Drive Shack Inc. (DS) Q1 2019 Earnings Call Transcript

Drive Shack Inc. (NYSE: DS)
Q1 2019 Earnings Call
May. 10, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Laurie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Drive Shack's fourth-quarter and full-year 2018 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 would like to hand the call over to Austin Pruitt, head of investor relations. Please go ahead.

Austin Pruitt -- Head of Investor Relations

Thank you, Laurie, and good morning everyone. I would like to welcome you to Drive Shack's fourth-quarter 2018 earnings call. Joining me here today are Ken May, our chief executive officer; and David Hammarley, our chief financial 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 remarks made today will include forward-looking statements. Actual results may differ materially from those considered by these forward-looking statements. 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 would like to turn the call over to Ken May.

Ken May -- Chief Executive Officer

Thank you, Austin. Good morning everybody. Welcome to Drive Shack's fourth-quarter conference call. We appreciate you joining us.

As you might recall, David and I joined Drive Shack in November. We're really excited to be here. There's been a lot of changes, which we'll be detailing some of those here this morning, but a lot of exciting changes and things we think that our investors will be excited to hear about. I'm going to give a summary of 2019 plans and goals for our business, and then David is going to give a summary of Q4 and 2018 results and spend a little bit of time on American golf and things that are happening there.

As far as background, I can't begin to tell you how excited I am to be at Drive Shack. It's just an incredible experience. I'm very humbled by it. As far as background, I spent 25 years with FedEx.

I've started at the bottom unloading packages and moved my way up. I had 13 different assignments there during my 25 years there. At one point, I had all of U.S. operations where I had 60,000 people delivering packages around the world.

At one point I ran their worldwide operations control centers where I was in charge of airplanes and trucks moving all over the world. And then my last job there was that CEO of FedEx Kinko's, where I had roughly $2 billion in revenue, 20,000 people and 1,700 locations. During my tenure there, we opened up 500 locations over a 24-month period. And so I guess the applicability of that experience is we know how to open up locations and go very fast.

FedEx is known for execution and precision, and that experience has really helped me in my career. It's going to help me here at Drive Shack. My last job was CEO of TopGolf. When I went there, they had seven locations and we weren't making a lot of money.

Through a lot of hard work of a lot of people that are there, a lot of great people over there, we went from seven locations to 34. We went from 2,000 associates to up to 12,000 associates and built an incredible culture where people really enjoyed working there. And so I'm eager to apply my knowledge and experience that I gained at FedEx and at TopGolf to apply to what we're trying to do at Drive Shack. I want to spend a few minutes on our company goals.

We want to continue our expansion into the rapidly growing entertainment industry as an interactive dining and entertainment business with great golf content. As far as our plan for execution, we've laid out three priorities for driving results from the intermediate to long term. Number one is we're going to be selling our own traditional golf courses to fund Drive Shack's growth and optimize the operational synergies between the two segments. Secondly, we will be growing Drive Shack's footprint with high-quality locations.

And third, we will achieve attractive unit-level economics by improving customer-facing and back of house operational capabilities at each of our entertainment venues. But let me go on a little bit more detail on each of these priorities. As far as sales of golf courses, American Golf, substantial strides have been made in monetizing the owned courses, which David will highlight in more detail in just a few minutes. In short, we have $155 million of proceeds sold or under contract today, with an additional $20 million expected to close by year end.

We also estimate an additional value of $45 million to 65 million from two courses we plan to sell in the long term. Ultimately, these proceeds will serve as a platform for growth, funding Drive Shack's golf entertainment business. And my hat's off to the team at American Golf for the work they've done on this over the past year. It has been extraordinary.

Our second priority is to grow our golf entertainment footprint quickly. We're focusing on growing nationally very, very fast. Our development team has done a great job. Ted Heilbron and his team is just extraordinary.

Just as an assessment, the pipeline is shaped up much faster than I thought that it even could, and they've done an extraordinary job. So today, I'm thrilled to announce that we have four new sites under contract. Those markets are: Chicago, Illinois, which is downtown Chicago; Portland, Oregon; Newport Beach, California, which our entrance into California is a big deal; and then Houston, Texas. And so these sites, I've toured all of them, all four of them, and they are situated in optimal locations across quality markets.

