Red Rock Resorts - Q2 2024

Transcript

Operator (participant)

Good afternoon, everyone, and welcome to the Red Rock Resorts second quarter 2024 conference call. All participants will be in a listen-only mode. Please note this conference is being recorded. At this time, I'd like to turn the conference over to Stephen Cootey, Executive Vice President, Chief Financial Officer, and Treasurer of Red Rock Resorts. Please go ahead.

Stephen Cootey (EVP, CFO and Treasurer)

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts second quarter 2024 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreeger, and our executive management team. I'd like to remind everyone that our call 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. During this call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release, Form 8-K and Investor Deck, which were filed this afternoon prior to the call. Also, please note that this call is being recorded. Let's start off by stating that the second quarter 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 second quarter in our history. In addition, our Las Vegas operations achieved near record Adjusted EBITDA margin. In addition to showing strong financial results in the quarter, we continue to be pleased with the financial performance of our Durango Casino Resort. 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. With two full quarters under our belt, the property increased visitation and net theoretical win in the surrounding Durango area by approximately 90% and 88%, respectively, while signing up over 55,000 new customers to our database over the same time period.

While it's still early days, Durango continues to ramp and remains on track to become one of our highest margin properties with the medium and long term, as well as generate a return consistent with or in excess of our prior greenfield developments. That said, and as stated on past earnings calls, we continue to experience cannibalization in line with our expectations, primarily at our Red Rock property, due to the Durango opening. But consistent with our past performance history, we expect to backfill this revenue, 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. Based on our success at Durango, we are pleased to announce an expansion of the property.

Our current plans for the next phase of Durango will add over 25,000 sq ft of additional casino space, including a new high-limit slot and bar area. In total, the expansion will add to Durango, the Durango Casino floor, an additional 230 slot machines, including 120 slot machines dedicated to our new high-limit room. In addition to the expanded casino space, we will be adding an additional covered parking garage with almost 2,000 convenient parking spots, significantly improving customer access to the property, while providing us flexibility for future expansions at Durango. While we are still in the planning and budgeting stages of the expansion, we currently expect construction to start later this year. We'll provide more information of this, on this expansion on future earnings calls.

With regard to the rest of our 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. With the disruption we experienced at Palace Station from the roadwork that impacted the ingress and egress to the property and the disruption we experienced at the Sunset Station from a major renovation, upgrading the Racing Sports Book and casino, both tailing off in the middle of the quarter, the team delivered another strong quarter across all business lines. With this quarter marking the sixteenth consecutive quarter that the Las Vegas operations delivered Adjusted EBITDA margins in excess of 45%. Now, let's take a closer look at our second quarter.

With respect to our Las Vegas operations, our second quarter net revenue was $483.2 million, up 17.1% from the prior year's second quarter. Our adjusted EBITDA was $223.1 million, up 15.6% from the prior year's second quarter. Our adjusted EBITDA margin was 46.2%, a decrease of 61 basis points from the prior year's second quarter. On a consolidated basis, our second quarter net revenue was $486.4 million, up 16.9% from the prior year's second quarter. Our adjusted EBITDA was $201.7 million, up 15% from the prior year's second quarter. Our adjusted EBITDA margin was 41.5% for the quarter, a decrease of 67 basis points from the prior year's second quarter.

In the quarter, we converted 58% of our Adjusted EBITDA to operating free cash flow, generating $117.6 million, or $1.11 per share. This brings our year-to-date cumulative free cash flow to $246.2 million, or $2.33 per share. This significant level of free cash flow was either reinvested in our long-term growth strategy, reinvested into our existing properties, or returned to our stakeholders via debt paydown, share repurchases, and dividends. As we finish up the second quarter, we remain focused on our core local guests as we continue to grow our regional and national segments across our portfolio.

When comparing our results to last year's second quarter, we continue to see upside from strong visitation and carded slot play across the majority of our database, including our regional and national segments. This strength, coupled with strong spend per visit across the database, allowed us to enjoy record second quarter revenue and profitability across our gaming segments in the quarter. Turning to the non-gaming segments, both hotel and food and beverage continued to grow year-over-year and deliver record revenue and profitability in the second quarter. Our hotel division experienced its highest-ever second quarter revenue and profit in our history, driven by our team's 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 second quarter revenue and profit, driven by higher average check and cover counts across our food and beverage outlets. With regard to our Group Sales and Catering businesses, as mentioned on our last earnings call, we face a tough second quarter comparable and expect to face tough comparables for the remainder of the year, mainly because of COVID sales that were postponed and rebooked into 2023. That said, we are seeing positive momentum in both of these business lines as we continue to build our pipeline into 2025. As we look ahead into the third quarter, we are seeing stability in the locals market and across our customer database and remain confident in our business prospects moving forward.

