Daniel Foley - Vice President of Finance and Investor Relations Marc Falcone - Executive Vice President, Chief Financial Officer and Treasurer.

Joe Greff - JPMorgan Carlo Santarelli - Deutsche Bank Shaun Kelley - Bank of America Cameron Knight - Wells Fargo Chad Beynon - Macquarie Steve Wisinski - Stifel.

Good afternoon, and welcome to Red Rock Resorts' First Quarter 2017 Conference Call. All participants will be in a listen-only mode. Please note this conference is being recorded. I would now like to turn the conference over to Daniel Foley, Vice President of Finance and Investor Relations. Please go ahead..

Thank you, Daniel. Good afternoon everyone and welcome to Red Rock Resorts' first quarter 2017 earnings conference call. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; and Marc Falcone, Executive Vice President, Chief Financial Officer and Treasurer.

Our call today will include forward-looking statements under the Safe Harbor provisions of the federal securities laws. Developments and results may differ from those projected. The risks and uncertainties related to these statements are detailed in our filings with the SEC. 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 and Form 8-K, which were filed this afternoon prior to the call. Also please note that this call is being recorded. I would now like to turn the call over to Marc Falcone..

Thank you, Dan, and good afternoon. I'm pleased to welcome everyone to our first quarter 2017 earnings call. The economic factor of Las Vegas continues to be very encouraging in 2017, resulting in further strength in our core business.

For the quarter we achieved both our highest first quarter consolidated and Las Vegas EBITDA in nine years and we continue to make good progress on our numerous growth initiatives, which include substantial commitments to our slot in marketing technology, the major expansion and upgrade of Palace Station and our exciting plans for the redevelopment of the Palms.

As the Las Vegas economy continues to strengthen, we remain confident that these investments will be important drivers of our future growth. In addition, over the past several months, we've entered into a series of transactions to further enhance our balance sheet, which will increase cash flow and improve our financial flexibility.

We're excited about our strategic plans coming together for the remainder of 2017 and are confident that we will continue to drive long term shareholder value. Now, turning to our results, the first quarter consolidated net revenues, including the Palms increased 16.3% to $418 million, while adjusted EBITDA increased 2% to $136 million.

In Las Vegas, net revenues, including the Palms increased 16.5% to $386 million and adjusted EBITDA increased 1.3% to $121 million. Margins for the quarter were 32.5% on a consolidated basis and 31.2% for Las Vegas operations.

The inclusion of the Palms in our quarterly operating results, the ongoing negative impact of disruption related to the expansion and upgrade of Palace Station as well as the enhancements relating to our food and beverage offerings and guest service levels were the contributing factors to the margin decline.

None the less, the core fundamentals of our business remain solid. Despite the impact of disruption at Palace Station, Las Vegas same store revenues increased 3%, driven by solid gaming revenue growth across nearly every category and 5% increase in our non-gaming revenues led by 10% increase in ADR in our hotel division.

We do expect the impact from our food and beverage enhancements will anniversary at the end of the third quarter. Next, I want to update you on the progress we made on our strategic initiatives since our last call. First, on the innovation side, we continue to make excellent progress with our new IGT slot system upgrade.

During the quarter we had beta testing some of these capabilities and are extremely excited with this systems potential to drive slot revenue growth. Initial guest feedback while still early has been extremely positive.

Ultimately, system upgrade will allow for on device delivery of proprietary and unique balancing capabilities to extend time on device and increase spend for visit. We expect the system to be fully operational by fourth quarter of 2017. At Palace Station, the first phase of the expansion and upgrade was completed on April 28.

This phase included a new bingo room in northwest exterior façade, slight improvements with improved access of Sahara Avenue and a new poker share in Casino Valley. The new upgrade has transformed the property's appearance and initial guest feedback has been very positive.

The next phase is currently underway and we'll include renovation and expansion of the casino, to new restaurants, a new buffet, the reminder of the façade and a refresh of the entire interior. Based on the construction impact in the first quarter we're still expecting $10 million to $15 million EBITDA impact for the full year.

