Good afternoon, and welcome to Red Rock Resorts Second Quarter 2022 Conference Call. [Operator Instructions] 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 for Red Rock Resorts Second Quarter 2022 Earnings Conference Call. Joining me on the call today are Frank and Lorenzo Fertitta as well as our executive management team. 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 definitions and complete reconciliation for these figures to GAAP, please refer to the financial tables in our earnings press release, Form 8-K and investor deck, which were filed this afternoon prior to the call. Also, please note that this call is being recorded. The second quarter represented another strong quarter for the company by any measure. In terms of same-store net revenue, adjusted EBITDA and adjusted EBITDA margin in the second quarter of 2022 was our second best quarter in the history of our company, only surpassed by last year's record-setting second quarter. On a consolidated basis, excluding great management fees, our second quarter net revenue was $422.2 million, down 1.4% from $428.2 million in the prior year second quarter. Our adjusted EBITDA was $190.1 million, down 9.5% from $210.2 million in this prior year second quarter. Our adjusted EBITDA margin was 45% for the quarter, a decrease of 406 basis points from the prior year second quarter. We respect to our Las Vegas operations, excluding the impact from our closed properties, our second quarter net revenue was $419.9 million, effectively flat when compared to prior year's second quarter. Our adjusted EBITDA was $205 million, down 8.6% from $224.8 million in the prior year second quarter. Our adjusted EBITDA margin was 49.9%, a decrease of…

[Operator Instructions] The first question today comes from Joe Greff with JPMorgan.

We often have been focusing on sort of the lower end consumer to give us a sense of consumer sensitivity to however you want to describe the mixed signal macroeconomic environment. But maybe we can switch gears and maybe can you talk about sort of the higher end of your database and how that higher-end consumer trended throughout the 2Q, maybe in relation to 1Q, and then is there anything noticeable from your drive-in Southern California consumer, any impact there from, obviously, higher gas prices and higher costs overall?

Sure. Quarter-over-quarter, Joe, I mean, overall, across the entire portfolio, we showed consistent trends throughout the database compared to Q1. That includes the higher end as well as the local as well to a point on the local as well it represents a small portion of our overall business. We've actually seen stability and consistency quarter-over-quarter and actually a slight uptick in the lower end of our database.

Great. And then, obviously, you guys are looking for the future and acquiring sites. Can you talk about the timing of the planned divestiture of the 3 closed properties. Is that under any kind of preliminary agreement or any kind of letter of intent with a potential purchaser under a non-gaming entitlement structure? Or is that sort of the process is kind of beginning on that front?

Yes. We just announced this just literally within the month. So that process is just beginning. But that said, we're seeing an extraordinary amount of inbound calls and demand for those 3 properties.

The next question comes from Carlo Santarelli with Deutsche Bank.

Steve, Frank, Lorenzo, whoever kind of wants to address the 2 parcels that you guys bought, the 128 and the 67 acres. As you think about kind of the time frame and acknowledging it's kind of planning for the future, much like the sales. How do you guys kind of think about when you go into the ground? Does Durango need to open? Or could you kind of start some of that stuff earlier?

No. I think we want to get Durango open and see the operating results out of Durango. We're very optimistic given the location, the demographics, the gaming supply in that area. But we want to get to Durango open, and then we'll be ready to start on the next project after that. And we expect to basically double the size of the portfolio by 2030 is kind of what the plans are, and continue to roll out new properties one after the other.

And just to add to what Frank said, we're going to go forward with entitling and zoning all of these properties so that when we opened Durango, and we see how Durango absorbed in the market, that we have optionality to go through any one of the 7 sites.

It's consistent with the strategy we've had for a long time. We've actually owned the Durango property for over 20 years. So for instance, on the piece of property that we have tied up on [Indiscernible], we think long term -- longer term, that's going to be a tremendous location because of the growth in that way, master-planned communities, the population growth and in order to kind of get these things to where they're in the pipeline, you have to step up and be willing to put them in the portfolio, the real estate portfolio so that it ensures that the company has this growth pipeline for years to come. So our strategy is very consistent with what we've done in the past.