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 remaining the employer of choice in the 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. Our continued success demonstrates 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, all while taking a balanced approach in 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 second quarter was $136.4 million, and the total principal amount of debt outstanding was $3.47 billion, resulting in net debt of $3.34 billion. As of the end of the second quarter, the company's net debt to EBITDA ratio is 4.2 times. As we stated on previous earnings calls, our leverage has plateaued and is beginning to ramp down as we look to delever to our long-term net leverage target of 3 times. Also, during the second quarter, we made a distribution of approximately $53.5 million to the LLC unit holders of Station Holdco, which included a distribution of approximately $31.1 million to Red Rock Resorts.

The company used the distribution to make its second quarter estimated tax payment, pay its previously declared dividend of 25 cents per Class A common share, as well as fund a purchase of 75,000 Class A common shares at an average price of $52.29 per share, under its previously disclosed $600 million share repurchase program. The second quarter purchases bring the total number of shares purchased under the program and through our 2021 tender to approximately 14.3 million Class A common shares at an average price of $45.32 per share, reducing our share count at quarter end to approximately 105.5 million shares.

Capital spend in the second quarter was $78.6 million, which includes approximately $35.9 million in investment capital, inclusive of the Durango Project retainage, as well as $42.7 million in maintenance capital. For the full year 2024, not including the spend to close our Durango project, we still expect to spend, capital spend to be between $140 million and $180 million, spread between maintenance and investment capital. During the quarter, we remained committed to strategically investing and offering new amenities to our guests at our existing locations in order to drive incremental visitation and spend on our properties.

During the quarter, we successfully opened Ortikia Mediterranean Grill at our Green Valley property and opened Lindo Michoacán restaurant at our Palace Station property and completed an upgrade to our racing sports book and partial casino remodel at Sunset Station. We are pleased with the guest response and the early results from these new amenities. We expect to continue to invest in our existing properties throughout 2024, including adding additional restaurant offering at our Palace Station property, as well as 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 and long term, and are looking forward to moving beyond the disruption challenges of these properties as we introduce these new amenities to our customers later this year. Turning now to North Fork.

We continue to move forward with the project, but we are finalizing the design and continue to work through the project budgeting process. We expect to be in preparatory site work on the project next month, with construction soon to follow in the fourth quarter of this year. The total construction time for the project is currently anticipated to be between 18 and 20 months, putting the opening of the resort into 2026. We are very excited to be making progress on this project, and we will 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 September thirtieth to Class A shareholders of record as of September sixteenth.

When we combine our recent share repurchases with our special and regularly declared dividends, we've returned approximately $168.5 million to our shareholders in 2024. The company continues to have a strong year, and Durango continues to validate our long-term growth strategy and demonstrate the power of our own development pipeline and real estate bank, which consists of over 445 acres of developable land, positioned in highly favorable areas across the Las Vegas Valley. This pipeline, coupled with our best-in-class assets and locations, gives us an unparalleled growth story 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.

Our success starts with them, and they continue to be the primary reason why our guests return time after time. We would again, to thank them recently for voting us Top Casino Employer in the Las Vegas Valley for the fourth consecutive year. And finally, we thank our guests for their loyal support each of the last six decades. Operator, this concludes our prepared remarks today, and we are ready to take questions.

Operator (participant)

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. If you'd like to ask a question, you may press Star and then one using a touchtone telephone. To withdraw your questions, you may press Star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is Star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Joe Graff from J.P. Morgan. Please go ahead with your question.

Speaker 13

Good afternoon, guys. Steve, or Frank, Lorenzo, I was hoping maybe you can give us some sort of sense of a range of CapEx associated with the Durango expansion, and particularly with respect to the expansion of the casino floor, and adding some slot areas in the bar. Do you anticipate any of this construction to result in disruption at all? And then I have a quick follow-up.

