Golden Entertainment - Q4 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Golden Entertainment, Inc. 2023 Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal remarks. Please note that today's call is being recorded today, February 29, 2024. I would now like to turn the call over to Mr. Joe Jaffoni, Investor Relations. Please go ahead, sir.

Joe Jaffoni (Investor Relations)

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 today's 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. Additional information concerning factors that could cause actual results to materially differ from these forward-looking statements is contained in today's press release and our filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During today's 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'll start the call with Charles reviewing details of the quarter and a business update. Following that, Blake and Charles will take your questions. With that, it's my pleasure to turn the call over to Charles Protell. Charles, please go ahead.

Charles Protell (President and CFO)

Thanks, Joe. The fourth quarter concluded a transformative year for Golden Entertainment. During the year, we streamlined the portfolio by divesting non-core businesses at attractive multiples, reduced leverage to favorably refinance our credit facilities, and return capital to shareholders through a special dividend and opportunistic share repurchases. To begin 2024, we completed the sale of our Nevada distributed business in January and established a quarterly dividend to initiate regular returns of capital to shareholders. In the fourth quarter, our operations generated revenue of $231 million and EBITDA of $48.8 million, bringing our total annual revenue to $1.1 billion and annual EBITDA to $222.5 million.

Our fourth quarter excludes the operations of the Rocky Gap Casino Resort and the Montana distributed operations that we sold in the third quarter, which created the majority of our reported declines in consolidated revenue and EBITDA. Adjusting for these sales, revenue was down 1.6%, and EBITDA was down 11% in the fourth quarter, with margins impacted by increases in labor and other costs over last year. Moving to the results of our continuing operations. For the quarter, revenue at our Nevada casino resorts was up slightly to last year, while EBITDA declined 8.8%. Unfortunately, we did not see any benefit from the Formula 1 initial race in Las Vegas, with the Strat's November EBITDA down about $800,000 year-over-year.

Despite the disappointing F1 experience for us, Strat occupancy in Q4 was 79%, up 2% over last year, with the weekends full and the midweek occupancy improving, but still lower compared to 2019. We are still missing 125,000 room nights at the Strat when compared to 2019, which we see gradually returning as we complete renovations and add amenities to the property. In October, we completed the renovation of Strat's original 1,180-room tower, the last of our major upgrades to the property, bringing our total renovated rooms to 1,300. Recently, we saw a tremendous pickup during Super Bowl, resulting in approximately $1 million in incremental room revenues over that weekend. After a few weeks of construction delays, Atomic Golf should be open in March, and we are excited to welcome this new amenity to the Strat.

In Laughlin, fourth quarter revenue was up slightly despite having one less major concert, while EBITDA declined 9%, primarily due to higher labor costs. In December, Laughlin revenue and EBITDA showed positive growth over the prior year, and we continue to see signs of margin stabilization to start 2024. Entertainment is a big driver of performance for our Laughlin properties, and we are working to optimize our offerings to create more cost-effective traffic drivers to our venues over the coming year. In addition, our new bingo room, which caters to local residents, has been successful in growing midweek revenue at our Edgewater property. Q4 revenue was down 4%, and EBITDA was down 10% for Nevada Locals casinos.

The majority of the EBITDA decline was at our Arizona Charlie's Boulder property, where we experienced reduced room nights due to the loss of a meaningful group contract relative to last year. This led to lower margins in the fourth quarter compared to last year. However, sequentially, over third quarter, the operating margin of our local casinos has improved. For our Nevada Taverns, fourth quarter revenue was up 3% compared to last year, and EBITDA was up 4%, as we acquired four new taverns under a new brand, and same-store performance remained stable. As of year-end, we had 69 tavern locations in Nevada, with 66 of them in Las Vegas. We believe it could create a portfolio of 90-100 taverns without meaningful increases in corporate overhead and have targeted 3-4 additional locations to be added in 2024.

