Red Rock Resorts Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 10 speakers on the call.

Operator

Good afternoon, and welcome to Red Rock Resorts First Quarter 2024 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Steven Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts' Q1 2024 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kriegon, 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.

Speaker 1

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 ks and investor deck, which were filed this afternoon prior to the call. Also, please note this call is being recorded. Let's start off by stating that the Q1 represented another strong quarter for the company by any measure. In terms of net revenue and adjusted EBITDA, our Las Vegas operations had its best first quarter in our history.

Speaker 1

And in terms of adjusted EBITDA margin, our Las Vegas operations experienced near record adjusted EBITDA margin. In addition to showing strong financial results in the quarter, we continue to be pleased with the customer feedback and the financial performance for our Durango Casino Resort. While we are still in early days, the team at Durango continues to execute and improve the property's operational performance, while at the same time driving incremental play from our existing customers and attracting new customers to our brand. In past earnings calls, we have stated that we believe Durango will be one of our highest margin properties over the medium to long term and will generate a return consistent with or in excess of our prior greenfield developments. With one full quarter under our belt, we are confident that Durango is well on its way to achieving both its margin target and its return goal even faster than originally planned.

Speaker 1

That said, and as stated in past earnings calls, we expect to experience and we have experienced cannibalization primarily at our Red Rock property due to the Durango opening. This has been largely in line with our expectations. Consistent with our past performance history, we expect to backfill this given the strong long term demographic growth profile of the Las Vegas Valley and the proximity of our properties to those high growth areas within the Valley. With regard to the rest of the portfolio, we continue to execute on our core strategy of reinvesting in our existing properties to deliver fresh and relevant amenities to our guests, all while remaining focused on best in class customer service. Despite this disruption, we experienced a Palace Station from the roadwork that significantly impacted the ingress and egress of the property and the significant disruption we experienced at Sunset Station from a major renovation upgrade in the race and sports book and casino, the team delivered another strong quarter across all business lines, with this quarter marking the 15th consecutive quarter that the Las Vegas operations delivered adjusted EBITDA margins in excess of 45%.

Speaker 1

Now let's take a look at our Q1. With respect to our Las Vegas operations, our Q1 net revenue was $485,600,000 up 12.9% from the prior year's Q1. Our adjusted EBITDA was $229,800,000 up 7.3 percent from the prior year's Q1. Our adjusted EBITDA margin was 47.3%, a decrease of 2 47 basis points from the prior year's Q1. On a consolidated basis, our Q1 net revenue was $488,900,000 up 12.7% from the prior year's Q1.

Speaker 1

Our adjusted EBITDA was $209,100,000 up 7.7% from the prior year's Q1. Our adjusted EBITDA margin was 42.8 percent for the quarter, a decrease of 200 basis points from the prior year's Q1. In the quarter, we converted 64% of our adjusted EBITDA to operating free cash flow, generating 100 and $28,600,000 or $1.22 per share. This significant level of free cash flow was either reinvested in our long term growth strategy, including our Durango project, reinvested in our existing properties or return to our stakeholders via debt pay down and dividends. As we begin 2024, we remain operationally disciplined and focused on our core local gas as well as continue to grow our regional and national segments.

Speaker 1

When comparing our results to last year's Q1, we continue to see upside from the strong visitation in play in our local, regional and national segments. This strength, coupled with strong spend per visit across the majority of our carded play, allowed us to enjoy near record 1st quarter revenue and profitability across our gaming segments, despite both the Super Bowl and the NCAA tournament not being so kind to us in the quarter. Turning to the non gaming segments, both hotel and food and beverage continue to grow year over year and deliver record revenue and profitability in the Q1. Our hotel division experienced its highest quarterly revenue and profit in our history, driven by our team success on continuing to drive higher occupancy and ADR across our hotel portfolio. Not to be outdone, our food and beverage division also experienced its highest ever quarterly revenue and profit, driven by higher average check and cover counts across our Food and Beverage outlets as well as continued growth in our catering business within the quarter.

