GDEN - NASDAQ

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note that this call is being recorded today. Now I'd like to turn over to James Adams, the company's Vice President of Corporate Finance and Treasurer. Please go ahead, sir.

Thank you very much, operator, and good afternoon, everyone. On the call today is Blake Sartini, the company's Founder, Chairman and Chief Executive Officer; and Charles Protell, the company's President and Chief Financial Officer. On this call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During the call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation of GAAP financial measures in our press release, which is available on our website. We will start the call with Charles reviewing details of the third quarter results and a business update. Following that, Blake and Charles will take your questions. With that, I will turn the call over to Charles.

Thanks, James. Starting with our financial results. We generated revenue of $161 million and EBITDA of $34 million in the third quarter. Our reported prior year numbers include the results from our divested Maryland casino and distributed gaming operations. By comparing the results to our continuing operations, total revenue declined 5% and consolidated EBITDA declined 21% in the third quarter. Our third quarter was challenging for both our casino and tavern segments, with the most significant year-over-year declines in July. As others have noted, Las Vegas experienced record heat this summer, which contributed to lower visitation at our casino properties and local taverns. In addition, we saw continued weakness at the lower tiers of our database as those consumers have reduced their discretionary spending in the current economic environment. Despite these challenges, we see Q3 as the lowest level of financial performance for our portfolio given October trends and our outlook for the remainder of the year. Reflecting that view, we have increased our share repurchase authorization by $100 million. So we now have over $130 million of buyback capacity to add to the $60 million we repurchased over the last 2 quarters. Now for some color on our operating segments. For our Nevada Casino Resorts, revenue declined 6% and EBITDA declined 20%, with most of the decline coming out of the STRAT. At the STRAT, our weekend occupancy was slightly up year-over-year. However, our midweek occupancy was down almost 6% to prior year and spend per guest also trended lower for the quarter. Las Vegas citywide occupancy and ADR were weaker in July, particularly for mid- to lower-tier properties. In addition, without direct meeting space, the STRAT was unable to benefit from recovering convention business in September to the same extent as other strip properties. For the STRAT, our Q4 looks stronger than Q3, and we anticipate stable year-over-year performance with opportunity for growth in 2025 from returning midweek occupancy and increased spend from our core customer. In Laughlin, despite lower visitation and revenue, our properties increased their market share in the quarter and reduced their operating expenses. Our Riverfront bingo room continued to help drive increased local business to offset lower visitation due to having one less major concert at our Laughlin Event Center. For our Nevada Locals Casinos, revenue declined 7% and EBITDA declined 15%, where we saw increased seasonality compared to recent years and decreased spend from our lower-tier customers. Our Arizona Charlie's Decatur property was further impacted by disruption from room renovations, which were completed mid-September. The largest revenue and EBITDA percentage declines in our Nevada Locals casinos continue to come from our smaller Arizona Charlie's Boulder property, which caters to our most value-oriented guests, while our Pahrump casinos remained stable year-over-year. We expect stable year-over-year performance in Q4 for all our local properties, which will be helped by the Las Vegas promotional environment moderating. For the third quarter, Nevada tavern revenue declined 2% and EBITDA declined 29% with margins negatively impacted mostly as a result of the elevated initial operating expenses associated with our 7 new taverns and the last mandated Nevada minimum wage hike in July. Our tavern customers were also impacted by extreme summer heat and less discretionary spending. We typically see our new taverns stabilizing within 9 to 18 months of opening or acquisition, and we expect these last 7 to follow the same pattern. With regards to our capital structure, we continue to maintain one of the best balance sheets in the gaming industry with our net leverage at approximately 2x EBITDA and $240 million of availability under our revolving credit facility. Since selling our noncore assets at premium multiples last year, we have repaid over $500 million of debt and returned nearly $150 million to shareholders through a combination of share repurchases and dividends, including over $80 million since the end of Q1. Between August and October, we have repurchased approximately 950,000 shares. Combined with the almost 1 million shares repurchased in Q2, we have repurchased nearly 2 million shares over the last 6 months, representing 7% of our outstanding shares and 9% of the free float. After increasing our buyback authorization, we have $131 million of availability for share repurchases, which can be funded by cash from operations as well as our undrawn revolving credit facility. We continue to believe that our portfolio of wholly owned casinos and local taverns will benefit from the favorable long-term demographic and economic trends in Southern Nevada, and we see significant value in continuing to acquire our own equity at this time. While we do evaluate strategic opportunities as they arise, it will be a high bar for acquisitions given our current valuation, and we anticipate continuing to meaningfully buy back stock absent more compelling alternatives. That concludes our prepared remarks. Blake and I are now available for questions.

