Drive Shack Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[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 Second Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Nick Foley, you may begin your conference.

[Nick Foley:]

Thank you, Crystal and good morning, everyone. I would like to welcome you today to Drive Shacks Second quarter 2018 earnings call. Joining me here today are Sarah Watterson, our Chief Executive Officer; Larry Goodfield, our Chief Financial Officer and Chief Accounting Officer; and Sara Yakin, our Chief Operating Officer. We have posted an investor presentation on our Web site, 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. We encourage you to review the disclaimers in our press release and investor presentation and 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 Sarah.

[Sarah Watterson:]

Thanks, Nick. Good morning, everyone. As Nick mentioned, I'll start on the presentation on Page 2. So Drive Shack, we're a leisure company with operations focused on traditional and entertainment golf. On the traditional side, American golf we host 4 million rounds of golf each year across our 74 courses that we both own, lease and manage. We really had a terrific quarter. Our earnings were up 10% from the same period of last year. And our management has done an incredible job driving new member increases as we ended the quarter with over 60,000 public and private members. In addition, however, to our day-to-day efforts of growing this business, our team is very focused right now on rightsizing American golf by monetizing our 26 own courses, restructuring or terminating our non-core leases, and then adding high-margin management agreement. As mentioned in earlier quarters, we intend to redeploy these proceeds from the efforts into our new and growing entertainment business Drive Shack, which we recently debuted our first site in Orlando. We’ve five additional sites in development and are working to convert more. Turning to Page 3, I want to dive a bit deeper into the progress on golf course monetization where we made considerable progress over the past few months. On the own side, we’ve 26 properties for sale with total estimated proceeds net of debt of $160 million. Of those 26, we’ve already closed on the sale of one property in July 3 for $3.5 million and we’ve another 15 properties in contract to LOI, that if they close, would account for over 75% of our total estimated proceeds. We are actively marketing the remainder of the portfolio and aim to complete these sales by early 2019. Furthermore, where it makes sense for us, we're seeking to retain the management and the courses we're selling, which will create a new million dollar plus revenue stream from those agreements. So we set out the year also aiming to terminate or convert 14 leases. And so far we’ve converted one lease to management agreement and terminated one lease, which resulted in annual savings of approximately $1 million. So after we complete all these actions, we expect to generate $160 million again of sale proceeds net of debt and we will have our remaining core traditional golf business that earns about $10 million of company cash flow. We look to redeploy these proceeds plus our other cash on hand into growing the entertainment golf business. So turning to the entertainment golf on Page 4, Drive Shack to recall again, is an energetic social destination where we combined the best of food and beverage with our most advanced golf games and technology. We’ve really been able to transform the traditional game of golf into a modern interactive multiplayer experience where individual groups of a thousand people can enjoy our 3, 4 facility, our 90 plus hitting bays that all overlooked at 200 yard outfield with illuminated targets signs and even a glowing ball picker that serves as the moving target. Each of our hitting bays serves group of up to six people and we feature a free tailor-made club, comfy furniture and lots of TVs for gaming, watching live entertainment. It's really something for everyone. So turning to Slide 5, we opened our first site in Orlando and have five sites in development, which are expected to open throughout 2019 and early 2020. We've identified an additional 30 sites that we're pursuing or in active negotiations in. well, obviously not all these sites will convert, we expect this pipeline plus our other markets we're targeting to ultimately support 5 to 10 sites open per year. And as we mentioned previously, we remain very focused on identifying ways to self fund our growth. On average including startup costs and land, each of the sites targeted cost is about $30 million. Based on this information and the proceeds and cash mentioned on the previous page, we will aim to find and build about 20 -- 15 sites by 2020. Turning to Page 6, Orlando as you know soft [ph] open was on April 7. We’re beginning to ramp the business and has gone very well as our center visitors has been solid. We’ve attracted over 40,000 visitors who played 18,000 hours of games and hosted over 300 events for us. As expected, the business has been largely driven BayPlay and SMB sales. And really where we are right now, we are looking to -- now as the facility is opened, remain focused on driving awareness in the market, growing our vendor business, memberships and sponsorship sales. We are launching multiple programs, marketing campaigns and online booking tool to really provide the ultimate guests experience as we continue to ramp visitors in the coming quarters. So, in conclusion, we will continue to towards monetizing the own courses to achieve the $160 million in proceeds, restructuring our lease portfolio to create a traditional golf business that will generate about $10 million in cash flow, and we will aim to utilize those $270 million proceeds, plus our cash on hand to build and successfully operate 15 golf entertainment venues over the next 2 to 3 years. With that, I’m now happy to take any questions.