And then going forward, as the number of contracts under negotiation keeps growing, we will continue to announce new deals as they are signed. But the pipeline is robust, and we are executing on building that pipeline very quickly. As far as sites under development, in the second half of the year we will open up our second, third and fourth sites in Raleigh, West Palm Beach and Richmond. All three of those are in quality trade areas.

Those buildings are in the process of going up and being finished. We have our head of construction working hand in hand with our new VP of new store openings to ensure a clean handoff and to open these up. A familiar theme that I hope you will begin to pick up on is the acute interest in ensuring both operations and development teams are stacked with experienced players. To do so, we've filled both with veterans and other leading multi-unit businesses that have golf entertainment experience and have opened up dozens of these type facilities.

And so I'm very comfortable that we can execute upon that. In the fourth quarter, we'll be breaking ground in our new location in New Orleans. We're excited about that. And then starting this spring, American Golf will begin operating with a driving range at Randall's Island, our flagship New York City venue, which will begin construction in 2020.

Third, I'd like to talk about our new box size. We're going to be rolling out a new 72-bay venue that will allow us to target untapped, smaller tier two MSAs. We've spent a lot of time in this box over the last four months, and we feel like it is going to be something that's going to allow us to leapfrog the competition. Specifically, it will nearly double the addressable markets within the United States.

And as we grow, we expect that the 72-bay design will be the most common format across our stores, which will bring down our average build cost. Priority three was building operational capabilities, and this is the thing that I'm most proud of, I think, is that we've built an incredible team. We have hired industry-leading veterans in just about every functional area who have done this before. And so I think that the executional risk has been dramatically dropped to zero or something close to zero, because these people have done this before and know how.

The functional areas we've hired these people at are in IT, real estate development, food and beverage, learning and development and events sales. We've also put together a new store opening team that I referenced earlier that is second to none, that has opened up dozens of these type locations. And then in our first site in Orlando, we've built a new team there, and we're working very hard to improve the operations of that particular site across all functional areas and with our new leadership team. The second thing under operational capabilities is a brand strategy.

When David and I started, we were a golf company. And the mindset changed. Now we know that we're an entertainment company. And with an entertainment company, you have to hire different people and train them differently and you incent them differently.

You almost have to entertain the employees just as much as you entertain the guests, because happy employees take care of guests. And so that's what we're focusing on through our new L&D efforts, and I'm very excited about that. And you're going to start to see that entertainment player come out in our marketing materials as we go forward. Third, with a new venue design.

First and foremost, the shift will be most evident on the entertainment side with the feel of our venue. As I mentioned, we are actively redesigning our box. Beyond size, we will enhance our venues in a way that accounts for every step along the consumer's journey. As soon as the car door opens, we want our guests to feel the energy and excitement overflowing from Drive Shack.

And walking into our venue will feel like walking into a party. Additionally, we look to create spaces throughout the entire venue, not just the bays that allows us to constantly innovate our offerings. You can expect to see structural changes in place for sites opening in 2020 and beyond, specifically the first one will be in our New Orleans location. For sites opening this year, we've made some thoughtful changes to aesthetics to give the venue a cosmetic makeover.

We've made tweaks throughout the building that, on aggregate, will generate a different atmosphere for our guest. Specifically, it will be edgier, trendier and more relevant. I mentioned early on hiring and training. We are totally revamping how we hire people and how we train people.

And we've hired a leading expert in learning and development to do this. And so we feel like that if we become edgier and entertain our guests better, that they will have a better experience. And so those new processes are in the process of being developed and rolled out as we open up these next three locations. We feel like this changed attitude, we're fun is the keyword for everyone, will be a big difference for our guests and for everyone.

On the food and beverage side, we've hired a corporate chef. We're totally working on food execution. That starts with the percentage of our food that's made from scratch. So you're going to see us move more to a fresh approach to developing our menu and executing on it.

