Title

Presentation

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

James Adams: Thank you very much, operator, and good afternoon, everyone. On the call today is Blake Sartini, the company’s Founder, Chairman and Chief Executive Officer; and Charles Protell, the company’s President and Chief Financial Officer. On this call, we will make forward-looking statements under the Safe Harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During the call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation of GAAP financial measures in our press release, which is available on our website.

We will start the call with Charles reviewing details of the second quarter results and a business update. Following that, Blake and Charles will take your questions. With that, I will turn the call over to Charles.

Charles Protell: Thanks, James. Starting with our financial results, we generated revenue of $167 million and EBITDA of $41 million in the second quarter. Note our prior year period includes the results from our divested Maryland Casino and distributed gaming businesses in Nevada and Montana. Comparing the results of the continuing operations, total property revenue declined 1.4% and consolidated EBITDA declined 4.9% in the second quarter. For Nevada Casino Resorts, revenue declined 1.4% and EBITDA declined 2.3%. At the STRAT, we achieved record Q2 hotel revenue with ADR up 8% and total occupancy up 4% to 73% for the quarter. Weekend occupancy at the STRAT was 97% and midweek occupancy improved 2% to 64%. We see opportunity in continuing to improve midweek occupancy as we are still missing nearly 18% of occupancy compared to 2019.

STRAT revenue and EBITDA increased in Q2 despite higher labor costs related to our new union contract. Last July, we started accruing for increased labor expense, so we expect more moderate cost increases in the second half of this year. Atomic Golf, which opened at the end of March, continues to build its customer base, which we anticipate will drive additional visitors and locals to the STRAT in the fall with cooler weather and more convention visitors. In Laughlin, we experienced declines in revenue and EBITDA, primarily due to our decision to reduce large-scale entertainment acts as well as increased labor costs compared to last year. In Q2, we focused on bringing more cost-effective entertainment options to our smaller showroom, which allowed us to achieve higher profitability on each act, although it resulted in lower related gaming and F&B revenue due to decreased patron volume.

Lower entertainment-related revenue was partially offset by our locals initiatives and bingo program that improved our market share in Laughlin during the quarter. For Nevada Locals Casinos, revenue declined 4.9% and EBITDA declined 13%, primarily due to decreased visitation and spends from our lower-tier customers. The largest revenue and EBITDA declines came from our Arizona Charlie’s Boulder property, which caters to our most value-oriented guests. In addition, road construction negatively impacted entry to our Arizona Charlie’s Decatur property in April and May. We also started modest renovations to the 259-room hotel at Decatur, which should be completed in 2025. Despite lower margins year-over-year, our Locals segment has operated at approximately 45% margins over the last 4 quarters, which we expect to continue.

For the second quarter, Nevada tavern revenue was up 3% over last year, supported by the purchase of 6 new taverns compared to the prior year period. This brings our total locations to 71 at the end of June, and we anticipate opening our 72nd Tavern in Q3. On a same-store basis, total revenue declined to 2.4%, driven by a 10% decline in food and beverage revenue, partially offset by a 6% increase in same-store gaming revenue. Lower revenue was largely attributed to the Golden Knights’ exit in the first round of the playoffs compared to last year’s Stanley Cup Championship. During the regular season, we observed meaningful increases in F&B and gaming revenue throughout our taverns when the Golden Knights play. Additional costs associated with adding 6 acquired locations in addition to increased labor costs across the portfolio resulted in EBITDA declines for our Tavern business.

Turning to the balance sheet. We started the quarter by redeeming our $276 million senior unsecured notes with proceeds from the sale of our Nevada distributed business in January. This results in our outstanding debt at the end of the quarter, primarily consisting of only a $396 million term loan. We also closed the quarter with $89 million of cash and access to $240 million of additional liquidity from our unfunded revolver. In May, we repriced our term loan, reducing our interest rate by 60 basis points to SOFR plus 2.25%, which created $2.4 million of annual interest savings. Since the beginning of 2021, we have repaid over $750 million of debt and are positioned today with the strongest balance sheet in our history and net leverage below 2x.

