Q4 2023 Golden Entertainment Inc Earnings Call

Participants

Joseph Jaffoni; IR; JCIR

Charles Protell; President, Chief Financial Officer, Treasurer; Golden Entertainment Inc

Blake Sartini; Chairman, President, Chief Executive Officer; Golden Entertainment Inc

Carlo Santarelli; Analyst; Deutsche Bank

Jordan Bender; Analyst; JMP Securities

Chad Beynon; Analyst; Macquarie Research

John DeCree; Analyst; CBRE Securities

David Katz; Analyst; Jefferies

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Golden Entertainment, Inc. 2023 fourth-quarter results conference call. (Operator Instructions)
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.

Joseph Jaffoni

Thank you very much, operator, and good afternoon to 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 provision 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 and 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

Thanks, Joe. The fourth quarter concluded a transformative year for Golden Entertainment. During the year, we streamlined the portfolio by divesting noncore businesses at attractive multiples, reduced leverage to favorably refinanced 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 One's initial race in Las Vegas with distressed 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 fall and mid-week 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 118-room tower, the last of our major upgrades to the property, bringing our total renovated rooms to 1,300. Recently, we saw 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 opened 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 properties. 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 Q3, the operating margin of our local casinos has improved for 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 to 100 taverns without meaningful increases in corporate overhead and have targeted three to four 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 purchase 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 distributor 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, 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 a 276 million of fixed rate bonds. We will repay the outstanding bonds in April, leaving us with a simplified capital structure less than two times debt 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 fourth. 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 and 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.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions)
Carlo Santarelli, Deutsche Bank.

Carlo Santarelli

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

Operator

This is the operator of the keynote speech and we got him yes, yes, I got your question, Carl.

Carlo Santarelli

I'm sorry.

Operator

Yes, everything when everything went blank there, so I wasn't sure your live.

Carlo Santarelli

Yes.

Charles Protell

Recall, can you can you hear us?

Carlo Santarelli

I do yes.
Okay.

Blake Sartini

Sorry. So if I your question, the answer is yes, we would anticipate the margin trend to be flat throughout the balance of 24. As you did reference, we did incur the on 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

Great. Thank you for that, Blake. And then if I could, obviously, I put it in the dividend, a nice touch just in terms of your thought process around 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?

Charles Protell

I know when we when we committed to the dividend, we did show with the expectation we could we could do the dividend, we can do the dividend as well as with our significant capacity remaining buyback 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 split with the very cognizant opinion that we can do both. And then the Company is positioned with optionality and for whatever may potentially come about in terms of M&A or other.
Got it.

Carlo Santarelli

Thank you.

Operator

Jordan Bender, Citizens JMP.

Jordan Bender

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

Charles Protell

Thank you. Yes, hey, Jordan. It's Charles. So yes, 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 some capital opportunities that are in our mind, a return that's better than those alternatives and returning capital to shareholders?

Blake Sartini

Yes. So but in that context, we do look at M&A. We have looked at M&A. I think you were not for us looking at something that, yes, $50 million EBITDA north probably makes the most sense. We're not going to 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 for the makeup of the Company at this point. So our focus is going to 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 and where the properties own the underlying real estate. And so I think that that in general is where it is. But again, I think as Mike was saying, you know, our view is we've set up the portfolio now with these divestitures that we can be focused on returning capital to shareholders while we continue to invest in our assets and have positioned ourselves, I think well to look at potential M&A opportunities that are accretive, Dage and fit within those parameters.

Jordan Bender

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

Charles Protell

No, no. I think that's from our standpoint stand alone on their end and no effect on our end.

Jordan Bender

Understood. Thank you.

Operator

Chad Beynon, Macquarie.

Chad Beynon

Afternoon, Blake and Charles. Thanks for taking my question. Kind of that's on simplifying the story and everything here. I wanted to start with the Stretta mid-week opportunities. I feel like that's something we've been talking about for a couple of years in the prepared remarks, you mentioned that again for 24, what's the convention calendar look like? 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 leads to margin on improvement. So any visibility into into 24 midweek?