It goes into the technology that supports our kitchens and our back of house operations. And so those things are being worked on. We're also working on a new menu design that we'll be rolling out in Orlando in our next three locations, which will be very, very focused on trends in the food industry. My conclusion after all of this is, we are confident these changes will result in a more streamlined organizational structure, a strong brand identity and improved functional operations, all of which we believe are the key factors in achieving our target economics.

In Orlando specifically, we expect to break even this year and generate substantial revenue and EBITDA by next year. So before I turn it over to David, I want to take a moment to thank all our hardworking exceptional ambassadors at American Golf and in Orlando, and then our venue support teams in New York City. They are the motor of this business, and I am very proud to be a part of this team. The new management team is doing all that we can to ensure that we're taking the necessary concrete actions to capture near-term opportunities while building our brand and growing our footprint nationally.

We are so excited about what's to come. So with that, I'm going to turn it over to Dave, and he's going to go over 2018 and American Golf.

David Hammarley -- Chief Financial Officer

Thank you, Ken. Good morning everyone, and thanks for joining us on the call. For my prepared remarks, I'll quickly review the results of the fourth-quarter and full-year 2018, give you a brief status update on the owned course sales progress and provide a perspective on our growth prospects for 2019 and beyond. In short, we are pleased with our overall progress.

The ramp up in performance for our first golf entertainment venue in Orlando was a bit slower than expected, but we generated solid overall revenues on a total company basis. We also entered the year on a high note, closing the sales for a substantial chunk of our own golf courses, with additional sales continuing into the current quarter as well. One point to call out before going through the numbers in detail is that our business models are at an inflection point. As Ken mentioned, our ultimate goal is to open new entertainment golf venues to fund this growth.

We're generating liquidity by selling traditional golf courses that we own within our American Golf business. Through the sales process, we've also entered into new management agreements with several course buyers, creating additional recurring revenue streams with our traditional golf business. In short, our overall business changed significantly in 2018 and will continue changing in 2019. This makes interpreting year-over-year results less meaningful for the past quarter and the next several quarters as we execute our strategic plan.

Additionally, on the more technical side of things, a new accounting standard was implemented in 2018, which makes year-over-year GAAP financials less comparable. With all that being said, let me give an overview of the fourth quarter and 2018 full-year results. On a total company basis, we generated approximately $314 million in full-year 2018 revenues. After adjusting for the accounting standard changes, full-year 2018 was flat compared to 2017.

For the entertainment golf segment, we don't have comparable year-over-year performance to discuss since our first Drive Shack venue in Orlando opened in April of 2018. In terms of absolute performance, the Orlando venue generated $1.6 million in Q4 of 2018 revenues with average spend per visit of $41. This compares to $1.5 million in revenues in Q3 2018 with average spend per visit of $38. Our focus on the corporate events business helped drive the average spend per visit up in the quarter by approximately 8%, and we are optimistic that the events business will continue to be a top-line driver for Orlando moving forward.

In Q4, we also implemented new marketing strategies such as enhanced digital targeting and new event-style programming to recruit walk-in visitors. The initial results show positive trends, including a 45% increase in incremental walk-in sales from November/December, a month historically driven mostly by event visitors. As Ken mentioned, over the last several weeks we have hired a new Orlando leadership team and been implementing several new top-line strategies and operational capabilities that give us a lot of confidence that the venue will continue to ramp up its financial performance each quarter. As Ken said, our new 72-bay venue will allow us to tap into more markets at a lower cost to build.

Target stabilized economics for this venue format will be $15 million to $20 million in revenue at an EBITDA margin of approximately 25%. Our 90-bay to 102-bay economics have been updated and are slightly improved versus our previous outlook. We have increased our revenue target from $16 million to $23 million at a 20% to 25% margin to $20 million to $25 million in revenues at an approximately 30% margin. As Ken stated, we have significant expansion plans for our entertainment golf business.

We will open three new venues this year, three to five in 2020 and five to 10 each year thereafter. This means that by 2022, we plan to have over 20 venues open across the U.S. Moving to traditional golf, it makes sense to focus on our same-store portfolio performance given the impact to the overall numbers of our sold courses this year. On a same-store basis, Q4 traditional golf revenues were up 1% versus prior year, and full-year revenues were up 3% versus prior year.

