Drive Shack Inc.
Q2 2019 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Good morning. My name is Christy, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Drive Shack’s Second 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’d like to hand the call over to Austin Pruitt, Head of Investor Relations. Please go ahead, sir.

[Austin Pruitt:]

Thank you, and good morning, everyone. I would like to welcome you to Drive Shack’s second quarter 2019 earnings call. Joining me here today are Wes Edens, our Chairman of the Board; David Hammarley, our Chief Financial Officer; and Hana Khouri, our new President.We’ve posted an investor 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. Actual results may differ materially from those considered by these statements. We encourage you to review the disclaimers in our press release and investor supplement 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 Wes.

[Wes Edens:]

Great. Thanks, Austin. Welcome everyone. We’ll just flip to page number two of the supplements and highlights and I will just spend a couple of minutes and go through them and I’ll turn the call over to Hana and to David.So first, top of the list, very exciting times for us here at Drive Shack. Generation 2.0 venues are opening soon. We have got three venues, Raleigh, Richmond and West Palm Beach opening over the next 2.5 months. Raleigh actually opens up on the 19th of August, so today is the 6th of August. So less than two weeks we’ll have our version 2.0. You’ll see significant changes to the venues themselves. This is I liking it to the version 1.0 is great because it generates proof-of-concept, gets you into business, allows you to get yourself up and running and then you have the chance to improve on everything.And we really think we have improved dramatically on everything about it. So a new technology, Trackman, which we’ll talk about, but by far and away the leader of golf ball technology in the world. We’re exclusive partners with them. We are incredibly excited about that. We have made major advancements to the games and then regionalized food and beverage. So really the whole suite of offerings across the site had to be very, very different, that also allows us to go back and take our 1.0 site in Orlando, retrofit it with both these technology, gaming and food and beverage. And so in effect, you’re going to get four new 2.0 sites all open here in the course of the next several months. So it’s an exciting time for the company. We’ll have really great things to report on we think over the course of the rest of this year.Secondly, the innovation is really the heartbeat of the company like this. And we are very focused on the adjacencies of our market because what we had started with, which is the natural thing to start with we think are these large sites and densely populated, large NFL-like cities, so large places to do business. And that’s what we are starting. We think that there are other significant growth opportunities for adjacencies.So the Mid-Size, which is a slightly smaller bay, it actually works well with the 500,000 population centers and down. Urban Box, which is the newest thing that we are focused on around here, indoor, small format, putting oriented, great technology, great food and beverage. We are very, very excited about this. Taking the same expertise that we use to develop the large box, we then applied to these smaller offerings in these smaller markets and we think we will expand the potential to grow the company dramatically.Hana will walk through both in the nature of what we’re looking at and also what we think the raw economics of it all, but it’s a very logical extension of our existing product and it is something that we think has tremendous promise for us.Liquidity update and the transformation of the company in terms of a golf course owner and manager, David will walk through this, but we closed another four courses, $20 million in gross proceeds. We’ve now generated $140 million in proceeds, expect another couple of the properties to sell through the course of the year and this will largely be behind us. So that’s a kind of cleaning up the rock pile of the existing assets. We are very, very happy about that.Lastly, I’d like to introduce Hana, but in a very similar fashion to kind of 1.0 to 2.0 version of our operating sites themselves, we experienced the same thing on the management side. So getting into business and having proof-of-concept then allows us to go back and really retool the organization, expand the organization and add in people with the most relevant skill sets that help us become the best management team in the world, which for us that’s the goal we are doing.I had a very personal experience with it, so we're going through this and going from the English Championship into the Premier League. And I think there’s a lot of parallels between that because you take the core of your existing organization and then add to it substantially because you want to compete at the highest levels. And that’s very much we’re in the process of doing here at Drive Shack.So Ken May came in about a year ago. And that was a big step for us in terms of a person who’s had a tremendous experience in leadership in the industry. We then have added approximately 30 people. The vast, vast majority of them are people that have come from either one of our competitors or people that are in the competitive landscape of these eatertainment individuals.So we now have a very, very highly skilled and experienced workforce. The last person to join us is really Hana. Hana had a noncompete with one of the competitors that expired on August first. She has worked for me as my Chief of Staff at one of my other businesses for the last year. It has been a tremendous addition to our playbook around here. She comes in with a wealth of personal experience. So over five years at Topgolf, she opened personally over 20 sites globally, created the operations playbook that was used in all those openings. There’s a long list of the things that she has done that we think are very relevant. And so we are extremely excited that that she joins us. And we think that Hana kind of complete the list now with the 30 plus people that we have across the organization.On an unrelated note completely, Ken came to us, came to the Board about a week ago asked to take a personal leave of absence. He’s been a tremendous force for us in the company. He has done a great job for us. And it being completely coincident with Hana who was a planned addition as soon as her noncompete expires. So Ken has stepped back for a period of time. We hope it’s a brief period of time. We’re obviously deeply supportive of him. He’s been a wonderful addition here and he has done a lot of the innovation that you’re going to see in these new venues that are going to open here in less than two weeks are all his handiwork. So we feel great about that and we wish him nothing but the best and we hope that we’ll have a good update on that.But we feel incredibly good about the management teams that exist both on the senior leadership side now with Hana as President, but then the technology and the food offerings and everything else throughout the rest of it. So with that, let me turn the call over to Hana.