Speaker 1

With regard to our group sales business, we continue to grow this segment within the quarter driven by growth in both room nights and ADR as we continue to work to grow our pipeline in 2024 and beyond. While both our group sales and catering revenues grew in the Q1, as we mentioned on a prior call, we expect tougher comparables in both these business lines for the remainder of 2024, driven mainly by COVID sales that were postponed and booked into 2023. As we look ahead, we are seeing stability in the locals market and across our entire database and remain confident in our business prospects moving forward, though we will continue to face disruption in our Palace Station and Sunset Station properties for the majority of the Q2. On the expense and labor side, we remain operationally disciplined and continue to look for ways to become more efficient, while continuing to provide best in class customer service to our guests and remain the employer of choice in Las Vegas Valley. Within the quarter, the company continued to manage our expenses, generate record financial performance, near record margins, reinvest in our properties and return capital to our shareholders.

Speaker 1

Our results demonstrate the resilience of our business model, the sustainability of our operating margins and the ability of our management team to execute on our long term growth strategy while taking a balanced approach to returning capital to our shareholders. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the Q1 was $129,700,000 and the total principal amount of debt outstanding was $3,500,000,000 resulting in net debt of $3,400,000,000 At the end of the Q1, the company's net debt to EBITDA ratio was 4.4x. As we stated on previous earnings calls, our leverage has peaked and is now beginning to ramp down as we look to delever to our long term net leverage target of 3x. During the quarter, the company completed 2 refinancing transactions.

Speaker 1

The first transaction involved a $500,000,000 offering of senior notes due in 2,032 at an interest rate of 6.5 8 percent per annum. The proceeds of this offering were used to pay down a portion of our revolving credit facility as well as our Term Loan A credit facility. The second transaction involved an amendment to our senior secured credit facilities pursuant to which various lenders will provide a revolving credit facility of $1,100,000,000 maturing in 2029, bearing interest at 1.5 percent over SOFR and a term loan B credit facility at 1,570,000,000 maturing in 2,031 bearing interest at 2.25 percent over SOFR. The aggregate proceeds of this amendment were used to refinance our revolving credit facility and term loans outstanding under our existing credit agreement. These refinancings increased our financial flexibility by strengthening our balance sheet, extending our debt maturities and modestly decreasing our interest expense.

Speaker 1

In May, our Board authorized an extension to our existing share repurchase program to December 31, 2025. The program has $313,000,000 remaining available for future purchases. As a reminder, since we began purchasing shares either through our share repurchase program or the 2021 tender, we have purchased approximately 14,200,000 Class A shares at an average price of $45.29 per share, reducing our share count to approximately 105,600,000 shares. Capital spend in the Q1 was $98,100,000 which includes approximately $77,300,000 in investment capital, inclusive of Durango project retainage as well as $20,800,000 in maintenance capital. For the full year 2024, not including the spend to close out our Durango project, we still expect capital spend to be between $140,000,000 180 dollars spread between maintenance and investment capital.

Speaker 1

During the quarter, we remain committed to strategically investing and offering new amenities to our guests at our existing locations in order to drive incremental visitation and spend to our properties. During the quarter, we successfully opened a new high limit slot room and Blue Ribbon Sushi Bar and Grill at our Green Valley Ranch property and opened a Federal Donut Chicken restaurant as well as remodeled the Sand Bar Grill, which is our pool bar and outside eatery at our Red Rock property. We are pleased with the guest response and the early results from these new amenities. We expect to continue to invest in our existing property throughout 2024, including adding additional restaurant offerings at our Green Valley Ranch and Palace Station properties, as well as an upgraded race and sports book and a partial casino remodel, plus a new Yard House restaurant at our Sunset Station property. Like our other recently introduced amenities, we expect these to be solid investments over the medium to long term, and I look forward to moving beyond the challenges created by construction disruption at these properties as we introduce these new amenities to our customers later this year.

Speaker 1

Turning now to North Fork. As we mentioned on our February call, our management agreement with the tribe was approved by the Chairman of the National Indian Gaming Commission in early January, with clearing the last hurdles to the development of this project, which we located on the tribe's 305 Acre parcel of trust land. The site is located north of Fresno, California and offers convenient ingress and egress and excellent visibility from Highway 99. Design is near complete. We have retained a general contract and we expect to break ground on the project in the Q3 this year.