Rounds played on our public courses were up 1% in 2018 despite playable days being down 2%, primarily due to bad weather. Additionally, our public course membership program Players Club grew membership by 14% in 2018. For the private courses, despite our clubs being at or near golf member capacity, we were able to raise our average member dues by 4%. For our owned golf course sales program, we sold a total of $90 million for full-year 2018, which compares to our prior public guidance of $125 million for full-year 2018.

Since January of this year, we've closed another $25 million in sales, which gets us to $115 million in owned golf course sales to date. We still expect to complete an additional $60 million in golf course sales in the next few months, which gets us to our total proceeds goal of approximately $175 million by the end of 2019, with the bulk of that additional $60 million closing by the end of Q2. The $175 million in owned course sales are proceeds for 24 of our 26 owned courses in the original portfolio. For the two owned courses remaining that have potentially more long-term value, we've tightened the estimated value range to $45 million to $65 million, including development upside, compared to our 2018 guidance of $45 million to $85 million.

We have updated the sales proceeds range for these two courses after evaluating in more depth the redevelopment potential upside of the two courses in their individual geographic markets. We will continue to explore the monetization of these remaining two courses in 2019. We are also focused on driving efficiencies across our traditional golf and entertainment golf businesses. Most immediately, we see straightforward ways to improve back office efficiency by combining certain aspects of American Golf and Drive Shack.

This includes eliminating some overlaps, combining technology platforms and leveraging many functional leaders and teams across the entire company platform rather than focusing on individual businesses. Additionally, we will continue to leverage American Golf's 50-plus years of experience in golf course operations to unlock key Drive Shack entertainment sites. These sites often require excellent course management skills or strong municipal relationships, both of which played a crucial role in winning the flagship Randall's Island site in New York City. Similarly, we will look to add Drive Shack's gaming technology to American Golf courses to enhance the traditional golf experience and drive more revenues and profits for that business.

As of year-end 2018, the American Golf portfolio consist of 13 owned, 36 leased and 17 managed properties. Our goals for this business continue to be largely monetizing the owned properties, optimizing the leased operations and growing our management business. In addition, we believe our ability to leverage Drive Shack's gaming technology on golf course driving ranges will be a unique value proposition in growing both segments of our business. Before I end today, I'd like to summarize our future expectations for the business.

We expect the Drive Shack Orlando site to break even from a cash flow perspective in 2019 and continue to ramp up its revenues and cash flow generation in 2020 and beyond. We anticipate our Raleigh, West Palm Beach and Richmond sites to open in the second half of 2019 and expect them to generate meaningful revenues and EBITDA starting in 2020. We plan to open three to five new sites in 2020, and five to seven sites in 2021 onwards, putting us at more than 20 sites by 2022. Moving forward, we expect our unit-level economics to be slightly improved versus our previous outlook.

Target cost to build are expected to be between $20 million and $35 million and will be driven by the size of the venue and the cost characteristics of the individual geographic market. Top-line revenues per site are anticipated to be $15 million to $25 million, with target stabilized EBITDA margins of 25% to 30%. We expect to complete the bulk of our remaining owned golf course sales, which include all but the two owned courses by year-end 2019, with total gross proceeds of $175 million, of which $115 million have already placed. We will continue to explore the monetization of the remaining two courses in 2019.

We will use these net proceeds as a platform for growth for the Drive Shack entertainment golf. After completing the transition of our traditional golf business in 2019 from a largely owned lease portfolio to primarily managed leased portfolio, we expect that our stabilized American Golf business will generate approximately $175 million in revenues and annual free cash flow of over $10 million in 2020 and beyond. In closing, I'm confident the actions we are taking to both improve our operational capabilities and accelerate our growth are starting to create strong momentum in 2019 and beyond. With that, I'll turn it over to the operator for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of George Kelly of Imperial Capital.

George Kelly -- Imperial Capital -- Analyst

Hi, guys. Thanks for taking my questions, and I appreciate all the added detail that you provided on the conference call.