The tavern model continues to generate attractive returns, with the last eight taverns we have built or bought creating an average ROI of over 25%. In January of this year, we completed the sale of our Nevada distributed gaming business for approximately $240 million, including purchased cash. In Q4, our total distributed operations are down meaningfully, given that our divested Montana distributed gaming operations are included in last year's results. Between the sale of our Nevada distributed operations this January and the third quarter sales of our Rocky Gap property and Montana distributed operations, we received total proceeds of over $600 million, generating over $500 million of liquidity after taxes and transaction expenses. These proceeds have significantly improved our leverage profile and enhanced our strategic flexibility.

We reduced our debt by over $60 million in Q4, bringing our total debt repayments to nearly $240 million for the year. Our outstanding debt at year-end consisted primarily of a $398 million floating-rate term loan and $276 million of fixed-rate bonds. We will repay the outstanding bonds in April, leaving us with a simplified capital structure, less than 2 times net leverage, and full availability under our $240 million revolver. Given our low leverage and liquidity profile, we are establishing a quarterly cash dividend of $0.25 per share, the first of which is payable on April 4th. In addition, we have over $90 million remaining under our stock repurchase authorization that we will use opportunistically to further return capital to shareholders.

Divesting our non-core businesses has concentrated our portfolio to wholly owned casinos and branded taverns in Southern Nevada, where we see some of the most favorable macro trends in the country. Going forward, our primary organic opportunities will come from improved performance at the Strat, an increased tavern footprint, and the entire portfolio benefiting from the continued strength of Nevada's economy. That concludes our prepared remarks. Blake and I are now available for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press Star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press Star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Carlo Santarelli with Deutsche Bank. Please proceed.

Carlo Santarelli (Managing Director of Gaming & Lodging Equity Research)

Hey, Blake. Hey, Charles. So guys, you obviously have endured, you know, some of the labor costs through the back half of this year. As you look out to next year, and all things considered, speaking towards specifically Nevada casinos, Strat, et cetera, with the room refurbishments, with Atomic Golf coming on in March, with kind of lapping some of the labor expenses, is there a scenario where margins, you know, could be flattish with some of the revenue uplifts, coupled with, you know, some of the, presumably, at least, lapping of expenses? Hello?

Charles Protell (President and CFO)

Hello?

Operator (participant)

Hello, this is the operator. Can I speak to

Carlo Santarelli (Managing Director of Gaming & Lodging Equity Research)

Do you guys hear me?

Operator (participant)

Yes.

Charles Protell (President and CFO)

Yeah, I heard your question, Carlo.

Carlo Santarelli (Managing Director of Gaming & Lodging Equity Research)

Oh, sorry. Yeah, everything went, everything went blank there, so I, I wasn't sure.

Operator (participant)

You're live.

Charles Protell (President and CFO)

Yeah. So, Carlo, can you, can you hear us?

Carlo Santarelli (Managing Director of Gaming & Lodging Equity Research)

I do, yes.

Charles Protell (President and CFO)

Okay, sorry. So if your question, the answer is yes. We would anticipate the margin trend to be flat throughout the balance of 2024. As you did reference, we did incur the renewal of the union contract at the Strat towards the end of this year, which provides some unique challenges to that property. But I think generally speaking, your comment is accurate. We would expect flat margin trends going forward.

Carlo Santarelli (Managing Director of Gaming & Lodging Equity Research)

Great. Thank you for that, Blake. And then if I could, obviously, putting in the dividend, a nice touch. Just in terms of your thought process around, you know, uses of the incremental capital with the leverage where it is, was there anything else that you guys perhaps considered, or do you feel like you're sacrificing any flexibility with the dividend policy?

Blake Sartini (Founder, Chairman, and CEO)

No. When we committed to the dividend, we did so with the expectation we could do the dividend as well as, with our significant capacity remaining, buy back stock. And ultimately, as we've repositioned the company with this deleveraging, we've repositioned for additional significant optionality. So from our perspective, we did this you know, with the very cognizant opinion that we could do both, and then the company's positioned with optionality for whatever may potentially come about in terms of M&A or other.

Carlo Santarelli (Managing Director of Gaming & Lodging Equity Research)

Got it. Thank you. Thank you very much.

Operator (participant)

Today's next question comes from Jordan Bender with Citizens JMP. Please proceed.