Speaker 1

We are very excited to moving forward with this project and we'll continue to provide updates on our quarterly earnings calls. Lastly, the company's Board of Directors has declared a cash dividend of $0.25 per Class A common share, payable on June 28 to Class A shareholders of record as of June 14. The company is off to a strong start in 2024 and with the opening of Durango, we continue to validate our long term growth strategy and demonstrate the power of our own development pipeline and real estate bank, which now consists of over 4 41 acres of developable land position in highly favorable areas across the Las Vegas Valley. This pipeline coupled with our current best in class assets and locations gives us an unparalleled that will allow us to double the size of our portfolio and capitalize on the very favorable long term demographic trends and the high barriers to entry that characterize the Las Vegas locals market. We'd like to recognize and extend our thanks to all of our team members for their hard work.

Speaker 1

Our success starts with them and they continue to be the primary reason why our guests return time and after time. We'd also like to thank them for recently voting us atop a casino employer in the Las Vegas Valley for the 4th consecutive year. I'd also like to make a special shout out to our Sunset Station team members for placing their trust in us. Finally, we thank our guests for their loyal support each of the last 6 decades. Operator, this concludes our prepared remarks today, and we are now ready to take questions.

Operator

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

Speaker 2

Good afternoon, guys. Steve, I heard you on your comment about stability in the entire database, which is great. We thought maybe you have a proactive prepared comments about that in light of other comments from your peers and competitors. I was hoping maybe you can cut it a little bit differently and maybe if there's a way to sort of it for Red Rock cannibalization, but if you look at your higher end properties versus that are more middle or lower price point properties. Has that disparity widened within your portfolio?

Speaker 2

I mean, it's another way of, I guess, of asking the low end versus the high end customer within the database, but maybe cut differently by property?

Speaker 1

Well, generally, we kind of look at the customers as a Red Rock brand as they hop around from place to place, Joe. So let's start from there. But generally, what we're seeing is we like what we're seeing across the database from all players. So we're seeing stability. From a Durango perspective, we've seen growth in the Durango zone, both from a NetTheo perspective as well as visitation, which is consistent with our strategy from a new sign ups perspective.

Speaker 1

We've had our highest growth in new sign ups since the Q4 of 2021, including over 37,000 people signing up at Durango. So we're bringing new customers into the brand.

Speaker 3

If you want. Yes, Joe, this is Scott. Maybe I can provide a little more detail. And as Steve said, we like to look at it from a brand level versus a property level. But when we kind of look at each segment in the database, we're encouraged by what we're seeing across all of those segments, inclusive of all of the demos.

Speaker 3

So not only are we up in wind visits and spend per visit across our segments, but we're also seeing positive growth in all demos. We saw our active database grow in the mid teens percentage. And as Steve said, we saw a strong increase in new member sign ups and Durango ended up being about 25% of that growth in the quarter.

Speaker 1

And again, Joe, just to kind of articulate, we're seeing that across all properties as well as all demos to add to what Scott said.

Speaker 3

And we're seeing continued strong growth in our out of town business as well. But this is Lorenzo.

Speaker 4

I will point out that on the low end of the business, it's actually up for the last 2 quarters in a row.

Speaker 2

Yes. And what do you think is driving that, Lorenza? That sort of maybe counter to either what maybe others are experiencing

Speaker 5

I think a lot of it has to do with the location of our property. So,

Speaker 3

I think a lot of it has to do with the location of our properties. I mean, if you guys go and look at where all the growth in Las Vegas is occurring and Summerlin West and in the Southwest part of the Valley where Durango is, I mean, they're growing at 2 to 3 times what the growth rate of the city is. So we have a little bit of a wind at our back with new customers coming online literally every month.

Speaker 2

Great. And then just a follow-up to some of the sports book hold issues, but you said Super Bowl and NCAA weren't kind to you. And you also referenced in general terms, Palace Station construction disruption as well as at Sunset Station. Are you able to quantify maybe in the aggregate what the EBITDA impact from those three items were in the quarter as we look at those as sort of one time and not recurring in the future? Yes.

Speaker 1

I mean sports for those particular events, it probably costs about $4,400,000 for the quarter. In terms of disruption, as I mentioned in our script, that we expect some disruption to extend into Q2. So it's not a one time event, but probably cost us, let's call it, about $4,000,000 all in.

Speaker 5

Thank you.

Operator

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

Speaker 6

Hey, guys. Thank you. I wanted to just more or less follow-up on Joseph's questions. And I guess a different way of maybe asking is, if you took the subset of properties ex Red Rock, what's happening there and Durango and ex the 2 disruptive properties Sunset and Palace Station. What is kind of the rest of the portfolio look like from a year over year perspective, whether if you could talk about that from a revenue EBITDA perspective, however you would approach it?

