Good afternoon and welcome to Red Rock Resorts First Quarter 2020 Conference Call. All participants will be in listen-only mode. 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.

Thank you, operator, and good afternoon everyone. Thank you for joining us today on Red Rock Resorts first quarter 2020 earnings conference call. We hope that all of you and your families are staying safe and healthy. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; Bob Finch, Executive Vice President and Chief Operating Officer; and Robert Tamian, Executive Vice President of Development and Strategy. Before we get started, I’d like to remind everyone that 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. During this call, we will also discuss non-GAAP financial measures. For the definitions and complete reconciliation of these figures to GAAP, please refer to our 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. The impact of COVID-19 has been swift and severe and our thoughts and well wishes go to all of those who have been directly or indirectly impacted by this profound crisis. We would also like to recognize and offer a heartfelt thank you to all of our medical professionals and first responders serving on the frontline of this battle. Most importantly, we would like to thank our team members for their commitments, patience and understanding, as we navigate together through this period of uncertainty. As you’d expect this call will be different from the ones we’ve had before. While, we’ll briefly discuss our first quarter results, most of our time today will be spent reviewing the decisive actions we have taken to prepare for a new operating environment, with a focus on the…

[Operator Instructions] Our first question comes from Joe Greff with JP Morgan. Please go ahead.

Good afternoon, everybody. Steve, thanks for providing us an EBITDA breakeven metric. I just wanted to take that one sort of operating sensitivity a step further. When we think of free cash flow breakeven or free cash flow usual levels as a percentage of prior year revenues, where would you peg that roughly?

So you have – when I started at EBITDA breakeven about 35%, you'd have basically 10% to that to cover interest costs.

Got it. And then when you think about the locals market right now you have sort of two counterbalancing things. You have a large number of retiree, who spend in visitation levels are independent of job security, but then you also have potential for high unemployment for strip employees that might frequent your local establishment. How do you think about the mixed and how sensitive are you to that maybe that ladder at risk category?

Well, look, our business model is, as you know, very different than the Las Vegas strip. The majority of our revenues do come from a local gaming market. Most of our customers live within three miles of our properties. You are correct, that a big portion of our slot revenue does come from retirees and baby boomers that are not necessarily reliant on employment. I think in the short to mid-term, the government has definitely been out there, bridging employees that don't have jobs right now, which in the short to mid-term we should be okay. Of course, in the long-term, the health of the Las Vegas strip is very important to the health of the overall Las Vegas economy. So we're hopeful that the government unemployment checks and all will be able to bridge to the other side of a good strong recovery on the Las Vegas strip.

Great, thank you for that Frank. And then Frank, well, I have you here, as you sit here now, what do you think the future of the Palms Casino is? I mean, do you reopen or do you keep close and try to monetize or sell later on? How are you presently thinking about that?

Sure. First, we can dispel the rumors that the Palms is for sale. That is a rumor, it's not correct. The way we're evaluating the foreclosed properties, is we felt that we took a very hard look at how much of our customer database we can cover in Phase 1, and be most efficient as possible to generate as much revenue as possible, right? So the tourist part of the recovery is going to lag, the recovery in the local gaming market, which we think we should be able to lead the recovery in the local gaming market, given the geographic distribution of our properties, the quality of our properties. And frankly, the quality of our team members who are so important to have relationships with the repeat customers in our business that typically come to our properties, three plus times a week. The Palms will be reopened based on what we see from initial demand with the six properties. And then what we're able to see in terms of tourists coming back to Las Vegas, how the strip is doing and everything else. But our plan is to reopen the Palms, but it's going to be dependent on what we see in the marketplace.

Thank you.

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

Hey, guys, thank you. And Steve, thanks so much for all the color that you provided in the opening remarks. If I could, just in terms of how you are thinking about the six assets that you will open, and in terms of how you guys would kind of position the headwinds, i.e. what keeps you up in that a little bit more? Is there tremendous concern or any concern at all about kind of the stipulation around social distancing in it? Or are you more thinking about this as what's going on in the local economy and even with some supply taken out of the market? What's the demand curve look like?

