Drive Shack Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good morning. My name is Crystal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Drive Shack's Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. BoHee Yoon, you may begin the conference.

[BooHee Yoon:]

Thank you, Crystal, and good morning, everyone. I'd like to welcome you today to Drive Shack's Third Quarter 2017 Earnings Call. Joining us are Sarah Watterson, our Chief Executive Officer; and Larry Goodfield, our Chief Financial Officer and Chief Accounting Officer. We have posted an investor presentation on our website, which we encourage you to download if you have not already done so. I would like to point out that certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. In addition, we will be discussing some non-GAAP financial measures, and the reconciliations of those measures to the most directly comparable GAAP measures can be found in the investor presentation. 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'd like to turn the call over to Sarah.

[Sarah Watterson:]

Morning, everyone. Thanks for joining us today. As BoHee mentioned, we've posted a presentation on our website, so I'll be referring to that throughout the call, and I'll start on Page 3 with an overview of our activity during the third quarter. For the third quarter, it was a pretty solid quarter for American Golf, our traditional golf business. While the company performance was really quite strong across all metrics, we did experience some effects related to Hurricane Irma across our 54-hole golf course in the southwest coast of Florida. In the quarter, we incurred about $500,000 of cleanup costs related to this event, which we're working to collect from insurance proceeds, so you'll see that recognized in future periods. Our team is very diligently working to return the full property back to operations, and we anticipate the effects of this event will not linger beyond 2017. Excluding the impact of this event, American Golf achieved adjusted EBITDA of $11 million for the quarter, which is up about $1 million or 10% from the prior year. So we remain on track towards generating our 2017 target adjusted EBITDA of $35 million to $37 million for this business. Moving to the Entertainment Golf business. We continue to make great movement, developing these Drive Shack venues. In Orlando, we're progressing very well through the latter stages of construction, and we remain on track to open during the first quarter of 2018. Furthermore, we're progressing through development on the 4 other announced sites, and we're continuing diligence across a large active pipeline across both the U.S. and globally. Lastly, on the debt front, we received the final paydown of our interest-related loan in August, resulting in approximately $70 million of proceeds. And additionally, we recovered about $12 million through the sale and paydown of our agency securities portfolio. We have approximately $180 million of cash at the end of 3Q, and our goal is to use these proceeds to thoughtfully grow our business. So now turning to Page 4. American Golf, as a company, still represents one of the largest owners and operators of golf properties in the U.S. We have 77 public and private golf courses across 13 states. As mentioned on previous earnings calls, we remain very focused on not only growing this business, but also restructuring the size and composition of the portfolio to really maximize results for our shareholders. Turning to Page 5, I'll focus on the financial results for American Golf. You'll see that company same-store revenues were up about $1 million and adjusted EBITDA was up $1 billion as well or 3% on a trailing 12-month basis. On the private side, we continue to be very strong on that side of the business during the course of the year. Our same-store revenues were up $3 million on a trailing 12-month basis, and we're able to grow - and that increase was primarily driven by our ability to grow full golf members by about 310 from the prior year, and we've raised our average dues per full golf member by about $200 million -- $200 per member versus the prior year. On the public side, our same-store revenues were down about 1% on a trailing 12-month basis, and we've had a decline in total rounds over a trailing 12-month basis, but that was largely offset by a large increase on the player's club membership and a decent increase on the average fees paid per round versus the prior year as well. So as I mentioned before, we remain very much on track to generate our targeted adjusted EBITDA of $35 million to $37 million for this year. We look forward to updating you on that over the course of next several months. And now turning to Page 6, a quick overview on Drive Shack. Our entertainment business combines golf, dining, competition and fun. We've announced 5 Drive Shack venues to date, including Orlando, which as I mentioned, we're expecting to open in the first quarter of 2018. We've included some images taken earlier in October depicting our construction progress. We believe each of these sites can generate about $3 million to $6 million of site-level EBITDA, and the cost to build a facility is about $20 million to $25 million. Beyond these announced venues, we still very much believe this opportunity to grow the business is vast. Day by day, I believe our momentum is growing. We're actively evaluating a large pipeline of sites, and we very much look forward to updating you on the progress, especially our further details around our anticipated opening of Orlando. So now I'd be happy to take any question.

[Operator:]

[Operator Instructions] And your first question comes from the line of George Kelly with Imperial Capital.

[George Kelly:]

Hi, guys. I have a few questions on Drive Shack.

[Sarah Watterson:]

Hey, George.

[George Kelly:]

Hi, morning. So wondering if you could first talk about the 4 other sites that you mentioned outside of Orlando. What could be the soonest, could we see some of those locations open in 2018? And how are you thinking about financing right now? What's the kind of time line where you could - do you expect to self-fund those 4 locations?

[Sarah Watterson:]

Sure. So I think some or all those locations could be open in 2018, based on our current development progress now. As you know, with any development business, no deal is done until the business is open and operating. But as I mentioned, I think we're making great momentum and I feel confident that some or all could be open in the year of 2018. As for the financing, I think we're all hands on deck to get Orlando opened right now. But I think, as we've always mentioned with regards to this business, we think it's a very financeable business. And so we'll be looking to begin evaluating methods by which we think this could work once Orlando is open.

[George Kelly:]

Okay. Okay. And then how many -- excuse me, how much of Orlando have you paid for already and how much is remaining?

[Sarah Watterson:]

So about -- I think it's about -- I think $10 million of Orlando has been paid or accrued for to date. And again, we believe that construction cost of an average site is $20 million to $25 million. We'll likely see, for Orlando, that it will be a bit higher than that in terms of all-in cost because it will have some startup costs associated with it. But on average, we believe the cost to construct these facilities -- build these facilities is about $20 million to $25 million.

[George Kelly:]

Okay. And then...

[Sarah Watterson:]

I think -- and George, I think, just to add a little bit, we've continued -- and I think you asked the question last quarter as well, we continue to move our financials in the direction of that of an operating business, and you'll see some further changes even this quarter with the classified balance sheet. But we also add in our short-term liquidity and we try to give some more color there. So hopefully, that's helpful for you and our investors.

[George Kelly:]

Great. Great. And then back to the 4 that you're planning. Wondering if you could talk more about how you're selecting those markets. And how does Topgolf kind of factor in that equation? It seems like at least in 1 or 2 of the sites that I've seen, there's a nearby Topgolf facility or 1 in development as well. So just wondering how that -- how you think about all that.

[Sarah Watterson:]

Certainly. And we have a great team here with a large and vast level of expertise and experience in picking the size and specialty of the sites that we're looking to build here, and both are important, not only on the entertainment side, but on the sheer scale of these facilities. We determine our sites based on a large blend of site-selection metrics, including things you would imagine

[George Kelly:]

Okay. That’s all I have. Thank you.

[Operator:]

With that, I will turn it back to the presenters for any closing or additional remarks.

[Sarah Watterson:]

Well, thank you so much for joining us. We're very excited to move towards the final stages of opening, and we very much look forward to keeping you guys apprised of any updates as we move forward. Thank you so much.

[Operator:]

This concludes today's conference call. You may now disconnect.