Speaker 3

Yes, Carlo, this is Scott. I think probably the best way to categorize our feeling of our performance and where we're headed is that we see stability across all of our properties with slight bit of upside. So we're seeing absent the disruption that Steve spoke about, strong performance. We're pretty confident with where we're at right now.

Speaker 6

Okay, great. And then just one quick follow-up. Corporate expense tend to be a little bit higher in the Q1. Is kind of that $18,000,000 to $20,000,000 a quarter rest of the year a decent place?

Speaker 1

Yes. I think I would add more to the higher side. We're looking to consolidate our warehousing. So one of the ups in this quarter was the warehouse coming online.

Speaker 2

Got it. All right. Thank you. Thank you both.

Operator

The next question comes from Steve Wieczynski with Stifel. Please go ahead.

Speaker 7

Hey, guys. Good afternoon. So Steve, you obviously talked a lot here about how you're still seeing the Las Vegas Valley and still seems pretty healthy in terms of consumer spending trends and Durango is clearly off to a very solid start. We've also heard from your competitors about the there has been a slight change in the promotional environment across the valley. It seems like there might be some competitors out there that are trying to more disrupt the market.

Speaker 7

And just wondering what you guys would say on that front?

Speaker 3

Yes, this is Scott. I think I'd take it in 2 categories. 1, the dynamic growth in the Valley that you can see not only in our investor deck, but even as recently as today, an article in the review journal about the growth of the Valley and the inbound new residents, bolstering our performance and our look forward. I think when we talk about competition from our view, we're not seeing anything in the market that would change our strategy or we're not seeing anything in the market that we haven't seen over the last couple of years. We've said before that there are some one off single operator properties within the local market that are competitively promotionary and have been, but we're not seeing anything out of the norm there.

Speaker 7

Okay. Thanks for that, Scott. And then Steve, you mentioned that Durango is up to already up to on pace to exceed your internal return projection. So this is somewhat of a hypothetical question. But as you guys start to think about additional projects down the road based on what you've seen so far at Durango, do you start to increase your return projections based on some of the maybe the learnings coming out of Durango?

Speaker 7

Or is Durango such a one off type asset that its return profile might be totally different than anything else you do across the valley? And I hope that question makes sense.

Speaker 1

Yes. I'm not sure we believe Durango is a one off. We love the area. And Scott mentioned, I think Lorenzo talked about the enterprise district is growing about 3 times faster than the rest of the valley. That actually includes some of our other development continues to grow at a 2.3% clip.

Speaker 1

We're getting 38% of our residents from California. In addition to population growth, you're actually seeing net income or discretionary income growing about 8% and expected to continue that way through 2029. So we view all of our opportunities as special. We have 6 of them. I think the team right now is going through entitling and getting these properties ready.

Speaker 1

And right now, we're just enjoying the growth of Durango. The team is doing a fantastic job, really ratcheting down and making the property more efficient. And at the end of the day, we're looking forward to that property being one of our highest margin properties in the system and then getting returns either at or in excess of what we've experienced in the past. And as I alluded to on the call, I think we're seeing that happening much quicker than 3 year time line that we've previously given guidance to. Yes, Steve.

Speaker 4

This is Lorenzo. I'm saying kind of similar what Steve said, but we remain confident that building out the portfolio of undeveloped land over the next 10 years, we're going to be able to kind of grow into that historical return on investment, which what Steve is around 20 ish percent of levered return on investment. That's correct. We're not saying that's going to happen year 1, but by year 3, we get there. I think what Steve obviously has said in his comments is that we're well on our way, maybe ahead of schedule a little bit on Durango.

Speaker 4

But when you look at the overall portfolio, we're still confident we can get to that 20% return on these Greenfield projects. And we're not in a position to say that we think we're going to get more at this point, but we think that 20% return is pretty solid.

Speaker 7

Okay, great. Thanks guys. Appreciate the color.

Operator

The next question comes from David Katz with Jefferies. Please go ahead.

