Drive Shack Inc. (DS) Q3 2019 Earnings Call Transcript

Drive Shack Inc. (NYSE: DS)
Q3 2019 Earnings Call
Nov 12, 2019, 9:15 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 third-quarter 2019 earnings conference call. [Operator instructions] Today's call is being recorded.

Thank you. At this time, I'd like to hand the call over to Austin Pruitt, head of investor relations. Please go ahead, ma'am.

Austin Pruitt -- Head of Investor Relations

Thank you, and good morning, everyone. I would like to welcome you to Drive Shack's third-quarter 2019 earnings call. Joining me here today are Wes Edens, our chairman of the board; Hana Khouri, our chief executive officer and president; and David Hammarley, our chief financial officer. 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. Just real briefly, to introduce the call, I'm sure that many of you saw the announcement yesterday that Ken May has decided to retire from the company. As we announced in our last call, Ken had taken a leave of absence.

He's dealing with lots of personal challenges and whatnot in his life and health-related stuff, and so he took some time off. And at the end of that period, he concluded the right thing to do was to go ahead and retire and move on. And we thank Ken for his leadership while he was here, and he gave us a great platform to build off of. We feel extremely fortunate that we have, in-house, a great replacement.

That person, obviously, is Hana. Hana was my chief of staff at New Fortress Energy. For the year prior to joining here, she got a lot of direct exposure to our company as we went through an IPO process where she saw a lot of the aspects of the public company stuff that were -- things that she needed to fill in on her expenses and background. Prior to that, though, Hana didn't need any filling in.

She was the executive of Topgolf from 2013 to 2018. She oversaw both national and international operations, was the -- led the opening of over 20 Topgolf locations globally, including the flagship venue in Las Vegas, as well as assets in Australia. So she has obviously tremendous of experience about this in between the direct personal experience and exposure had to her at the time she was working with us at New Fortress. And what I've seen here, I feel like we're very, very fortunate to have her in place here.

And I think frankly, the success the businesses had and this has been a terrific quarter now, without stealing the thunder, I'll pass it over to her, is no part -- small part of a function of both her and of the team that she's assembled around her. So with that, I'm going to turn it over to you, Hana.

Hana Khouri -- Chief Executive Officer and President

Thanks so much, Wes, for that introduction. I'm really actually very excited and honored to be stepping into the CEO role here. And I know that I along with others at this organization certainly wish Ken the best in his retirement. With that, I want to say good morning to everyone, and thank you for joining Drive Shack's third-quarter earnings call.

We have quite a bit to talk about today after a very busy and productive quarter. We feel really great about the quarter and where our business is headed. So first, I'm going to start with a short summary of our third-quarter highlight and then I'll discuss updates across the business. I would then hand it over to David to take you through our financial targets and capital plan.

First, taking a look at our third quarter highlights. We are thrilled to share that we have successfully opened our new Generation 2.0 venues in Raleigh, Richmond and West Palm, and they've all significantly outperformed our expectations, beating our projected revenue plan by approximately 21%. I'm going to speak more to this shortly. In addition to the opening of these three core stores, we've also made significant strides in the development of our new entertainment experience, the Urban Box, and are working toward our goal of opening three of these venues by the end of 2020.

Finally, as we look at the traditional golf arm of our business, they continue to perform incredibly well, growing our Players Club membership base by 6% as compared to Q3 of last year. So moving on to Page 3 of the supplement now, which really showcases the exceptional results we achieved across our new store openings. Since reporting last quarter, we successfully opened our Generation 2.0 venues. The first opening was in Raleigh on August 23rd.

Raleigh was followed shortly thereafter by Richmond on September 20th. And lastly, we opened West Palm Beach on October 18th. Since last Friday, we have achieved revenues of $6.5 million, beating our plan by approximately 21% and setting us on the path to exceed our Q4 revenue targets. We are on pace to achieve an average EBITDA of $4 million to $6 million in each of these venues with yields of 10% to 15% in 2020, which we couldn't be more excited to report.

As a reminder, Orlando has served as our beta site. It successfully allowed us to test our technology and product offerings, especially ahead of these 2019 venue openings. In late September, we made the decision to temporarily close Orlando in order to retrofit the venue with 2.0 enhancements. Most notably, we integrated Trackman, our exclusive provider of ball tracking technology.