Stephen Cootey (EVP, CFO and Treasurer)

I'll take the first part of it, Joe. I think it's right now, we're still going through the design and planning process, so we expect to have a budget in the next month or so, and we'll be announcing that on our next earnings call. In terms of disruption, expect it to be the minimal disruption to the property.

Speaker 13

Okay. And then, you mentioned earlier, Steve, in your prepared remarks that, you know, the Red Rock cannibalization was in line with your expectations. If we look at your performance in the 2Q year-over-year, and we exclude whatever the contribution is from the incremental EBITDA generated from Durango and the cannibalization impact at Red Rock, the property, does that imply that the rest of the portfolio was up year-over-year on an EBITDA basis? Is that the implied math?

Stephen Cootey (EVP, CFO and Treasurer)

Yeah. I mean, effectively, if you kind of strip away exactly what you talked about, yeah, the core portfolio is probably flat. But it should be noted that, you know, with Durango, probably, you know, we've grown operating LVO EBITDA over $30 million, which is pretty much the majority of the Las Vegas growth story over the last quarter.

Speaker 13

Yep, got it. All right, thanks, guys.

Operator (participant)

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

Speaker 13

Hey, guys. Thank you. Steve, you talked about starting Durango kind of later this year. Obviously, in the slide deck and previously, you guys have talked about kind of the next legs of unit growth. Is there a scenario where you could basically get started with a next project while phase two, so to speak, at Durango is ongoing?

Scott Kreeger (President and COO)

Yeah, Carlo, this is Scott. Maybe I can take that one. As we said in past calls, one, we like the optionality of our development portfolio. So we have several options that we can entertain, and we're driving all of those projects through their entitlement process. We've mentioned Inspirada as a potential project that's on the forefront, and really, we'll just have to see how we manage capital. But there is the possibility of doing joint development as we go forward.

Speaker 13

Great, thank you. Then just a quick follow-up. If you guys could comment at all on, in terms of what you're seeing across the locals market, I mean, as you know, we all see, you know, state-reported GGRs, and there's only so much you could take from them. But in terms of the relative health of the market, spend levels, et cetera, as well as kind of the promotional environment, is there anything that you guys would identify as being a notable change in the 2Q relative to, say, the 1Q?

Scott Kreeger (President and COO)

Carlo, this is Scott again. Yeah, let's take it from a database perspective first. One, you know, we see stability and consistency in Q2 performance, and as we've kind of going through July, we're seeing that trend continue. When you look at the individual segments of our database in Q2, all of our segments had positive growth year-over-year, with specifically high performance in our VIP section, which is attributed to our shift towards a higher-net-worth customer, and also in our regional and national segments as well. So we saw strong growth in our new member signups. We were up about 23% in new member signups. Our overall active database grew double digits, and if you look at our uncarded segment of our business, it was stable, while in aggregate, growing up over 11%.

So when we look at all of our database trends and our customer measurement metrics, we're very optimistic about where we're at and what we're seeing going into Q3.

Stephen Cootey (EVP, CFO and Treasurer)

I think, Carlo, your second part was economic environment. I think what we're seeing is rational and consistent and really no change systematically from what we've seen in the past.

Speaker 13

Understood. Thank you both very much.

Operator (participant)

Our next question comes from Sean Kelly from Bank of America. Please go ahead with your question.

Shaun Clisby Kelley (Analyst)

Hi, good afternoon. Thank you all for taking my question. Steve or team, just wanted to ask about sort of the implications of Durango on margins. Obviously, when you open a property, you tend to, you know, overstaff and want to get all the service requirements right. Where are we at in that, you know, kind of balance as we sit here and look at the results in the second quarter? And just sort of trying to square that with the kind of down 60 this quarter and obviously have a slightly different comps year-over-year on the margins too. So just kind of where do we sit right now in terms of margin and cost stabilization at Durango?

Scott Kreeger (President and COO)

... Yeah, this is Frank. Remember, it's only the second full quarter that we've had this property open. You know, this is a long-term asset in a market that is continuing to grow month by month with new population. We're extremely happy with the results so far, but, you know, we've always said that it takes at least three or four quarters, really, to get everything fine-tuned. I think we're on our way, and we're super pleased with results.

