Good afternoon, and welcome to the Red Rock Resorts Third Quarter 2022 Conference Call. All participants will be in a listen-only mode. Please note, this event 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 at Red Rock Resorts' Third Quarter 2022 Earnings Conference Call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreeger and our executive management team. I'd like to remind everyone that our call 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 of 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 third quarter represented another strong quarter for the company by any measure. In terms of same-store net revenue, we had our best third quarter in the history of our company. And in terms of adjusted EBITDA and adjusted EBITDA margin this quarter was our second best third quarter ever, only surpassed by last year's strong quarter. On a consolidated basis, excluding great management fees, our third quarter net revenues was $414 million, effectively flat when compared to the prior year's third quarter. Our adjusted EBITDA was $182 million, down 1.3% from $184.3 million in the prior year's third quarter. Our adjusted EBITDA margin was 43.9% for the quarter, a decrease of six basis points from the prior year's third quarter. With respect to our Las Vegas operations, excluding the impact from our closed properties, our third quarter net revenue was $411.6 million, up 1% from $407.4 million in the prior year's third quarter. Our adjusted EBITDA was $199.9 million, down 2.1% from $204.2 million in the prior year's third quarter. Our adjusted…

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. The first question today comes from Joe Greff with JP Morgan.

I’d like to ask a question about margins performance in the 3Q here. They were better than what we and consensus had all expected sequentially flat and down unlike a competitor quarter-over-quarter. Can you talk about what you're seeing on expense creep on cost inflation overall, maybe what you're doing differently now versus before on the expense side that might be incremental in mitigating some of that? And then as a Part 2, related to this topic, Steve, in the fourth quarter, would you expect to experience sequential revenue and margin performance similar to history, where revenues were up sequentially and margins were up a couple of hundred basis points sequentially fourth quarter versus 3Q?

Yes. I don't think we want to have a crystal ball and to or want to project into Q4. But you're right. Historically, Q3 has been the company's weakest quarter, and typically, Q4 is one of our two best quarters, between Q4 and Q1. So, I mean, we don't see anything that would suggest that, that will be any different than it's been historically other than last Q3, where we had a bunch of stimulus money in the economy that may have made things a little bit harder to read.

Yes, Joe, this is Scott Kreger. Maybe I can add a little bit more color. First of all, the management team continues to be operationally disciplined and we focus on margin every single day. And I think the results of the consecutive quarters of performance kind of show that. But when we talk about the influences of margin and inflationary pressures, there's probably three areas that we can touch on; labor, cost of sales and reinvestment. So, from a labor perspective, our wage rates are competitive with best-in-class competitors in the valley. And we are seeing some wage inflation. But that wage inflation is offset by active management of workforce labor. And so net-net, we've been able to mitigate any of that labor or wage inflation, and we seem to see that plateauing over the last couple of months. Secondarily, we are seeing some cost of sales inflation in predominantly the food and beverage areas. So, we are seeing cost per cover going up in the teens. But at the same time, through dynamic pricing and menu engineering, we've been able to offset that with a 25% increase in revenue per cover. And as that brings its way down through the department, our total food and beverage revenues are up 8%, and we had record profitability in that business segment. And then lastly, from a reinvestment and promotionary basis, we continue to see rationality and stability in the promotionary market, and we're enjoying being able to reinvest in our products, our team members and to bring new amenities to our guests. So, all in all, in all of these measures, we've been able to control these pressures and still produce margins that are top of the class.

And Steve, corporate expense was a little bit higher. Is this a good run rate for you guys to be in for the near term.

Yes. I think it is, Joe. As you know, last quarter, we articulated our growth strategy for the future. And so, what we did this year is we did a slight reallocation, a recalibration of corporate expenses because we wanted to really allow the investors to see and from our management team to manage the true property allocation versus the allocation of corporate that's designated to growth in other enterprise-wide initiatives. So yes, what you're seeing right now is a good corporate run rate.

The next question comes from Carlo Santarelli with Deutsche Bank.

Steve, to the extent you guys could talk about it a little bit, but as far as the development right now is going, obviously, you guys are nicely out of the ground and moving through kind of the harder construction. When you look out to kind of that fall 23 opening and between here and now, what are some of the areas where perhaps there's a little bit more uncertainty around the construction schedule and timeline. And that remaining kind of cost bridge to get there, what does that look like just in terms of the schedule of cash flows?

