Drive Shack Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good morning. My name is Nichole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newcastle Third Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions] Thank you. Well [indiscernible] you may begin your call.

[Unidentified Company Representative:]

Thank you, Nicole and good morning, everyone. I would like to welcome you today to Newcastle’s third quarter 2015 earnings call. Joining me here today are Wes Edens, the Chairman of our Board of Directors; Ken Riis, our Chief Executive Officer; Justine Cheng, our Chief Financial Officer and Julien Hontang, our Chief Accounting Officer. We posted an investor presentation on our Web site, which we encourage you to download if you have not already done so. Before I turn over the call over to Wes, I would like to point out that certain statements 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 regarding forward-looking statements 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.

[Wesley R. Edens:]

Great. Thank you and welcome everybody. Let me give just a few general highlights, and I’ll flip through the first couple of pages of the presentation. So please refer to that and then I’ll turn it over to Ken Riis to talk about the debt portfolio. Sarah Watterson is with us, who is actually in-charge for our golf operations and the new initiatives we got there and then Justine will wrap up with the financials and then we’ll turn over for questions. So starting on Page number Two, the portfolio that we have just by the way of review is as shown in the chart at the bottom. So a little over half of our investments are in the debt portfolio that’s a declining number as those investments mature and roll off. The golf portfolio which has been a terrific performer for us on left hand side and we have $20 million in cash. Total investment is $470 million. On the right hand side you can see the golf portfolio 87 properties across 13 different states, 2015 targeted EBITDA of $30 million to $32 million, so up 40% from 2013. We expect returns of the real estate debt portfolio 15% to 20%, golf 13% to 15%, cash as we deployed mid-teens as well. So, it's a very attractive performing investment portfolio at the moment. Page number Three, the financial results, I'll just touch on the highlights because Justine will come back in detail, but core earnings of $10.4 million, $0.16 per weighted average basic share, so basically very-very similar to what happened in the second quarter. AFFO and GAAP income were a little bit lower, because there are some onetime gains that we had in the second quarter were not recurrent that came out of it, but in general a very steady and very productive quarter for us. Paid dividends of $8 million or $0.12 per share. Page Four, the highlights of the third quarter. The debt portfolio which again Ken will go through in detail, generated $13 million of net investment income and 18% annualized returns so a highly performing real estate debt portfolio. $361 million face amount of non-agency assets that produced the bulk of those returns, but again Ken will talk about here in just a second. On the golf portfolio the big event for us is that this summer in August we acquired a third-party debt of $157 million in the portfolio at $0.90 on face value, $141 million in purchase price generating a $14 million net gain. We financed that on the short-term basis when the middle of doing a long-term finance, which we expect to get down, later this year or first thing next year. The core underlying portfolio performed well again Sarah Watterson will talk about that in just a second. So, we've done a lot of restructuring work that's been very constructive, and then we also have had very-very good just organic growth. We're on track in that portfolio to generate 2015 adjusted EBITDA of $32 million up about 40% when we bought only few years ago. Page Five, just show a picture, I like these capitalization pictures because they do - are helpful in terms of laying out what happened, but we had a second mortgage in place and a first mortgage. And you can see the portions that we owned are shaded in green, the third-party was the other, that's what we acquired, we bought $157 million in debt for 90% face value. And we can see on the right hand side is that at the moment we have a heavily equitized portfolio that is a short-term financed, but the heavily equitized that we are looking to refinance on longer term debt under some good terms given where interest rates. Little bit overview and then I'll turn it over to Ken in a second for you. Flip to Page number Seven, the strategic investments that we have made at Newcastle over the years have generated strong returns. So going back to 2011, when the share price was at $4.40, we basically have created new investments in New Residential, New Media, New Senior. All those were separate public companies that have their own reporting on them, but you can see that for a Newcastle shareholder from the date that we made that first MSR investment back in December of 2011, we have generated terrific total returns. 38% cumulative aggregate returns over that period of time, 221% combined and 3.2 times investment multiple, so it's been a terrific and productive period since then. If you look on Page Eight, the value creation exercise for us is actually quite simple, at least quite conceptually. Number one, we identified sizeable and undervalued sector where we think we can attract, we can invest capital and do so productively. Two, we evaluate and execute on the investment thesis, obviously it's different for each one of these sectors, and then three is to grow organically and through acquisitions to reach critical mass, though the business thing can be sustainable on a standalone basis, that's exactly where we are to our leisure business right now. So, Page Nine, the real forecast and the focus for us is to come up with a plan for growth on the golf side which we'll talk about in just a second, but right now let me stop and turn over to Ken here to talk about the debt portfolio. Ken.