Speaker 3

Hi, afternoon. Thanks for taking my question. Just to tack on to the end of that last discussion, I'm not sure that we got a ton of commentary about what's next. And I know that you occasionally talked about looking at Durango, maybe Inspirato, maybe something else. Is there any update that you can share, any thoughts you can share around what's next for Red Rock?

Speaker 3

Yes. I mean, I think first up is going to be North Fork, probably around the end of Q3, beginning of Q4 of this year. And then as we've always said, we are actively working on plans for an expansion at Durango, which will be in a position to go forward if we decide to by the end of the year or the beginning of next year. And then we're working on plans at Inspirato to have that in a position to make a decision when we want to go forward. And that those plans should be ready what Lorenzo

Speaker 4

and I mean we're finishing up all the entitlement and all the plans that we should have costing on the project by the end of the year and we'll be able to kind of at that point communicate to everybody kind of what our timing is and what our budgets are. In addition to that, we've seen that we've been able to generate great return on investment by reinvesting in our current existing portfolio through building high limit areas for both tables and slots. We're really happy with the results there. We're definitely seeing the benefit at Green Valley Ranch and Santa Fe as well as we've talked about Red Rock in the past. So, we're going to continue to focus on those as well.

Speaker 4

I think part of the issue that we have here is just seeing these projects in a place to where we have tight budgets, tight plans, so we can get these things going is really what we're focused on right now. And we should have information for you guys on what we said before timing and budgets in the near future. Yes.

Speaker 3

And I think it'd be interesting if anybody's out here in next several months or whatever to take a look at the new race and sports book at Sunset and we're going to open a yard house there and it's really turned out a sweet place. I think customers are going to accept it and be really happy with what we've done. I appreciate that. And if I can just follow-up, is one of the potential permutations sort of both expansion and Inspirada? And does that sort of change, Steve, any of the kind of leverage commentary or are those sort of happening at different times?

Speaker 1

Cognizant of the balance sheet. And as we said, leverage is peaking, has peaked, and we're looking to delever the balance sheet and pay for that next stage of growth.

Operator

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

Speaker 7

Hey, guys. Wondering, are you still actively looking to sell any of your undeveloped land banks here? Thanks.

Speaker 3

Yes, this is Scott. So I think we're in the same position as we mentioned in the last call where we have 2 pieces of land that are actively being marketed. 1 would be the Wild Wild West land, which is essentially 100 acres of contiguous land just off the strip. And then there's a portion of our cactus development site, which is a total of 128 acres. There's about 40 acres of that site that is non critical to what we want to do there.

Speaker 3

And so we've got that actively marketed as well. And then we do have a small entitled parcel in Reno as well, which if the right offer came about, we'd be interested in selling as well.

Speaker 7

Got it. Great. And then just as a follow-up, more clarification, I noticed in the deck, your convention and meeting space 231,000 square feet. I think that's down like 8%, 9% from the last deck. So is that sort of 20,000 reduction a function of construction or anything else?

Speaker 1

We'll have to check. It shouldn't be down, Barry.

Speaker 2

Okay. Thanks.

Operator

The next question comes from Dan Politzer with Wells Fargo. Please go ahead.

Speaker 8

Hey, good afternoon, everyone. Thanks for taking my question. I know you guys had a couple of one offs in the quarter that impacted margins a little bit. But as we think about that Durango contribution over time, I think you've said that should be the most efficient margin property. So as we think about the coming quarters and the ramp of it, when do you think we might see that impact start to flow through?

Speaker 3

I think it will be incremental over the remainder of the year, but you don't get it all at once. I think one of the great things that we were able to accomplish, which is very difficult, is have a very smooth opening at Durango and focus basically exclusively on the customer experience. And as business starts to settle in to what normal business levels are going to be by day of the week and time of the day, we're going to continue to refine operations. But I would say it'll probably take towards the end of the year to really get it where we feel that it's going to be going forward.

Speaker 4

Yes. And with that said, I mean, just so this is our literally our first full quarter of operations. And the project is highly profitable, generating very high margins, pretty much in line with the rest of our properties already. So as Frank said, as we really start to understand business volumes and whatnot, we can start to tweak margin and confident we'll get there by the end of the year.

Speaker 8

Got it. And then just for my follow-up, I don't know if maybe you could talk about the cadence over the course of the quarter. We obviously got the industry numbers, and so it seems like things softened a bit over the course of the quarter. I don't know if that was what you guys saw in terms of your own operations, but any kind of reconciliation there? And then any detail, if you can on April, just if that's been a continuation or of that stability that you guys have kind of called out?

