Q4 2019 Earnings Call

Good morning, My name is Crystal and I will be a conference operator today at this time I would like to welcome everyone to bad tribe shacks.

Fourth quarter and full year 2019 earnings conference call.

Lines have been placed on mute to prevent any background noise.

After their prepared remarks, we will have a question and answer session.

Instructions will be given at that time.

Today's call is being recorded.

At this time I would like to hand over to air Austin Pruitt head of Investor Relations Mr., let you may begin.

Thank you and good morning, everyone I'd like to all come here to drive Shack fourth quarter 2019 earnings call. Joining me here today are Hana Corey our Chief Executive Officer in President and very good field, our Chief Accounting Officer, and interim Chief Financial Officer, We posted an investor supplement on our website, which we encourage you to download if you've not already done.

I would like to putting out a 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 Restauranteurs contained in our annual and quarterly reports filed with the FCC and now.

I would like to turn the call over to Hanna.

Good morning, everyone and thanks for joining trash trucks fourth quarter earnings call, we have quite a bit to talk about today after a very exciting quarter in Europe, but before we get started I want to announce it David here really is no longer with drive shack I'm pleased to announce it Larry good sales will be named our interim CFO.

Married with the T. part of the company's transition from predominantly financial services organization to an operating company for the past year Larry's focused on several projects. In addition to his role as Chief Accounting Officer and Treasurer throughout this time with board and drilling time with fortress and drive shack. He touched virtually every part of the accounting and finance function.

I'm confident that Larry will be a great resource and leading the continued growth for the drive Shack organization.

I'm now going to start with a so a short summary of our fourth quarter highlights then move on to discuss results and updates across the business I will then handed over to Larry.

So Q4 in 2019 was a really significant quarter in your for US as we really completed our evolution from a development company into a venue based entertainment company.

We launched three new stores that generated around $15 million in the second half of last year, putting us on pace to achieve EBITDA margins of 25% and yields of 10% to 15% in 2020.

What really mark this transition for us with a massively successful launch of our core Big box Gulf Entertainment stores that we called drive shack.

As a reminder, we launched our first drive shack been you in Orlando in 2018.

These are beta site, where we tested new enhancements, we would later rollout energen Twob 10 years.

After launching argent human use we spent some time going back into Orlando and revamping that site with specific enhancements to the technology and outfield.

We're also really pleased with the progress that we've made in Q4 with our new experience, we're launching in the coming weeks, the urban box, which will feature tech enhanced cutting and entertainment, we've signed leases in Dallas, Texas in Charlotte North Carolina and are in the final stage of negotiations for multiple other locations across the U.S. This puts us well in our way to opening the Vinny.

Used by the end of 2020.

Finally, we spent quite a bit of time developing a capital plan to help on the business and our growth.

Turning to page five talk about her focus our focus here drive shack is really simple we want to continue to focus on the in entertainment industry building, one to Q2 core stores per year, and we're going to successfully launched the urban boxing is having the first three open and fully operational by the end of 2020.

The map on page four shows a great representation of the vast availability of real estate and being used across the U.S.

The reality is that every state me U.S. is a great market for what we're doing in the entertainment space, but the U.S. is actually a pretty big place. So highlighted in dark green on the map you'll see the states. We've started wet but we do plan to try to get around all of them.

One notable difference in this map in the previous versions is the addition of two locations for the urban box, which are now confirmed in Dallas, Texas in Charlotte North Carolina, I will speak to this in more detail shortly.

[laughter].

Turning to page [laughter], turning to page six we talk about our drive shack Corbin yours as well as our urban box then yes, we have four vineyards currently in operation Orlando, Florida, a which is our beta sites opened in 2018, Raleigh, North Carolina opened in Q3 2019.

In Richmond, Virginia, and West Palm Beach, Florida, the opened in Q4 of 29 team.

Additionally, we've committed to four other been yes.

New Orleans, which is opening and 2020 later this year.

Oh, the opening next year in 2021, Newport Beach, and Manhattan, which are both slated to open in 2022.

Moving down to the urban box then yes, we have to committed opinions that I spoke about earlier, one in Dallas, Texas and one in Charlotte North Carolina.