Yes, the scheduled cash flows, the way we're looking at it right now, to date, we spent about $124 million as of 9/30 out the door. So, it's a $750 million project. You figure there's probably about $75 million of retainage that will extend into 2024 and the remainder will be spread out, probably most likely in the first half of 2023. So again, the majority of the construction, we're well on the way of construction. As I mentioned, we topped out in October. We?re expected to be fully enclosed by February. We're going to have the plant, the building, powered up by March. So, in terms of hiccups in the schedule, we're on schedule, and we're working hard -- it's a day-to-day fight to keep this on schedule and on budget. But from a cash flow perspective, Q1, Q2 most likely are going to be the biggest outflows of capital from a construction standpoint.

Great, thank you, Steve. And then if I could, just a follow-up. You guys obviously talked about two of the drivers that are -- or one of the drivers, I should say, that's a little bit less kind of obvious as to how it impacts the business is that of inflation. And to the extent you guys have seen cycles before, and it's probably a long time since we've seen inflation like this. But when you think about what you're seeing in the housing market today and how sticky the customer remains relative to kind of the inflationary environment and the impact that could have, which of the two would you say from your lens is a little bit more concerning for the outlook at this point?

Well, I think we've been living through inflation for the last several quarters. And the performance has been fairly consistent even given those headwinds with inflation. So, we don't see anything at this point in time that would have us change our outlook that we've had on the company.

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

Maybe just wanted to go back to the broader call out on wage inflation. I think that's the key topic that we're all keeping an eye on. I believe the comment was that things are actually -- you're actually starting to see things plateau a little bit. Maybe if you could just give a little bit broader background on what's kind of going on in the Las Vegas Valley right now on the hospitality side, that would be helpful.

Yes. So just to follow on with that. We do see pockets specific job classifications where we have to adjust rates on a time-to-time basis. But overall, we are very competitive. We think we offer a best-in-class package of benefits and wage to our employees. And I think the important thing to note is we're able to staff all of our business verticals at 100%. So, we don't see any impact to our ability to operate. And at the same time, we don't have a crystal ball, but we're hoping that we've seen the most of the wage increase at this point.

And then as a follow-up, just thinking out to the development side a little bit. You talked about the site purchase that you made, and obviously, there's a few different, I think, portfolio moves that are happening here. Could you -- I mean, I know you?ve probably got a very long-term plan behind that. But can you just talk a little bit about the acreage purchased and kind of how you're thinking about it?

Yes. I think from a purchasing standpoint, there are two predominant purchases that I can highlight. The first of which is located on Losee and the 215 in North Las Vegas. So that is one of the fastest-growing areas of the Las Vegas Valley. There's a UNLV campus going in over there and a large medical campus. And it fits our thesis of being right on the Beltway and in a high development area. So, we look at that as probably farther down the development cycle than some of our others. But we're really excited to be able to close on that property in the next month. And then secondarily, we purchased a large piece of property on the south side of Cactus, which sits between the I-15 and Las Vegas Boulevard. We already owned a parcel on the other side of the street. But when this parcel became available, we looked at the key tenets of success for our development, which is ingress and egress and the ability to have optionality of master planning based on the acreage. So, we're super excited to be able to move across the street and acquire that piece of land. When we look at the demographic profile of that area, it's very similar in structure to the Durango project. So, while it has a bit more competition than the Durango project does, it's still a really exciting piece of land, and we have closed on that.

And then we have 180-plus acres of real estate that we're currently actively marketing.

The next question comes from Stephen Grambling with Morgan Stanley.

Following up on Carlos' comments on the macro, realizing you're not seeing anything concerning yet. If you did see any kind of decline in demand, what levers do you have, given the labor cuts made already, and how might your approach to buyback and perhaps tolerance for leverage change?

I wouldn't classify as labor cuts. I mean I think we've just done a good job as Scott explained, this is Lorenzo, on just being efficient and making sure that we're scheduling labor according to demand. Beyond that, I think as you see that we're generating very high margins relative to historical numbers, if you did start to see a degradation in revenue, obviously, we would have the ability to manage labor and various other levers that we could look to maintain margin at higher than historical levels. So, we're hoping that, that doesn't happen. And like we said, I mean, what we're seeing right now is fairly consistent with what we've seen in the last couple of quarters. So -- but we manage this literally on a daily basis.

