Drive Shack Inc.
Q1 2019 Earnings Call Transcript

Published: 10 May 2019

[Operator:]

Good morning. My name is Lorie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Drive Shack's First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, we will have a question-and-answer period. Instructions will be given at that time. Today’s call is being recorded. Thank you. At this time, I would like to hand the call over to Austin Pruitt, Head of Investor Relations. Please go ahead.

[Austin Pruitt:]

Thank you, Lorie, and good morning, everyone. I would like to welcome you to Drive Shack's first quarter 2019 earnings call. Joining me here today are Ken May, our Chief Executive Officer; and David Hammarley, our Chief Financial Officer. We have posted an investors supplement on our website, which we encourage you to download if you have not already done so. I would like to point out that certain remarks made today will include forward-looking statements. Our actual results may differ materially from those considered by these statements. We encourage you to review the disclaimers in our press release and investor presentation, and to review the risk factors contained in our annual and quarterly reports filed with the SEC. And now, I would like to turn the call over to Ken.

[Ken May:]

Thank you, Austin. Good morning, everybody. Welcome to our Q1 earnings call. We have got a lot of good things to talk about today. Appreciate you joining us. I am going to start with a short summary and discuss our Q2 and 2019 goals and just going to tell you where we are at with those. Dave is going to follow-up with the Q1 results and our initiatives and defines what has been done by the American Golf team. As far as summary at a high level, David and I had been here for six months now. There have been a little thought changes and a lot of restructuring. I can’t imagine or I keep – again to tell you how much restructuring we have done, every facet and every functional area of this business has been restructured and new leadership has been inserted where appropriate. And so in my 35 years in business, I have never seen some of the leadership team is good as what we have right here. And so, high level, we love where we are at as a company. We are poised to begin execute – executing on our plan. Just for to remind you, I am a FedEx guy, since 25 years launching airplanes and trucks around the world. We focus and we execute, we do what we say we are going to do. At FedEx I have terminated quality people for having two minute flight delays and so you are going see us focus very, very much as we open these three locations and as we begin rolling out more. Our goal remains the same, I want to expand our presence into the entertainment industry as an interactive Dining and Entertainment business that has great golf content. As far as Q2, we had three things we wanted to really get done this quarter. We want to first get ready to open our next three locations in the second half of 2019. We have laser like focus on doing that and opening them up very, very well and we are bullish, and hopefully, they are going to open up very strong. They are going to significantly be better than how we opened up Orlando last April. So teams are focused and everybody is in place and we are in a process of getting those open. The second area is we wanted to improve our design and construction processes to reduce costs and improve the speed which we build our venues. Quite frankly, we were spending too much on our venues and it was taking us too long to build them, and so we put new processes in place and new leaders in place. They are going to be focused on reducing costs and speeding up the velocity in which we build them, so excited about that. And the third thing was to continue to build a robust real estate pipeline. We had done that. Our real estate team has done incredible work. We're winning deals all across the country. Some of ones we have announced, one we will announced 11 today and there will be a lot more to come. They are really doing well. Now going back up to the macro level plan for 2019, I’ll give you three priorities that we will be focusing on. First one is to sell our Traditional Golf courses to fund Drive Shack growth and begin to harvest the operational synergies between two segments. Prior to Dave and I started there was a Chinese firewall between American Golf and Drive Shack and we had a lot of redundant overhead and we weren’t taking advantage of some purchasing opportunities and so we're putting processes in place, relooking at our old structures and things such as that to derive those synergies home. The second thing was