Q2 2020 Drive Shack Inc Earnings Call

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 Jacek second quarter 2020 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 session.

Instructions will be given at that time.

Today's call is being recorded.

At this time I would like to hand, the call over to also improving head of Investor Relations. This permit you may begin.

Thank you and good morning, everyone I'd like to welcome you to drive Shark second quarter earnings call. Joining me here today are Hana Corey our Chief Executive Officer, and President and married that field, our Chief Accounting Officer, <unk> interim Chief Financial Officer.

Posted an investor supplement on our website, which we encourage you to download if you've not already done so I would like to point out 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 interview the risk factors contained in our annual and quarterly reports filed with the FCC and now I would like to turn the call over to Hanna.

Hi, Good morning, everyone and thank you for joining drive Shack second quarter earnings call before we dive into the supplement I want to begin by getting a brief overview the quarter and where we stand today.

First I would start by saying that I'm really pleased with the way that our company performed in Q2.

Even with the uncertainty that could cause for businesses across the country and specifically across the hospitality space I'm genuinely impressed with the way our team has come together to manage through the pandemic and I think it really shows and the results this quarter.

As a reminder, we shut down all of our menus and a majority of our golf courses in Q1 across the various weeks in Q2, we were able to reopen Oliver golf courses and all of our entertainment venues with the exception of Orlando.

The Big question last quarter in Q1, and really at the beginning of Q2 was okay. So after you shut down and then reopened our guests really going to still have an appetite to go out and be social given the current environment.

The answer that question. We discovered is yes, absolutely people are still wanting to get out there still wanting to be social one active and drive shack is wells are golf courses have really provided our guests to say space to do that.

We've been able to provide our guests with the social entertainment experience, whether it is our dry it whether it is that our drive shack locations or at our golf courses and we're able to do that safely and in accordance with local regulation.

As we really been using courses, we constantly reevaluated our expenses overhead and operational efficiencies in order to ensure we were operating as it as cost effectively as possible, while still being able to provide our guests with the great experience.

Last quarter, we deferred all of our capital spending that deferment or pause on all capital projects continued throughout Q2. This is really helped us to preserve our liquidity and it's an addition to maintaining the other cost saving measures that were put into place in Q1.

As a result of these measures. We currently have 12 million and liquidity and expect to breakeven at the company level. This month.

Our unlevered balance sheet had only a small amount of corporate debt and asset to sell you can provide meaningful sources of liquidity for us in the coming months.

When it turned out to supplement on page three and we'd like to touch on a couple of highlights specific to quarter to you.

So in quarter two our total company revenue was 32 million, which is 55% lower than Q2 of 2019. The reality is that we knew it was going to be welfare and especially given the environment. When you look at the timing of our Corbin use and our golf courses reopening we really went the entire quarter up until June with some but not all the news.

Operating in June we were able to get 100% number golf courses back on line, along with Richmond, which opened at the end of May and Raleigh, which was not able to reopen until the ended the quarter in the final days of June.

On the traditional golf side, we successfully reopened 17 courses in April 38 in May and the remaining five in June.

I also just want to highlight the despite the closures in Q1, we continue to work internally on finalizing the concept in store and strategy for the pottery, which we still believe will generate significant growth for our company.

We plan on beginning construction on our first few pottery been used in the followed this year.

Turning to page four in regards to our liquidity as mentioned earlier, we have 12 million currently an unrestricted cash last quarter, we had 14 million in cash and gave guidance for burn rate of 1.6 million am I.

I'm pleased to say that we were able to effectively manage and even less than our cash burn through a combination of increased revenues, coupled with streamlining our operations to become more efficient.

Over the last five months, we've taken a very deliberate lucky the cost base the business, we've enhanced the efficiency of our business and it worked diligently to identify ways to reduce spending without sacrificing our capacity to operate ultimately this is allowed us to successfully reopen I've been using courses and has resulted any more than 50% reduction in s. unite the.

Corporate level as compared to quarter to 2019.