Trackman, combined with the upgrades we've made to our proprietary gaming platform, will provide a more consistent and engaging guest experience, which we believe will result in extended visit times and an increased spend per visit in Orlando. While we're thrilled that the success of our new stores thus far, we are also continuously looking for ways to enhance our venue space on learnings and guest's feedback. We are currently in the process of developing new games for rollout beginning in Q4 of this year. The guest feedback so far regarding the games has been really positive.

Guests have shown exceptional interest for a less traditional golf games like Monster Hunt and Shackjack, which we focus on developing more of -- which we will focus on developing more of in the near term. By 2020, our goal is to debut more games like this every quarter. Another update you should expect to see by the end of Q1 2020 is a new food and beverage menu. We're going to be focusing on offering more items that are made in-house, including some healthier options.

We are looking at the data that we have around what our -- what items our guests are buying and using that to help guide some decisions we are making to reduce the menu size. Narrowing the number of items on the menu is going to help ensure consistent, high-quality execution for our guests. And lastly, we are working very diligently to get online reservations rolled out by the end of Q2 2020. This will, in part, help to alleviate long wait times that many of guests are experiencing in our new venues due to their popularity.

Moving to the next page of the supplement, to Page 5. I want to spend a few minutes talking about our Urban Box experience, which we first spoke about last quarter. At Drive Shack, a key priority has been and will continue to be innovation. The Urban Box focus will be to provide a social and tech-enhanced minigolf expense with really exceptional food and beverage.

We are taking the same expertise we've used to develop our core stores and are applying it to smaller indoor locations across more than 50 potential markets in the United States. These are ideal for densely populated and highly trafficked urban locations, where one of our core stores would not fit. The Urban Box will significantly increase our store growth potential due to the vast availability of retail space, shorter development time lines and less capital risk. Since the last call, we have really focused on four key deliverables as it pertains to the Urban Box, all of which are under way.

First, we needed to identify and secure technology for ball tracking and automatic scoring. Second, we wanted to get our architects and course designers identified and focus on helping to determine the venue format, layout and vibe. Third, we needed to identify potential real estate and to create test fits. And lastly, we wanted to select a name and get started on the trademark registration process.

So because of the hard work of our talented team, all four of these deliverables are well under way, and we expect to have three venues open by the end of next year. As we talk about our development, I want to point out that our strategy is to continue opening our core 72 and 90-plus bay Drive Shack facilities, while simultaneously developing and opening Urban Box locations. We already have the four previously mentioned core Drive Shack locations in Orlando, Florida; Raleigh, North Carolina; Richmond, Virginia, and West Palm Beach, Florida. As we completed the builds of each of these venues, we had our construction teams work hand-in-hand with our openings team in order to ensure a clean handoff.

We've really made it a priority to ensure both of -- our operations and development teams are stacked with experienced players. And to do so, we filled both teams with veterans from other leading multiunit businesses. This really played a critical role in the success of these -- getting these venues open. We also have four -- we have also committed to four additional venues.

New Orleans broke ground earlier this year and is planned for a 2020 opening; Chicago, which is planned for 2021 opening; and Newport Beach and Manhattan, which are both expected to open in 2022. The map on Page 6 of the supplement illustrates both the markets that we are already in, as well as the markets we are considering either for the Urban Box or a course tour across the U.S. As the number of contracts under negotiation keep growing, we will continue to announce new deals as they are signed. Since joining the Drive Shack team, I've often been asked what differentiates us from the competition, and I want to spend a minute talking about that now.

As we think about the success of our new core venues, the debut of the Urban Box, along with the success of our traditional golf business in AGC, it is very clear that Drive Shack has a special and differentiated offering as compared to the competition for a few reasons. As I touched on earlier, we are the exclusive entertainment golf partner of Trackman. The accuracy of Trackman's radar-based technology is unrivaled, and we are actively looking at ways to incorporate their tech across our golf platform, including our traditional golf courses. Trackman is used by 90% of PGA TOUR pros and works with some of the world's largest broadcast companies, including the Golf Channel and ESPN.