Charles Protell

Yes, 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, I've 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 counter looks pretty robust for citywide. But as you know, some of these larger hotel casinos have added or increased size of their casino of their of their own conviction areas, particularly some of the new properties that have just come on that may put some pressure on the citywides. But as I would, 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 the 75 million atomic. These are things we can control is what I'm getting at this atomic range called facility coming on, which we believe will greatly enhance our ability to generate additional midweek traffic with that wholly owned facility outside of what the citywides are looking like. But we remain bullish on on on our prospects for midweek. Weekends were full, primarily rates getting better and we believe this midweek begins to fill in both through our own efforts, ATOMIC and other as well as the robust citywide calendar.

Blake Sartini

And Chad, I would just add to that, we have seen improvement. If you look over the course of all of 2023, our midweek occupancy was around 66% in our Q4 midweek occupancy, even despite F. one was at 72%. So we are seeing that improvement. That being said, in 19, our midweek occupancy was around 85%. And so that 125,000 missing room nights for the frac relative to 19. That's worth about $40 million in revenue to the property at just current spend levels that we're seeing. And so that's about 20 million of EBITDA. And so that's where we really see the opportunity of that 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 with the property guys.
Yes, as we go through this year.

Chad Beynon

Thank you. And then with respect to eventually getting to a goal of 90 to 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 three to four in 24. And then beyond that, are these conversions from other on 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 these new opportunities can come from banks?

Charles Protell

Yes, Chad, we as we've 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 triple-A locations. We tend to get the first phone call on those sites because of our size, scale, scope and our success in operating Tavern. So we are very dialed into new tavern sites around the value. These would be greenfield sites that we're very we're very good at building are 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. We think we have four coming on the route for one 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 to 100 number.

Chad Beynon

Thank you, both appreciate it.

Operator

John DeCree, CBRE Securities.

John DeCree

Good afternoon. Like reference, Charles, wanted to revisit your comments about F. one I think it's fairly common. We've heard from a number of your peers, not on center strip position 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 is it a change for the city overall or that you might be able to do differently to to maybe maximize the contribution to the strat for next year and future periods?

Charles Protell

Yes, 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 applied not only to our customers, but to local here in Las Vegas. So things like selling individual day tickets, incentive package and potentially making the start times a little bit earlier, allowing for dedicated casino areas with easier access for our guests. So those are just a few things that we shared with the folks that one and we've talked about with other operators. But I think there is a general acknowledgment that the M event needs to appeal to more than just a Hyatt properties at the center strip that are connected to the event to make it a real success for all of Las Vegas.
There's an organized our non mid strip co-op that is that is working together, if you will, significant, there's significant numbers of people involved and operators involve working with F1 to do just what Charles said trying to 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 knowing what we know now we would do again. But going forward, we want to we want to work with them to be more involved in activities around that week or 10 days. It's not just the weekend that's a week or 10 days. And this co-op of these non mid strip operators, I think, is going to be successful and gaining some traction certainly better than last year.

John DeCree

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

Blake Sartini

Yes, 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 a rooms are within seven to nine years and 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 the 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 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 and 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 run or other 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

Fantastic. That sounds great. Thank you very much.

Operator

David Katz, Jefferies.

David Katz

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. It's just given how quickly the The landscape has improved dental and a lot of areas for consumers, capital markets, et cetera. And is the market different today and then it was 90 days ago.
And how so 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.

Charles Protell

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

David Katz

Got it. So if I can follow up of it more specifically. Are there more deals? Is the bid ask different narrower or the same? And in what way would we would we note improvement?

Charles Protell

So I think it's certainly narrowing. But again, it's about the expectations. 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 I think again, it comes down to where are where are the financing markets. And I think those ultimately only get better. I think the Reach play a large part also in M&A and to 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

Thank you very much.

Operator

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.