Jordan Bender (Senior Equity Research Analyst of Gaming and Leisure)

Great. Good afternoon. Thanks for taking my question. In the slide deck, it says, you know, you guys are comfortable bringing the leverage up to three, or you want to be under a three. Can you just maybe update us on the parameters around, you know, what you would look like, what, or sorry, what you would look for on the M&A front? You know, is it more single assets, or would you go, you know, small portfolio of, assets? Thank you.

Charles Protell (President and CFO)

Yeah. Hey, Jordan, it's Charles. So yeah, that's obviously our target is to remain under three. I don't think we're going to take our leverage up just for the sake of taking our leverage up. We have to have, obviously, capital opportunities that earn, in our mind, a return that's better than those alternatives of returning capital to shareholders. You know, so but in that context, we do look at M&A. We have looked at M&A. I think, you know, we're not, for us, looking at something that's, you know, 50 million EBITDA north, probably makes the most sense. We're not gonna spend a lot of time with things that are smaller, just given the integration time and management effort, and also in terms of moving the needle for the makeup of the company at this point.

So our focus is gonna be fairly narrow from an M&A lens. We will want to find opportunities that are either single assets or portfolios that are in the West, where the properties own the underlying real estate. So I think that, in general, is where it is. But again, I think as Blake was saying, you know, our view is we've set up the portfolio now with these divestitures, that we could be focused on returning capital to shareholders while we continue to invest in our assets and have, you know, positioned ourselves, I think, well to look at, you know, potential M&A opportunities that are accretive to us and fit within those parameters.

Jordan Bender (Senior Equity Research Analyst of Gaming and Leisure)

Great. And then just on the back of the merger announced this morning from two of the slot suppliers. You know, historically speaking, has there been any positive or negative impacts to your slot floor or even your purchasing budgets, when M&A occurs in that space?

Blake Sartini (Founder, Chairman, and CEO)

No. No, I think that's, from our standpoint, you know, standalone on their end and no effect on our end.

Jordan Bender (Senior Equity Research Analyst of Gaming and Leisure)

Understood. Thank you.

Operator (participant)

Today's next question comes from Chad Beynon with Macquarie. Please proceed.

Chad Beynon (Managing Director and Senior Analyst)

Afternoon, Blake and Charles, thanks for taking my question.

Blake Sartini (Founder, Chairman, and CEO)

Yeah.

Chad Beynon (Managing Director and Senior Analyst)

Congrats on simplifying the story and everything here. Wanted to start with the Strat midweek opportunities. I feel like that's something we've been talking about for a couple years. In the prepared remarks, you mentioned that again. For 2024, what's the convention calendar look like? You know, do you think that just overall visitation to the Strip, which remains strong, we'll finally see kind of an inflection point for that midweek, which obviously, you know, leads to margin improvement. So any visibility into 2024 midweek? Thanks.

Blake Sartini (Founder, Chairman, and CEO)

Yeah, Chad, I think, I think you're right. We have been talking about that, and we are beginning to see some green shoots in the fourth quarter of that midweek trend. Obviously, as I've talked about before, given 65% of our room occupancy comes from the OTA sites, we are dependent a lot on those citywides for some of that midweek. The calendar looks pretty robust for citywides, but as you know, some of these larger hotel casinos have added or increased size of their casino of their own convention areas, particularly some of the new properties that have just come on. That may put some pressure on the citywides. But I would bring into this conversation, last year, we had significant disruption in the spring and fall from construction of the rooms.

I think we've said in the past that aggregated to around $5 million, we felt, in hotel revenue. That disruption is gone, and we have this $75 million Atomic. These are things we can control, is what I'm getting at. This Atomic Golf facility coming on, which we believe will greatly enhance our ability to generate additional midweek traffic with that wholly owned facility outside of, you know, what these citywides are looking like. But we remain bullish on our prospects for midweek. Weekends were full, primarily. Our rate's getting better, and we believe this midweek begins to fill in, both through our own efforts, Atomic and others, as well as the robust citywide calendar.