Look, I think there is definitely unknowns. We're not sure what this is exactly going to look like. On the other side, I think some of the new guidelines definitely will have friction in terms of the customer experience. We have gone out and done quite a bit of research with our customers, and I can tell you that about 80% of them were very positive about returning to visit our properties within two weeks of reopening. But we also learned that they're very concerned about safety and health. And that's why we have gone to the greatest links that we possibly could in terms of testing all of our team members, installing thermal cameras, and all of our entrances and trying to reduce the amount of friction to the most that we possibly could to make for a good guest experience. There is going to be social distancing and there is going to be capacity restraints in terms of how many people can have in a restaurant, casino floor. We're going to frankly have to work through that. And hopefully, as we get more testing and information, we'll see that the disease is under control, and slowly, but surely be able to return to a normal operating environment.

Great, thank you. That's a helpful. And then if I could just double back to the comments on the cash burn. I just want to make sure I understood fully what you were saying. The $49 million a month run rate with fully loaded labor costs that includes Wildfire and the six other casinos. That's a $49 million just expense run rate with those properties open, but then you went on to say that if, in fact, those properties remained closed, that would then drop to a $24 million. So implying that the labor aspects and the aspects of opening those properties, again adds $25 million revenue agnostic. Is that correct?

That's right. But in addition, I just want to make sure that it's clear that that just doesn't include just labor it’s also OpEx, interest costs and CapEx. That's correct. The $49 million to $24 million, effectively, that implies about $20 million of labor would fall away.

Understood. Okay, great. Thank you both very much.

The next question is from Barry Jonas with SunTrust. Please go ahead.

Hey, guys. Any sense what the promotional environment could be as the casinos are reopened? I just want to get a sense if you think it'll be elevated given potentially less demand or if folks will be more focused on costs and margins. Thanks.

Look, I think this is a very unique situation in a very unique environment. And, fortunately or unfortunately, we’ll all find ourselves in a similar situation all at the exact same time. And while we had been focused on eliminating redundant marketing expenses and being more efficient in our marketing spend, I mean, the crisis is definitely accelerated and made us much more focused on what a reopen business would look like. And the fact that we're going to have to be much more disciplined in what's important to our customers. And we believe the market is going to be rational because it's going to have to be that way for people who survive in this new environment. So I don't know if you have anything to add to that Steve?

No. I think that was perfect, Frank.

Great. And last quarter we talked a little bit about exploring land sales. Presumably, the world is a lot different now. But where is that -- those processes? Is that something you're still entertaining? Or is the market just turned and that's on a hold?

No. Look, I think we had gotten some fairly good traction on several of the pieces of land that we have. We have a significant amount of value in undeveloped real estate. And, we were making pretty good progress. But as you know, in this environment everybody's pretty much gone on pause, I think until people see what happens in the economy and where things settled out. So we're hopeful if things get going again and everything, we can restart that process.

Great. And then the last one for me, as we think about reopening strategies and likely reduce gaming supply for social distancing and reduced occupancy. Maybe just talk about what the impact ultimately to gaming could be, given the fact I'm guessing you're not at 100% occupancy on your gaming floor? Maybe just help frame what a reduced supply ultimately could translate to on the revenue line item.

Look, let's go through it a little bit. I think that in the slot department, we're going to be reduced to 50% of capacity. I think the reality of getting over 50% capacity is really a peak period short window situation. So I think for the most part on swap machines, you typically have people social distancing anyway. We have pretty good sized casino floors and slot operations. I think when you come to table games, which is more labor intensive and you cut the occupancy down to, say three positions per table, I think we're going to be a little bit more challenged on table games to actually be profitable there. We're going to do our best. And then I think when you look at restaurants and bars and things like that, again, it's going to be a bit more challenging. The restaurant business is a very thin margin business at the end of the day. And to be reduced to 50% capacity in restaurants and bars is not going to be helpful. But I think the good news is that our primary profit generator, which is slot machines, other than short periods of time on peak occupancy, we should be okay.

It's really helpful. Thank you so much, guys.

The next question is from Harry Curtis with Instinet. Please go ahead.

Hello, everyone. Just a couple of follow-up questions on the same issues. Can you go back to the mix, maybe it'd be helpful to get a sense of what percentage of your frequent player cards or card system you believe would be retirees and maybe less exposed to the risk of job loss?

Hey, Harry. Just for competitive reasons, we're not going to go parse the database on the call.

I mean, can you give us a sense of a broad brush – I’m not -- I guess where I'm going with this and this is -- I mean it might be encouraging. Or is there anything encouraging that would lead you to believe that the mix of your business is more retirees or ex-retirees that are less likely to be hunkering down more? I'm giving you an opportunity to…

I agree. No, I understand Harry. I think a large chunk of our database is boomers and retirees. And we feel those folks are fairly insulated from the downturn.

