Red Rock Resorts, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Las Vegas operations had best third quarter in history with near record adjusted EBITDA margin. Durango continues to grow Las Vegas locals market, increased visitation and net theoretical wind, signed up new customers, and on track to be high margin property.
• Planning to expand Durango later this year, adding over 25,000 square feet of additional casino space, new high limit slot and bar area, 230 slot machines, and additional covered parking garage. Budget is approximately $116 million and expected to take 12 months to complete.
• Capital spend in third quarter was $80.4 million. For full year 2024, not including Durango project closeout, capital spend expected to be between $185 million and $195 million. Successfully opened Yard House restaurant at Sunset Station, planning to add China Mama at Palace Station, and make investments in Sunset Station and Green Valley Ranch properties in 2025.
• North Fork project situated on 305 acre site North of Fresno, California, with 100,000 square feet of casino space, over 2,400 slot machines, etc. Site work and construction started, total construction time anticipated between 18 to 20 months, opening in 2026, cost expected to be approximately $785 million.

Segment Performance

• Las Vegas Operations: Third quarter net revenues were $464.7 million, up 13.9% from prior year's third quarter. Adjusted EBITDA was $202.6 million, up 5.8% from prior year's third quarter. Adjusted EBITDA margin was 43.6%, a decrease of 333 basis points from prior year's third quarter. On consolidated basis, third quarter net revenue was $468 million, up 13.7% from prior year's third quarter. Adjusted EBITDA was $182.7 million, up 4.3% from prior year's third quarter. Adjusted EBITDA margin was 39% for the quarter, a decrease of 353 basis points from prior year's third quarter.
• Durango Casino Resort: Had three full quarters, visitation and net theoretical wind in surrounding Durango area increased by approximately 91% and 92% respectively, signed up over 70,000 new customers to database. Expected to become one of highest margin properties and generate a return of approximately 15% net of cannibalization through its first year of operation.
• Non-gaming Segments: Hotel division had highest third quarter revenue and profit in history, driven by higher ADR and maintained occupancy. Food and beverage division also had highest ever third quarter revenue and near record profit, driven by higher average check and cover counts.

Guidance

• 2024 full year capital spend not including Durango project closeout expected to be between $185 million and $195 million.
• Durango expansion has current budget of approximately $116 million and expected to take around 12 months to complete.
• 2025 Green Valley Ranch room refresh expected to start in June 2025 and continue through November 2025, cost approximately $150 million. Sunset Station renovation total cost expected to be approximately $53 million with work already commenced. Durango expansion includes adding covered parking garage and casino space with budget and timeline as mentioned.

Risks

• Disruption to south side of Durango property during construction period.
• Tough comparables in group sales and catering business for remainder of year.
• Impact of sports events, such as unlucky sports in October affecting business.
• Potential impact of election year on business activity.
• Promotional environment competition in locals market potentially affecting business.

Q: Looking back at the performance in the 3Q, is there anything that you would call out as sort of one-time or kind of a unique trend change outside of the normal seasonality, whether that's extreme heat or renovation disruption? And maybe a sort of directional. Or mathematical way of answering it is if you look at the performance of Durango less Red Rock cannibalization, how did the rest of the portfolio perform?

A: Hopefully, it's just quick, Joe. Let me start with the first bit of questions. There's no real unusual items throughout the quarter other than just that return of that typical third quarter seasonality. For example, if you look at past years in 2019, Q2 to Q3 was down almost 19%. So, when you kind of look at Durango, what we talked about here is we expect to deliver about net 15% return on our investment in the first year investment. So, it's actually higher than we promised. We actually promised 10%. So, when you do the quick math, if you have an $800 million cost, that's implying a $120 million in net of cannibalization. When you apply some impact of cannibalization, what you end up getting is that the core portfolio was down low single digits in terms of revenue.

Q: margins 43.3% or 43%, what sort of expenses sort of drove that increase? And then, how do you think about flow through, or margins going forward? Particularly as you know, we think about 2025 as maybe being more of a reinvestment in existing assets kind of year. And maybe you can talk about '25 in terms of renovation impact disruption that you might anticipate?

A: In terms of just the margin, I'll just frame it very simply. I think about 150 basis points of that margin contribute to cannibalization. So, revenue moving to our existing properties over to Durango. And then you couple that with lower revenues as part of the Q3 seasonality. And then, we did -- we are bearing the brunt of minimum wage which costs us about $1.2 million for the quarter. Yeah, I think what you're -- I mean, from a group perspective, the entire company.

Q: The entire company, sorry?

A: Okay. I think the one we just talked about with graph is probably one of the bigger one-time issues. If you kind of add all that together, you're going to experience about $23 million worth of disruption. As we start the room and model at Green Valley contain the podium remodel at Sunset and then we attach the garage to and the high limit room at Durango. That's really -- those are really the big one-time items.

Q: Good evening, everyone. Thanks for taking my question. Can we just dive into the Super Bowl comps a little bit? It came up a couple of times. It was -- the Super Bowl volume levels in terms of hospitality strong. And perhaps the sports betting was not? What's the hard part and what's the easy part within the Super Bowl piece?

A: Well, this is Lorenzo, I think if you look at obviously, hotel food and beverage, things like that, not having the Super Bowl. It is going to be a tough comp versus last year. I would say of all the events that the city has had, citywide events, whether it be F1, you name it. I think Super Bowl was just a huge benefit to the overall city. And obviously, we benefited from that as well. Actually, I think we were -- we lost money on the game. Hopefully, it will not be a headwind or repeated, but from a comp.

Q: Hey, guys. You added a new slide in the deck on Cactus at the front of the new development pipeline section. Just curious where this stands in terms of what you'll be focused on next. Thanks.

A: I think that as we look at all of our Greenfield projects, then the good thing about a lot of them is the population growth is getting to a maturity point where they're up for consideration. So, when we look at Cactus, it has different positive attributes than say Inspirato or Kyle Canyon site. The specifics around Cactus are that it is a hybrid location. It sits on the Las Vegas strip as well as it is surrounded by a very lucrative local market as well. So, it makes it a unique development opportunity, because you can take advantage of the hybrid aspect of the property or the location. It would probably be something of larger scale than say an Inspirato. So, we weigh the pros and cons of that capital contribution as well.

Q: Hey, guys. You covered a lot of ground. Maybe one on the promotional environment, largely speaking across the locals market. I guess, a couple of your peers have talked about it. Maybe stabilizing or a baiting, and I guess, some of the single asset operators in the neighborhood have been a little bit more aggressive. So, curious what you're seeing, if you think it's died down at all and -- or stabilized, and if it's had any impact one way or another on your business?

A: Yeah. It remains unchanged in our view. And what we think is a stable rational environment that is very manageable.

Q: Hey. Good afternoon, everyone. And thanks for taking my question. First, you've talked a bit about taverns in the past. I mean, can you just give us an update on how you think about that element of your strategy in terms of CapEx, or units that you expect to open over the next few years?

A: Yeah. Dan, it is Scott. Happy to say that a few weeks back, we opened our first tavern in the north part of town. So, early performance is outpacing our expectations. So, we're happy about that. We have two more coming online in the general area in North Las Vegas, which happens to be a very under penetrated area for us. We have a product coming online in January and then the third tavern coming online in June. And then, we have a total of seven opportunities and the remaining three will be scattered over the next year and a half. I think, in large part, we're attributing the early successes of the first tavern and because of the interlinkage of the boarding pass program, and the fact that we're relatively under penetrated out in that market.