Our balance sheet strength facilitates our ability to accelerate returning capital to shareholders, which includes our regular quarterly cash dividend of $0.25 per share and the repurchase of nearly 1 million shares in Q2. At the end of the quarter, we had $61 million of availability on our share repurchase authorization, and we intend to use this full amount by the end of the year. Over the last 18 months, we have returned over $110 million to shareholders through a combination of share repurchases and dividends. While we continue to evaluate strategic opportunities as they arise, we still have not reviewed any opportunities that would offer a better return than investing in our own equity through our buyback program. With our low net leverage and excess liquidity, we can return capital to shareholders and prudently reinvest in our own properties.

Our cash flow from continuing operations is generated from wholly owned casinos and the market-leading tavern portfolio in Nevada, where we continue to see long-term trends of increased visitation and population growth that will support the future performance of our business. That concludes our prepared remarks. Blake and I are now available for questions.

Operator: Thank you. [Operator Instructions] Your first question comes from Barry Jonas with Truist Securities. Please go ahead.

Barry Jonas: Hi, guys. I wanted to start with Atomic Golf. Maybe talk about how it’s been progressing relative to your expectations and how you see the path to hitting those targets? Any commentary on cross-sell to the STRAT would be appreciated? Thanks.

Blake Sartini: Yes. Thanks. So from a physical standpoint, it has met or exceeded our expectations. I think as we’ve talked about since they opened. And it’s a phenomenally competitive world-class building. They got out of the gate slow. So they – our expectations were not met as they opened, I would say, it was a rough rollout for them in learning the market, understanding their position in the market and so on. Recently, they have right-sized their staff. They have turned over their marketing – third-party marketing efforts to another firm. They have ramped up specialty events, including group events, entertainment events and so on. All of that leading to the – they are gaining momentum. We continue to believe that the future is bright for cross-traffic between Atomic given its obvious location immediately adjacent to us as well as their learning and their ability to position that property more effectively.

We are seeing green shoots with what they’re doing, and we anticipate that to continue. So we – again, we anticipate a future of a lot of cross-traffic, significant cross-traffic between our properties.

Barry Jonas: Great. And then just for my follow-up, as you know, 2 Strip properties have closed recently. I’m curious to get your thoughts if you see yourself as a potential beneficiary from the closures? Thanks.

Charles Protell: Yes, Barry, it’s Charles. Yes, I mean, look, that’s obviously a significant amount of rooms coming off, a little more center in South Strip, but less supply certainly helps from our perspective as we get into the fall.

Barry Jonas: Great. Appreciate it. Thank you.

Blake Sartini: Thank you.

Operator: Thank you. Your next question comes from Jordan Bender with Citizens JMP. Please go ahead.

Jordan Bender: Great. Good afternoon everyone. MGM made comments around F1 and just maybe some of the weakness around pricing that they’re seeing in the 4Q. I think last year for you guys, that weekend might have been a headwind. So you’re just starting from maybe an easier comp, if you want to call it that. But can you just give us some color directionally on what you’re seeing at the STRAT that weekend in terms of booking and pricing?

Blake Sartini: Yes, you’re right. Last year, I would say headwind was probably an appropriate term for that weekend. This year, we are way ahead of promotional activity during that weekend for both downtown and the north part of the Strip, which obviously we’re included in. There has been a concerted effort between casino ownership and operations to work with the LVCVA to provide an entertainment-heavy weekend, that weekend with music events, pop-up events, significant investment with the participation of the LVCVA. So we are in offensive mode this year for that weekend. And as a result, we anticipate a much better weekend for us as we continue to roll out or plan for the specific events that will occur. All of the downtown properties are involved. I think part of the Arts District as well is involved, which is adjacent to us, and we intend to be involved heavily in that process – or in the entertainment schedule.

Jordan Bender: Great. And then just a follow-up or maybe a clarification. In the slide deck, where it talks about the Belle, it says held for future non-gaming development opportunities. I believe that could be a new commentary for that. Are you seeing any uptick in terms of interest for that parcel of land?