All right. You mentioned how well you guys were doing across the portfolio ex Palms in January and February. Can you give us some perspective on how the Palms was doing relative to not only your expectations but also in the last couple of quarters? And what trends were moving in the right directions, so that we can get a sense of if and when it does or when it does reopen? What the expectations ought to be?

Sure. I mean, when I break down the Palms, and again, we’ve disclosed the numbers in the past, and so from a revenue perspective, we had about $37 million in net revenue in the quarter, which we thought was pretty good. On the EBITDA front, actually EBITDA up right negative 47, but what you have to take into consideration when you adjust for negative hold, we actually showed a positive EBITDA of $1.8 million for those first two months. So we were trending in a very positive manner.

Got it. And my last question is, can you speak to amenities that really weren't all that profitable that could be slow to come back, and at the end of the day it actually could lead to a higher margin on a lower comparable level of gaming revenue?

Sure. I mean, for one, we will be opening none of our buffets. Buffets did generate traffic, but they were definitely lost leaders. Those will not be operating in Phase 1 as well as some other specialty restaurants. So we're going to narrow it down to basically the restaurants that were the most popular and had the most throughput, but we're going to leave some of the other ones unopened in Phase 1. We're not going to open poker rooms in Phase 1, we just didn't think it made sense with only three players per table or so that that would be a profitable venture. So that'll be on hold. And then movie theaters which actually are good for our business, those are going to probably lag, what would be a Phase 1 opening only because I don't think there's a lot of product out there right now, Harry. So we're going to have to wait for the distribution of the movie houses to have good product out there that people wanting to see.

Got it. All right, that's helpful and good luck. Thank you everyone.

The next question is from Jared Shojaian with Wolfe Research. Please go ahead.

Hi. Good afternoon, everyone. Thanks for taking my question. So you touched on Graton a little bit, but can you just talk more about how we should be thinking about the November expiration date? The opportunity to extend that, how you're thinking about that?

Well, I mentioned on the remarks, right, we know it's going to be extended due to closure, but at this time we don't know the length of that extension.

Okay. Thank you. And then you talked about the 35% to 45% of ex Palms revenue to get to breakeven. You've taken out a lot of costs, some of which will come back as demand returns. Do you have a sense for how much of prior peak revenue you need to get back to the prior EBITDA level, because presumably, some of these costs are true permanent reductions? Is that a fair way to think about it?

Yes, that's right. As I mentioned on the call, I'd say about $150 million we would view is something pretty permanent.

Okay, thank you. And I guess just one last one for me. Has your thinking on the sale leaseback model changed at all, whether you have a more favorable less favorable view of it after this crisis? How are you thinking about that?

Well, I think -- I mean, arguably, it’s just another way to raise capital. I think the fortunate thing unlike 2008, all capital markets are open to the company, whether it's the debt markets or equity markets. I think the positive here throughout this crisis and what we've learned is we own all our real estate, so we as a company have maximum flexibility in what to do with it.

Okay. Thank you.

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

Hi, afternoon. Thanks for taking my question. Against the competitive Las Vegas locals market during the last downturn, can you talk about how your, I guess, Phase 1 portfolio performed against that group? Just looking for if you gained some market share. And then secondarily on that, and I think I know the answer, but was it more of just kind of a spend per visitor situation where you actually were getting the visits? Your customer just was coming with a smaller wallet. Thanks.

You're going back to 2008. In 2008, I think your second point is absolutely correct in terms of -- I'll have to go back and take this offline in terms of how those companies actually -- those individual six properties performed during the crisis and get back to you Chad.

Okay. On the Red Rocks refurb, could you give us -- I don't know if I missed this an update in terms of where that is from a spend standpoint and just a finishing standpoint.

Well, it's complete. It’s just waiting now for a guest to occupy them. We have probably about $8 million retainage left to spend but the work has been done.

Okay, great. Thank you very much.

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

Good afternoon, everybody. Just two quick ones. Steve, you mentioned on the Graton extension. But could you just, let us know, is it really just a -- what's the mechanic? Is it a just a kind of a extension based on the amount of time that the property is closed kind of thing? Is that the basic idea that you just don't know how long it's going to remain closed? Or how does mechanic work? If you can share.

Yes. I'm going to have Jeff Welch, our general council answer that question for you.

Hi, Shaun. The management agreement provides that the period of the closure will effectively measure what the business was doing when it closed, and does it get back to substantially all of the business that it was doing prior to closure. So it's actually not a defined period that can be measured by date of closing to date of reopening to determine the extension.