Once the entire expansion and upgrade is complete, we're optimistic that the property should see a substantial rebound and increase in business that would generate solid returns. Now turning to the Palms, where we also continued to make excellent progress on many fronts.

During the quarter revenues at the Palms were up 6% compared to the prior year, with growth in nearly every department. Most importantly, we remain on track with our targeted synergies.

We've also made excellent progress on our redevelopment plans and should be able to share with you shortly some of the exciting new amenities and enhancements we have planned for the property. As many of you know Las Vegas economy is thriving, employment is at an all-time high and reached a record 966,000 jobs in March.

Las Vegas has experienced 69 straight months of job growth with the unemployment rate now at 4.8% the lowest in years and closely nearing the overall US unemployment rate. The strength and job creation was broad based and has been evident across every employment category.

Particular strength has been seen in leisure and hospitality, professional business services and construction, which since 2012 has been the fastest growing job segment in the valley. The pace of job creation is expected to continue as Las Vegas forecasted to be the fastest growing job market in the United States through 2020.

It's not just job growth leading the way, nearly one third of every new resident arrives in Las Vegas are retirees and contributing to non-job related population growth.

Retirees continue to find the latest favorable tax environment and cost of living extremely attractive and it continues to be one of the top retirement destinations in the United States.

All together this made Clark County the second fastest growing county in the United States over the last year for those counties with a population over 1 million people.

Due to the tightening labor market referenced above, total weekly earnings continued to increase at a healthy pace and were up 6.1% March, delivering approximately $2 billion of annualized additional wages to Las Vegas over the past 12 months. All these positive factors have contributed to the still robust housing market.

Home prices were up 11% in the first quarter and Las Vegas has the highest level of new home closing since 2008 during the first quarter. Higher real estate prices continue to eat away negative home equity values in the market with underwater mortgages now at 16.6% as compared to 70% at the peak.

The Las Vegas housing market has now recovered approximately 52 billion of the 70 billion loss value from the downturn. Lastly, the Las Vegas development and construction pipeline continues to grow with nearly $15 billion of under construction or planned projects.

The pipeline includes the recent exciting announcement of Raiders pending move to Las Vegas and subsequent plans for a new stadium which will create thousands of new direct and indirect construction and service jobs. Overall, the Las Vegas economy continues to strengthen and we're well positioned and take advantages of these positive trends.

In our Native American segment, we reported another strong quarter with management fees up 23.3 million or up 14.1% over the last year.

Gun Lake had a solid performance during the quarter and just yesterday, the property opened a major portion of its planned expansion which includes a much larger casino floor with 500 additional slot machines, a new buffet and a new entertainment lounge. At our Graton Resort & Casino, we continue to experience record operating results.

The recent hotel and resort expansion at Graton drove better than expected results from existing guests as well as incremental new visits to the property. We believe current operating momentum and the success of the expansion will continue to drive higher management fees throughout 2017.

In addition, the property recently announced the refinancing of its $700 million of outstanding debt with a meaningfully lower annual interest expense resulting in increased management fees to Red Rock Resorts. Lastly, as a reminder in November of this year our management fee will increase from 24% to 27% of pretax income.

With respect to North Fork, in March the California Supreme Court granted North Fork's petition to hear our appeal and stand up for California versus Brown. The court also differed briefing in our case until decide the case involving the same issue with the enterprise tribe and which the appellate court ruled in favor of the tribe.

While we do not have an exact timeframe for when we expect a decision, as it directly relates to the time of the enterprise case, we're hoping to see some decision in the next 12 to 18 months. I will now cover some balance sheet and capital items.

As of March31, the company's cash balance was 119 million, the principal balance of outstanding debt was 2.4 billion and there was 35 million outstanding on our $685 million revolving credit facility. As of March 31, our debt to adjusted EBITDA ratio was 4.8 times and interest coverage remains strong at 4.5 times pro forma for the Palms acquisition.

