher rate. If it’s from food and beverage, it will be lower than that, so.

[Barry Jonas:]

Helpful. Thank you so much guys and congrats on a great quarter.

[Frank Fertitta:]

Thank you.

[Operator:]

The next question is from Shaun Kelley with Bank of America. Please go ahead.

[Shaun Kelley:]

Hey, good afternoon everyone. Maybe keeping along with the last comment, I just wanted to get a little bit more color on some of these amenities that were – I guess, when we started the second quarter not fully online, but definitely reopened once you were allowed to in June. Could you just give us any sense of either how quickly some of those are coming back, be it on the hotel side, the theater side, the convention side? Did those go from $0 to $100 million? Or do we have room for some of those to ramp sequentially as we move through the third and fourth quarters, even from what we saw in Q2 on a revenue basis?

[Stephen Cootey:]

I’m going to start with theaters. Theaters just really ramped up in May when you had – you’re just starting to get a film slate, which has really been the big item that’s held them back. The theaters are ramping, but they are ramping up slowly, Shaun. So we expect there is a lot of room to run in the theaters going forward. And sales and catering, same thing, while we’re building up a big book of business, building up that book takes some time. So we’re seeing on the social side most likely in the back half of this year. And then the group business is starting to come back in ‘22 and ‘23. In terms of the other amenities, the hotel business, as I mentioned in the remarks, the hotel has really snapped back very well. So I think we have – we’re getting our rate back. Rate back is pre-COVID levels giving us for this quarter. We’re slightly behind occupancy. So there is a lot of room to run in terms of filling the rooms. I think that goes hand-in-hand with the sales and group business because we really do need that midweek room to kind of boost that occupancy.

[Shaun Kelley:]

And maybe one other high level, and you’ve covered plenty of ground on the call. But I would say if we rewind the kind of history lesson here, there was a tie back last cycle, and there are probably parts of the good times where you get compression or spillover from the Strip. Do you see that on weekends at some of your core properties, let’s say, whether it’s Green Valley or Red Rock? Are you seeing that? Are you seeing on weekends? Can you just describe a little bit about that environment or that fact? And where do you expect it to go from here?

[Lorenzo Fertitta:]

I would say that – a couple of things. One – this is Lorenzo. We have taken – we have been less reliant upon what the Strip has done recently. Meaning we have kind of set our own tone and our own sales rate. And relative to rates that we’re publishing and that we’re able to get...

[Frank Fertitta:]

And casino segment...

[Lorenzo Fertitta:]

And yes, the casino segment has been higher than it ever was really historically and the OTA segment has been lower. So we’re kind of getting a nice double whammy that where we’re getting nice rate and we think getting a better customer in our rooms as well.

[Shaun Kelley:]

Thank you very much.

[Operator:]

The next question is from Chad Beynon with Macquarie. Please go ahead.

[Chad Beynon:]

Hi, good afternoon. Thanks for taking my question and congrats on the quarter. Given some record cap rates that we’ve seen, particularly in Southern Nevada, has anything changed in terms of your thoughts around owning all of your assets versus selling a ranch stream at near-record multiples?

[Lorenzo Fertitta:]

I don’t think anything has changed. I mean, certainly, we take notice of some of the cap rates and we like it. We think the fact that we own all of our real estate continues to be a very compelling investment opportunity for people who want to own our name. We’re one of the few companies left that provides that structure that’s completely intact. And I don’t know me and Frank as large shareholders kind of like owning the real estate over the long haul. So that’s where we think the value is.

[Stephen Cootey:]

It’s good. I think, Chad, I think it’s good to note that you’re right, we’re at near record cap rates. And it seems that since the birth of the gaming REIT several years ago, every quarter has been near record cap rate. So it’s benefited us from waiting because it seems like cap rate...

[Frank Fertitta:]

We like the fact that we own the real estate, and we also own the upside as Las Vegas market continues to grow on the upside. So we like to have them both.

[Chad Beynon:]

Great, thanks. And then just in terms of seasonality, normally, Q3 in the Valley, people start to head out of town for vacation. And I think seasonally, it comes down by about 3% or 4% on a sequential basis. I know you’re not giving guidance for the back half of the year, but do you expect normal seasonality to kind of set in? Or do you think this year could be a little bit more pronounced, given the lack of vacations people were taking and now they might be out of town more this year than in prior periods?

[Stephen Cootey:]

We think it’s going to be about the same. But it’s tough to tell. We don’t have – that’s one where we don’t have a crystal ball in terms of what our guests are going to be doing.

[Chad Beynon:]

Okay, thank you very much.

[Operator:]

The next question is from John DeCree with CBRE. Please go ahead.

[John DeCree:]

Good afternoon everyone. Thanks for taking my questions. Just two perhaps on the database and customer segmentation, over the past 3 or 6 months, have you seen a significant increase in new customer sign-ups? I guess how is your database growth trend being recently through the reopening compared to maybe historical pre-COVID?

[Stephen Cootey:]

From a new sign-up perspective, it’s been not only just extremely – we’ve done extremely well. We’ve focused on this from an operation standpoint. It’s up quarter-to-quarter as well as, let’s call it, now based on pre-COVID levels. Not just in terms of the number of new sign-ups, but how active they are with the card. So when they get a card, more and more of them are using it immediately. And then when they use it, they are much more valuable to the casino.

[John DeCree:]

That’s helpful. And Steve, I think in your prepared remarks, you mentioned that the older customer segment has started to come back more meaningful. Could you give us a sense of how close to normal that customer segment has returned perhaps exiting the quarter? And how much more room there could be ahead?

[Stephen Cootey:]

That’s – I mean, a good question. We’ve all made – we made headway not only just across the older demographic, but all age segments. I think from a customer standpoint, probably 55% to 65% of our customers have returned, but our most valued customers have returned. So there is still wood to chop on bringing our older customers back.

[John DeCree:]

Got it. Thanks for the additional color and congratulations on the quarter guys.

[Frank Fertitta:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Stephen Cootey for any closing remarks.

[Stephen Cootey:]

I’d like to thank you for taking the time to join our call, and we look forward to talking to you next quarter. Thank you very much.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.