[Operator Instructions] The first question comes from the line of Barry Jonas from Truist Securities.

I appreciate the comments on [indiscernible]. Charles, I appreciate your comments on M&A, but maybe you could just talk about what you're seeing out there, how rich of an environment is there for assets you'd be interested in? And then I'd be curious to get your thoughts on the sale-leaseback model. You have a slide in the deck, as always. Just curious if any updated thoughts given where valuation sits today.

Yes. I'll take a bit of the first part, and Blake may want to comment on the second. I think from an M&A perspective, we haven't seen a lot out there that's compelling for us. I think when you look at the M&A landscape right now, there's still a bit of a disconnect between buyers and sellers around the bid-ask spread on not so much necessarily maybe the multiple, but more on what's the run rate EBITDA. And I think that as we look into next year, I think there's going to be a lot more visibility around stabilization of operations as well as the benefit of declining interest rates, which should help the M&A environment.

Yes. In addition to that, look, I don't think it's overstating that we are in active mode right now looking at all of our potential strategic alternatives. And that includes -- I think in our investor deck, we provide some math around the value of our real estate and how that may drive value certainly in our share price, given that our math shows our OpCo is really free if you buy our shares. So again, we're in active mode. In regards to REIT, particularly, I'll tag on to Charles' comments in the M&A segment, we're looking for holdco assets. I don't -- there aren't many of those out there. There's a limited inventory, I think, of Holdco assets. They are out there, but that would be our preference in terms of moving the needle for valuation at Golden given our strength of our balance sheet and so on. But we are considering all -- we're active in considering all alternatives at this point.

Great. That's helpful. And then just as a follow-up, also appreciate the commentary on the consumer and certainly the summer heat and seasonality. But curious if you saw any impact from the election in any of your segments? And now that that's over, have you seen or would you expect to see any improvements related?

Yes. I think historically, around these major federal elections, presidential elections every 4 years, we do see consumers in the short term prior to the election, having a pulling back if that's the right term, but certainly cautiously spending before and some -- and a little bit after. So much like seasonality, these elections -- these broad elections only come around every 4 years, we do see a pattern of consumers pulling back certainly in the short term before the elections occur.

The next question comes from the line of David Bain from B. Riley Securities.

I'm hoping we can unpack the margin stability or opportunity from 3Q results. It seems like multiple segments will improve to flat year-over-year in 4Q. So I assume you meant EBITDA there. And is that a function of higher revenue and some rebound in margins? I understood the commentary on the tavern with the 7 coming online and those normalizing longer term, but maybe across the rest of the portfolio would be helpful.

Yes. I think that, quite frankly, the only asset that from a margin perspective remains a bit challenged will be the STRAT as we look into Q4. And that really has to do with the latest culinary union contract that we signed earlier this year. As we look at the other assets, we see stabilization, both on the revenues and the cost structures in that business. Some of it specific to changes we're making. If you look down in Laughlin, focusing a bit more on the locals and our strategy of going to smaller scale entertainment. And in the locals that are here in Nevada, we really just see stabilization of the spend. while we continue to manage costs in that business. You mentioned the taverns already. And I think with respect to the STRAT, the STRAT will ebb and flow with the occupancy of the town and what's going on along the Strip corridor. And so we're basically a derivative of that without any of our own direct group meeting space. The one thing we do have is we have an elevated cost structure. It's reflected in our views for Q4 that are generally out there with all of you right now. So we feel confident in our statements about Q3 being the low point for the portfolio.