Great. And then if I could just kind of more near term, as you guys are acknowledging you talked about kind of stable in the 3Q trends. From a seasonality perspective, the 3Q have been unusual over the break period prior to the pandemic. But as you think about kind of normal seasonality in Las Vegas this year, is there anything that kind of would stand out to you as being notable?

The business seems very stable. We don't see anything at this point in time that would cause us to change our outlook on the business going forward.

The next question comes from Shaun Kelley with Bank of America.

One I wanted to also ask about the sort of the capital development piece. So I'm just intrigued as you think about the sites that you have and then, of course, the incremental purchase here maybe you're not ready to share it with us, but do you have a pecking order for kind of what you think about as next behind Durango? Or do you let sort of the demographics and some of the changes in the valley there kind of lead the way first before you make that decision?

It's all really dependent on demographics and where we see the demand versus the supply. So obviously, we're in the ground with Durango. We're expected to open that, call it, around 4Q of '23. We're currently working on plans right now on the Inspirada location as well as what we call the Skye Canyon location up in the Northwest. So that, as Frank mentioned, we get -- the plan would be that we get Durango up and operating, stabilized, generating the returns that we're looking for. And then we'd be in a position where we could -- the Board can make a decision if they wanted to pull the trigger on those projects. So just a matter of our team continually working on entitlements, making sure that we're completely up to date on what's going on in the real estate market in Las Vegas, where the growth is going and whether it's a short-term view or more importantly for me and Frank, what's the long-term view for where we see this company going and our ability to multiply the size of the company. The way that we're going to do it is the way that we built the company, which is through development of greenfield projects. And in order to be successful there, you have to have you got to control the real estate, and you got to have the pipeline growth we're just executing what we've always done. So...

And then I guess the follow-up to it. In order to achieve a goal as ambitious as doubling the size of the portfolio by 2030. Would that imply that the scope or scale of the next couple of developments could be on par with Durango or what you've done with Red Rock in the past? Are we talking that level of development? I would think it would need to be large in size in order to have a big impact on the portfolio like you mentioned.

It's going to be dependent on the market size. I mean, some of the projects will be considerably smaller. We've got a couple of projects in the pipeline that will be at least on par with where Durango is. So it's a little bit of mix of both.

It's all site dependent. It's all side, but all the projects are planned to be able to expand over time. So even though some of these projects may start out maybe smaller than Durango, they will be able to grow to Durango plus as the market demand is there.

Yes. And it's really hyper focused on returns, right? So designing these properties with the expectation that we can hit our historical return numbers of kind of that 20% unlevered return on invested capital. So that's really what's going to determine the kind of the getting cost and the size of the project relative to what we project the demand to be in those different submarkets.

The next question comes from Steve Wieczynski with Stifel.

So obviously, labor has been a big issue, not only for your company, the casino industry, but also the general entertainment industry as well. And I guess I'm wondering with the 3 assets now being closed permanently. Does this help your labor situation at all? Meaning, have you been able to bring a lot of those employees over to the other operating assets?

Yes. I mean, at the time when we closed the property back in June of 2020. So we closed the property just recently. There was a very small staff at all 3 properties, in which we were able to bring over all or at least the majority of the staff over.

Yes, Steve, this is Scott. I think one of the important factors is are we able to staff our properties appropriately to maximize revenue. So we can tell you that we're very successful in being fully staffed and fully operational across the brand, albeit we are seeing some wage inflation. We think that that's a relatively temporary phenomenon that will decrease over the next 8 months or so.

Understood. And then Steve or Scott, I guess, when we look at the 50, let's call it, 52-ish type margin last year in Vegas, and I understand that level wasn't probably sustainable long term. But if you look at the -- I think you called out a 450 basis point drop in margin this year. Is there anything that you would kind of highlight as putting more pressure on that margin?

No. I think we've always been pretty consistent. It's about the operating leverage and the gaming revenues and the revenues that flow through the system.