We're currently and active negotiations across multiple been use in the United States to fill that third 2020 slot as well, it's a to fill the future slot.

We have an active pipeline of urban box then yes.

That you'll see on the bottom right.

And as we look ahead, we're very focused on accelerating the pace of our entertainment companies grow we're serious about expanding the national footprint and we have broner pipeline to support this initiative.

[laughter].

In addition to the new sites, we announce in Dallas in Charlotte, you're negotiating multiple other sites across the U.S. openings both in the coming months and years ahead. These end user situated and optimal locations as key markets across U.S.

Right now we have an active pipeline of over 63 venues across United States for future urban box locations.

The number of contracts under negotiation constantly growing they will continue to announce new deals is there sign.

On page seven when it spend a minute talking about the math behind these Ben yes, [laughter] burst I'm just outline our goal is to build for plus additional core drive shack than yours and at least 50, if not more urban box then used by the end of 2023.

Our targets for the core drive Shack, then use included only costs of 25 million to 40 million, which site level EBITDA as a 4 million to 7 million and development yields of 10% to 20%.

Our urban box, we expect expect gross development cost of seven to 11 million with site level EBITDA as of two to 3 million and development yields of 25% to 35%.

Due to the current nature of the retail market, we expect potential tenant incentives across many of the sites. We are considering will further reduce or build cost.

The lower cost to build everything boxes, driven by the smaller store size and our ability to go into existing space is combined with strong top line revenue in March and deliver significantly higher development yields relative to our core story.

[laughter].

On page eight <unk> and just a minute talking a little bit about our capital plan.

With the development goals and that we just went over in mind.

We really do you believe that we can internally finance our growth in 2020, which will require about $100 million. This will be used towards three areas. The first is the completion of the construction and the openings of New Orleans, and the three urban boxing yes.

Second is to help fund the continuation of construction on the other committed core assets.

And lastly, it will in part from the beginning phases of development for some of the urban boxes slated to open in 2021.

We do you believe that we can successfully finances internally through a combination of asset sales financing and sale leaseback.

[laughter].

With this in mind and turning to page nine I want to talk about drive Shack schools. This is really what we get excited about around here.

Our first we went to have 50 or more been yes open and operating by the end of 2023, we envision this being around eight or more core drive shack menus, and 50 or more urban box in years.

With each of the Corbin, who's doing $4 million to $6 million, an EBITDA and each urban box doing two to 3 million of EBIT EBITDA. We're looking at entertainment golf EBITDA targets of around $165 million by the end of 2023, which is really incredible.

Second we want to use the extensive expertise and knowledge that the drive shack team has to pursue a number of different categories in the entertainment space.

Entertainment space with a multibillion dollar industry and while.

Entertainment Golf, it's a for ray for us into that space. We're really excited about all the other possibilities that exist under this brought umbrella.

When we step back and reflect on the Big picture, we see something really incredible would tend to potential. This is a world with billions of experience secret is United by the need for social connection the power of immersive Entertainment has never been more profound.

In the last couple of years, we've witnessed consumer preferences changing people everywhere demanding unique multifaceted ways to enact socially with the largest buying segments, preferring to spend money on experiences versus things.

Added up it means there's a world of opportunity for us It drive shack, the growing demand for unique experiences increasing desire for more active lifestyle and is changing consumer preferences I touched on our all tailwinds for our business and with our teams unparalleled industry experience, an insatiable drive to innovate these trends really play to our strength.

Well, let's switch gears to our venue operations and development and I'm now turning to page 10, we spoken about the venues that we opened last year as we look across Raleigh, Richmond, and West Palm Beach, We're pleased to report that they've had exceptional results.

In the second half of 2019. These then use generated total revenue about $15 million in 2020, we expect these venues to generate a total of around 50 million in revenue, which will put them on pace to achieve our EBITDA margins of 25% and those yields of 10% to 15%.

Looking at page 12.

Well, we are pleased by the success of our new venues. That's far we're always looking at new ways to improve our been use and further enhance enhance the guest experience.

Since reporting last quarter, we've rolled out when you game, just darts and were in testing mode for another game, which we call hot shot that focuses on target scoring.