Charles Protell (President and CFO)

And Chad, I would just, you know, add to that, we have seen improvement. If you look over the course of all of 2023, our midweek occupancy was around 66%, and our Q4 midweek occupancy, even despite F1, was at 72%. So we are seeing that improvement. That being said, in 2019, our midweek occupancy was around 85%. And so that 125,000 missing room nights for the Strat relative to 2019, that's worth about, you know, $40 million in revenue to the property at just current, you know, spend levels that we're seeing, and so that's about $20 million in EBITDA. So that's where we really see the opportunity of the property. That's the reason we're making the investments we are, and forming the partnerships we are with folks like Atomic and others.

So we're excited now that we've got the bulk of construction behind us, Atomic opening, to really see what the property does, as we go through this year.

Chad Beynon (Managing Director and Senior Analyst)

Thank you. And then with respect to eventually getting to a goal of 90-100 Taverns, we've heard of increased competition in the market. Charles, you talked about the returns, so it certainly sounds like a business if you know how to do it well. It sounds like a good business to be in. But the new opportunities, the 3-4 in 2024 and then beyond that, are these conversions from other operators that just don't have kind of the best practices that you have? Are you getting into new housing markets that are expanding in the valley? Maybe just a little bit more color around the competition and kind of where these new opportunities can come from? Thanks.

Blake Sartini (Founder, Chairman, and CEO)

Yeah, Chad, as we divested of the, call it the third party route side of the business, we were continuing to focus on our wholly owned tavern business. And by virtue of that simplification, if you will, we are, I would say, pretty humbly at the top of the pyramid in terms of new sites that are coming about and what we would call AAA locations. We tend to get the first phone call on those sites because of our size, scale, scope, and our success in operating taverns. So we are very dialed into new tavern sites around the valley. These would be greenfield sites that we're very good at building boxes that have solid returns, as Charles mentioned.

We do see opportunity at times for acquisitions, which this year we have, I think we have four coming on.

Charles Protell (President and CFO)

Yeah.

Blake Sartini (Founder, Chairman, and CEO)

The 41 in the north that were prior owners that we felt locations met our criteria and that their demographic met our criteria. There are going to continue to be those opportunities, but we're focused on mostly new sites at this point going forward, and we believe that the landscape can provide the amount of sites over the years that will get us to that 90-100 number.

Chad Beynon (Managing Director and Senior Analyst)

Thank you both. Appreciate it.

Blake Sartini (Founder, Chairman, and CEO)

Thanks, Chad.

Operator (participant)

Our next question is from John DeCree with CBRE Securities. Please proceed.

John DeCree (Head of Institutional Investor Research)

Good afternoon, Blake. Good afternoon, Charles. Wanted to revisit your comments about F1. I think it's, you know, fairly common. We've heard from a number of your peers, you know, not on Center Strip, or positioned to the ultra high end. Curious your thoughts as to that event for next year and going forward, if there's some opportunities that you think could either change for the city overall or that you might be able to do differently to, you know, to maybe maximize the contribution to the Strat for next year and future periods?

Charles Protell (President and CFO)

Yeah, I think it's a good question. We've had some discussions with other operators. We think there's, quite frankly, a lot of things that they could do to broaden the appeal and the audience for F1, not only to our customers, but to locals here in Las Vegas. So things like selling individual day tickets instead of a package, you know, potentially making the start times a little bit earlier, you know, allowing for dedicated, you know, casino areas, so it's easier access for our guests. So those are just a few things that, you know, we shared with the folks at F1, and we've talked about with other operators.

But I think there is a general acknowledgment that the event needs to appeal to more than just high-end properties at the Center Strip that are connected to the event to make it a real success for all of Las Vegas.

Blake Sartini (Founder, Chairman, and CEO)

Yeah, there, there is an organized, non-Mid-Strip co-op that is, that is working together, if you will. There are significant numbers of people involved and operators involved, working with F1 to do just what Charles said, try and activate more of the city during the event. Even though we didn't participate in what we expected to be the upside, I personally think it was a great event for the city, a worldwide event for the city, the way it was, it was packaged on TV, particularly internationally. So I think taking one for the team last year was probably, something that, that, you know, knowing what we know now, we would do again. But going forward, we want to, we, we want to work with them to be more involved in the activities around that week or 10 days. It's not just the weekend.