Okay. And also, the 4Q commentary was helpful for this, but maybe if you could speak to F1 and the Super Bowl comp in 1Q and how that translates not just to the STRAT, but the Las Vegas portfolio generally.

Yes. The F1 comp is -- we've made adjustments, obviously, to our approach last year, certainly on the spend side. So we're going to make significant improvements in regards to what we spent to try to drive traffic to the properties that's going to result in a positive. I think generally, citywide, we're hearing it's going to be a tough comp to F1 last year, given ticket prices are low. We're hearing room rates are lower. We've gone out and partnered with the downtown folks to do kind of a weekend festival that weekend to try and drive some of that customer inertia downtown with entertainment bands, pop-ups and those kinds of things. So we're well -- much better positioned for F1 this year than we were speaking for ourselves last year, certainly from a cost standpoint. And it is a tough comp in Q1 with Super Bowl. Super Bowl was big for us last year. I think it was big for the city last year. So we're going into Q1 knowing that, that's going to be a tough comp.

And to give just a sense of magnitude of Super Bowl, it was worth about $1 million in EBITDA to us. And so from my perspective, as we talk over the course of the quarter, we think there's many other drivers that overcome that between the tavern stabilizing, between increased occupancy and things that are going on at the STRAT, we feel fine in terms of fading that comp.

The next question comes from the line of Jordan Bender from Citizens JMP.

With Atomic Golf up and running, has there been any thoughts around if something else incremental could fit into the excess land between the STRAT and Atomic Golf that could help drive more foot traffic, I guess, to both properties?

Yes. Look, it's no secret. We've been talking about Atomic Golf has been slow to ramp up. Before I talk about the additional potential development on property near us or adjacent to us, I still believe Atomic remains a modern competitive facility. It's a $70 million facility. And irregardless of the slow ramp, which it is ramping, is still going to continue to be a relevant and significant asset next to our property. It's a world-class asset in terms of physically what it offers. So we're long-term bullish on that. In regards to the adjacent property, I think between the STRAT and Atomic is too narrow. We tried to push that closer to the building to make it convenient for cross-walk traffic. But we do have 5.5 acres of developable asphalt flat land across the street, which is desirable. We're getting a lot of inquiries into what could possibly be put there. We're trying to fit a highest and best use concept in there that would drive more traffic to the property. So absolutely, we have adjacent property that with the ability to put some attractions on there that would benefit the STRAT.

I'd say we're also working on development of extra amenities inside the building. So we have approximately 150,000 square feet of developable space on a mezzanine level of the STRAT. And so we're working with some third parties to bring some experiential type attractions to the property that we think help drive traffic as well.

Great. And then, Charles, just on the follow-up, as we approach kind of year 1 of a dividend being paid, is there any cadence or parameters we should be thinking about in terms of does that go up? Is it based off of a payout, a yield, et cetera?

Yes. I mean, look, we've talked and thought about it almost as constant dollars, a bit out the door with the fluctuation based on the amount of equity we could buy back into the company. So in other words, when we get to those 1-year anniversaries, we'll take a look and see what's our projected cash flow going forward, how do we think about how much stock we bought back and how that translates into overall cash outflow. But clearly, we -- the dividend to us has been a constant piece of our cash flows going forward, and we look to increase that as we get into next year.

The next question comes from the line of David Katz from Jefferies.

I just want to make sure that I'm processing all the commentary properly. We're talking about potentially activating some of the excess land one way or the other. And we're also potentially talking about a sale and leaseback. And would the proceeds necessarily be used for capital returns? Or is there a range of potential uses just for the purposes of this exercise?