Steve, it goes without saying this is the same operating team that managed through the 79-day shutdown with 0 revenue. So, these guys -- they're very comfortable managed both on the downturn and also the ability to capture the upside. And from a leverage perspective, we have a $1 billion revolver, we have ample liquidity. We're prepared to weather a storm if one was to come.

Makes sense. And maybe an unrelated follow-up. Can you just remind us maybe how the management agreement for North Fork is either structured or how to frame the potential contribution from that asset once up and running compared to some of the other management contracts you've had in the past?

Well, I think it's still being developed and worked on. So, I imagine it's going to be consistent with --

It will be a seven-year contract but we're still in -- basically meeting with the National Indian Gaming Commission going through the management agreement and what the final outcome of that will be.

From a projection standpoint, we think of it more of a Gun Lake than a Graton.

The next question comes from Jordan Bender with JMP Securities.

Great. In the current operating environment, can you comment on your share repurchase outlook in the face of pretty elevated CapEx over the next four quarters?

Sure. I mean, guys, I think it all starts with the balance sheet. Again, as I mentioned, this is Stephen, we're very comfortable with our liquidity position. We have a very solid balance sheet, very low cost of capital, no short-term maturities, very flexible credit agreement. So, I think the position the Board and management team is taking is still a balanced approach, and we feel that we can accomplish both our long-term growth objectives, which Durango is the one staring us right in the face as well as opportunistically and systematically return capital to shareholders.

Great. And then just my follow-up -- Yes.

Go ahead. I'm sorry.

Yes. Sorry, just on my follow-up. You mentioned last call that you wanted to get Durango up and running before you started your next new build project. Is there a scenario where the supply demand becomes attractive enough for you guys to start building on one of your parcels before Durango is finished next year?

No. We want to be very disciplined in what we do. And we are working on programming. We're working on entitlements in order to be in a position to be ready to go on future projects. But until we get Durango up, operating and hitting stride, we're going to be patient and make sure Durango is working before we move forward with the next project.

The next question comes from Steve Wieczynski with Stifel.

So, I want to ask about the older demographic and maybe what you guys saw there during the quarter in terms of visitation and spend patterns from that demographic? And if there were any material changes to what you've witnessed over the, let's say, the last six months or so. And then maybe how you're thinking about that demographic moving forward given the higher rate environment?

Yes, Steve, basically, in a nutshell, when you talk about 55 plus, there's two factors. One, we look at that segment of our business as stable at this point. And we've also kind of looked at that part of our business over the past quarters as having essentially fully returned. And so, when we look into the future, we see a lot of dynamic growth in the 55 and 65 plus ranks in the Valley; both from an incoming resident growth where they're about 4.5x the growth profile in the next five years as the under 55s. And in our own database, we're seeing about twice the spend per visit. And we're also anticipating over the next five years about a 16% increase in their household income. So we continue to have that as our core customer base, and we continue to market to them. And we're seeing stability in regard to their visitation and spend.

Okay. And then second question, I'm not sure, Steve, if you'll comment or not comment on this, but can you give us an indication as to how October has trended so far relative to September? And I guess I'm just trying to gauge if there have been any material deviations? I would suspect that answer is probably going to be no.

Yes, I think we said what we wanted to say in our prepared remarks.

We don't see anything that's changed our outlook for the business.

The next question comes from Barry Jonas with Truist Securities.

Can you give more color on how the sales process is progressing in the current environment for the closed properties as well as the other land that you're marketing?

Yes. So, we are what I would classify as active. So as Frank mentioned, we have about 186 acres that are currently being marketed. And all of those properties have interested buyers that we're in discussion with at this time.

Got it. Any update on the closed properties still seeing healthy interest there?

Those are part of --

Yes, those are part of the $186 million.

Oh, I got you. Okay. And then just as a follow-up question. I don't think you've talked too much about your downtown Fremont project. But curious if you could talk about the strategy there and if we could see more smaller projects coming down the road.

