Drive Shack Inc. (DS) Q2 2019 Earnings Call Transcript

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Drive Shack Inc. (NYSE: DS)
Q2 2019 Earnings Call
Aug 06, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Christy, and I'll be your conference operator today. At this time, I would like to welcome everyone to Drive Shack's second-quarter 2019 earnings conference call. [Operator instructions] Today's call is being recorded.

At this time, I would like to hand the call over to Austin Pruitt, head of investor relations. Please go ahead, sir.

Austin Pruitt -- Head of Investor Relations

Thank you, and good morning, everyone. I would like to welcome you to Drive Shack's second-quarter 2019 earnings call. Joining me here today are Wes Edens, our chairman of the board; David Hammarley, our chief financial officer; and Hana Khouri, our new resident. We have posted an investor supplement 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 statements. 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 Wes.

Wes Edens -- Chairman of the Board

Great. Thanks, Austin, and elcome everyone. We'll just flip to Page No. 2 of the supplement on the highlights, and I'll just spend a couple of minutes and go through them and I'll turn the call over to Hana and to David.

So first, top of the list, very exciting times for us here at Drive Shack. Generation 2.0 venues are opening soon. We've got three venues: Raleigh, Richmond and West Palm Beach opening over the next 2.5 months. Raleigh actually opens up on the 19th of August.

So today's the 6th of August, so in less than two weeks, we'll have our version 2.0. You'll see significant changes to the venues themselves. This is why I liken it to the version 1.0. It is great because it generates proof of concept, gets you in the business, allows you to get yourself up and running, and then you have a chance to improve on everything.

And we really think we have improved dramatically on everything about it. So new technology, Trackman, which we'll talk about, but by far and away the leader of golf ball technology in the world, and we're an exclusive partner to them. We're incredibly excited about that. We've made major advancements in the games, and then regionalized food and beverage.

So really the whole suite of offerings across the sites have been very, very different. That also allows us to go back and take our 1.0 site in Orlando, retrofit it with this technology, gaming, food and beverage. And so in effect, you're going to get four new 2.0 sites all open here in the course of the next several months. So it's an exciting time for the company and we'll have really great things to report on, we think, over the course of the rest of this year.

Secondly, the innovation is really the heartbeat of a company like this and we are very focused on the adjacencies of our market. Because what we have started with, which is the natural thing to start with, we think, are these large sites in densely populated, large NFL-like cities, so large places to do business, and that's where we're starting. We think that there are other significant growth opportunities for adjacencies. So the midsize, which is a slightly smaller bays, actually works well with the 500,000 population centers and down.

Urban Box, which is the newest thing that we are focused on around here. Indoor, small format, putting-oriented, great technology, great food and beverage. We're very, very excited about this. Taking the same expertise that we used to develop the large box, we then applied to these smaller offerings in these smaller markets that we think will expand the potential to grow the company dramatically.

Hana will walk through both the nature of what we're looking at and also what we think the raw economics of it are. But it's a very logical extension of our existing product, something we think has tremendous promise for us. Liquidity update and the transformation of the company in terms of a golf course owner and manager, David will walk through this. But we closed another four courses, $20 million in gross proceeds.

We now generate $140 million in proceeds, expect another couple of properties to sell through the course of the year, and this will largely be behind us. So that's kind of cleaning up through the rock pile of the existing assets. We're very, very kof happy about that. Lastly, I'd like to introduce Hana, but in a very similar fashion to our kind of 1.0 to 2.0 version of our operating sites themselves, we're experiencing the same thing on the management side.

So getting into business and having proof of concept that allows us to go back and really retool the organization, expand the organization and add in people with the most relevant skill sets that help us become the best management team in the world, which for us, that's the goal we're doing. I have a very personal experience with it, so we're going through this. And we're going from the English Championship into the Premier League, and I think there's a lot of parallels between them. Because you take the core of your existing organization and then add to it substantially because you want to compete at the highest level, and that's very much we're in the process of doing here at Drive Shack.

