Drive Shack Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good morning. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to Drive Shack’s Fourth Quarter and Full Year 2016 Earnings Call. [Operator Instructions] At this time, I would now like to turn the call over to BoHee Yoon.

[BoHee Yoon:]

Thank you, Carol and good morning everyone. I would like to welcome you today to Drive Shack’s fourth quarter and full year 2016 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 website, which we encourage you to download if you have not already done so. Before I turn the call over to Sarah, 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 during the call 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 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 Sarah.

[Sarah Watterson:]

Good morning, everyone. It’s Sarah Watterson. Thanks for joining Drive Shack’s fourth quarter 2016 earnings call. We posted a presentation on our website that we will be referring to this morning. So, I will begin the call and then turn it over to Sara Yakin as BoHee mentioned, our Chief Operating Officer for review of American Golf’s results. So I will begin on Page 3. Looking at 2016, it was really a transformative year for the company. We finished the year with a fresh name, new corporate structure, signal our conversion to a leisure business focused on both traditional and entertainment golf. Throughout the year, we made great strides monetizing the debt business. We achieved about $140 million of recovery in the past 12 months alone and $700 million since 2013. We expect a majority of that remaining $120 million of recovery to occur in 2017 and we will aim to utilize those proceeds to grow our traditional and entertainment leisure businesses. On the traditional side, American Golf continues to perform well. We achieved 2016 adjusted EBITDA of $33 million, which is up 6% from 2015 and was within our targeted range. Despite El Niño weather conditions in the first and second quarters, we are able to achieve solid results primarily through membership growth and member dues increases. On the entertainment golf side, we continue to make strides to develop a global network to Drive Shack venues. During the year, we built out a full corporate team and announced the development of our inaugural site in Orlando. We expect this site to open within the next 9 to 12 months. Our pipeline for future Drive Shack sites remains very robust and we continue to work through 25 plus markets around the globe. Now, I would like to turn the call over to Sara.

[Sara Yakin:]

Thanks, Sarah. Turning to Page 4, I would briefly like to provide an overview of the business today. American Golf continues to be one of the largest owners and operators of public and private golf courses in the U.S., with 78 properties across 13 states. Our focus is providing lasting experiences for our 50,000 plus members and customers who play over 4 million rounds with us annually. During the year, we entered into one new management agreement in California and exited 8 lease agreements that were losing a combined $0.25 million per year. Going forward, we remain committed to refining our portfolio to maximize results for shareholders. Now, turning to Page 5, I would like to discuss the full year results for American Golf. Despite challenging weather conditions around the country, we achieved full year adjusted EBITDA of $33 million, a very solid performance for the business. 2016 same-store revenue grew 3% year-over-year or $7 million to $289 million. The largest drivers influencing growth on the private side, where we had 19 courses in our same-store portfolio were one, membership dues, which were up about $225 per full golf member; and two, increased event revenues as a result of strength in sales efforts. Results for our 48 same-store public courses continue to be driven by steady growth within our public member program, The Players Club, which had 36,000 members paying average annualized dues of about $400 at the end of the year. Finally, our managed courses provided a steady earnings stream of almost $2 million in 2016. Looking ahead, we continue to see growth potential within our existing portfolio. And for 2017, we are targeting adjusted EBITDA of $35 million to $37 million, which implies a 9% increase at the midpoint. Now turning to Page 6, I would like to quickly highlight how our steady year-over-year growth in AGC continues to drive value creation. Since acquisition, we have been able to dramatically increase the potential enterprise value of the golf business. If we are able to achieve our 2017 adjusted EBITDA target of $35 million to $37 million, as just mentioned, we will have grown the value of the business by over $100 million to about $325 million. The implied investment multiple on this growth on our $121 million equity base is nearly 2x. By continuing to improve course performance and right-size our portfolio, we remain committed to realizing this growth and creating additional value for our shareholders. Now, I would like to turn the call back to Sarah who will provide an update on our exciting entertainment golf business to Drive Shack.