Scott, maybe you can talk a little bit about -- we do have a small property.

Yes. Yes. We have our core six large properties, and they have a unique age demo to them. And then as we look at diversifying different products across the brand as you go from large properties to kind of smaller regional market and then even down into the micro markets, you start to see a different customer profile in age and behavior. And so, the Wildfire brand for us, which we've had for a while, is something that we're focusing on and growing both existing assets in the form of capital improvements and then the Wildfire Fremont property, which will be the newest flagship of that brand category. So, we opened at the end of the year here or --

Right before Super Bowl.

Sorry, right before Super Bowl. And we're excited to continue to invest into this brand because it's got a bit of a younger demo. While it still has really good crossover with our core properties, it allows us to penetrate into smaller submarkets in the Valley.

The next question comes from Chad Beynon with Macquarie.

With the convention business and tourism coming back on the strip at a pretty high clip. Are you seeing anything in your spillover properties, I guess, namely, Palace Station that's benefiting? I know you talked about F&B and hotel growth continuing in the quarter, but wondering if you're starting to see a positive benefit from any compression nights on the strip.

Yes. We're seeing very favorable growth in hotels, both on the ADR side and the RevPAR side, we're up in the mid-teens in both of those categories. And then as we continue to see reoccurring quarter-over-quarter growth in catering, we are looking at probably somewhere in the order of a 40% increase in that segment of the business. And then as we look forward into our forward bookings, we're about to surpass the pace that we were at, at pre-quote levels as far as sales and group business.

And then on sports betting, the September numbers came out in Nevada today, very strong from a handle, from a hold standpoint. We've been seeing strong hold mainly because of single game parlay on the mobile side, but this was probably a little higher than what we expected in Nevada. Are there things you're able to do to kind of help that hold rate or maybe even offer some of the single game parlays that people like around the country, offered in more of a retail fashion.

Well, I think it starts with the fact that we book our own business, and we have a really skilled group of guys that do our book-making we have a lot of confidence in what they do. We're always trying to provide as many different ways to wager on sports. And if we feel that there is a need in the market for a new vehicle, we would work on that. And a lot of that has to do with it being able to be programmed into our mobile application, which we are seeing a lot of conversion on.

The next question comes from Cassandra Lee with Jefferies.

You mentioned in prior calls, potential to double your portfolio by 2030. And I want to get your thoughts on some of the factors that may delay or accelerate that time line. For example, what kind of performance do you have to see from Durango to feel comfortable moving to the next phase?

Look, I mean, generally, that's kind of what the plan is. Obviously, we've got some great pieces of property that, as Frank has mentioned, we're working on entitlements. We're working on the master plans. And the idea is to get Durango up and running and get it stabilized, generating an acceptable return or a target return that we have been able to achieve historically on our portfolio. Then from there, it's going to be dependent upon how strong the overall macroeconomic market is and what those different micro markets look like. So, I mean, right now, we're very bullish on our ability to develop those properties. And I guess, for lack of a better word --

The long-term secular trends.

The ability to roll it out. You may have some ebbs and flows here and there, but I think we feel very strongly that the long-term secular trends of the Las Vegas Valley are going to continue, which is projected to have a very strong growth, not population, but the mix of population is growing here or moving here tends to be at higher income levels and particularly in the areas where we actually own these undeveloped pieces of property, many of which are in the highest growing areas with the highest income areas of the Las Vegas Valley. So yes, the intention is to continue to develop and roll these properties out. And as Frank said, though, we're going to take an approach that allows us to get each development up and running and stabilize before we start the next one.

Great. And if I may follow up, there's been some expansion plan announced recently in the Southern Las Vegas area. How may that impact your planned investment there?

I don't think it affects our planned investment or timing. I think it's actually probably a good sign. I think you're referring to the [M] Resort who announced a hotel expansion and I think maybe they may be expanding food and beverage outlet and some convention banquet space. To us, that's a great positive, which it means that they're very bullish on their business and the trends that they're seeing are very positive in their ability to drive rate and occupancy out and that part of town, I think, bodes very well for the positioning that we have out in Inspirada and on the Cactus [II] piece of property. So, we think that's a positive.

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

Well, thank you, everyone, for joining the call, and we look forward to talking to you next quarter. Thank you.

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