Speaker 1

Yes, Dan, I think I'll address it and then I'll probably just add in. But don't want to get into month by month, but what we saw is stability across the quarter and we're seeing that going into April. I would say the March, the only real weakness there as we already articulated there, you saw some weakness in race and sports, which I think was universal across the Strip mainly due to those 2 large events in the Super Bowl and NCAA tournament, otherwise stability throughout the quarter.

Speaker 8

Thanks so much.

Operator

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

Speaker 9

Thanks for taking my question. Wondering if you could revisit the topic of getting bigger or getting into the tavern business as a medium or long term goal, has anything changed in terms of how you're thinking about that? Thanks.

Speaker 3

Hey, Chad, it's Scott. Nothing has changed. We still think it's a great place to invest in and for all the reasons that we talked about in the past that it's a unique customer with a different profile than our core customer. So it skews younger and skews towards the sports better. So we like that kind of a customer.

Speaker 3

We have 7 units currently under contract. First one will come in online in September, the second one will come online in December and then we have 2 coming online in January and then the remainder of the units throughout 2025. So we're actively out there seeking to grow the number of units that we have in the market and we think it's an opportunity for us to kind of expand into what we call the micro market within the valley.

Speaker 4

And this is Lorenzo. From a health standpoint, I know everybody's focused on different segments of the market that that end of the business, what we call kind of a smaller property, seems to be very healthy and very consistent and actually growing. So as a sign relative, it's a very local market, but that is going very well from an operating standpoint.

Speaker 9

Thank you. And then on the food and beverage side, I think that was a big standout in the quarter just kind of the year over year growth and I'm sure most of that or a lot of that growth came from Durango. Is this you made a comment about group bookings. Should this food and beverage revenue become more regular? Or is there still some significant seasonality around how we should think about that with different groups and weddings and those types of things.

Speaker 9

Just trying to figure out the magnitude of the growth that we saw and how that should look throughout the remainder of the year. Thank you.

Speaker 3

Yes. Let me split it up into 2 segments so that it's a little bit easier because they have a kind of a different behavior. When we talk about our retail food and beverage operations, I think you're going to continue to see strong performance across the properties. We're bringing on great restaurant tours and great offerings across the valley. So we see that continuing.

Speaker 3

When we look at catering, which is a function of group nights and social catering, While we saw strong numbers across the Q1, we have been kind of signaling that we're about to lap ourselves with COVID re bookings and COVID cancellation fees on a year on year basis. So this quarter, the second quarter and a little bit into the third quarter, we'll kind of trail off those difficult comps. And then going forward, if I had to say anything that we have a little work to do, it's probably in the summer months. But then in the Q4, it starts to pick back up for us.

Speaker 9

Thanks for the additional color. Appreciate it.

Operator

The next question comes from Brandt Montour with Barclays. Please go ahead.

Speaker 5

Hey, good evening everybody. Thanks for taking my questions. So actually just one, but it's a bit of a 2 parter. I was curious, when you think about Phase 2 for Durango, which if I remember correctly, is something you planned alongside Phase 1. What have you learned 5 months in, 6 months in here that may have made you want to tweak anything to Phase 2?

Speaker 5

I know we don't know Phase 2 yet, but maybe just qualitatively, has anything made you want to adjust those plans? And then the second part of that is specifically around the F and B and the lease model, which you have in Durango. I mean, we see these F and B results and how strong the segment is for you. Is there a thought to maybe convert or do any more of that F and B on an owned basis to capture those EBITDA dollars? Or how are you thinking about that?

Speaker 4

Yes. This is Lorenzo. I'll take a stab at that. As far as what we've learned after a few months of being open here, I think the biggest change potentially of what we thought prior to opening is that we need to solve for some additional parking before we get necessarily get into the Phase 2, what we had originally planned, which is a good thing, by the way. We kind of used all of our historical metrics and what we had historically seen.

Speaker 4

The volumes at peak period at Durango primarily partly driven by the success of the food hall and so we're rather restaurant offerings. We just need more parking. So we're working on a solve for that. So we don't want to completely rip up the parking lot and do an expansion at the same time. So we're trying to figure out timing on that.