They also work with top equipment manufacturers, including Callaway, TaylorMade, and Titleist. We've incorporated track -- enhanced Trackman gaming software that allows our guests the opportunity to play virtual versions of real golf courses that exist around the world. Alongside these Trackman games, we continued to innovate our own games with our proprietary gaming software. This allows us quite a bit of flexibility, not only around modification, but also creation of new games, allowing us to build games relatively easy based on what guests want and what is on trend.

Our gaming software has been designed, consistently refreshed update and roll out new games, which we believe will be a key driver of the year-over-year same-store sales growth in the future. As discussed, we are launching the new product innovation with the Urban Box, which is an already proven concept in Europe and one we are really excited about. We are also the only company to offer a truly integrated traditional and entertainment golf proposition. We have the unique ability to take over existing ranges and courses and then manage and operate the property through our traditional golf arm until Drive Shack is ready to break ground.

Additionally, through AGC's relationships with local municipalities and governments, we have access to real estate that others may not. Finally, Players Club, which is AGC's public subscription program, continues to grow their membership base and is the leading due subscription model in the golf industry. Before I turn it over to David, I just want to take a moment to thank all of our hard working, exceptional associates and managers across our venues and the corporate office, as well as the folks running the traditional golf business at AGC. They are really the motor of this business, and I'm so proud to be a part of his team.

We really could not be more excited about what's to come. And with that, here's David Hammarley.

David Hammarley -- Chief Financial Officer

Thanks, Hana, and I'm on Page 8 for those of you following on the supplement. So as Hana said, we're really excited about the initial results of our Gen 2.0 venues because they're right on track to achieve our target economics. And just to review those, for our core venues, and that's the traditional Drive Shack, 72 and 90 bay-plus, we are expecting development costs of $25 million to $40 million, with site-level EBITDA of $4 million to $7 million and development yield of 10% to 20%. For our Urban Box product, we're expecting to development cost of $6 million to $10 million, with site-level EBITDA of $2 million to $3 million and development yield of 25% to 35%.

The Urban Box development yields are higher given the cost to build is driven by smaller size and our ability to go into existing spaces, which often come with tenant incentives. Those lower build costs, combined with strong top-line revenue, potential and strong margins will deliver higher development yields relative to the core venues. Moving on to Page 9. We're very excited about the prospects of the growth of our entertainment golf business.

Our current business plan includes a development plan that gets achieved 30 units by 2022. We plan to scale our core Drive Shack business by one to four venues per year, with Urban Box targeting three venues next year, 2020; and ramping up staff to seven to 10 units in 2021 and beyond. In terms of the cost of development, that will be between $350 million and $375 million and we expect to fund this with existing cash on hand, debt and our ability to monetize our two remaining owned courses, which we estimate have value between $45 million and $65 million. Moving on to Page 10.

One thing we've talked about in the last few calls is our transformation of our business from a traditional golf business to an entertainment golf business. As mentioned, we've achieved our goal of selling 24 of our 26 owned golf courses for $170 million, and that's been used to fund the growth of our entertainment business. Now as you know, we opened our first entertainment golf unit in Orlando in April 2018 and the three Gen 2 units this year. As you look going forward, between 2020 and 2022, the expansion of our entertainment golf business will be very rapid, going from eight units to 30 by 2022.

That will lead to a total company revenue of approximately $570 million and a mix of revenue of two-thirds entertainment golf and one-third traditional golf as that transformation takes place. Moving on to Page 11. As we think about our -- the value potential for the business, in 2022, we estimate an EBITDA of $95 million based upon the revenues I just discussed. That is broken into our core Drive Shack business, estimated 10 units at approximately $5 million per store; our targeted 20 Urban Boxes by 2022 at approximately $2.5 million; with our American Golf business estimated at $35 million, which is $190 million in revenues at a course EBITDA margin of 15% to 20%, and then our SG&A cost we estimate to be approximately $40 million, which is targeted at 5% to 10% of total company revenues.

Given all of that, we expect EBITDA of approximately $95 million. If we consider the trading multiples of other high-growth entertainment multiunit businesses of between 10 and 15 times, we believe there is significant upside to our current share price of approximately two to three times. With that, I will turn the call back over to the operator.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Aaron Hecht of JMP Securities.

Aaron Hecht -- JMP Securities -- Analyst

Good morning. Thanks for taking my question.

David Hammarley -- Chief Financial Officer

Hi. Aaron.