I think if you point out the new slide that you posted in the deck, I think it's on Page 40. It basically shows the margins since we opened in 3Q of '20. And I think there was a lot of doubt when we posted a 46.2% margin and a 45% margin, whether we could maintain those margins. And I'll say that other than the 2Q of '21 outlier with all the stimulus money in the system, our margins have basically been very tight right on 49% in the Las Vegas operations for the last 4 quarters. So I would say the only thing that has got a little bit of pressure is the wage inflation, of course. We've managed, I think, to maintain cost of sales in a pretty close range based on adjusting prices given what cost of goods are. But again, the last 4 quarters, we've been plus or minus 49%. So we're pretty pleased with that.

The next question comes from Barry Jonas with Truist.

Patrick Keough here for Barry Jonas. Two, if I may. One, the Street is assuming Las Vegas EBITDA will be down year-over-year in 2022 and 2023. Do you think that's an overly cautious view even if you exclude Durango?

So if you look at 2022, for instance, if you take the first half of '22, I think we're ahead by $12 million in EBITDA versus 2021. As Frank mentioned, we don't have any change in our outlook for the business based on what we've seen in Q1 and Q2 so far this year. So we've got pretty -- a little bit of cushion or some cushion rolling into the second half of the year that from a business volume standpoint, we feel pretty good. Looking out beyond 2023, it's just -- it's impossible to know kind of what the future holds. I can tell you that we're obviously very bullish on Durango. We think it's going to be a great project, and it's going to get great returns. And certainly, we'll add some stub period to '23, but more so, we'll get a full year of it in '24, which we would expect to be able to post pretty good growth in EBITDA with the addition of that. I guess, I'm clear.

I agree.

All right. That's great. And as a follow-up, are there any early trends or updates from cashless gaming that you saw in the quarter?

Yes. This is Scott, Patrick. Actually, we're encouraged. So one of our goals was to get this rolled out to all of our properties and to have a very complete application that goes across all of our point-of-sale processes. As we start to market into the product, we're seeing 2 things on a percentage basis, a pretty dynamic growth in the percentage of usage and then also a pretty nice uptick in the average spend per customer that participates in the program over their previous spend. I think it's early days in the adoption, but we're encouraged by the product and its rollout.

The next question comes from Dan Politzer with Wells Fargo.

So just in terms of how you're thinking about building out the portfolio, it sounds like you have some pretty aspirational plans ahead. How do you think through your leverage ratio and financing that? And would you look to maybe alternative sources of financing such as gaming REITs as a possible source of funding?

I think the intent is to -- we have a very strong balance sheet right now. We have a very low leverage at 3.5x leverage, very low cost of capital, no long-term maturities. The idea here is to fund these resorts out of free cash flow.

Got it. And then the -- I think you had $2.2 million of quarterly costs, give or take, for the 3 properties, which you're demolishing and selling the land for. What should we think about -- how should we think about the timing of when these costs might roll off and come back into the P&L?

Before the next earnings call.

[Operator Instructions] The next question comes from Chad Beynon with Macquarie.

With respect to the strong non-gaming trends that you posted in the quarter, particularly around food and beverage, in your prepared remarks, you talked about some of the things that you're doing within the 4 walls of your properties. But maybe just from a same-store customer basis, are you still seeing opportunities for your customers to spend more at your properties, either customers that have been holding back or just inflationary opportunities that you're able to push down to the consumer, and there's no pushback on that.

Well, first of all, I think that overall, we're seeing very dynamic growth in all the non-gaming sectors of the business. One of our strategies is continue to invest in the amenities of the property. So we have a pretty robust slate of new products coming online across all the properties. And so not only do we see people continuing to spend into these non-gaming experiences, we're going to meet them with new amenities across all of our properties, which we think will increase even more of that spend per visit and visitation in those areas.

I think if you look for opportunities for growth, I think, the one area that's still we think we have a lot of room to recover in banquets and catering while it's up versus last year. It still hasn't fully recovered, but the pipeline moving forward looks promising, and we're confident that, that will start to come back over the next 12 to 18 months.

And then is there any update on the North Fork opportunity or any other management opportunities in California or other markets?

Jeff, did you want to take that call?

May be not, go ahead.

Right now, we're still working through the management agreement process. So right now, there's no further update. But hopefully, soon, we'll have.

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

Thank you, everyone, for joining the call, and we look forward to talking to you in 90 days. Thank you.

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