Yes. So I think the purpose of highlighting the value of the real estate is to illustrate what Blake had discussed earlier, which is if you look at any reasonable multiple of a rent stream, that is in excess of the total enterprise valuation of the company as it sits here today. So from our perspective, clearly undervalued in terms of the combination of the OpCo as well as the real estate. So that's why, quite frankly, we're confident in increasing the share buyback very meaningfully. We have $130 million of availability on that buyback. It represents a little bit over half of our revolving credit facility, and we could use that as we see the opportunity within the market to do so. We will have consistent buyback through Q4, and we're going to be doing that into the future. But I think you're not going to see us do a sale leaseback to fund other development that you're not going to see as a strategic alternative. I think to the extent that we are trading at levels that -- where the discount remains for a prolonged period, and I think some people might point out that it has, but we've been in a challenging interest rate environment, which I don't think has helped REIT multiples. And so as we see the rate cuts that happen today and we anticipate rate cuts in the future, it's our belief that multiples get better and cap rates get better from a real estate perspective, and we're going to let that play out as we get through next year.

Totally agree and totally sensible. If I can follow that up and just, I know we've talked about these things before, but does the field of play, I assume it includes potential mergers or other, right, when Blake says we're active, does the field of play include corporate type activities like that?

Yes. Yes. I mean we are -- it's frustrating, and I'm sure it's frustrating to our investors and to those that follow the company, it's frustrating to see we get no credit for the real estate whatsoever. So within that context, we're frustrated with the valuation. And we are sitting in a good position with a strong balance sheet, wholly owned real estate and a well-run company to look at all alternatives. So yes, corporate merger, we're active in looking at all things that may potentially drive significant value to our current portfolio.

The next question is from the line of Chad Beynon from Macquarie Asset Management.

This is Aaron on for Chad. I wanted to touch on the direct business at the STRAT, which has been a nice success story for you guys. How high do you think that can go? Or just how do you think about the optimal mix there?

Yes. So we've worked pretty hard. And when we first took over the property, the OTA mix was about over 70%, 72% to 74%, 75%. That's down now to between 60% and 65%. And we think we could keep moving that lower. I mean, ideally, we'd like it to be about 50% of the property. So we're doing a lot of things in terms of boosting our direct booking business, working more closely with the citywide conventions and selling blocks of rooms into the citywides and doing a little bit of a better job capturing customer data once they -- even though they may have booked off an OTA, once they get on the property, being able to send them return offers directly rather than through the OTA. So we are pretty excited about that journey. It's a slow journey, but it's a good one, and there's upside in the property from doing that.

Yes. I would just add to that, that I think Charles said it very well. we continue to see bright spots at the property. We are aggressively marketing the casino and seeing improvement in part and play. We're seeing improvement in revisitation, people revisiting the property, which prior to our ownership was pretty much nonexistent. We -- just for a metric that may or may not be relevant in today's environment. But if you look at '19, our ADRs are still up approximately 20% today over '19 levels. Our occupancy is down a bit, but weekend is up, but the midweek is where Charles continues to talk about our upside. So there's a lot of data points in the property that are going in the right direction. We're kind of taking it an inch at a time, but it is going in a positive direction.

Understood. Just turning to taverns. In terms of growing the number of your taverns, as we look to next year, do you anticipate adding locations at the same rate as you have this year? Just any color on how you see the opportunity set there would be great.

No, I think we had some unique opportunities in the marketplace to acquire some brands and some locations that we think long term will be very beneficial to the portfolio. Going forward, we're more focused on developing ground up. And so we look to add 1 to 2 next year. And then going forward after that, it's probably in the 3 to 4 range.

The only thing I would add to that for a little more color is we're bullish on that greenfield Charles talks about 1 to 2. We are solely looking for what we call 5-star or premier locations only to further grow the portfolio. We're having success in providing an inventory of these solid locations for us going forward. And those locations, as Charles said, 1 to 2 a year. And still those new locations versus the acquired locations, which admittedly have taken us longer to ramp up, those new build locations still provide a 25% cash-on-cash return when we build them. So we're very, very confident we will continue in that direction.