Hana Khouri -- Chief Executive Officer and President

Good morning.

Aaron Hecht -- JMP Securities -- Analyst

So when I look at the development pipeline map in the supplement, looks like a couple of the future sites that we previously saw there, like Houston and Portland, have been removed from that list. What caused those sites to be removed? Anything we should take away from that in terms of future development? And has the timing of rollouts changed at all?

Hana Khouri -- Chief Executive Officer and President

Aaron, it's Hana. Thanks, that's a really good question. You're right. Previously, we had explored sites in Beaverton, Oregon, Stafford, Texas, and Bloomington, Minnesota.

These markets are absolutely still under consideration, but the rollout of the Urban Box format has provided us some additional flexibility in the way that we're able to look at real estate. So there's actually three competing stores in the Houston MSA. So instead of adding a fourth large-format entertainment golf venue, we saw an opportunity to be instead the first indoor putting concept. The site we're looking at in Beaverton was about 20 minutes away from Portland's urban core and about 15 minutes away from a competitor store.

So here, the Urban Box would provide us with an opportunity to be at the core of Portland with more exposure to the guests that we're targeting. So really in short, we plan on continuing to proceed these markets, but we'll look for potential Urban Box locations instead of the core store locations in those markets in particular. In reference to your question about the development time line and whether we feel that, that is going to shift at all. The answer to that is absolutely not.

We actually expect the development of the Urban Box experience that's rolling out this concept to be much faster than the one of the core stores in the base boxes.

Aaron Hecht -- JMP Securities -- Analyst

Got you. Yeah. Obviously, given the numbers you're putting out there, the Urban Box concepts, they have a higher return on investment than the Drive Shack venue. If you see some early returns or outsized performance on those 2020 Urban Box deliveries, would it be logical to think you'd roll out more of those venues quicker than you're even talking about now given smaller upfront capital costs in those higher returns?

Hana Khouri -- Chief Executive Officer and President

Yeah, absolutely. So next year, again, we're aiming to open three of the Urban Box stores by the end of next year. We believe that our time line can actually be much more aggressive, especially given the shorter development times and the cheaper cost to build and also the availability of the retail real estate across America right now.

Aaron Hecht -- JMP Securities -- Analyst

Right. And staying on the entertainment golf side, do you think there's an opportunity for more Urban Box-type concepts, not just maybe golf-related. But is there other entertainment-related box concepts out there that you guys are thinking about or considering? And then what you think about this -- we'll call it an ancillary business line outside of the traditional Drive Shack or your American Golf. What do you think these other venues can represent as a percentage of the total company when everything kind of stabilizes?

Hana Khouri -- Chief Executive Officer and President

Yes, good questions. I think, right now, we're definitely right now focused on the golf and the golf entertainment space. But our goal is to really entertain people and to be the first thing people think about when they're deciding how to spend their time off with their friends and family. So right now, we're fulfilling that goal through entertainment golf and also through AGC and traditional golf.

But we would certainly -- can certainly envision a future and where our offering becomes more diversified and robust. Speaking to where we are currently, we're proactively thinking about how we can roll out a new suite of games every quarter and are intently focused on providing original and highly engaging games on a regular basis for our guests. So we definitely do see a world where we incorporate additional competitive socializing and entertainment offerings and entertainment. Right now in the near term, obviously, our focus is on further diversifying those in the golf space through our games in our experience.

Aaron Hecht -- JMP Securities -- Analyst

Got you. And then in terms of financing the growth, obviously, you guys have done a good job monetizing the golf courses thus far, have some cash from that. How would you describe future funding plans between the cash you have right now and whether you'd be looking at debt or some other options in the future? I mean, just holistically, how would you tell people to think about that?

David Hammarley -- Chief Financial Officer

Yeah, Aaron. It's David. Yes, I think we're excited about the growth plans, and it is going to require some additional financing other than the core sales. So we're looking at debt -- asset-backed debt as an option.

We still do have two owned courses remaining that we could potentially monetize. And as we move forward, we will be generating free cash flow as we move through the business plan. So it'll be a combination, but I would say that we are looking at different debt options for, I would say, the near to medium term.

Aaron Hecht -- JMP Securities -- Analyst

Got you. That's all I got. Appreciate the time and nice quarter.