Our goal is to continue rolling out a new game every quarter as a reminder, our gaming software is built in house, which allows us quite a bit of flexibility not only around modification, but also with the creation of new games, allowing us to easily bill games based on what guests want in what is on trend.

Our gaming software has been there's been designed to allow us to consistently refresh update and rollout new games, which we believe will be a key driver of the year over year same store sales growth in our future.

We've also made updates and enhancements to our food and beverage menu that incorporate guest feedback and increase operational efficiencies. We've narrowed the number of items on the menu to help ensure consistent high quality execution and eliminated certain lower margin or I don't know where margin items. We incorporated these changes into new menu, which we officially launched earlier this week.

And finally, we're working diligently to roll out online reservations by the end shoot you it's going to help alleviate the long wait times. The guests are experiencing do the popularity of our opinion.

Later this year, we're going to open our fifth Corbin you in New Orleans.

We will talk more about in a minute, but the physical design opinion aesthetics will be notably different than that of our previous then yes.

We strategically reallocated the space across the venue to optimize the revenue generating areas, creating more flexible event spaces and incorporating multiple outdoor patios.

[noise] became new Orleans, and turning to page 13 to drive shacks new venue development.

Our development goals are actually pretty simple first we want to be smart about our site selection second we want to compress a construction timeline and be on or below budget and lastly, we want to shorten the time period from opening to breakeven or.

Our strategy is to develop core drive Shack, then use in key markets, while simultaneously building urban box and use the cross the U.S.

We currently have the four drive shack locations operating in Orlando, Florida, Raleigh, North Carolina, Richmond, Virginia, and West Palm Beach, Florida.

We have one did you under construction in New Orleans that slated to open later this year.

We had three additional coresites committed in Chicago, Illinois, Newport Beach, California, and Manhattan, New York.

All opening across 2021 and 2022.

As I mentioned earlier, we plan to open three urban box phase Twob, which will be in Dallas in Charlotte later this year.

On the next page page 14. This is all about our newest experience the urban box.

This experience, we're really excited about it's going to focus on bringing people together with your competitive socializing using technologically enabled mini golf as he anchor we're combining technology inputting with elevated food and beverage and other entertainment to create a unique and engaging experience for our gas.

The venues are going to be true multiple nine whole cutting courses that surround an upscale craft cocktail bar. The commentary menu focuses on elevated high quality offerings that are designed to be shared with friends and police a wide variety of taste.

We've incorporated multiple on course bars that feature unique menu with drinks that cater specifically to convenient consumption while playing.

Throughout the venue multiple bars lounges B.I.P. spaces in outdoor patios are going to come together to provide a full nights worth entertainment all under one brand.

The photos that you see on page 14 on the Rightside. There are renderings of one of our locations and we're we're actually really excited about these we have some incredible talent on our team we're working with both our in house folks have tons of relevant experience here as well as select external partners that are really helping to breathe life into this experience.

Now I'm going to turn it over to Larry So he can talk about financial.

Great. Thanks, Anna and pleased to speak to you all this morning.

Turning to page 16.

As we think about the value potential the business in 2023, we estimate total company EBITDA of approximately 165 million based upon the development plan hand. It took you through so in summary, a court driveshafts generating 5 million of EBITDA. Her than you did the urban boxes at about two and a half million up EBITDA per venue I Didnt American golf 35.

Million total EBITDA, then subtract a she in a 36 million, bringing total company EBITDA to approximately 165 million <unk>.

When we consider the trading multiples of other high growth entertainment businesses generally between 12 to 15 times.

I believe drive Shack, Lebanon appraised value of approximately 2 billion, which highlights the significant upside potential of our business and that's exciting to us.

Before I turn it back to Hannah I like to touch upon some financial highlights for the quarter first and foremost Santa mentioned earlier for Q4 or drive shack generation to bundle venue contributed 12 million in revenue.

After that 700000 Tomorrow, Atlanta location, which is close for a couple of months in Q4 for renovations.

Well, it's about 45 million of revenue from traditional golf.

One thing I will note is that while it's been great golf was the first few months of 2020, Q4, 29, P. inside decrease of playable days versus Q4 2018 of about 5% and.

And despite the decrease revenues that traditional gulfport resilient.