[Hana Khouri:]

Thank you, Wes. I really couldn’t be more excited to join Drive Shack so early in their story and I feel like I’m joining at the perfect time. Our transformation from a traditional golf course owner and operator to an entertainment business is largely complete.At the end of last year, we owned 13 golf courses and had only one operating Drive Shack in Orlando. By the end of this year, we expect to own two golf courses and have four operating Drive Shack with even more sites in the development pipeline. We’re on the verge of three major openings. We’re going to open Raleigh in the coming weeks as Wes said. Then we turn around and open our venue in Richmond shortly thereafter, then finally West Palm Beach shortly after Richmond in the fall.If we look ahead at our development pipeline over the next few years, we expect to have an additional three to five new sites open and operating by the end of next year. We currently have seven in development and are analyzing the economics for over 30 potential sites, which includes our new Urban Box concept, which I will discuss shortly.Our development goals are really simple. We want to be smart about our site selection. We want to compress the construction timeline and be on or below budget and we want to shorten the time period from opening to break even.Orlando has really served as our beta site successfully allowing us to test our technology, operational layout and product offering, especially ahead of those 2019 venues opening. We entered into an exclusive partnership with Trackman, which we really believe is the best ball tracking technology in the world. It’s held in high regard by PGA pros and we really expected to improve our gaming experience and the guest experience.Simultaneously, we have redesigned the outfield to provide a more intuitively after game play has enhanced lighting and effects in more durable turf. We’ve also rolled out a new food and beverage menu, which will soon feature seasonal and local offering. These enhancements, as Wes said, will be retrofitted back into Orlando and we will continue to use Orlando as our beta site in the future to continue to test these new innovations.While we’re thrilled to quadruple the number of operating Drive Shack over the next three months with Raleigh, Richmond and West Palm and a key priority for us has been and will continue to be innovation.We are really excited to announce the newest product development that we have called the Urban Box format. It’s going to be an indoor concept that’s ideal for dense, highly trafficked, urban locations where typical large form of Drive Shack that you see today would not fit.So the footprint will be around 25,000 square feet. When you compare that to the two other boxes, those are just over 55,000 square feet. This concept is going to leverage all the key features that you know and love about Drive Shack, including an elevated food and beverage offering, great hospitality and then our technology compared – our technology paired with a pudding concept. Most importantly, it's going to be super entertaining and really fun.The cost of our Urban Box will be about a third of our full size stores and it will make – it will be both easier and faster to build compared to our full size. We expect the new format to cost between $5 million and $8 million to build and to generate about $8 million in revenue. While we'll continue to develop the Urban Box, the mid size 72-bay facilities will remain an equal priority. We expect to debut both of these formats in 2020 and expect to have 20 stores open by 2022.With that, I'm going to turn it over to David to take you through our results for the quarter and our future outlook.

[David Hammarley:]

Thanks Hana. First I’m going to talk about Orlando, where in our first year operations we've generated about $6.3 million in revenue, driven by 160,000 visitors with an average spend per visit of about $40. If you look at our revenue to date, about 38% has been driven by food and beverage with events at 31% and BayPlay at 29%.Over the past two months as we've been looking at some of the innovations we've been doing, there walk-in sales has accounted for about 70% with events at 30%. And as Hannah mentioned, we're really focused on enhancing Orlando with the 2.0 enhancements including Trackman and range design. And we think this will help improve the unit economics of Orlando moving forward.Turning to our traditional golf business, as you know, our American Golf business has 50 plus years of experience operating in golf course and we think this is a key asset for the company. In fact that it had played a role in helping us unlock two key development sites for us, Randall's Island and Newport Beach. And we're really excited to leverage that going forward.In terms of our own golf course sales, as of today we've sold approximately – we've sold 20 courses for approximately $140 million beginning of 2019. Over the next few months, we expect to sell an additional $35 million of sales across four courses, which gets us to our projected goal of $175 million by the end of this year. This $175 million will be [indiscernible] is the proceeds for 24 of the 26 owned courses that we started within in our own portfolio. As we previously said, the two courses that remain have approximate value of $45 million to $65 million in total proceeds, when you include development upside. We will continue to explore that, the best way to monetize those assets as we move forward.Before I end today, I'd like to summarize our overall future expectations for the business. In the coming months we plan to open Raleigh, West Palm Beach in Richmond and we expect them to generate revenue and EBITDA consistent with our unit economics starting in 2020.Moving forward, those unit economics for Drive Shack entertainment include a cost to build of $25 million to $35 million for the mid size and full sized stores and $5 million to $8 million for our Urban Box. Top line revenues will be $15 million to $25 million for our mid-size and full size stores with $7 million to $9 million for Urban Box.And overall, stabilized EBITDA margins will be between 25% and 30%.We expect to complete those 24 to 26 owned golf course sales by year end for $175 million. After completing our traditional golf business transformation, we believe the stabilized economics for the business will be approximately $175 million in revenues with course EBITDA margins of 15% to 20%. Our owned golf course sales proceeds will fund our development CapEx to be beginning of Q1 and we are currently exploring capital financing options to move the business forward.As mentioned previously, our total company SG&A we expect to be between 5% and 10% of company revenues by 2022.Overall, looking at the company today, we are very excited about the focus on moving the business from 1.0 to 2.0 and the product innovation Hana and Wes discussed.With that, I'll turn it over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] And you have a question from George Kelly of Imperial Capital.