Stephen Cootey (EVP, CFO and Treasurer)

Yeah, Sean, I think also we should kind of revisit Q2 of 2023. If you recall, you know, last year was the first time we became a self-insured plan, and the plan has run exceptionally well last year, so we were able to take a benefit of almost a $3 million accrual benefit in Q3. So when you take that out, you know, margins, well, then, and we reflect and report it down 60 basis points, they were effectively flat to slightly up.

Shaun Clisby Kelley (Analyst)

Steve, I guess, kind of follow up on that last point, is it too much of a reach then, and maybe help me factor in that adjustment to think of the same store portfolio, if we have a little bit of drag net for Durango, could the same store portfolio have been flat in the quarter? Or are we there on a margin basis, or is that too aggressive?

Scott Kreeger (President and COO)

You do have a little bit of labor effect in there. So as we mentioned in the first quarter, around February, we did do a proactive labor increase across the board to kind of mark the market on labor. So right now, we've been able to absorb that labor increase. Teams are doing a really nice job of managing their labor, and it really, our labor increases are really at market right now when you look at the rest of the valley's increases.

Shaun Clisby Kelley (Analyst)

Thank you so much.

Stephen Cootey (EVP, CFO and Treasurer)

Yeah, I was going to say it's slightly below flat. It's darn close.

Shaun Clisby Kelley (Analyst)

Impressive. Thanks, guys.

Operator (participant)

Our next question comes from Jordan Bender from JMP. Please go ahead with your question.

Jordan Maxwell Bender (Analyst)

Great. Thanks. As your operating leverage continued to improve here into the second quarter, would you expect to get back to that 50%+, which I believe you've targeted historically, just given what you see in the business today?

Stephen Cootey (EVP, CFO and Treasurer)

Are you referring to flow-through, or are you referring to margins? I don't think we've ever put forward a 50% margin target.

Jordan Maxwell Bender (Analyst)

Flow-through.

Stephen Cootey (EVP, CFO and Treasurer)

Yeah, flow-through, right now, we're roughly about 37.5%, and, you know, that is our target, and I think we'll eventually be able to get there. You just have to fight for some of the cannibalization, as that we've talked about in the earnings remarks. It usually takes about 2-3 years for the backfill of Red Rock to fill in, and that's when you really start getting the benefit of that leverage and flow-through.

Jordan Maxwell Bender (Analyst)

Okay, and just on the follow-up, when you think about your capital allocation, you know, at the right price, would you look at an asset or assets coming up for sale in the Las Vegas locals market? Thank you.

Stephen Cootey (EVP, CFO and Treasurer)

Yeah, I think we've said this in the past, and we'll, you know, we will look at everything, but I think as Scott articulated, we have a great owned pipeline of growth that we're currently working on, and so the bar would have to be incredibly high.

Scott Kreeger (President and COO)

Yeah, it would have to be very high. I would tell you that all of our development opportunities are where all the growth is taking place in the suburbs, and we think those are far better than, you know, looking at older assets, you know, maybe in areas that are not growing as fast.

Jordan Maxwell Bender (Analyst)

Great. Nice quarter.

Scott Kreeger (President and COO)

Thank you.

Operator (participant)

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

Steven Moyer Wieczynski (Analyst)

Yeah, hey, guys. Good afternoon, and congratulations on the quarter here. So, Steve or Scott, if we look at... I'm looking at slide 37 in your deck. Can you just kind of walk me through some of the assumptions that are kind of going on here with the, you know, with that graph? I'm just trying to understand better, you know, maybe some of the assumptions that need to happen in order to move, you know, Durango from that. You're kind of showing that 20% ROI to, you know, if the property got to, what, 180 of EBITDA, that would be, what, 23%, somewhere in that range?

Just trying to understand that a little bit better and maybe, you know, how you kinda came up with that.

Stephen Cootey (EVP, CFO and Treasurer)

Sure, no problem. This was the slide here is really so much not so much focused on Durango, but really focused on the 445 acres of real estate and how we view the real estate as opposed to a per acre price. But what you're seeing is on the left hand of the chart, for those of you who can't follow at home, we originally purchased the Durango site for $30.8 million. And then we sold off a piece of the Durango land for $23.8 million, so your net cost of your land is roughly $7 million. The project has come in around $800 million.