Is that something good about the traditional golf industry, our members attachment for courses as well as how we manage them.

And one final item, we sold three traditional golf properties for 90 million recognize a gain of approximately 700 million, which is included in other income.

On the three sales, we converted to with management agreements and we'll continue to collect the management see.

With these sales we have two remaining old traditional golf assets in our portfolio and with that I'll turn it back to handle for closing remarks. Thanks Larry.

In closing, we believe 2020 will be a momentous year for drive shack as a company carried by team that sets us apart and drives its forward.

In 2019, our team accomplished something incredible the opening of the company's second third and fourth entertainment venues in a span of three months and later this year, we will double the amount of entertainment and using our portfolio.

The past six months' had been incredibly fast paced an exciting.

It's because of the commitment tenacity and hard work of our team that we've been able to lay the foundation for what will be an extraordinary future.

Okay. Operator, we are we would like to began QNX. Please.

I will now open the call for acuity. Our first question comes from the line of Erin.

JMP Your line is open.

Hello, how are you.

Hi, good how are you.

Thanks for taking my question.

Yeah.

Obviously.

The markets have been hit pretty hard by these corona virus fears.

You guys have a lot of development.

To go complete over the next couple of years any thoughts or color you can give me on supply chain.

Potential delays it could happen do you think there's any risk on the impact of project deliveries.

Yeah. That's it that's a great question, we actually have been putting a lot of thought into this and.

On the drive Shack side, we're very confident and in our ability in our core been used to be able to fulfill the need from a <unk> from a procurement standpoint for any of the stuff that we're buying when we look at the urban box venues were working very closely with both our in house procurement BP as well as our.

In house and external architects, who we're sourcing materials right now the majority of the materials and product that we're looking at currently is are things that we're looking at that are readily available as well as things that we don't anticipate there being any kind of supply chain issue.

So you know always always of risk, yes, but we feel really really great about the plan, we had in place to try to mitigate that.

So it sounds like you have enough optionality on design.

In time.

Made changes where need be if there's a product.

Are there are there any products that you've seen so far that have become available or is this just more risk the markets pricing and rather than.

The than actual tangible.

It's all sourcing the field at this point.

Yeah, I don't think we have really seen anything we've we've just done a series of meetings internally and around the urban box and around the specific topic, we have not yet seen a need for us to change our design or any of our technology due to a lack of availability.

But we certainly have the options available should this become a problem in the future, but as of right. Now we went through a very long list earlier in the week of.

Everything from you know a computer to our wallpaper coverings, and we were feeling really good about it but we do have backup.

Gotcha, Gotcha, and then or.

Also on the development side.

Then in terms of leverage that your loud.

You feel comfortable taking the company to what kind of metrics are you thinking about obviously, there's a lot of financing options. After 2020, but I guess, there there's ways to normalize that in the leverage calculation. So just kind of your thoughts around how how far can go.

Yeah. Good morning, Aaron Yeah, we're looking at financing at some our sites and we're thinking based on site level financing enough to start off around four to five times of EBITDA.

Okay.

Is.

Based on the projections you haven't plays for.

You know the guidance of 50 urban boxes and eight.

Traditional drive shacks the do you have.

The balance sheet in place she thing to be able to succeed and hit those targets. If you hit the development delivery and pro forma numbers or is there going to be no. Other financing options it needs to be considered outside of the three that you listed on the on the supplement.

Yeah. Aaron This is Larry again, and I mentioned during the deck that our financing plans going include a combination of asset sales.

Should we have two remaining in the portfolio as of yearend financings and sale leasebacks, but the key to pretty simple the way we're thinking about it is our asset class, which is really the venue business, putting you know traditional golf aside for a moment is where we feel pretty good that debt financing is attractive or we can borrow based on cash flows and we believe it.

And Bob He's done a hard asset value for real estate in our industry. That's what we see companies are doing to doing both so that's sort of how we're thinking about it.

Gotcha.

Is it time I'll jump back in the Q.

Thank you.

Thank you if they are no further questions that concludes today's question and answer session. I will now I'll turn the call back to Austin Pruitt for any further remarks.

Thank you all for participating in today's conference call. We look forward to updating you after Q1.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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