As we continue to navigate the ever changing environment in which we operate today, we believe we're positioning ourselves to emerge from this disruption as an industry leader, while an array of entertainment concepts were popular before co bid and you can see these on page five by the way.

The current state of the World we live in today due to the prevalence of the virus really favour isn't open air or outdoor environment.

Well, we've always prided ourselves on being the best entertainment experience in our space.

We do attribute at least a portion of our popularity in this quarter to the temporary shifting consumer preference for outdoor activities that required limited overlap with other guest.

Given the way out of both our agency courses and drive Shack, then yes, we can provide the ideal setting for I guess connect with friends on doing physical activity in social distancing.

Later on in the presentation I'll spend some more time discussing the specific changes we've made to address the impacts of koby 19, but I first want to start by highlighting that our ultimate focus as a business remains unchanged.

While the path to attain our goals may look a little different than we'd originally imagined we will continue to manage the implications that koby 19 has had on our business well safely and successfully operating our venues and courses.

We're going to continue to develop the big Bucks a core drive shack vineyards in New Orleans in Manhattan Metals Island, and we will successfully launched the pottery format with a goal now the opening seven stores and 2021.

Turning to page said and I want to walk through a timeline for these uneven yes.

I've mentioned on the last call we paused construction in New Orleans in Q1, which caused her opening date to shift into 2021.

Additionally, we believe the timeframe for me handles island in Manhattan will remain on track for its planned opening in 2022.

In regards to the pottery format, we expect to open our first two venues in 2021 in Dallas, Texas in Charlotte North Carolina.

Our goal for next year is to open New Orleans, and seven pottery location.

Lastly, you may notice it Chicago Newport Beach are no longer on our list of in use we are pursuing.

We recently elected to not be forward with those locations.

The decision to reevaluate our path to piece was driven in part by the economics as it relates to drive shack venue in comparison to that of a pottery venue for those would be following along in the supplement this is laid out clearly on page eight.

When we look at the pottery as it compares to a large format drive Shack then you the puttering on average well cost around six and a half million dollars to bell, we projected EBITDA of around $2 million to $3 million. This generates an unlevered development yield of anywhere from 25 to 30 per se.

Additionally, we believe the yields could be here with land deficiencies.

The pottery offers a path to scale more quickly with less capital and faster returns because of this we believed that the pottery is a real path for growth for our company and future.

To be very clear, we will continue to focus our core drag on our core drive shack stores and we are wholly committed to opening both New Orleans, and Randall silent and at the same time, we're fully see pottery on the pottery in parallel and I'm being able to successfully and quickly open as soon as things normalize.

[noise] looking at our AG see venues and shifting gears for just a minute on page 10, you can see the map where all of our courses are in the U.S. When we began quarter too we had only three of the 60 courses open.

We are glad to say that we ended the quarter with all 60, our golf courses open. Despite the clothes shoes are courses produced incredibly successful results in quarter, two because just like our drive Shack then use our traditional golf courses provide a C outdoor setting forgets to come and be entertained.

On page 11, we show some of the key results agency had in the quarter.

So compared to June of last year in June 2020 courses saw revenue from Green and cart fees up 10%. Despite available T. times being reduced by nearly 32% that was due to you and the implications of coal bed.

Green card fee rates per around were up 12% private member sales were up an impressive 32% and member rounds were up 20% ABTS exceptional results highlight the tremendous demand for traditional golf and really prove its ongoing viability as a top leisure activity.

I want to turn your attention now to entertainment golf and you results on page 12.

After closing off we're been used the week of March 16th we reopened our generation two been used in May and June West Palm reopened first on May 15th Richmond closely followed reopening on May 29, and Raleigh was able to reopen at the very end of the quarter on June 26.

These venues collectively generated $2 million and revenue in Q2, which we're really happy with given the staggered nature of the reopening.

Upon reopening the revenue numbers at these venue steadily grew each week and have remained relatively stable.

Despite official limitations on her new capacity in group size is the been used took less than 21 days on average to break even after reopening further details around the vineyards break even success can be found on page 13, I'll go through now.