Then the charts on the right, on the left, the $128 million was just really EBITDA, you know, analyst consensus that we were able to pull from your research reports. What we've stated was that in, you know, within three years, that we would be at a 20% ROI, so that's how we came up with the $160 million. The $180 million long-term growth platform is just to outline that these properties don't stop growing after three years. They continue to grow. If you look at Red Rock, it's, you know, it opened in what, 2005, and it's continued to grow ever since.

Okay. That's perfect. Thanks, Steve. And then, second question, you know, more of a high-level question, but, you know, obviously, there's been a lot of, you know, kind of rumors going around about M&A across the gaming space over the last, you know, call it six weeks or so. Just, you know, just wondering if you could help us think about your current appetite for M&A, and I'm guessing you probably don't have much of an appetite for, you know, for buying versus building, given your large, you know, land bank. But just wanted to hear if anything has kind of changed on that front.

Frank J. Fertitta (Chairman and CEO)

... No, I think we touched on it maybe a little bit earlier, and so we will look at everything, 'cause it's the right thing to do as a public company. But, you know, Scott, I think articulated we have an owned growth platform that we are busy executing on right now.

Chad C. Beynon (Analyst)

Okay, gotcha. Thanks, guys. Appreciate it.

Operator (participant)

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

Barry Jonathan Jonas (Analyst)

Hey, guys. I know it's been pretty hot in Vegas. Curious if that's impacted the top line, or should we be modeling maybe a meaningful increase in energy costs, for Q3? Thanks.

Scott Kreeger (President and COO)

Yeah, this is Scott. Actually, if you look at our energy costs for the quarter, the only increase in energy costs is a kind of a pro rata increase of adding Durango. If you look at our core six, property energy, it's actually flattened down. So, you know, these energy costs are starting to, to come down slightly. Plus it's our team's, you know, efforts to continue to look for ways to conserve, energy and, and lower that cost. But no, I wouldn't anticipate that it goes up any more than what it's been trending at.

Barry Jonathan Jonas (Analyst)

Got it. Okay. And then, you know, appreciate the comments about the health, or the stability of the consumer. Just curious if you could maybe talk a little bit about the low end. I know that was something where you had seen, I think, previously some growth, while others had seen the, a little more contraction. So curious how that's trending.

Scott Kreeger (President and COO)

I think you just nailed it. So we had reported in the past that there was some slight growth, and that's stable and consistent into this quarter as well. So we're slightly up in our lowest-end customer segment, which, by the way, as we've said in the past, it's really not our core focus. Our core focus is to go after these customers that are high net worth and the high growth areas of the valley. And so we're encouraged by the fact that even our lowest end of the database is showing positive growth.

Frank J. Fertitta (Chairman and CEO)

And as you know, Scott mentioned earlier on, uncardable handle is up, which is another view.

Barry Jonathan Jonas (Analyst)

Got it. Got it. All right. Thank you so much.

Operator (participant)

Our next question comes from Stephen Grambling from Morgan Stanley. Please go ahead with your question.

Stephen Grambling (Analyst)

Hey, thank you. So it looks like you already have the 15%+ return on Durango, and a continued ramp gets you to 20%+ returns. I realize you haven't given the CapEx for the expansion project, but how do you typically think about the returns and spend on expansion projects like what you're thinking about Durango versus a typical greenfield build?

Frank J. Fertitta (Chairman and CEO)

I think we look at the returns in the same manner that we expect that 20% ROI net of any cannibalization. I think what you're really thinking about is on the exist-- with the Durango, I think the risk is just much lower-

Stephen Grambling (Analyst)

Yeah.

Frank J. Fertitta (Chairman and CEO)

- because we know, we know the demographic profile, and we know the needs of the resort.

Stephen Grambling (Analyst)

And then similarly, I know it's early, but when you look at the future ground-up development projects you've got out there, is there anything that may make those different to Durango in terms of targeted returns, or does this, you know, initial out-of-the-gate execution, give you more confidence in the potential to build in those markets?

Scott Kreeger (President and COO)

Well, look, I think we're probably most specifically thinking around the Inspirada area, as a, as a next step. When we look at the demographic profile out there, it's one of the fastest growing areas in the highest net worth area of the valley. If we do our math, the project could sustain those returns in the near future. It really is just a matter of capital allocation and opportunity, as we weigh those opportunities. And as time goes on, that area is filling in more and more, and that'll just bolster our, our view on the return there.