[Operator:]

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

[George Kelly:]

Hi, guys. Thanks for taking my questions.

[Sarah Watterson:]

Hi, George.

[George Kelly:]

So a few questions for you. First, wondering just about your balance sheet. Is your legacy debt portfolio fully monetized at this point?

[Sarah Watterson:]

No, we're still -- again, as we kind of focus really on the traditional entertainment golf, we’ve placed less of a focus on actual supplements on our debt business. But we are still actively working to monetize that business over the midterm and still believe there's about $75 million of recovery in that business.

[George Kelly:]

Okay. And how long would you expect that to take to monetize?

[Sarah Watterson:]

We expect it to take -- could be up to several years. Things were actively working to monetize, but as we mentioned in previous quarters plus, it's less predictable on time at this point given the nature of the investments.

[George Kelly:]

Got you. Okay. And then second question on before we get to the new stuff, about the golf owned portfolio process. This -- the target that you’ve put out of -- I believe, it's a $160 million in net proceeds. Does that include any kind of tax? Will there be much taxes associated with the sales?

[Sarah Watterson:]

That’s a great question. We are actually aiming to utilize our net operating losses to cover the taxes related to these sales. So ultimately we're hoping that will mitigate any of those expenses.

[George Kelly:]

Okay. And then -- okay, so Drive Shack, the new store in Orlando, just wondering so you’ve had it for about a full quarter now, I guess, over that. How do you feel about sort of visitor and spending trends against your earlier goals? And how do you feel about the box in its current form? Do you think there will be changes for the other new locations that are planned?

[Sarah Watterson:]

We are feeling great. We've always thought there was going to be a ramp to the business. And so the focus really right now is on -- now that we are open, pre-selling feature events, launching great marketing programs and efforts to really kind of propel the site and to give us lessons for future sites that we're opening as well. And then on the box there's always going to be things that we want to change as we move from 1.0, 2.0 to 3.0 and some -- most small things as we continue to evolve, we will continue to evolve our location. But I think the team has done an incredible job building something from the ground up. And people are really are enjoying it, which is great.

[George Kelly:]

So would you say you feel comfort with the major elements of the boxes as it exist right now, that's what the future sort of next grouping of stores will look like?

[Sarah Watterson:]

Yes.

[George Kelly:]

Okay. And then, you mentioned 40,000 visitors. Can you quantify any other -- what is the spend per visitor? What is the -- what was the revenue contribution in the quarter, any other kind of financial metrics?

[Sarah Watterson:]

Sure. We had really actually solid spent per visitor of $44 over the quarter. So we are -- again, as we’re ramping the business, we generated about $2 million of revenue, and so we will continue to grow that as I mentioned through event sales, increased awareness, which will all drive visitors. But $44 is our spent per visitor over the quarter.

[George Kelly:]

Okay. And then I didn’t see in the presentation any of the four wall targets. I believe it was $16 million to $23 million in sales and about $5 million in EBITDA per unit. Has that changed or any kind of update there?

[Sarah Watterson:]

No, our illustrative kind of average site economics are still the $16 million and to $23 million of revenue per kind of fully ramp site, and that would project out about $3 million to $6 million of EBITDA.

[George Kelly:]

Okay. And that -- how long did it take to get to maturity would you estimate?

[Sarah Watterson:]

I think we’re hoping for 2019 to be kind of a fully ramped year and working towards that. But obviously, we will learn more and hopefully as we open future sites, that period will decrease.

[George Kelly:]

Okay. And then just a couple of last questions. You mentioned in the presentation, financing potential to secure financing on. Can you talk about what that could look like? Are you talking to any kind of REITs or other special partners or traditional sort of banks or what are you looking for?

[Sarah Watterson:]

I think the benefit of what we're doing from a full construction process to whether it's owning or leasing sites as we’ve a number of different options to look out, whether we wanted to do at the site level or portfolio level of construction financing. So we’re beginning to contemplate our options, but I think what's great is we have a number of different options we can explore.

[Operator:]

[Operator Instructions] At this time, I will now turn the call back to Sarah.

[Sarah Watterson:]

Well thank you very much everyone. Really appreciate you joining us this morning and please reach out to us if you have any questions and look forward to updating you as we move forward. Thank you.

[Operator:]

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