Over the last several months, we have completed a series of debt related transactions including the re-pricing of both, our Term Loan A and Term Loan B facilities as well as the partial repayment at a discount of our $116 million land loan.

These transactions along with $250 million partial redemption of our senior notes which is anticipated to recur on May 10 are expected to decrease our annual interest expense by approximately $23 million.

Through these transactions we've reduced our overall borrowing rate by 150 basis points and substantially improved the company's financial flexibility to pursue potential high return growth projects.

Turning to other balance sheet items, capital spend in the first quarter was $41 million, which consisted of approximately 10 million of maintenance CapEx and $31 million of investment capital, which included the Place Station expansion and previously discussed projects at the Palms.

For 2017, we continue to estimate total capital expenditures will be between $175 million and $200 million. In addition, in April we acquired the land underlying the Boulder Station and Texas Station ground leases with total consideration of $120 million.

The transaction will be immediately accretive to cash flow and will provide the company full control of this real estate. Lastly, on May 3, the company announced that its Board of Directors declared a cash dividend of $0.10 per Class A common share for the first quarter to be payable on May 30 to shareholders of record as of May 16.

In conclusion, we remain excited about the underlying strength of our core business and the ongoing growth of Las Vegas economy. At the same time, we continue to work on our numerous initiatives to drive future growth and remain focused on evaluating additional ways to further enhance shareholder value. Operator, this concludes our prepared remarks.

We will now take questions from participants on the call..

Thank you. [Operator Instructions] Our first question will come from line of Joe Greff from JPMorgan. Your line is open..

Good afternoon guys. Marc you mentioned you're still expecting the disruption at the Palace Station to be $10 million to $15 million this year.

Can you help us understand what the impact was in the first quarter?.

We're not going to get to specific, but I think it's in line with our expectations, the negative drag from the renovation and upgrade work we're doing at Palace Station. And over the year, we should be in that $10 million to $15 million range..

Okay, another way of maybe speaking about it, would you say the incremental contribution from Palms was basically enough to the renovation disruption?.

Again Joe, we're not going to get to specific, but Palms had a very good first quarter overall on a revenue and EBITDA basis..

Okay, great. And of the $175 million to $200 million of project CapEx, that contemplates the redevelopment plan to the Palms that you're going to share with us in the future or could those redevelopment plans increase that $175 million to $200 million CapEx range..

Yeah, the $175 million to $200 million included some of the projects that you're currently aware of, such as - we're currently renovating the Café at the Palms. We'll soon finish that project in June and then start on the buffet. So our CapEx includes some projects at the Palms.

Like I said, we're consenting to work on the longer redevelopment plans and positioning of the property and we have not finalized a budget or scope, so until then the CapEx will be in that 175 to 200.

I'd anticipate with whatever we finalize with respect to the positioning of the Palms that we'll announce a capital program and timing related to that at that point in time..

Great and then just with respect to how you guys are thinking about the trajectory and the near term Palms, do you think some of the redevelopments and repositioning and that the property disrupt EBITDA generation from where it's been recently? In other words, would EBITDA take a hit for four you have greater EBITDA growth coming from what you're doing there?.

Yeah, I would expect that once we get into the redevelopment plans later in this year that we could see some disruption at the Palms from a cash flow perspective. But currently our synergies are on target and the property is performing in line with our expectations..

Thank you very much..

Thank you. And our next question comes from line of Carlo Santarelli from Deutsche Bank. Your line is open..

Hey, thanks and good afternoon everybody. Marc if you could, could you just walk through the rationale? I know you said kind of provide yourselves with a little bit more flexibility, but you're obviously the second operator here in the last two quarters, so it's kind of a acquired ground leases underneath your Las Vegas assets.

Could you talk a little bit about the rationale behind why you wanted to do that as well as maybe provide us some context for what kind of boost that could give to EBITDA?.