to grow Drive Shack’s footprint with high quality locations and do it on time and on budget, and as I have said already, the real estate team is delivering on that. And the third thing was to achieve attractive unit level economics by improving customer facing and back of house operational capabilities at our Entertainment Golf Venues and I will be talking more just a second about that. So let’s go back to selling our golf course. David will be going into more detail in a few minutes, but we have made substantial strides in selling the own courses and we were very pleased with where we are at there. Nearly all of our expected short-term proceeds are sold or under contracts for approximately $175 million in liquidity. We also wanted to estimate additional value of $45 million to $65 million from two courses we plan to sell in the long-term and we are working on how to accomplish that. Ultimately, the net proceeds will serve as a platform for growth and funding our Golf Entertainment business. The second priority for 2019 is to grow our Entertainment Golf footprint and do it very quickly. We have six fights. We've previously announced to open in 2020 onwards. To remind you, Randall's Island in New York was one, New Orleans, Louisiana, a wonderful site in Downtown Chicago, a wonderful site in Newport Beach, California, Sugar Land, Texas outside of Houston and Beaverton, Oregon outside of Portland. All are Grade A locations that our competition wanted that we were able to get. And so, with those six, were already public own, today we want to add another one, it’s Minneapolis, Minnesota in the suburb of Bloomington. This is a Grade A location, it is five minutes from the Mall of America and so it is going to be a killer location and we are excited about that. We hope to break ground on it either later this year or early in 2020. And then we will continue as we go forward announcing deals on our quarterly calls as we get them signed. As far as sites are that are under development, under construction, our second, third and fourth sites will be opened in the second half of 2019. Those locations are Raleigh, North Carolina, Richmond, Virginia and West Palm Beach, Florida, and then as we stated earlier we plan to break ground in New Orleans later this year and we are committed to the New Orleans market. As far as part three of our 2019 priorities, as far as operational capabilities, this is the big news for the quarter. We have spent the last 90 days working on this. We are excited to announce a partnership with a leading ball tracking vendor in the world Trackman. Trackman is world renowned 90% of the PGA tour pro use it. Most pro – we are not even practice for that having a Trackman behind them. And so Trackman is a trusted partner of the world's largest broadcast companies such as Golf Channel, ESPN, the top equipment manufacturers in the world such as Taylormade and Titleist and the top universities in the world as far as Stanford, Duke and the University of Memphis, I have to say that. International team such as, the USA, Australia and China, and so as we open these next three locations we will be installing TrackMan is the technology that will be driving our games and then we will be retrofitting Orlando soon thereafter with this particular technology. As far as new venue design, we have really done a lot of work on that. Our 72 Bay Venue our design is almost complete. We have pleased to announce that we hired one of the leading designers in the country to come to work force. He starts a week from Monday. He's going to head up all of our architecture and design. His notable projects in his crews he helped design Cowboy Stadium, Whiten Stadium [ph] , as well as he is just finishing up work on the LA Rams Stadium and so I tried hiring him at Topgolf, I wasn't able to get him. We've been lucky enough to hire him at Drive Shack and we are excited about that. As far as food and beverage, we hired a experience veteran hospitality industry to improve our food operations and our menu. He is totally all over this. We have redesigned our menu. We will be rolling it out starting in June and then all our new locations will have that particular menu. So in conclusion, I just want to say that, we are taking the necessary actions to capture near-term opportunities, but while building brand and growing our footprint nationally. We are very excited and very bullish about where we are and so more to come over the coming quarters, but I think, as investor you are going to be excited to hear about what we are doing. So, with that, I am going to turn it over to David to go into some numbers and talk about American Golf.