Speaker 4

Relative to the success we have had on the food and beverage side, I think where we are is we want to just focus on what we think we do really well, which is run slot machines and table games and hotels and let experts who run restaurants kind of run the restaurants. It's I think allows us to drive higher margin business overall throughout the portfolio. And as we've learned from doing this for 35 years or however long it's been, restaurants are very difficult to run and it's very challenging. And if we can find great operators to bring in that sole focus, we'd much prefer to do that.

Speaker 1

And Brandt, just one kind of note, the F and B line item that you're seeing in the press release, that's our owned and managed restaurants. The lease revenue that Lorenzo spoke to is going to fall in the other category.

Speaker 5

Makes sense. Thanks for all the comments.

Operator

The next question comes from Joe Stauff with CIG. Please go ahead.

Speaker 5

Thank you. Good morning or good afternoon. I wanted to ask just maybe a broader question just on the locals market and all the migration and most of the migration coming from California and so forth, you're spending a lot of capital to build and expand sort of the premium product in the market. I think most of us understand what Boyd is doing. I wonder if you can comment on other competitors in the market.

Speaker 5

And are they trying to match you or are they staying with more low cost model in terms of their approach in the Las Vegas market, Las Vegas locals market? And then I wanted to ask, just specifically, you had a reference in one of your slides regarding Durango at $180,000,000 plus. Does that imply that whether it be the parking lot and the expansion, you're thinking about 100,000,000 dollars of capital invested at some point as you kind of green light those projects? Thank you.

Speaker 1

Yes. I think what you're talking about is the land side and that was really just to show the value creation that we get by purchasing raw dirt. And so and as Frank and Lorenzo always said, while we tend to get our greenfield return within 3 years, these assets don't stop at year 3, they continue to grow. So we just wanted to provide a metric to show that we plan to grow this asset beyond that 20% ROI.

Speaker 3

You're basically trying to demonstrate the value of the gaming entitled real estate portfolio by developing projects.

Speaker 1

But it doesn't include the garage. But Joe, it does kind of lead into that slide is probably a good segue into really your first question. I can't really comment on what other competitors are doing, but we know what we're doing. Frank and Lorenzo for plus years is focused on delivering the best in class assets and most importantly, the best in class locations. We live in a very regulated market.

Speaker 1

The locals market is protected by SB208, which restricts the amount of gaming and title land that can come off the Strip. And fortunately, and I think to these guys' credit over the past 40 years, they've bought up pretty much every piece of gaming and title land that comes available. And then this is something that's built into our DNA, our Sky Canyon purchase and our low sea purchases. We continue to look for gaming title land that we view as potential developable resorts down in the future. So that's where it starts from us and that's really where it ends.

Speaker 1

So locations, it's tough to repeat a location. There's only one once it's gone, it's gone. And right now, we feel we have the best of the 6 available.

Speaker 4

Yes, that's part of the value in the platform, right, is having the best locations and trying to project out where growth is going to happen, where the city's dynamics from a demographic standpoint are going to change over time, try and be ahead 10, 20 years so that we're positioned. And I think that as we started really thinking about this in the late '90s, that's starting to pay off here kind of 20, 25 years later. We're starting to see the benefit of that. And that's why we're able to develop something like Durango, get outsized returns. And I think part of the reason for the debt that Steven put together, as Frank mentioned, was just I think a lot of people think about our company and say, they have 500 acres of additional land, let's put a value per acre on it, 300,000 an acre or 500,000 an acre.

Speaker 4

And what we're trying to demonstrate is that we are a development company. That's really what our core principles are and what we're capable of doing. And by taking a raw piece of dirt and converting that into an operating asset, we feel like that we're literally creating 1,000,000,000 of dollars of value, for instance, in the case of a Durango. So trying to think about what the future of this company holds and what the embedded growth in the company is all with opportunities that we own and control and we can bring online whenever we want. They're not going away.

Speaker 4

So we think that there's a lot of value there.

Speaker 3

Yes. Durango is performing great right out of the box, but there's like 4,500 new housing units planned or under construction currently in that zip code. And that's kind of the built in growth that's going to continue to make Durango better and better and better.

Operator

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

Speaker 1

Well, thank you everyone for joining the call today, and we look forward to talking to you in about 90 days. Take care.

Operator

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

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Red Rock Resorts Q1 2024
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