So Ken May came in about a year ago and that was a big step for us in terms of a person that has had tremendous experience and leadership in the industry. We then have added approximately 30 people, but a vast majority of them are people that have come from either one of our competitors or people that are in the competitive landscape of these eatertainment individuals. So we now have a very, very highly skilled and experienced workforce. The last person to join us is really Hana.

Hana had a noncompete with one of the competitors, they've expired on August 1st. She has worked for me as my Chief of Staff at one of my other businesses for the last year and has been a tremendous addition to our playbook around here. She comes in with a wealth of personal experience. So over five years at Topgolf, she opened personally over 20 sites globally, created the operations playbook that was used in all of those openings.

There's a long list of things that she has done that we think are very relevant. And so we're extremely excited that she joins us. We think that Hana kind of completes the list now with the 30-plus people that we have across the organization. On an unrelated note completely, Ken came to us, came to the board about a week ago, asked to take a personal leave of absence.

He's a -- he's been a tremendous force for us in the company, he's done a great job for us, ended up being completely coincident with Hana, who is a planned addition as soon as her noncompete expired. So Ken has stepped back for a period of time. We hope it's a brief period of time. We're obviously deeply supportive of him.

He's been a wonderful addition here and he's done a lot of the innovation that you're going to see in these new venues that are going to open here in less than two weeks are his handiwork. So we feel great about that and we wish him nothing but the best and we hope that we'll have a good update on that. But we feel incredibly good about the management team that exists, both on our senior leadership side with Hana as President, but then technology and the food offerings and everything else throughout the rest of it. So with that, let me turn the call over to Hana.

Hana Khouri -- President

Thank you, Wes. I really couldn't be more excited to join Drive Shack so early in their story, and I feel like I'm joining at the perfect time. Our transformation from a traditional golf course owner and operator to an entertainment business is largely complete. At the end of last year, we owned 13 golf courses and had only one operating Drive Shack in Orlando.

By the end of this year, we expect to own two golf courses and have four operating Drive Shacks, with even more sites in the development pipeline. We're on the verge of three major openings. We're going to open Raleigh in the coming weeks, as Wes said. Then we turn around and open our venue in Richmond shortly thereafter.

Then finally, West Palm Beach shortly after Richmond in the fall. If we look ahead at our development pipeline over the next few years, we expect to have an additional three to five new sites open and operating by the end of next year. We currently have seven in development and are analyzing the economics for over 30 potential sites, which includes our new Urban Box concept, which I will discuss shortly. Our development goals are really simple: we want to be smart about our site selection, we want to compress the construction time line and be on or below budget and we want to shorten the time period from opening to breakeven.

Orlando has really served as our beta site, successfully allowing us to test our technology, operational layout, and product offering, especially ahead of this 2019 venue opening. We entered into an exclusive partnership with Trackman, which we really believe is the best ball-tracking technology in the world, held in high regard by PGA pros. And we really expect it to improve our gaming experience and the guest experience. Simultaneously, we have redesigned the outfield to provide a more intuitive layoff for gameplay, has enhanced lighting effects and more durable turf.

We've also rolled out a new food and beverage menu which will soon feature seasonal and local offerings. These enhancements, as Wes said, will be retrofitted back into Orlando and we will continue to use Orlando as our beta site in the future to continue to test these innovations. While we're thrilled to quadruple the number of operating Drive Shacks over the next three months with Raleigh, Richmond and West Palm and the key priority for us has been and will continue to be innovation. We're really excited to announce the newest product development that we have called the Urban Box format.

It's going to be an indoor concept that's ideal for dense, highly trafficked urban locations where a typical large-format Drive Shack that you see today would not fit. So the footprint will be around 25,000 square feet. When you compare that to the two other boxes, those are just over 55,000 square feet. This concept is going to leverage all the key features that you know about Drive Shack, including an elevated food and beverage offering, great hospitality, and then our technology compared -- our technology paired with a putting concept.

Most importantly, it's going to be super entertaining and really fun. The cost of our Urban Box will be about a third of our full-size stores and it will make -- it will be both easier and faster to build compared to our full size. We expect the new format to cost between $5 million and $8 million to build and to generate about $8 million in revenue. While we'll continue to develop the Urban Box, the midsize 72-bay facilities will remain an equal priority.