Frank J. Fertitta (Chairman and CEO)

Yeah. I think our thesis is still the same on new greenfield projects, that, you know, our target is to, you know, in year one, get a low double-digit return, growing over time to 20%+ return.

Scott Kreeger (President and COO)

And that's net of cannibalization.

Frank J. Fertitta (Chairman and CEO)

That's right.

Stephen Grambling (Analyst)

Great. And if I can just sneak one other one in that's changing directions a little bit. I think last quarter, you called out ingress, egress around Palace Station. Has that subsided, or are there still any kind of one-offs to think about and call it the core portfolio that could still be weighing on trends?

Frank J. Fertitta (Chairman and CEO)

Well, the project that was affecting Palace Station is complete at this point, but I'll let Scott, you know, address for you guys. A lot of the interstates and everything around Las Vegas over the next several years are gonna, there's a lot of projects coming up, and so current project is over with, and...

Scott Kreeger (President and COO)

Yeah, so things are back to normal at Palace. We had quite a bit of traffic disruption. Now, that's all freed up, and our customers are finding their way back to the convenient location, and we're seeing that start to come through in the financial performance. The other disruption that we talked about was Sunset. So we've completed that race and sportsbook remodel. And then the other big piece of that is a new Yard House restaurant that'll come online in the fall. And so we're super excited about football season over at Sunset, and start to look at the true benefit of the spend there.

What Frank mentioned relative to traffic is that there is a lot of federal dollars coming into Las Vegas, and part of the great thing about Las Vegas being one of the fastest growing cities in the country is you have to keep up with infrastructure. So while we will see some arterial major freeway improvement, in the long run, it just makes it easier for people to get to and from our properties that are mostly located on that beltway.... Awesome. Thanks so much.

Speaker 13

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

Dan Politzer (Analyst)

Hey, good afternoon, everyone. A question on, in terms of the margins, and maybe asking a bit different way. I think this is the first quarter in maybe, you know, seven or eight quarters where gaming revenues have actually outgrown non-gaming. And I think a piece of that, you know, to your point, was the group piece, and the comps there. So I guess the question is, as we think about the back of this year, should we expect that dynamic to continue, where gaming revenues maybe outgrow those non-gaming revenues?

Stephen Cootey (EVP, CFO and Treasurer)

Well, I can tell you about the, I mean, when you kind of look at the gaming revenue, I think you touched on it, before, like food. So food and beverage was like, you know, there was, as we mentioned, we had a tough comp with catering. And we mentioned those, you know, those tough comps will kind of continue to 2024, with green shoots appearing in 2025. And on the room side, you know, there were some, you know, some linen expenses that we had to overcome, as well as, you know, some, some group cancellation. And again, same along with the catering. You know, while we're facing tougher comps in the back half of 2024, we expect some green shoots to happen, in 2025.

Dan Politzer (Analyst)

Got it. And then just in terms of the overall environment, it looks like weekly earnings have actually started to tick higher just in the most recent months versus the first quarter, even the fourth quarter. So, you know, to what extent would you say, if you look back the last couple of months versus last six or nine months, do things maybe feel like they're starting to get a little bit better in the market?

Stephen Cootey (EVP, CFO and Treasurer)

I mean, from a labor perspective, right? We, I mean, we, I mean, Scott touched on that we're one of the fastest growing demographics, you know, in, in the United States, and that's supported by an incredibly diverse job market, right? Which right now is growing about 2.3 times faster than the United States average. And last month marked the 38th consecutive year-over-year employment growth number. So, and to your point, you did comment on the, on earnings growth. It was up 5.1% year-over-year, starting in June. And we overall expect aggregate household income to continue even to grow, to grow over 11.7% over the next five years. So things feel good from an economic standpoint.

Dan Politzer (Analyst)

Got it. Thanks so much.

Speaker 13

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

Chad C. Beynon (Analyst)

Afternoon. Thanks for taking my question. Just in terms of the Durango 2.0, I think you mentioned 230 slot machines, which would add about 10% capacity, 25,000 sq ft. That's significantly more in terms of space. So it sounds like they'll be more spaced out for high-limit, et cetera. But why was this the right number? And do you think there will be cannibalization at the property, or this will be additive to, you know, what you're currently generating on the slot floor? Thanks.