Great. So if I'm understanding it correctly, then that actually means that it's almost like a business interruption style kind of make hole for the amount that you would have been making in that period that was lost, if I understand that correctly.

I'm not sure I would characterize it as working exactly that way. I think, you should think about the closure effectively being ending at the time when the Graton resort gets back to the level that it was offering before it closed.

Basically when it gets back to a substantially able to operate the facility the way it was operated before.

Okay, understood. Thank you for the extra detail on that. And then a second question, and it's fairly high-level. I think you've tackled this in a few different ways. But just broadly, could you speak maybe about during your experience during the last downturn what does tend to happen out there on the strip? And we've seen, I think, some major operators already removing things like parking fees and whatnot. Do you expect to see some enhanced competition from the strip for some of the marginal local dollars and just maybe a sense of how that played out, how successful some of those initiatives were or were not during 2008, 2009? You probably saw some very similar behaviors back then as well.

I mean, look, we've been doing this for over 40 years, and it's no secret that from time to time, whatever the strip decides to try to go after a local business. And it's not to say that locals never go down to the strip, they do, once in a while. But the reality is local gaming is based on, number one, convenience, number two, the quality of the product. Our product is specifically designed to cater local customers ingress egress convenient parking, the way the slot floors are laid out, the value of the slot floor, value proposition. And most importantly, these are repeat customers. They want people to know them, recognize them, know what they want. And that's why our team members are really our most valuable thing that we have there. They're the most valuable asset that we have. And that's why we have gone to extra lengths to keep our team members on that have the relationships with all these customers. I can tell you, I know when I go places and I'm sure you guys know as well. You go to where you recognize and people take care of you, and they know you, and it's convenient. And it's the same thing here. So I mean, we're in the suburbs, our primary customers live within three miles of where we are. So I would not anticipate any material change.

Thank you everyone.

The next question is from Stephen Grambling with Goldman Sachs. Please go ahead.

Thank you. Two quick follow-ups. First, I realized perhaps early to fully think through this, but how do the recent events alter your thinking about the right capitalization of the business in a more normalized environment? You generally anticipate holding more or less cash and/or carrying rough levels of leverage?

Look, I think it’s apparent to everyone that unforeseen events, mean that you need to have flexibility and you need to have runway. And less leverage is better and more flexibility is better.

Fair enough. And then second, what are you watching to get comfortable with to open the Palms relative to the other assets? Is there a specific milestone related to visitation on the strip or more the read from those other properties and your ability to get your other properties and your ability to get higher value players?

It's going to be number one dependent on what we see at the six properties, what we see in terms of profitability at the six properties. And we will be looking at whether we think we can be profitable on any additional properties that we reopen. I think that's going to be the metric.

Fair enough. Thanks so much.

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

Good afternoon, everyone. Thanks for taking my questions. Steve, I think you've answered this one in a couple different ways, but to ask it a little bit more directly perhaps. When you think about getting revenue back to 35% and breaking even on EBITDA, how are you thinking about to flow through beyond that 35%? Is there kind of a range? It probably depends on mix and what amenities are open. But is there a broad range that you're thinking about for flow through?

I mean, I think in the past we've given 50% to 70%. We expect a little bit higher. But you've answered your own question. Really, I mean, a lot of it's going to depend on how the business opens once we're open up we’ll see where the revenue is.

We’ll see where the revenue is.

Yes. Fair enough. That's helpful. And lastly, you've talked about the $20 million receivable from the CARES Act and it may be a little soon and probably still waiting for some guidance. But have you been able to quantify any additional benefits that you might get from CARES Act in the future?

Yes. I think the CARES Act has been very helpful for us. We expect to get if all goes well another additional $15 million through the payroll retention. There's also the ability to defer about $10 million, what I would call from FICA, from a FICA [indiscernible]. And then we also have a QIP came back. As you know, that was a -- we were a big beneficiary of that for the Palms. There was a technical correction in the bill. And the CARES Act that allowed us to get another $28 million related to the acceleration of depreciation. And then there's also adjustable taxable income deductible moved from 30% to 50%. So those main four benefits are the big ones right now.

Great. Thanks, Steven. Good luck on the reopening everyone.

Thanks.

Thank you.

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

Thank you everyone for joining us. And please be healthy and safe, and look forward to hearing from you -- talking to you again in 90 days. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.