We expect to debut both of these formats in 2020 and expect to have 20 stores opened by 2022. With that, I'm going to turn it over to David to take you through our results for the quarter and our future outlook

David Hammarley -- Chief Financial Officer

Thanks, Hana. I'm first going to talk about Orlando, where in our first year of operations, we've generated about $6.3 million in revenue, driven by 160,000 visitors with an average spend per visit of about $40. If you look at our revenue today, about 38% has been driven by food and beverage, with events at 31% and BayPlay at 29%. Over the past two months, as we've been looking at some of the innovations we've been doing there, walk-in sales have accounted for about 70% with events at 30%.

And as Hana mentioned, we're really focused on enhancing Orlando with the 2.0 enhancements, including Trackman and range design, and we think this will help improve the unit economics of Orlando moving forward. Turning to our traditional golf business, as you know, our American Golf business has 50-plus years of experience operating golf course and we think this is a key asset for the company. In fact, it played a role in helping us unlock two key development sites for us, Randall's Island and Newport Beach, and we're really excited to leverage that going forward. In terms of our own golf course sales, as of today we've sold approximately -- we've sold 20 courses for approximately $140 million since the beginning of 2019.

Over the next few months, we expect to sell an additional $35 million of sales across four courses, which gets us to our projected goal of $175 million by the end of this year. This will -- this $175 million will be -- is the proceeds for 24 of the 26 owned courses that we started with in our own portfolio. As we've previously said, the two courses that remain have approximate value of $45 million to $65 million in total proceeds when you include development upside. We will continue to explore the best way to monetize those assets as we move forward.

Before I end today, I'd like to summarize our overall future expectations for the business. In the coming months, we plan to open Raleigh, West Palm Beach and Richmond, and we expect them to generate revenue and EBITDA consistent with our unit economics starting in 2020. Moving forward, those unit economics for Drive Shack entertainment include a cost to build of $25 million to $35 million for the midsize and full-size stores, and $5 million to $8 million for our Urban Box. Top-line revenues will be $15 million to $25 million for our midsize and full-size stores, with $7 million to $9 million for Urban Box.

And overall, stabilized EBITDA margins will be between 25% and 30%. We expect to complete those 24 to 26 own golf course sales by year end for $175 million. After completing our traditional golf business transformation, we believe the stabilized economics for the business will be approximately $175 million in revenues, with course EBITDA margins at 15% to 20%. Our own golf course sales proceeds will fund our development capex through the beginning of Q1 and we are currently exploring capital financing options to move this business forward.

As mentioned previously, our total company SG&A we expect to be between 5% and 10% of company revenues by 2022. Overall, looking at the company today, we are very excited about focus on moving the business from 1.0 to 2.0 and the product innovation that Hana and Wes discussed. With that, I'll turn it over to the operator for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And you have a question from George Kelly of Imperial Capital.

George Kelly -- Imperial Capital -- Analyst

Hey, guys. Thanks for taking my questions.

David Hammarley -- Chief Financial Officer

Thanks, George.

George Kelly -- Imperial Capital -- Analyst

So, sorry to hear about Ken. Hopefully he returns soon. But so just a few questions for you. First of all, can you take us through the sites that you expect to open in 2020? Just which ones? I know you've announced a lot of locations that seems like they're in process.

So which ones are coming next?

David Hammarley -- Chief Financial Officer

Yes. Yes. So the three I can talk about today that we expect to open are Houston, which is specifically Stafford, Texas, New Orleans, and Bloomington, which is in Minneapolis near the Mall of America.

George Kelly -- Imperial Capital -- Analyst

OK. OK. And then discussion today about then and you talking about the Urban -- the new format. And just in your projected new store openings for the next few years, there's -- quite a few of those are with the Urban Box.

So wondering if you could talk about why that's -- why you're so excited about that. And are -- is it challenging to find sites for the larger and midsize stores or sort of what's going into the mix being so heavily weighted toward the small-format stores?