Charles Protell: Yes, it’s Charles. We do have interest in that land. I think the point of that commentary is there will not be gaming reintroduced to that site within that market. That’s not in the cards at this time.

Blake Sartini: Yes. It’s approximately 1,000 feet of Colorado River frontage, which does not exist anywhere else along that resort corridor down there. We believe it has significant future value and to Charles’ point, we’re exploring from A to Z what the possibilities are for that piece of property to enhance the already robust room inventory that exists in Laughlin.

Jordan Bender: Thanks for the questions.

Blake Sartini: Thanks.

Operator: Our next question comes from David Katz with Jefferies Group. Please go ahead.

David Katz: Hi, sorry, it was on mute. Thanks for taking my question. In your initial commentary, you talked about though the opportunity at mid-week. I think it was an 18% gap to 2019. How are you going to do it, I guess, is the short version of the question? What strategies do you have for that?

Charles Protell: Well, I think we have been doing it. I mean we’ve been improving midweek occupancy by 2% to 3% every quarter for the last few quarters, and we expect that to continue. So we’ve improved our direct bookings quite a bit since we’ve taken over the property, and that continues. I think when we took the property over direct bookings between groups and casino was less than 20%. Now we’re over 30%. So I think it’s that continued march. It’s not going to be overnight, but it’s something that we’re working on, and we’re seeing progress, and we expect that to continue for the next several quarters.

Blake Sartini: The other area on top of that, and I think direct bookings to Charles’ point, is the focus, which we are seeing improvement. We are seeing headcounts improve in our casino particularly in the slot area. So as we grow that particular part of our business that leads to more casino bookings, more direct bookings and again, tangibly we are seeing increases in our player count. So between those things, we do believe and we’re seeing results in midweek occupancy.

David Katz: Got it. And as for my follow-up with respect to the tavern business, having come through this, the entire of this earnings season, there’s been a lot of talk about a little lower end of the database, so to speak, showing some weakness. I just want to double back on that and talk about anything you may or may not have seen within your customer base, particularly in the taverns that would be something we should note?

Charles Protell: Yes. I mean, David, we commented on the low end of the database, continue to show weakness in terms of visitation and spend. And I think, for us, the taverns tend to ebb and flow generally in-line with the locals casinos. So the trends are fairly consistent from that perspective for us on that lower tier of the players. If you look at the mid to upper tiers, those have been more stable, but it’s really at the low end tier where you’re seeing the weakness.

David Katz: I suppose I was asking is it getting – is it the same, better or getting any worse?

Blake Sartini: I think it’s – my expectation is the same to getting better. And part of that is seasonality. The summer – the first part of the summer is always tough for the local business in general and the tavern business as the population continues to grow, school starts again, people begin to get into their regular local patterns. Football is coming as a big driver to our taverns. I expect it to be the same and get better over the near future. The taverns, as I’ve mentioned before, are a very resilient part of our portfolio.

David Katz: Appreciate it. Thank you very much.

Blake Sartini: Thank you.

Operator: And our next question comes from John DeCree with CBRE. Please go ahead.

John DeCree: Yes, good afternoon, guys. Thanks for taking my questions. Maybe to start in Laughlin, Charles, I think in your prepared remarks, you’ve mentioned that you’ve shifted to a focus on smaller-scale events there. Obviously, you reported some improved profitability on those. But curious, just kind of been an event-driven market, what drove the decision to downsize. And is that temporary or more structural and kind of how you’ll manage loss on an event calendar going forward?

Charles Protell: Yes. I think as we look at the same period last year, we had five events, at the large 10,000 12,000-seat amphitheater. And only one of those events for us was profitable, profitable in terms of looking at, can we cover the act through selling tickets. So I think as we regroup and looked at that, I think the other issue was frequency. So we had too many, right? So for our customer base, when we have over 70% of our gaming revenue is rated play, we are constantly incentivizing them to come into our locations. And so the frequency is a little bit too high and the cost for the acts was getting a bit too high. That said, we have 1,500 to 2,000 seat secondary showroom depending on how you configure it. So instead of spending $750 million to $1 million an act, we could spend $50,000 to $150,000 an act, and we could do three of those acts a month and not really burn out our own players in terms of visitation or their wallet without taking as much risk on the expense of those acts.