Ken May -- Chief Executive Officer

Thanks, George.

David Hammarley -- Chief Financial Officer

Thanks, George.

George Kelly -- Imperial Capital -- Analyst

So just a few questions for me, first about new sites. So I understand you're targeting smaller metros now. Just looking to sort of expand on that if you could? So I remember beforehand, the strategy had been sort of a regional clustering of new entertainment locations. Is that still the expectation going forward? And how do you think about TopGolf when you're picking new locations?

Ken May -- Chief Executive Officer

George, thank you for the question. We will not be doing regional clustering. We're going to be focusing on a national footprint. We're going to go where the competition is not.

That is our intention. We would like to be opportunistic where we see real estate deals where we might be closer to the population in certain markets where the competition is not. And so we're going to be very tactical, very smart about what we are doing going forward. But it will be on a national scale.

George Kelly -- Imperial Capital -- Analyst

OK, OK, got you. And then you mentioned some of the changes to the format. I mean, just sort of contrasting with the current location in Orlando, what are the biggest structural-- can you give any more detail about any of the major changes, whether it's the game and the technology or anything else, just about how it will look different?

Ken May -- Chief Executive Officer

Yes, the main thing is is that our main bar right now is on the second floor. We're going to move it down to the first floor. When you come in, we want to, like I said earlier, that you're walking and feel like you're walking into a party. And so moving that main bar down and creating an energy when you walk into the building will be the biggest change.

There are other things that are going to be added into the box that we're not prepared to talk about yet, that will take it even to a-- make it even a better experience going forward.

George Kelly -- Imperial Capital -- Analyst

OK. And this will be-- all the locations already under development, the next three will look somewhere kind of in between? Is that fair?

Ken May -- Chief Executive Officer

They will actually be-- pretty much, the steel was coming out of the ground when David and I started. So the ability to pivot and to move bars and things like that around were not available to us. We looked at it, but they were too far along. And so we're going to be doing some aesthetic-type changes to the building.

We'll be programming it a little bit different than we've been programming it in the past. Certain parts of the building will be programmed differently. Certain days of the week and certain nights of the week. And I think, that'll be the biggest structural changes you'll see to those buildings.

It'll be more aesthetic than anything.

George Kelly -- Imperial Capital -- Analyst

OK, OK. And then last question for me is just about financing. I understand the gross proceeds of all the sales and expected sales of the legacy portfolio. Can you maybe just, one more time, where are you with cash? What are the net-- is there any kind of tax implication about any of these golf properties or the future ones? And then is there any of that legacy debt portfolio that's still left to be monetized?

David Hammarley -- Chief Financial Officer

Sure. Let me take the last question first. So on the legacy debt portfolio, we have moved away from that business. There is one position that is roughly $20 million on our balance sheet.

And so that's a long-term play. We're staying on top of it. We think the medium to long-term value of that is about $70 million, and so that covers that. In terms of the golf course liquidity, we have about $60 million of cash on hand.

And as we think about the overall range that I gave of gross proceeds of $220 million to $240 million, you would take the debt that we had against those courses, which we've already paid off, of roughly $100 million out of that and adding it to the cash on hand, which gives us gross proceeds of around $180 million to $200 million. And so as we think about the aggressive development plans we have, we know that starting next year we're going to be going into the financing market in order to fund our growth. We're confident, with the operational performance we're going to have in our open venues, that will have the unit economics necessary to go out and get that financing. And so we've already been starting to have preliminary discussions around the best types of financing vehicles we've used to drive that incremental growth after we've utilized the golf course sales.

George Kelly -- Imperial Capital -- Analyst

OK. Thank you.

Ken May -- Chief Executive Officer

Thanks, George.

Operator

[Operator instructions] If there are no further questions, we'll conclude today's call. [Operator signoff]

Duration: 29 minutes

Call participants:

Austin Pruitt -- Head of Investor Relations

Ken May -- Chief Executive Officer

David Hammarley -- Chief Financial Officer

George Kelly -- Imperial Capital -- Analyst

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