Scott Kreeger (President and COO)

No, we expect it to be additive, otherwise, you know, we wouldn't be doing it. And I think, the additional parking and everything sets us up long term at Durango for the phase three, you know, and, the ability to bring more amenities and more reasons to come to Durango long term. I mean, this is what we've done historically at all of our properties. We get phase one open, and then we continue to do master planned expansions as we see the demand and as we see the amenities that our customers are looking for. And I'll just add to that, the addition of a new slot high-limit room is just testament to our strategy to invest in higher net worth customers, and we're seeing that in our highest database segment, in our out-of-town and regional.

And the more we invest in high-limit experiences and VIP. The returns have been really good on. Yeah, been great returns, and so we're just leaning into that.

Chad C. Beynon (Analyst)

Great. Thank you. And then, on the tavern business, I believe last quarter you said first opening could be sometime around September. Has anything changed in terms of the target number of units, the timing of that, and kind of how that should look over the next year? Thanks.

Scott Kreeger (President and COO)

No, you got it right. So the first one will come online in September, the second one in January, and the third in June of next year. So we have contracted 7 units. We're always out there looking and trying to cut deals on new development opportunities, so that's an ongoing effort. But that's the timing of the first three.

Chad C. Beynon (Analyst)

Excellent. Thank you, guys.

Speaker 13

Our next question comes from Brant Montour from Barclays. Please go ahead with your question. Good afternoon, or good evening, everybody. Thanks for taking my questions. So, on Durango phase two, I realize you're in the design phase, so it's probably a little bit early. But, I was curious if you could talk a little bit more about the non-gaming aspect and maybe just high level, the different avenues that you could take the build-out, assuming that there would be non-gaming that is in phase two, it doesn't slip to phase three. But, you know, would that skew more, or are you thinking it could skew more group or, or perhaps more leisure, in terms of the product? And sort of what would be the risk return differentials between the sort of various avenues you could take that?

Scott Kreeger (President and COO)

This is Scott. Let me take this in a couple of different directions. One, when we look at the Durango Zone growth, it's the fastest area of growth in the valley, and we've grown the market with our opening. There's two expansion opportunities. They cater to different aspects of the business. So a fully integrated resort like Red Rock has day parts in the weekday, day parts in the weekend that serve different purposes. The first, what we would call the north phase expansion, would be more entertainment-focused and day trip-focused for the weekends. So things like movie theaters, things like potentially a country western dance hall. These types of things tend to drive weekend visitation, that type of programming.

On the other side of the property, it's more resort-driven and drives midweek visitation for the property, things like a resort, hotel expansion, spa, meeting space. And so what you end up with, after all of these phases, a truly integrated resort that has different, activities and different day parts during the week.

Speaker 13

That's really helpful. Maybe just a quick follow-up. You know, I think the comment earlier was that it was possible to do a joint development with a greenfield. Maybe you could just talk high level about the different factors that would go into that, you know, macro and/or micro, whether it's, you know, a Fed rate cut or if it's the health of the locals consumer. What would be the primary things that would factor into that?

Stephen Cootey (EVP, CFO and Treasurer)

Yeah, I think the first step is really getting the garage down and set, because that's gonna help us with the laydown area and be able to go to either the north or south, as Scott said. But I think in terms of doing multiple projects, I think there are a couple things to consider, and you touched on them. The economic health of Las Vegas, you know, absolutely critical, making sure the health of our customers are there, the continued absorption of Durango, as well as the backfill of Red Rock. And then lastly, really the balance sheet, and it's about capital allocation. As we said in the past, that we take a balanced approach to capital, long-term growth, reinvesting in our properties, but also returning capital to our shareholders.

So we're cognizant that we need to keep, make sure the balance sheet remains flexible.

Speaker 13

Excellent. Thanks, everyone.

Operator (participant)

Our next question comes from John DeCree from CBRE. Please go ahead with your question.

John G. DeCree (Analyst)

Good afternoon, guys. Thanks for taking my question. Maybe just one from me. I think we covered a lot of ground, but go back to a stat. I think I heard Steve in your prepared remarks about 55,000 new customers signed up at Durango. That kind of stood out to us. I mean, we kind of think about almost everyone in the valley, you know, probably is already a Boarding Pass member. So, you know, curious how that lined up at Durango with your expectations and kind of what it tells us about some of the untapped markets where you have development sites. Is that, you know, is that number that was something in line with your expectations, or you know, these stats, it kind of sounds like maybe there's quite a bit more of untapped demand.