Blake Sartini: Yes. I think it’s important to note that we believe this direction will produce more profitability in Laughlin versus the prior direction through more frequent lower-priced shows in a 2,000 to 2,500 seat environment and a reinvestment of some of that money that was going into some of these expensive acts into player-driven events, specific player-driven events in which we’ve seen significant improvement on the cost side and on the revenue side. So we are marching toward more profitability. It’s a fundamental change in the way we’re going to market in that market in Laughlin. As a result, we believe and we’re seeing early results that we will provide more profitability in that market than the prior, if you will call it, A act, big ticket that has been kind of priced out of the market, if you will, given what we can pick up on the ticket sales side.

So I want to make that clear that we’re marching towards more profitability in that with this new entertainment direction.

John DeCree: Got it, Blake. That’s clear, Charles, I appreciate that helpful color. Maybe one to shift gears back to the STRAT, looks like overall that Casino Resorts segment margin held up really well, particularly relative to 1Q and in spite of the higher labor costs. So I think you’ve mentioned the high ADR. So how much of kind of the margin cadence or improvement was revenue mix of higher ADR? Was there something you were kind of be able to do on the cost mitigation side? I know you’re kind of anniversarying in July, some of the accruals, but it looked like 2Q, the margin held up well. So curious if there was some maybe expense management or just revenue mix?

Charles Protell: Yes, we do – I mean, look, we do have cost mitigation plans in place at this point. We expect that also to accelerate towards the end of the year. But within that resort segment, a lot of that benefit was out of Laughlin, the strategy that we just discussed, which even though you had higher revenue and EBITDA at the STRAT and like we said, record hotel levels. I mean we were at 14% year-over-year in just hotel revenue at the STRAT, that revenue came with a lower margin due to the union contract on a year-over-year basis. That should normalize. We were accruing for that in July last year. So this delta should be decreasing as we get through the year.

Blake Sartini: Yes, we’re not happy with the STRAT margin at all currently, and we are laser-focused on that particular part of the business at the moment through, as Charles mentioned, significant cost mitigation as well as refining how we market and drive direct bookings to the property.

John DeCree: Awesome. I appreciate it. Like two unrelated questions that tie all together. Thanks, guys.

Operator: Thank you. The next question comes from Chad Beynon with Macquarie. Please go ahead.

Chad Beynon: Good afternoon. Thanks for taking my question. Charles, I wanted to focus on the share repurchases. You acquired a substantial amount in the quarter. You have a significant amount left under the authorization plan. Wondering if you could just shine a little bit more light in terms of if we should expect something of the same pace if you would consider drawing down on the revolver. Obviously, it’s an interesting time with the stock, and I don’t think you’re being properly valued nor do you, given the activity in the second quarter. But yes, maybe just a little bit more color in terms of how active you could be here.

Charles Protell: Look, I mean, the base plan you saw us buy over or close to 1 million shares in the last quarter. We intend to keep that pace through the remainder of the year, call it roughly $30 million spend in each quarter, and we’ll buy as many shares as we can over that. And then we’ll go get another authorization from the Board and re-up that. So there’s no issues with that. And I think that if the opportunity gets bigger, we obviously have a $240 million unfunded revolver with full availability with no restrictions. So we’ll see what happens, but we’re not afraid to use leverage to an appropriate extent in order to buy our own equity.

Chad Beynon: Okay, thank you. With respect to promotional activity in the Valley, I know probably 3 or 6 months ago. It seems like some of the private companies were becoming a little bit more active. Maybe you felt some of that with one or two of your properties in the region. Has that faded away just in terms of how promotional some have been? And is that something that you’re still feeling in the numbers and could get maybe better or worse going forward? Thanks.