Hana Khouri -- Chief Executive Officer and President

Thank you so much.

Operator

Your next question comes from the line of George Kelly of Imperial Capital.

George Kelly -- Imperial Capital, LLC -- Analyst

Hi, everyone. Thanks for taking my questions.

Hana Khouri -- Chief Executive Officer and President

Hi.

David Hammarley -- Chief Financial Officer

Hi, George.

George Kelly -- Imperial Capital, LLC -- Analyst

So I have a few for you. First off, just start with the golf entertainment venues. First, for Hana. I know you've opened a lot of these -- of these venues before.

What -- the first few months after a store opens, how does that give you -- how much confidence do you have after seeing that sort of opening in the future productivity of that site?

Hana Khouri -- Chief Executive Officer and President

Yes, that's a really good question. It gives us, in short, a lot of confidence. But even before we open the venue, we're really able to understand how successful it will or could be based on very early preopening results. Things like our hiring numbers, our preopening event sales, which are essentially events that we're selling to corporate and social guests that are prebooking.

So we have a lot of early indicators before we even open the doors. But to address your question specifically, once we do open, there are a number of different metrics and things that we can look at to determine how successful a venue will be in the future, and a lot of those are identified fairly quickly. The ones we've identified in these last few venues, in Raleigh, Richmond and West Palm specifically, we have a lot of faith, a lot of faith in their ability to go forward and to be very, very successful. In part, based on their current sales and also because of their consistently strong pipeline of event sales that are in the future -- into next year.

George Kelly -- Imperial Capital, LLC -- Analyst

OK. OK. That's helpful. And then next question -- and I don't have the slide deck in front of me.

So I this may -- very well if I've gone through it there. But are you only opening one venue in 2020 and one in 2021? Or are there -- New Orleans and Chicago or are there other things that you plan on introducing in those two years?

Hana Khouri -- Chief Executive Officer and President

Yeah, that's a really good question. And yeah, I don't think it was outwardly in the deck so you did not miss that. In 2020, we will be only opening New Orleans as a core Drive Shack. So that will open next year.

We've already broken ground on that this year, and we're really excited. That community is really excited to have us, as are we. We're very excited to be in New Orleans. In addition to that, drive -- core Drive Shack, we will be opening three Urban Box locations.

You look at 2021, we have Chicago identified as opening in 2021. We're also looking at additional possibilities for core Drive Shacks in that year, as well as our plans are to open anywhere from five to 10 Urban Boxes. And we expect as we move forward into 2022 and in years beyond for our pipeline to only grow.

George Kelly -- Imperial Capital, LLC -- Analyst

OK. OK. And then a question about the Urban Box. I'm still unclear what it is.

I mean I understand it's a golf experience. It's a -- the return profile, etc. But can you just explain briefly, what is -- I mean, is it mostly a restaurant with sort of an entertainment concept on the side and a bar and sports bar kind of theme? Or what will this look like?

Hana Khouri -- Chief Executive Officer and President

Yeah. We were hoping to be able to give some very specific clarity on that on our next earnings call, when we're further into the process. But broadly speaking, and what I can say right now is, that the Urban Box is really going to be focused on minigolf and a putting experience that brings people together. It's going to be tech-enabled.

So that means you won't have to carry around a scorecard, which allows you the opportunity to freely eat and drink and socialize with your friends and family versus worrying about if your friend is cheating or who's winning, that's all taken care of for you. We're going to be hyperfocused on our food and beverage offering in these spaces and are aiming to provide some really elevated and differentiated food and beverage offerings. So the plan would be, George, if you are coming with your friends, you would maybe come on a Saturday night. You would come in and enjoy the bar and have some food and then play one round or two of competitive minigolf, so that you could really engage with your friends and maybe even bet to see who wins.

Operator

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Austin Pruitt for any further remarks.

Austin Pruitt -- Head of Investor Relations

Thank you, all, for participating in today's conference call, and we look forward to updating you after Q4.

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Austin Pruitt -- Head of Investor Relations

Wes Edens -- Chairman of the Board

Hana Khouri -- Chief Executive Officer and President

David Hammarley -- Chief Financial Officer

Aaron Hecht -- JMP Securities -- Analyst

George Kelly -- Imperial Capital, LLC -- Analyst

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