[Kenneth M. Riis:]

Sure. So the debt portfolio is good, it's generating good return for us, but it's smaller than it was a few years ago. Currently the face amounts of assets we own is $760 million and it's split pretty evenly between non-agency assets and agency securities. It's generated $30 million of net investment income in the third quarter. And just to give you some context of what we've done throughout the year. Through September 30th, in our non-agency portfolio we've sold or received pay downs of $300 million resulting in $90 million of principle recovery to Newcastle and generating $30 million of gains, so, very active and very productive. The good thing is our remaining portfolio continues to generate good income for us and we are poised to continue to recover principle and timing it with our reinvestment into golf assets and we expect that they happen over the next two years and we expect to recover $270 million to $320 million over that period of time.

[Wesley R. Edens:]

Great. If you flip to Page 11, Sarah could you talk to the golf business plan?

[Sarah Watterson:]

Sure. Hi everyone, so, we're turning our attention back to golf, American Golf manages 87 locations across 13 states today, 63 of these courses are public and 24 are private, our portfolio is really optimally situated with 77% of these courses in top MSA's. As you could also see in the West Coast and South East we're able to offer more playable days at our course as compared to other portfolios given our good climate's that we're in. As Wes mentioned earlier, the business is on track to achieve $30 million to $32 million of adjusted EBITDA in 2015. When we took this portfolio over in 2013, we brought in a new team of management and through expense reduction by restructuring leases and really kind of restructuring our expenses. And also topline through kind of reinvigorating member recruitment programs, or private courses and introducing kind of member like programs at our public courses to really bolster the recurring revenue stream. Our team has done a terrific job of taking these underperforming assets and turning them into successful growing courses. You saw Page 9, I think will re-see the opportunity to really take that growth that we’ve experienced in this American Golf portfolio and look to acquire new courses overtime and really try and replicate those results. On Page 12, it's really the results of our team effort. You will see that there is definitely growth in the player club members that have grown to about 15,000 this year, up quite a bit and then on public rounds played despite even a modest increase in playable days, our public rounds are up as well. We hope to continue to grow with our management team in place, we hope to continue to grow EBITDA into the next year. We think there is still leverage to be pulled that we can meaningfully increase our EBITDA there. Turning to Page 13, after I just told you how well our American Golf portfolio is performing. It seems a little bit odd to talk about industry decline, but we think these asymmetric opportunities are really where the opportunity is going to be created. The golf industry and we've said this all along, is a large and fragmented market. I think initially when we talked about this portfolio, we talked about as potentially either trade or trade turning into the business, I think now that we’ve seen the portfolio performance of American Golf and we’re seeing the same large fragmented markets to kind of act upon. I think we’re seeing it as more of a business. With a number of golf rounds still in decline, the number of players in decline there is obvious reasons as for why this is and I think we can take an active approach in correcting some of these declines. It takes too much time, it's embarrassing and difficult and generally help people get better at something and so they like to do something they are better at doing. And so as I mentioned earlier, we’re going to look to selectively acquire and reinvent golf courses, while also scaling a new golf business which I’ll describe shortly. When we look as to where we want to participated on the innovative side, we looked at ideas that were really performing well and I think the most promising idea that we looked at was innovative entertainment and innovative entertainment, basically just combines food and beverage with activities like video games or bowling or trivia and so it's a dining plus experience is the way I describe it. People are always looking for fun and interesting things to do and I think the growth in this sector is really evidenced by companies that have gotten it really right and you can see that in the stock performance of some of these innovative entertainment companies. So I think as we look to what is the future of Newcastle? We see our opportunity is our innovative golf business, [drive shack] (Ph) as meaningful lever into the growth of Newcastle. Innovative golf is not something that’s new, there are companies that do it in the U.S. right now top of is a peer that really has done a great job building their portfolio. And I think if you look abroad, there is numerous both indoor and outdoor peers in Asia and in particularly look at South Korea and there is a number of opportunities there. What these establishment offer, basically a variety of food and beverages combine with forage restaurants and basically a technology enhanced golf game where players can compete against one another. So it's not quite golf, but it's definitely golf like and I think this non-golf vibe attracts a completely different demographics than traditional golf which we really like, because we’re attracting those different demographics to our courses. You’ll see on the graph below that one of our peers has estimated that 70% of their attendees are non-golfers and 50% of those attendees are under 30. We look at the average age of traditional golfer and 50 to 55. And so bringing those types of demographics to our courses will not only help our drive shack business, but as we look to leverage the size and do this on American Golf existing ranges, I think it will bring non-golfers to the game of golf. What I’m really excited to talk about also is you know we’re going to look to do this with TaylorMade Golf Company and I think as we look to who you want to partner with is worth doing this. The TaylorMade premier golf brand both kind of in the U.S. an exceptional golf brand in Asia really makes them an ideal partner for us. We’re going to look to develop and market about two to three sites over the next 12 months to 18 months and then once we’ve established our proof-of-concept, we’re going to look to scale pretty rapidly. As I mentioned previously, I think our main differentiator in addition to our great partnership with TaylorMade is also our ability to kind of leverage the expertise and real estate at American Golf and potentially other courses that we’ll acquire overtime. With American Golf 77% of the courses in top MSAs, it's 10 acres to 15 acres of land to build these facilities and so I think we should be able to leverage these existing great urban located areas as well as their existing golf ranges will really give us some competitive advantage. Finally, the returns are very attractive. We think they are going to be about 15 plus unlevered return and really will balance out our core golf portfolio very well. And so with this, I’ll turn it back to Justine.