Blake Sartini: It seems that promotional activity is pretty consistent to even maybe up a notch or two in the market. And you’re right, the private guys kind of lead that direction there. But overall, we’re seeing a pretty consistent elevated approach with maybe even a little bit of a higher approach. Do we see that continuing? I think as long as the lower end, which I think I’ll speak for ourselves that we’re seeing, I think you’re going to see some tweaking and adjusting into that kind of a market. So I do think it continues for a period of time. I don’t think it becomes irrational, which at this point, I don’t think it’s irrational. It’s more aggressive. But I think most operators have – are not going – we’re certainly not going to be rational, I don’t think others will. But I see it continuing as long as we’re facing these kind of low-end challenges.

Chad Beynon: Thanks. And maybe if I can squeak in last one here, just kind of going back to the midweek opportunity at the STRAT. I know previously, a lot of your business was sourced from OTAs and that’s something that was kind of in the plan for ‘24. Is there still an opportunity to just grow this directly when you increase the occupancies midweek? Or will you have to rely on, yes, maybe some of the more expensive vendors that come at a lower margin to your business? Thank you.

Charles Protell: The answer is yes, we can still improve that direct booking as we’ve talked about. I mean, again, when we took the property over, it was close to 80% on the OTAs. We’ve moved down below 70%. And even though we don’t have group meeting spaces in the property, we do sell direct wholesale into group citywide packages. So we have folks that we’ve hired from a sales perspective that are making good progress in that. So between those efforts, the direct to new players, as Blake alluded to through our new card sign-up programs on the slot floor, those two things are going to be pushing less reliance for us on the OTAs as we go forward.

Chad Beynon: Thanks, Charles. Thanks, Blake.

Charles Protell: Thank you, Chad.

Operator: Thank you. Your next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.

Carlo Santarelli: Hi, Blake, Charles, I had a couple of questions, but all kind of related to the same thing. In Slide 9, you guys assume $90 million of rent. Coincidentally, that’s roughly half of kind of a casino EBITDA. Is that kind of what that is, assuming just kind of 2x rent coverage on the casino-only real estate?

Charles Protell: Yes, that’s right, and it’s probably a little bit conservative, but I feel that’s a fair number.

Carlo Santarelli: Okay. And then when you think about like these multiples and acknowledging, I think the average multiple for real estate paid is just a little bit higher than your low end here if you look at the history of all the transactions and the desire, I believe, that exists from some of the REITs to get into the Las Vegas Locals market. Do you feel like you need to kind of hold out for the higher end of this range despite kind of the interest rate environment that exists right now that maybe makes it challenging?

Charles Protell: Yes. Well, Carlo, I mean, obviously, that interest rate environment is anticipated to be changing between now and the end of the year and certainly into next year, fairly meaningfully. So yes, I don’t think we have far to go for REIT multiples to get back to levels where they arguably should be, meaning that they have an ability to pay lower cap rates for casino rent if they ever decide to go that path. And then if you look back even just recently at our Rocky Gap transaction, that was in a deal where it was north of 13x for a relatively small rent stream on leased land asset. So I feel like at that mid to high end of that range is an achievable or should be achievable multiples if it was something that we were to consider, and it’s not something that we consider at the cap rates that are out there right now at this moment, but rates are coming down, at least as we look at all the forecasts that your banks are putting out over the remainder of this year and into next year.

Blake Sartini: Yes. As we sit here, Carlo, and it’s been mentioned about valuations that we don’t believe are appropriate. I think if you look at us currently, I think we’re trading at or less, certainly do the math, even conservative math less than a real estate value. So the question for us is, you’re right, and Charles is right, there is, I think, an ability to maximize value by waiting a bit for the macro environment to change specifically regards to interest rates. I think the question for us is, long-term, how do we generate the most value being this public company? Is it owning our real estate or not, and we go through that constantly. And right now, as Charles said, we’re not anticipating changing direction because with our balance sheet, with our free cash, with our undrawn revolver and our position strategically, I guess, if you will, in the market.

We think we have a lot of optionality and a lot of ways to drive value and owning real estate, certainly, I think, is a pretty good backstop to analyzing all of those opportunities.

Carlo Santarelli: Appreciate that, guys. Thank you, both.

Blake Sartini: Thanks, Carlo.

Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you so much for your participation. You may now disconnect.