Yeah, so let me take the second piece first and that is, we'll pick up approximately $7 million of incremental EBITDA related to the purchase of the two ground leases.

Obviously, we're long term believers in the Las Vegas market, we like to own our real estate, there is opportunity for us to acquire these land leases and sales at the accretive nature of the cash flow, the addition of the 7 million as well as controlling the land underneath those properties was key to our long term belief in the Las Vegas local market..

Okay, great.

And then just in terms of the balance sheet as you see it right now, clearly you want some dry powder for whatever you guys ultimately decide on the Palms, but in terms of other thoughts around some of the other land parcels that you have for development, not necessarily for sale, but for development, kind of what's the mind set on things like Reno and Durango at this point?.

Well, currently right now I think we mentioned this in the past, but our focus right now is on the Palace Station renovation, expansion as well as the redevelopment project at the Palms.

Until we get further through those projects respectively I think with respect to Reno as well as Durango we would continue to do the appropriate analysis around those projects and be prepared at some point in the future, but there is nothing on the immediate horizon for either one of those development opportunities..

Okay, great. Thanks, Marc..

Thank you. And our next question comes from line of Shaun Kelley from Bank of America. Your line is open..

Great, thanks. Good afternoon everybody. Marc just could you give us maybe a little color between - as we think about the kind of the different components of what's going on. With the EBITDA the positive contribution from Palms which sounds like it performed well, offset by Palace and F&B initiatives.

I mean between the two negatives, which one of those is dragging more right now and how do you see those two pieces kind of trending as we move through the year..

I would say from our perspective, the investments in food and beverage and the drag on margins is a larger contributor on the negative on both an EBITDA and margin perspective in where we currently are with Palace. And I suspect to anniversary some of those investments by the end of the third quarter..

And just like - it looks like last year, I think the F&B contribution margins were actually negative by the second and third quarters, so I mean are there incremental things that have been done even - just like a multiyear, multistage initiative that is kind of causing that because we would think that we would have been sort of heading to either your comps kind of by now..

I think some of the investments we made really began towards the latter part of the second quarter, accelerated into the third quarter of last year and that's the expectation line of anniversary those by 3Q of '17..

Great, thank you very much..

Thank you. And our next question comes from line of Cameron Knight from Wells Fargo. Your line is open..

Good afternoon, thanks very much.

Just turning to the sports book Marc, can you talk about the cadence of business through the quarter and how the quarter finished with March madness past the weakness in Jan and Feb that you highlighted previously?.

Yeah, I would say sports had a really tough start to the quarter. The continuation of the negative trends we had from the NFL, little by the NCAA, Football and then obviously through the Super Bowl and we got some good momentum through the second half of February and the balance of the quarter to end up in a good spot.

However, I would just say that hold still is down year-over-year, but we did finish out on a respectable side. We had mid single digit increases and rate for sports overall in the quarter..

Got it thanks and then I mean conference activity was pretty high across the strip during the first quarter, particularly with the ConAGra Convention coming back into Vegas.

Do you think that had a - did that have a meaningful material impact on the results this quarter?.

Well, tend to - those large citywide conventions, we have roughly 5,000 hotel rooms now. When you take into account the Palms acquisition and so we get a lot of ADR compression and RevPAR compression citywide, we tend to benefit from that across the market.

So I think ConAgra was helpful to us overall from a RevPAR perspective and an ADR perspective in the quarter..

Okay, got it. Thanks and then one last one for me.

Just slightly bigger picture, if congress removes the deductions for state and local taxes, would that change your view on Reno and its appeal to you?.

I don't think at this point any of those changes would affect our decision. I think like I reiterate the fact that we're very focused on delivering an outstanding product at Palace and excited about what the future holds for the Palms and that's primarily the focus and I think we'll stay with that course..

Perfect, thanks a lot..

Thank you. And our next question comes from line of Chad Beynon from Macquarie. Your line is open..