[Justine A. Cheng:]

Thanks Sarah and good morning everyone. As Wes mentioned, core earnings this quarter was pretty steady from last, we generated $10.4 million of core earnings or $0.16 per share. AFFO which adjust core to include net gains was $16.3 million or $0.25 per share. Again that’s not really comparable to the second quarter where we did liquidate a significant portion of our legacy portfolio and for Q2 generated $15 million of net gains versus the $6 million of net gains in Q3. The net gains there again was generated from our golf buyback transaction, where we were able to buyback the debt at a 10% discount. Our GAAP income this quarter was $6.5 million or $0.10 a share that does include depreciation and amortization of $9.8 million or $0.15 per share. And lastly, turning to our dividends, we paid $8 million or $0.12 a share and that represents a 10% yield roughly on our stock price today. And so with that, I’ll open up the call for questions. And turn it back to the operator.

[Operator:]

[Operator Instructions] Your first question comes from the line of [indiscernible]. Your line is open.

[Unidentified Analyst:]

Good morning and congratulations on a very nice and steady quarter. I just have a question about the dividend, there was a thought that the dividend might have been increased for the third quarter, which it wasn’t, but there certainly seems to be ample room where you could increase the dividend by a couple of pennies a quarter. Is there any thought been given to increasing the dividend over the next few quarters?

[Kenneth M. Riis:]

Thanks for the question. It was a steady quarter and we definitely do have room to increase the dividend if the Board chose to do so. We talk a lot at the Board Meeting about the availability of capital given the opportunities that we see and made the decision that we will keep the dividend stable and continue to have dry powder in the form of cash on hand as we’re looking at a number of different acquisitions. So but I think we evaluate from quarter-to-quarter is the Board decision obviously and of course most important thing is to have the flexibility to do it which given our earnings, we clearly do.

[Unidentified Analyst:]

Okay. Thank you.

[Kenneth M. Riis:]

You bet.

[Operator:]

[Operator Instructions] I would like to turn the call back over to the presenter.

[Wesley R. Edens:]

Great. Well thanks everyone for dialing in. it’s a good quarter, we look forward to the rest of the year and we will be talking to you in the New Year I guess. Thank you very much.

[Operator:]

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