The next question is from the line of John Dickree from CBRE.

I think most of mine have been answered, but maybe one follow-up on the tavern discussion, and particularly the new builds and properties you acquired that take, I think, up to about 18 months to stabilize. Can you give us a little bit more color on that life cycle? I mean when you bring a new property into the system, a new tavern or opening ones, you typically lose money and then break even and then moving into profitability? And I guess the follow-up is, given the 7 or so that you spoke about earlier kind of came online at different times, where we are kind of in that life cycle today as you think about kind of inflection to profitability and maybe margin enhancement across that business overall?

Yes. So when we typically open a ground-up tavern, we're spending between $2 million and $3 million, and it's usually on the shorter end of that scale of ramp-up, call it, the 9- to 12-month range. We usually have in a location where we potentially don't have a lot of other locations, and there's not the competition around. So they ramp faster, and we staff them with people that came out of our existing taverns. So they know the process, they know our methodology, they know our brands and they know our marketing. And we very quickly see those ramp to 25% to 30% cash-on-cash ROI, as Blake mentioned. With the acquisitions, depending on the staff that we acquired, that could either be shorter or longer. In this case, for these 2 brands, it's longer. So we have basically turned over the entire staff in the 6 locations we've acquired. Now we've put in new staff, and we're seeing the fruits of that in terms of that ramp-up as we're getting into Q4 right now. So we're confident that those will get there. They're a little bit -- there's some different brands from what we've had in the past. So we like that. We actually opened our new build with one of those brands. So it adds a little diversification to the portfolio, but it's just taking us a little bit longer to get them up to our standard.

Ladies and gentlemen, we take the last question from the line of Carlo Santarelli from Deutsche Bank.

Charles, I just wanted to kind of understand a little bit. When you talked about the Nevada Casino segment, and I believe you also mentioned with respect to the local segment, a 4Q that you expected to be stable year-over-year. I just kind of want to understand what you meant with the stable comment. I'm assuming you don't mean you would anticipate they would be flat year-over-year, but maybe I'm misunderstanding.

Yes. For Q4 year-over-year, flat, right? Other than the STRAT which was in my commentary. And in the commentary, my reference was really to the locals. So that's our local properties and our casinos out in Pahrump. Laughlin should be the same way. I think STRAT should be a little bit down year-over-year given where we are from a labor expense perspective, but that's the time.

All will be better than Q3.

Yes.

Okay. And then just -- it might have been nuanced and I might not have exactly understood it correctly. But what -- when you talked about the disconnect between buyers and sellers, you made the point that it was not necessarily a difference in pricing in bid-ask. It was more of a difference in earnings or EBITDA or cash flows. Is the perception then from a buyer's perspective that sellers are looking for a multiple off of a business that's flat or growing and buyers just are kind of looking for things to continue to kind of slightly kind of erode? Or what exactly is that dynamic you were referencing?

Yes. I would say the dynamic, probably not as specific is that buyers are looking at like we would look at a more conservative EBITDA to underwrite in the future. Depending on what sellers may be offering, whether they're offering double-digit growth rates, and we're saying we're not going to get there or they're offering more flat, and we think we should be a little bit more conservative. I just think that there's more conservatism, at least from our perspective as a buyer than what we're seeing in the situations we've looked at from a seller perspective.

Dear members, we have a follow-up question from David Bain from B. Riley Securities.

This question may be a little off track given the Tavern discussion that were kind of clearly centered around Las Vegas. But have there been any new thoughts around Tavern business expansion outside of Nevada? I believe you still have the J&J relationship, if I'm not mistaken, and you got the proven model, and I would think the brand opportunity as well.

Yes, that's actually a very good question. So when we exited the route business, both in Montana and Nevada, I think on prior calls, I referenced the fact we have not exited our potential for remaining in the distributed business through operating the brick-and-mortars or brands either that we have or new brands. We -- I think that's an opportunity for us, yes. And although nothing is imminent, I think there's a path for us to do that.