[Sarah Watterson:]

I will turn back to Page 7. We remain very enthusiastic about the prospect of growing this business and we are continuing to work towards the opening of our first site, as I mentioned, in Orlando, Florida. For those of you who are just joining us and becoming familiar with the concept, our venues will consist of three stories of indoor, outdoor driving range suites and restaurant bar spaces, where friends, family, colleagues can compete against one another, while playing fun golf-like games and enjoying great food and beverages. On Page 8, as shown, we believe the opportunity to develop these facilities is vast and we are actively working through a robust pipeline of markets both in the U.S. and globally. We are leveraging our ownership of American Golf to identify and evaluate potential sites on existing golf courses. We have built out a full corporate team at Drive Shack with ample hospitality and entertainment experience to identify other sites within the largest markets in the U.S. And finally, we are capitalizing on the expertise and breadth of our manager, Fortress, to build these venues internationally. Needless to say, we believe there is a tremendous opportunity for growth both domestically and worldwide. Now turning to Page 9, I would like to briefly discuss our financial results for the quarter. Earnings were up for the full year over 2015. We achieved core earnings of $47 million or $0.71 per share, which is up about $9 million or $0.14 per share from 2015. The increase was primarily driven $2 million net increase from the debt business, primarily as a result of the accretion of earned related to the interest – partial pay-down that occurred in September and then $4 million of that increase was attributed to improved golf performance and less expense of debt achieved through our new golf refinancing that we did in June of last year. $3 million of that improvement came from G&A savings and lower interest expense from our junior subordinated debt after a rate step down that occurred in April. And finally on Page 10, I would like to conclude by recapping where the company is today and I am really excited to say it poised to go. 2016 was a very defining year for us, again, new name in Drive Shack, a new corporate structure as we dreaded and very well-positioned to execute on our leisure focused business plan now more than ever. American Golf has produced solid results and we are continuing to expect modest growth within this existing portfolio as we look to earn $35 million to $37 million of adjusted EBITDA in 2017. We have made a ton of progress monetizing our debt business and really optimizing the value we can get from that business and we will work to recover the remaining $120 million over the near-term. We expect to redeploy these recovery proceeds and our other cash on hand, which total about $250 million today to fund Drive Shack venues over the midterm using our own liquidity. And as such, our Board of Directors has determined that we will not be paying a first quarter 2017 common dividend and we will instead be retaining that capital to invest in the growth of Drive Shack. We remain dedicated to quickly and thoughtfully identifying sites for these venues, each of which is expected to cost about $15 million to $25 million to build and expect to generate about $3 million to $6 million of site level EBITDA. We have a lot to keep you apprised of in the future and we look forward to keeping you apprised of these developments. We are very excited about the prospects for this business and we are working very hard to turn Drive Shack into a household consumer name. So with that, I would like to turn it over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] And your first question today comes from George Kelly from Imperial Capital. Please go ahead.

[George Kelly:]

Hi, guys. Couple of questions for you. First, related to your golf portfolio, what’s your expectation over the next year or longer than that over – related to potential to grow your course portfolio, sorry I asked that very – do you think you can grow your basic courses or should we see more closures similar to the fourth quarter?

[Sarah Watterson:]

Yes, I think it’s twofold, George and hope you are doing well this morning. I think right now our principal focus is on growing Drive Shack. We have talent kind of within our golf team to always look for attractive new opportunities, but where we have made a lot of progress is really on rightsizing the golf portfolio and we will always look at new opportunities. But again, our principal focus is on growing Drive Shack venues.

[George Kelly:]

Got it. So then the targeted EBITDA growth year-over-year should be a factor of a lot of it is continued cost cutting, is that accurate?

[Sarah Watterson:]

No, I think the way to look at it and the way I think about it, when we took over the American Golf portfolio, we had about 92 courses and generated $22 million of EBITDA. By rightsizing that portfolio, both on a lot of revenue movement as well as on some expense reduction, we have been able to increase that with 78 course portfolio right now to want to achieve $35 million to $37 million this year. And so I would say it’s just as much focus on member growth, member dues growth and new revenue opportunities within our portfolio that is really going to propel growth in 2017.

[George Kelly:]

Got it. And then another question on – it was reported recently the Fortress transaction, what happens to the management contract, is there anything you can say under new ownership?

[Sarah Watterson:]

Yes. We don’t expect the transaction to have any impact on our business. Drive Shack is very important to Fortress and Fortress is very important to Drive Shack. And Fortress leadership maintains intact and heavily invested in our success.

[George Kelly:]

Got it. And then last question on Drive Shack, there are couple – I don’t hear, is TaylorMade a part of Drive Shack anymore?

[Sarah Watterson:]

TaylorMade and Drive Shack still are very strategically aligned and building out our venues. They are – I may not say their name, but we are still very much strategically aligned with one another.

[George Kelly:]

Okay. I think that does it. Thank you.

[Sarah Watterson:]

Thank you.

[Operator:]

Now, let me turn back the call over to the presenters for any concluding remarks.

[Sarah Watterson:]

Thank you all for joining us today. We look forward to keeping you apprised of our developments in the future and have a great day.

[Operator:]

This concludes today’s conference. You may now disconnect.