Great, thanks for taking my questions. First, I wanted to ask about I guess North Las Vegas in particular. Board recently acquired a couple of properties up there and now that those which are relatively new have been plugged into a different system.

I'm wondering if there was any type of affect or if you expect anything to happen as players potentially try product with one of the other known company. Thanks..

Hey, Chad. I would say, listen, those properties have both been in operations for quite a while. We've been competing with assets for quite a while and we're very familiar with those assets as well as the customers in that North Las Vegas market.

I don't think we've seen any major change or significant change with the change of ownership and the promotional environment still remains relatively stable across the market and including North Las Vegas..

Okay, thanks. And then my follow up with respect to slow through, I guess how we should think about it going forward given some differences in the hotel, the F&B and GGR growth rates, is there anything that we should be thinking about in terms of how the EBITDA to revenue flow through should be within your Las Vegas business. Thank you..

Yeah, Chad I think as we get through the third quarter here and we anniversary some of these investments we made in our business. Our expectation is, in addition to other initiatives we're focused on that we would be able to have improved flow through in the course of normal business starting hopefully let me get through the quarter.

So our expectation is, you will start to see improved flow through going into the fourth quarter of '17 and into 2018..

Okay, great. Thank you, Marc..

Thank you. And our next question comes from line of Steve Wisinski from Stifel. Your line is open..

Yeah, thanks.

Hey Marc that you mentioned that Palms was up 6% year-over-year in terms of revenues, but did you say or would you say what the property did year-over-year in terms of EBITDA?.

No, we did not disclose that. We don't generally speak specifically, but wanted to give some positive data points about how the Palms was performing and as I mentioned earlier, it did have a strong quarter overall on a revenue and EBITDA margin..

But is it fair to say though, EBITDA was higher year-over-year relative to what the property was doing under previous ownership?.

That's correct..

Okay and then second question just around your core customer base at Palace Station, have you guys had many discussions with them about what are they doing while the disruption is and the construction is going on, meaning are they still coming or are they coming less often, are they going to any other of your assets or are they staying home more and things like that.

Have you had many conversations with them, your core customers there?.

Yeah, well I think it wasn't. We have a strong management team there, they have very good relationships with our customers, who're always talking to them and they recognize its somewhat disruptive now, but they're still coming.

Some are going to other properties and some continue to come on a regular basis, so there's no really a direct answer to the general behavior. I would say that there's a lot of unique circumstances and we feel the property is going to be very well positioned when we're through this renovation and upgrade of the property..

Okay, great. Thanks a lot Marc. I appreciate it..

Thank you. And our next question comes from line of Joe Greff from JPMorgan. Your line is open..

Hey, guys just two quick follow ups. You just mentioned when you're done with the Palms renovation you'll be pleased with the EBITDA potential of that property and a return implied there in. When does the property getting renovated.

Are we talking about three more quarters or are we talking about a year and a half, just thinking about the sense of how to think about the near term there..

At Palms or Palace, I just want to make sure I understand correctly..

Palms..

The Palms like I said, when we get to announce everything in context we will give a more definitive timeline in terms of what we're doing and how long we expect the property to be in a position of redevelopment..

Do you think on this call a year from now that we'll be talking about renovation issues at the Palms? It's another way of my asking about..

I don't know, it's too soon to tell..

Okay, okay it's great. And then I'll ask you another equally fair question Marc.

From here would you expect total in the [indiscernible] adjusted EBITDA growth to accelerate in the next three quarters?.

Our expectation is we have a very strong economic environment. Revenues are growing in that 2% to 3% range, which we have indicated in the past was our expectations and then as we kind of anniversary these expenses and improve flow through, our expectation would be that we should see rising EBITDA on our business overall..

Thank you..

Thank you. [Operator Instructions] This concludes today's Q&A session. I'd now like to turn the call back over to Marc Falcone for closing remarks..

Thank you everyone for your time today. We look forward to talking to you soon..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..