It's a week or 10 days, and this co-op of these non-Mid-Strip operators, I think, is going to be successful in gaining some traction, certainly better than last year.

John DeCree (Head of Institutional Investor Research)

Great. That's, that's good to hear. I think we've, we've heard similar, Blake, so appreciate your thoughts on that as well. And then maybe the follow-up question, bigger picture at the Strat. So, quite a bit of reinvestment lately. You've mentioned construction disruption, last year. What's left, in the near term to do at the Strat? And then perhaps ask that in a bigger context of some of the land that you have around. Obviously, Atomic Golf is activating some of that, but, you know, I think you've got, you know, quite a bit more that you could maybe utilize or monetize. You've talked in the past about maybe third-party partners. Curious if you've had any updated thoughts or further conversations on those opportunities since, you know, the last we kind of talked about it.

Blake Sartini (Founder, Chairman, and CEO)

Yeah, we have. You know, there's no, there's no major disruptive, additional capital programs planned at the Strat at this point. As Charles mentioned, we have 1,300 of our 2,400 room inventory, pretty much brand new. The other 900 or 1,100, let's call it, rooms, are within 7-9 years and in, in, in pretty good shape. So the hotel itself is situated pretty well. We are, and we have embarked on a slot floor upgrade, which is, we think will be meaningful this year, which we, which we anticipate, being done here by mid-March. And you know, there are other projects, small bar design projects and things like that, designed to capture more of that traffic coming through the casino.

So in terms of disruption, I think we're pretty much done with that, certainly this year. On the adjacent property, we own approximately six acres across the street that we've had significant conversations with many different types of uses that ultimately we want to land on something that clearly brings more inertia to the Strat in terms of whether it's a non-gaming hotel. We have apartment, condo-type discussions and frankly, some out-of-the-box entertainment-type discussions. So we are very active in trying to activate that property in and around the Strat. And in addition, by the way, we have property around our other facilities that we're having the same conversations about how we can energize our other properties with adjacent property that we currently own.

John DeCree (Head of Institutional Investor Research)

Fantastic. That sounds great, Blake. Thank you very much.

Operator (participant)

The next question comes from David Katz with Jefferies. Please proceed.

David Katz (Managing Director)

Hi, afternoon. Thanks for taking my question. I wanted to go back to the M&A landscape and ask it a bit of a different way, which is the last time we talked about this 90 days ago, is just given how quickly the landscape has improved in a lot of areas, you know, for consumers, capital markets, et cetera, is the market different today than it was 90 days ago, and how so?

Charles Protell (President and CFO)

I think improving is definitely the word to be using, and I think you'll see it continue to improve as the financing market gets better. So I think that's all predicated, obviously, on interest rates. And so as we see those Fed rate cuts coming, and people's anticipation of that, and plus, I think once folks settle into somewhat of the new margin environment, it's easier to predict cash flows of the businesses that we all have and where the consumer demand is. And so as long as that is stable and rates starting to come down, I think ultimately you'll see more consolidation, not only in our industry, but others.

David Katz (Managing Director)

Got it. So if I can follow up a bit more specifically, are there more deals? Is the bid-ask different, narrower, or the same? You know, in what way would we note improvement?

Charles Protell (President and CFO)

So I think it's certainly narrowing, but again, it's about the expectations. So, you know, we've had situations in the past where people are trying to market assets off of 2021 numbers, and people are buying assets off of 2025 numbers. So that bid-ask is now narrowed in terms of the discussion. But so you know, I think, you know, again, it comes down to where are, where are the financing markets, and I think those ultimately only get better. I think the REITs play a large part also in M&A, and so the extent that their cost of capital improves as rates come down, I think that they'll play a big part in advancing consolidation in the sector, and I'd anticipate that to happen over the course of this year.

David Katz (Managing Director)

Perfect. Thank you very much.

Operator (participant)

At this time, we are showing no further questioners in the queue, and this does conclude both our question and answer session, as well as our conference. Thank you for attending today's presentation, and you may now disconnect.