Drive Shack, Inc. (DS) Q4 2017 Earnings Conference Call March 7, 2018 9:00 AM ET
BoHee Yoon – Secretary
Sarah Watterson – Chief Executive Officer
Good morning. My name is Maria, 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 2017 Earnings Call.
All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. BoHee Yoon, you may begin the conference.
Thank you, Maria, and good morning, everyone. I'd like to welcome you today to Drive Shack's Fourth Quarter 2017 Earnings Call. Joining me here today are Wes Edens, the Chairman of our Board of Directors; Sarah Watterson, our Chief Executive Officer; and Larry Goodfield, our Chief Financial Officer and Chief Accounting 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 statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results.
In addition, we will be discussing some non-GAAP financial measures, and the reconciliations of those measures to the most directly comparable GAAP measures can be found in our investor presentation. 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 Sarah.
Thanks, BoHee. Good morning, everyone. I'll be referring to the presentation that we posted on our website, and I'll start on Page 2. As we're kicking off 2018, I thought I'd lay out a simple summary of the year ahead and our goals for the business. Our legacy business is now down to a handful of investments, and we think it's on the way to being fully monetized.
Our goal is to continue on the leased and managed courses, to restructure or terminate certain courses, optimize the remaining courses and then actually begin to expand this portfolio by adding new management agreements. This year, we'll start to sell our own courses. We have 26 courses across eight states, and we'll work to redeploy the proceeds from these sales with our cash on hand, which in total could equal plus or minus $300 million, to build Drive Shack.
Turning to Page 3. The total American Golf business consisted of 75 leased, owned and managed properties at year-end. As I take a minute to kind of go through the history because our team has really done an incredible job since acquiring this business in 2014. As you’ll remember, we bought debt on the portfolio in 2006, restructured that debt to equity at the end of 2013 and then hired a terrific team to grow the business.
All in all, through this, management is growing adjusted EBITDA from $22 million at the end of 2013 to $35 million at the end of this past year. These efforts have resulted in 2x to 3x potential growth on our invested equity, so honestly, really great results.
Tuning now to our leased and managed portfolio. This subset has been and continues to be very important for us. We have 49 properties across seven states and many decades of experience, solidifying our reputation as one of the best operators of private, daily fee and municipal properties. We are not only a reliable operator to municipalities such as New York City, L.A. County and San Diego, which we've been partners with for more than 30 years, but we are also the largest public daily fee operator in the state of California.
Through the terrific course management and innovations to the game, such as our public – such as our private club approach to public club membership we call the Players Club, we've been able to provide unmatched results for both our municipal and our private partners. I think there is certain strategic value in growing this business, and I'll get to that in a little bit.
Moving to Page 4. Our owned portfolio is 26 properties across the U.S. Our teams has enhanced the valuable properties, growing course – same-store course EBITDA by about 20% since 2013. We not only believe there's still room for upside in these courses, but we also believe there's substantial real estate and golf market value since they are situated in such attractive markets. For instance, 14 of these 26 properties sit in key California markets, spanning about 2,000 acres of very valuable real estate. The gross value of these high-performing courses could be $200 million to $325 million in total.
Now on Page 5. It's no surprise that as a company, we continue to make a transformation to focus on fast-growing Drive Shack. Our concept is very much now taking shape. You'll see from the pictures below, there's an enticing combination of food, fun and gaming that you'll find at our Orlando facility, which is expected to open by the end of this month. It really has come together through the incredible efforts of our very talented team, and we're so excited to share this venue with you when it opens later this month.
We remain optimistic about the opportunity to build these sites at plus or minus $25 million cost to build, and they have the potential to generate mid- to high-teen unlevered returns. On top of that, with the portfolio of these sites, we think there's sponsorship and numerous other upside growth opportunities that can make this investment even more exciting.
On Page 6, you’ll see that in addition to opening and optimizing Orlando, growing the sites in our pipeline is our focus for 2018. Beyond Orlando, we have five additional committed properties right now. We expect to announce new sites over the coming months, and then future additional sites will come from our more than 25 markets that are being explored. All in all, we hope to open 5 to 10 sites per year as we continue to ramp the business.
So as I touched on briefly earlier, I think we have a really unique opportunity right now to combine the strategic value of our in-house American Golf expertise to really propel the growth of Drive Shack. I think there’s a lot of ways that we’ll continue to do this over the next couple of months, but one main way is through the – addressing the issues on the underutilized golf assets of many communities.
There’s about 2,500 municipal golf courses in the U.S., and the prospect of repositioning both these courses as well as other municipal assets in partnership with Drive Shack is actually something that’s taking shape. In fact, four of the sites I mentioned above have come from similar opportunities. We think this will become increasingly more important as we move forward.
The last thing I’ll talk about is valuation. And admittedly, while it’s a little hard to value a company in transition, especially with a significant amount of development assets, we want to provide you with a road map to the way we’re thinking about it that will certainly develop over time.
With $140 million of cash on hand, proceeds from the owned course sales, we think we can self-fund with some financing just about 15 facilities. If you take those 15 facilities at an approximate $5 million site EBITDA, you have about $75 million of Drive Shack site EBITDA, which, combined with our robust growth pipeline and our commitment to innovation, could warrant 15x to 20x multiple. This is also in line with select peers. Obviously, these are general assumption-based thoughts, but as we open facilities, learn from operations and grow our pipeline, we’ll continue to update you moving forward.
So in summary, before I hand it over for questions, I want to lay out the simple specific four goals for 2018. We want to continue to monetize the legacy investments; successfully operate and begin to grow, both organically and through acquisition, our leased and managed portfolio; start to sell the owned courses; and then use our cash on hand, plus the proceeds from the owned courses, to build out Drive Shack.
And so with that, I’m happy to take a few questions.
Okay. Thank you very much, guys. If there are no questions at this time, we look forward to updating you as we move forward. Thank you.
Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.