[David Hammarley:]

Thank you, Ken. Good morning, everyone, and thanks for joining us on the call. For my prepared remarks, I will review the Q1 results, provide a brief status update on the own core sales sale progress and provide an update on our growth prospects for 2019 and beyond. In short, we are pleased with the overall progress of the business. We generated solid overall revenues on the total company basis and the ramp-up and performance of our first Golf Entertainment venue in Orlando continues to improve. We have also made further progress selling our own golf courses. As a reminder, our business model is at an inflection point. Our growth plan is focused on opening new entertainment golf venues. To fund this growth we are generating liquidity by selling the Traditional Golf courses that we own within our American Golf business. Our overall business mix is changing and will continue changing in 2019 and beyond. This make interpreting year-over-year results less meaningful for the past quarter and the next several quarters as we execute our strategic plan. That being said let me provide an overview of the 2019 first quarter results. On a total company basis we generated approximately $54 million in Q1 2019 revenues, compared to Q1 2018 of $67. Decline in revenue is primarily due to the 16 golf courses sold as of the end of Q1 2019. Turning to the Entertainment Golf segment, we opened our first venue in Orlando in April 2018, so we don't have comparable year-over-year performance this quarter. In Q1 2019, the Orlando’s venue generated $1.7 million in revenue, compared to Q4 2018 total revenue increased by 11%, driven by a 13% increase in visitors. We are excited about the increased traffic to our Orlando venue this quarter. As our first entertainment golf venue, we've activated a local team focus on grassroots marketing and strategic sponsorships to further grow our brand awareness. Ultimately, this will benefit the next three sites we open across the Southeast this year. Q1 spent per visitor of $40 was down slightly versus $41 in Q4, driven by a lower mix of events business as a percentage of overall revenues. Walk-in sales accounted for 72% of total revenues, with that event accounted for 28% of revenue in Q1. This compares to Q4's revenue split of 60% walk-in and 40% events. The events business typically have a higher spent per visitor than walk-in and we generally expect Q4 to be the strongest events quarter of the year, given the corporate demand during the holidays. For our Traditional Golf, same-store revenues were down 5% versus prior year, driven largely by worse than average weather in our major geographies, especially California. Based on industry metrics, golf course rounds played were down 12% for the industry in Q1 in California, where 70% of our Q1 Traditional Golf revenue is based. The weather was much more favorable in April for our California courses, so we are optimistic about the remainder of the year. We continue to be consistent growth on our public course membership program, Players Club, with new membership up by 14%. For the private courses, despite our clubs being at or near golf member capacity, we increase total same-store membership dues revenue 3% by increasing average member rates by 4%. In terms of our own golf course sales, as of today, we have sold a total of 18 courses for $132 million since the beginning of 2018, including five courses for $42 million since the start of 2019. We expect to complete an additional $43 million in golf course sales in the next few months, which gets us to our total proceeds goal of approximately $175 million by the end of 2019. The $175 million in own course sale of the proceeds were 24 of the 26 own courses in the original portfolio. For the two own courses remain that have potentially more long-term value, we estimate a value range of $$45 million to $65 million including development upside. We will continue to explore monetization of our two remaining courses in 2019. As of May 10th the American Golf portfolio consists of eight owned, 36 leased and 19 managed properties. Our goals for this business continue to be largely monetizing the own properties, optimizing the leased operation and growing our management business. In addition, we believe our ability to leverage Drive Shack gaming technology on golf course driving ranges will be a unique value proposition and growing both segments of our business. As Ken said, we have made great progress assembly a world-class team to Drive Shack over the last few months. We have hired the team we need that will enable us to scale the business up dramatically and we anticipate a relatively steady corporate cost base moving forward other than a few select strategic hires. While we have frontloaded the team to support the growth plan for Golf Entertainment business, we've also started to implement cost efficiencies across our Traditional Golf and Entertainment Golf businesses. We have started to integrate the handful of back office functions such as accounting and IT under our One Team structure. With our team and operating costs largely in place, we expect overall company G&A cost to scale down to 5% to 10% of total revenues over the next few years as the business scales up. Before I end today, I’d like to summarize our future expectations for the business. We continue to expect Drive Shack Orlando site to breakeven from a cash flow perspective in 2019 and continue to ramp-up its revenues and cash flow generation in 2020 and beyond. We anticipate our Raleigh, West Palm Beach and Richmond sites to open in the second half of 2019 and expect them to generate revenues and EBITDA consistent with our target unit economics starting in 2020. We plan to open three to five new sites in 2020 and five to 10 sites in 2021 onwards, putting us at more than 20 sites in 2022. Moving forward we expect the following unit level economics for Drive Shack entertainment sites. Target cost to build are expected to be between $20 million to $35 million and will be driven by the size of the venue and the cost characteristics of the individual market. Topline revenues per site are anticipated to be $15 million to $25 million with target stabilized EBITDA margins of 25% to 30%. Ramp up the target unit level economics of each new site should take approximately six months. We expect to complete the sales of the 24 of our 26 own golf courses by year end, with total gross proceeds of $175 million. Our own golf course sales proceeds will fund our developing CapEx needs through the beginning of 2020. We are exploring various financing options to execute our entertainment golf site growth plan through 2022 and beyond. After completing the transition of our Traditional Golf business from a largely own lease portfolio to primarily managed lease portfolio, we expect that our stabilized American Golf business will generate approximately $175 million in revenues and course level EBITDA margin of 15% to 20% in 2020 and beyond. Total company G&A is expected to be 5% to 10% of total company revenues by 2022 onwards. In closing, I'm confident the actions we are taking to both improve our operational capabilities and accelerate our growth have created strong momentum for 2019 and beyond. With that, I will turn it over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of George Kelly of Imperial Capital.

[George Kelly:]

Hi, guys. Thanks for taking my questions.

[David Hammarley:]

Hi, George.

[Ken May:]

Hi, George.

[George Kelly:]

So first a couple just on Trackman, I was wondering if you could talk about, why did you make the change, what would they bring that you didn’t have prior and will it be, I mean, it seems like that such a big brand, is that something you'll promote and you'll be -- something that will be more visible to get your venues?