So just curious your thoughts on, you know, new customer sign-ups and where you're seeing incremental demand and, you know, how that fit with your expectations?

Scott Kreeger (President and COO)

This is Scott. I think Steve and I will both comment on it. One of the things I'll take a pivot a bit. The most impressive thing that I see is that the growth of our existing known customers in that zone is in the high 70 percentile. And then when you look at new-to-brand growth in the area, it's nearly 90%. So Frank talks about this a lot, and so does Lorenzo, that when we come into an area, we grow the market. So those stats, coupled with the 13%-15% growth in the area over the next 5 years, really kind of support that. And new members signing up is a piece of that.

Stephen Cootey (EVP, CFO and Treasurer)

Yeah, it just kind of points to the importance of location and proximity to your customers, John. And so when—and to add to what Scott was saying, you know, spend per visit, visits, these are all positive trends or trends that can be improved upon and grown in all nearly all of our development properties. And as Frank kind of talked about earlier on, you know, these development areas tend to be in the highest growth areas within Las Vegas Valley.

John G. DeCree (Analyst)

Understood. Maybe one follow-up, guys, on the similar topic on the cannibalization you've expected, and you've seen at Red Rock. That cannibalization, I don't know if you, you know, kind of have this granularity in front of you, but is that customers that are just living closer to Durango, going to Durango more frequently than Red Rock? Is it Red Rock customers just maybe taking a trip or two, you know, at the new property? I guess, how would you characterize that? Are you definitely just seeing as at a proximity, seeing those who live closer to Durango are just going there more frequently, or are you seeing something else as it relates to the cannibalization that you expected and how the customer's behaving?

Scott Kreeger (President and COO)

I think it's very similar to what we've seen, you know, over the last 30+ years of developing new properties in Las Vegas. And that's where we gave guidance that we expected year one to be, you know, ±10% cannibalization of Red Rock, given proximity to Durango. I think we're actually starting to see things maybe getting a little bit better than our initial guidance. But yeah, I think it's both, both things that you said. You know, the people that are more proximate to Durango are, number one, we're growing the visits that we got from that customer before, the frequency of that customer. And, you know, there's people that still want to go over in the Red Rock zone and look at Durango. So it's a little bit of a combination of both.

The good news is, the long-term strategy of where our properties are located is where all the new rooftops are, and that's why the guidance that we gave is what we've seen historically, where year one is down about 10%, and by year two, year two and three, it's already backfilled, and you're off to the races, growing again, so.

Dan Politzer (Analyst)

... Awesome. Thanks for taking all the questions, guys. Really appreciate it.

Operator (participant)

Once again, if you would like to ask a question, please press star and one. Our next question comes from David Katz from Jefferies. Please go ahead with your question.

David Brian Katz (Analyst)

Hi. Afternoon, everyone. I just want to double back on some of the discussion earlier about sort of that next project, and I'm not sure if we named it specifically as Inspirada and whether you said anything about that one in particular. But do you necessarily have to get back to that 3x level before you would start to spend on it, or, you know, is that more of a long-term leverage target? Specifically, how are you thinking about leverage in all that context, please?

Stephen Cootey (EVP, CFO and Treasurer)

Hi, David, this is Steve. So, it's a good question. We do not have to get to the three times where we start our next project.

David Brian Katz (Analyst)

All right. And if I can just follow that up, I, I'm not sure if you talked about sort of where your collective mentalities are about Inspirada and, you know, how soon we could start to talk about that in a more substantive way?

Scott Kreeger (President and COO)

Yeah, this is Scott. David, I think as we always say, we've been actively entitling all of our development sites. We are in the process of entitling Inspirada. You know, we would imagine that that process could be concluded in a little bit less than a year if we were to, you know, continue to push as we are. That would give us optionality at that point to decide if it was the right time to pull the trigger.

David Brian Katz (Analyst)

That'll work. Thank you.

Operator (participant)

Ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Stephen Cootey (EVP, CFO and Treasurer)

Well, thank you very much for joining the call, and then we look forward to talking in about 90 days. Thanks. Take care.

Operator (participant)

Ladies and gentlemen, that does conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.