Wes Edens -- Chairman of the Board

Hi. George, it's Wes. Let me give a little bit of an overview and I'll it over to Hana. But I think if you look at the development time lines for the large stores, it's a couple of years from the time you make a site selection, agree on a piece of land, go through the permitting process, construction process and then get opening.

So it can be as quick as 18 months, right, even a little bit less if you're actually really, really fortunate in terms of all the planning and permitting. But it also can be two-plus years when you're talking about a place like New York City, which we think is going to be an amazing site to say the least, but it takes a number of years to make that happen. The smaller sites, the mid-level sites in smaller cities we think will be a little bit easier to permit and build. The footprint is a little bit smaller.

The last, the Urban Box is one that is actually, we think, considerably less in the development time line and has very similar economics to the big stores. So we show, and Hana walked through it a little bit, the representative economics of it. But what you're really looking for is probably at a minimum 15,000 square feet, a maximum of 25,000 square feet, so something in that range. And as it turns out, there's a lot of space in America that has -- that fits those characteristics.

The permitting process is really a permitting process that is really just talking about the fit-out for a retail tenant, no different than if you were a drugstore or a clothing store or whatnot. So you don't have a restaurant and you don't have a significant permitting time line. So we think that the -- once we're up and going and kind of finalized our format for that, we think that the total time from identification of an asset to opening doors could be as little as nine months. And the number of sites that are available number in the thousands and there's hundreds and hundreds of markets.

So -- and the economics, we believe, will be comparable -- obviously a little bit less, but comparable at the end of the day to the very large sites. So I think you have the large sites, which provide brand awareness, proof of concept, you get a buildup, your -- all the different technology, entertainment, all those rest of the things. And the small sites may be the greatest expression of it all. So it's actually -- it's a really, really exciting thing, and we think it's a very logical extension of kind of what our brand is and couldn't be better about it.

But Hana, I know you have a lot of thoughts about this?

Hana Khouri -- President

Yes. I think why we're so excited about this? I think people really are nowadays craving that social interaction and going -- sitting at a bar is not as popular as it once was. People want to participate in an activity when they go out. And I think this gives folks an interesting alternative while still being able to stay true to the Drive Shack brand.

And as Wes said, I think there's just a lot more -- there's a lot of opportunity in these empty spaces across America to be able to put this concept into.

George Kelly -- Imperial Capital -- Analyst

OK. That's helpful. Then just a couple of other questions. The long-term golf course sales, what kind of time line would you expect that $45 million to $60 million, whatever the number was?

David Hammarley -- Chief Financial Officer

It's always hard to given an answer since it is long term. I would say we probably expect on one of those two courses to do something in the next six to 12 months is our hope. But as you know, we have conversations going, but -- so that's probably the most guidance I can give on that, George.

George Kelly -- Imperial Capital -- Analyst

OK. OK. And then last question from me. And I don't know if Wes or David -- Wes, I appreciate you being on this conference call and taking questions and everything.

So I'm curious just about financing that you're considering with your pipeline of new stores. Can you give any kind of update about how that dialogue is going or if you've started it? And when would you expect to have more to announce there?

Wes Edens -- Chairman of the Board

Yes. We've had a bunch of preliminary conversations. There's also the work that's been done in the industry is beneficial to us. So people are very familiar with it.

And whether it's straight-out financing or sale leaseback financing on the venues, I think as soon as that they are open, which again the next version 2.0 opens in 13 days from now. As soon as they're open and running, I think our financing options expand exponentially. And so between now and the end of the year, I think you'll have a lot of news on the financing side to kind of show how we're going to pay for the existing stuff and, of course, the stuff to come.

George Kelly -- Imperial Capital -- Analyst

OK. Thank you.

Operator

[Operator instructions] If there are no more questions, we will end the call.

Hana Khouri -- President

Thank you.

Operator

[Operator signoff]

Duration: 22 minutes

Call participants:

Austin Pruitt -- Head of Investor Relations

Wes Edens -- Chairman of the Board

Hana Khouri -- President

David Hammarley -- Chief Financial Officer

George Kelly -- Imperial Capital -- Analyst

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