[George Kelly:]

Hi guys. Thanks for taking my questions.

[Wes Edens:]

Thanks George.

[George Kelly:]

So sorry to hear about Ken, hopefully he returns soon. So just a few questions for you. First of all, can you take us through the sites that you expect to open in 2020?

[Wes Edens:]

Sure.

[George Kelly:]

Once I know you've announced a lot of locations that seems like they're in process, so which ones are coming next?

[Wes Edens:]

Yes, so the three that I can talk about today that we expect to open are Houston, which is specifically Stafford, Texas, New Orleans and Bloomington, which is in Minneapolis near the Mall of America.

[George Kelly:]

Okay. Okay. And then, discussion today about, and you talking about the Urban the new format, and just in your projected new store openings for the next few years, there's quite a few of those are the Urban Box. So wondering if you could talk about why that's – why you're so excited about that? And is it challenging to find sites for the larger and mid-sized stores or sort of what's going into the mix being so heavily weighted towards those smaller format stores?

[Wes Edens:]

Hey George, it's Wes. Let me give a little bit of an overview and I'll turn it over to Hannah. But I think when you look at the development timelines for the large stores it's a couple of years from the time you make a site selection, agree on a piece of land, go through a permitting process, construction process, and then get openings. So it can be as quick as 18 months, right, even a little bit less if you are actually really, really fortunate in terms of all the planning and permitting. But it also can be two plus years when you're talking about a place like New York City, which we think is going to be an amazing site to say the least, but it takes a number of years to make that happen.The smaller sites, the mid level sites, smaller cities, we think will be a little bit easier to permit and build. The footprint is a little bit smaller. The last, the Urban Box is one that is actually, we think, considerably less in the development timeline and has very similar economics to the big stores. So we show and Hana walked through it a little bit. The representative economics of it, but what we are really looking for is probably a minimum 15,000 square feet, a maximum of 25,000 square feet, so something in that range. And as it turns out, there's a lot of space in America that has, that fits those characteristics.The permitting process is really, really a permitting process that is really just talking about the fit out for a retail tenant. No different than if you are a drug store, or a clothing store, or whatnot. So you don't have a restaurant, you don't have a significant permitting timeline. So we think that once we are up and going, and kind of finalized our format for that, we think that the total time from identification of an asset to opening doors can be as little as nine months. And the number of sites that are available, number in the thousands and there's 100s and 100s of market. And the economics, we believe, will be comparable, obviously a little bit less, but comparable at the end of the day to the very large sites.And so I think you have the large sites which provide brand awareness, proof of concept, you get the build up your, all the different technology, entertainment, all this restaurant things. And these small sites may be the greatest expression of it all. So it's actually – it’s really, really exciting thing and we think it's a very logical extension of kind of what our brand is and couldn't be better.And Hana I know you have a lot of thoughts about this.

[Hana Khouri:]

Yes, I think, why are we so excited about this, I think, people really are nowadays craving that social interaction and going sitting at a bar is not as popular as it once was. People want to participate in an activity when they go out. And I think this gives folks an interesting alternative while still being able to stay true to the Drive Shack brand. And as Wes said, I think, there's just a lot more – there's a lot of opportunity in these empty spaces across America to be able to put this concept into.

[George Kelly:]

Okay, that's helpful. Then just a couple other questions. The long-term golf course sales, what kind of timeline would you expect that 45 to 60 or whatever the number was?

[Wes Edens:]

It's always hard to give an answer sensitive. It is long term. I would say we probably expect on one of those two courses to do something in the next six months to 12 months is our hope. But, we have conversations going, but – so that's probably the most guidance I can give on that George.

[George Kelly:]

Okay. Okay. And then the last question from me, and I don't know if Wes or David, Wes, I appreciate you being on this conference call and taking questions and everything. So I'm curious just about financing that you're considering, with your pipeline of new stores. Can you give any kind of update about how that dialogue is going or if you've started it and when would you expect to have more to announce there?

[David Hammarley:]

Yes we've had a bunch of preliminary conversations. There's also the work that's been done in the industry is beneficial too. So people are very familiar with it. And whether it's straight out financing or sale leaseback financing on the venues, I think, as soon as they are open, which again the next version 2.0 opens in 13 days from now, as soon as they open and running, I think, our financing options expand exponentially. And so between now and the end of the year, I think, you'll have a lot of news on the financing side to kind of show how we’re going to pay for the existing stuff and of course the stuff to come.

[George Kelly:]

Okay. Thank you.

[Operator:]

[Operator Instructions] If there are no more questions, we will end the call.

[Hana Khouri:]

Thank you.

[Operator:]

Thank you. This does conclude today's conference call. You may now disconnect.