[Ken May:]

Yeah. George, appreciate the question. We are excited about being partners with Trackman. They are – their brand is international and they are known for delivering, I mean, they have 150 engineers and their location in Copenhagen, I was there recently and so they -- they're all about precision and we will be using their brand to promote our -- the accuracy of our game as we move forward. I don’t want to batten out the previous provider but it was camera-based technology and it did not work up to our expectations, Trackman is right our base technology. And so I visited a location in Hamburg, Germany that TrackMan has on golf driving range, their several stories, their technology works, it works, the read rates are extremely high and so what we feel like it’s going to take our game to a much better higher level as far as guest experience, because of the accuracy. We are pleased with our games. We are going to be trying to change them some. We select our games are in good shape and so the integration of their technology with our game developers, we feel like that we are going to be able to continually rollout new games to keep our experience fresh and get people new reasons to come back to Drive Shack throughout the year versus having static gains that never change.

[George Kelly:]

Very cool. Very cool. And if I am hearing that right, I mean, the addition of Trackman will not sort of change your strategy as far as having games for all levels of players?

[Ken May:]

Not at all, if anything, we are going to enhance our games going forward. We are busy trying to integrate them into our technology right now as we open these next three locations. But once that platform is built, you are going to see us really go hard at game development and it will be games based upon how you want to play, I mean, if you are kid, you want to play a short game, we are going to have a kids game. If you're an average golfer like me and you want to hit the 150 yard shot, that’s fine. If you are great golfer and you want to play to back while the driver we will have great games for you. And so we want to build to meet people where they are able the game and some 80% of our guests are non-golfers and it is a game, it's not necessarily golf, golf just happens to be the platform for it. And so I think you are going to see us enhance our experience going forward.

[George Kelly:]

Okay. And just one last question with Trackman and then I have some other stuff. But is -- how do you – what is that not asking for specifics, of course, but. What is that partnership look like, is it is some kind of fee per unit or how does that work?

[Ken May:]

Yeah. They – I mean, I can’t get into the specifics with it, because what we signed with Trackman. But I'll let -- I can say this, is it drops our technology costs to build a Drive Shack versus the prior technology that we were using and so we are very pleased with that. We got a long-term deal. We have got exclusivity things such as that. So we're excited about it.

[George Kelly:]

Okay. Okay. That’s helpful. Okay. So then different topic. Just about site selection and I am wondering if you could, not only sort of how you chose, maybe if you could walk through -- just as an example walk through why you picked Minneapolis, what was it about that market that attracted you, just sort of understand better how you choose locations. And then the secondary part of that is, between you and Topgolf and anyone else that’s out there. How many venues you think there can be in the U.S. and how small of the market could work for the concept, anything you can talk about there would be helpful?

[Ken May:]

Okay. As far as Minneapolis, if you told me three years ago that we be hot and heavy on Minneapolis, I would say, probably, not but there is a too cold, but our competition is opened up the location there and they are doing very, very well. This site popped up recently, I mean, we haven't been working on this long and it was right near the Mall of America and so in access to some very affluent suburbs of Minneapolis. And so we -- it popped up the demographics, I mean, we are searching for 18 year to 32 years to 34 years old, like $100,000 per year and there are a lot of them in this part. We are also looking for Grade A office space and there is a lot of office space there. And so that would -- that helps drive our event business. And so those two things drove us to – we – us in the competition and we are looking at it, we jump on it very quickly and signed the deal, that’s how we got it. And so it’s going to be a great location for us. As far as potential – I can’t go into specifics, but we feel like there could be hundreds of these of all different shapes and sizes. We are currently working on 102 Bay design and we are finishing up our 72 Bay design and we are looking at different options going forward. And then beyond that there is an international opportunity that we are starting to talk about. We are getting quite a few inquiries about people that want us to go international. And so at some point we will resource that and go after that opportunity as well. So, I mean, there will be 100s of these around the world going forward, like 100 of Drive Shack going forward.

[George Kelly:]

Okay. Okay. Cool. And then just wondering what’s the next – this is my last question. The next few that are opening, can you be more specific about when you expect to open them and I just want to make sure I heard you right that that do expect low track to the targets that you've established, is that right?

[Ken May:]

Yeah. It’s going to be between late August and late October. That’s our current thinking.

[George Kelly:]

Okay. Okay. Really appreciate all the information guys. Thanks for taking my questions.

[Ken May:]

Thanks.

[David Hammarley:]

Thank you.

[Ken May:]

Thanks, George. Good to hear from you.

[David Hammarley:]

Thanks. Thank you.

[Operator:]

[Operator Instructions] If there are no more questions, we will end the call. Thank you for participating in Drive Shack’s first quarter 2019 earnings conference call. You may now disconnect.