[laughter] West Palm was open it for 47 days in the quarter generating revenue of $1.2 million and breaking even in 16 days.

Richmond was open for 33 days in the quarter they generated revenue of about $550000 and broke even after 30 days.

Finally rally was open for only five days at the quarter, but generated revenue of $63000 and broke even after 16 days similarly to west Palm.

The results for Q3 through July 31st for these three needs have been very positive with all three then use trending towards great result.

[noise]. So early in the presentation I touched upon the ways that drive shack was poised for success in our ability to continue to operate three the pandemic.

On page 14, I went to briefly touch on a few details around some of our safety measures that have set us up for success in this environment.

First and foremost all of our associates are required to wear masks and b well in order to come into work, we provided them with resources additional training on P.P. and other safety measures that will keep both then and their guests say.

We added partitions between each day it drives shot which allows the based function more like private suites, allowing each group their own defined segmented space with physical barriers between other guests.

We're also closely following all local and federal health and safety guidelines and it or enforcing these policies with our guests as well as our staff.

I did games give gets the opportunity to get out get moving and be physically active which is something I guess, they're excited about especially in a world where many gems and recreational facilities are closed.

Lastly, we provide a space a safe space for social interaction, which has been a real scarcity in the current environment.

And finally as it relates to our opinions we're pleased to announce the progress we've made on our pottery experience as a reminder, the pottery will bring a FNB and technology together to elevate and put a modern and more social spend on the game of many goal.

We are near completion on the construction document and will begin the permitting process for Dallas in Charlotte in the ball, we'd be we plan to begin construction on these two didn't use in Q4 of 2020.

Now before I hand, it over to Larry I'd like to tie this all together.

Our goal and plan over the next 18 months or by the end of 2021 is to have New Orleans fully constructed in operation and to build an open seven pottery stores.

We are projecting a total cost of $100 million to complete our plan.

We have meaningful sources of liquidity in the value of our assets, which we are looking at in part as an option to fund our growth.

Based on this growth plan that I've laid out we expect 2021 run rate EBITDA of around $36 million at a 15 times multiple this produces an enterprise value of over $500 million.

We really believe that the economics of the pottery provides us a growth path provide the growth path for us that is not only attainable, but it's also highly profitable.

With that I'm going to hand, it over to Larry to take you through the result.

Thanks, Anna and good morning, everyone.

And for those following our presentation I'm on I'll start off on page 22 for all this was a truncated quarter for us.

All of our golf courses and drive shack venues, where either already closed or closed in April and then reopened by the end of June with few exceptions.

So the financial results showed some very positive trends that emerged as we progressed through our reopenings and build momentum.

And this is on both sides of our business with June representing the first month, we have the majority of our golf courses into overdrive shack venues open for the full month.

So on the quarter, we're reporting total company revenue of $24 million and that's after excluding managed horse reimbursements of approximately $8.5 million. This represents a $35 million decrease or 60% reduction compared to the prior years quarter, which we certainly expect to be lower than the prior year.

Now diving into the result at the business unit level to highlight the trends given the scattered reopenings during the quarter.

First our drive shack values.

Topline came in slightly above 50% of our pre called the plan that's measured from the period of time, when we reopened and that's about $1.8 million a revenue for the quarter.

But the headline is really in June or site level EBITDA turned positive for the month.

Driven by tighter venue cost structure and this is the two then is open for the full month with Raleigh opening on June 26.

And as a reminder, our three generation 2.0 venues were not open in the comparable period and 29 team. They want to development. So no same store results to report.

Moving to American Golf, which also had very good results in June were all except for fiber golf courses were open for the full month. The highlight here is we turned positive on course, <unk> EBITDA of $3.5 million on $12 billion of revenue and that's based on increased off demand at our public and stable memberships at a private from Q1 the Q2.

On the corporate cost side, we're reporting a gene a decrease of 50% from Q2 2019.

And at 35% decrease from the prior quarter and so we managed our cost smartly <unk>.

It really does that represent more than $5 million the savings year over year as we realigned our team implemented cost reduction measures.

Moving now to the balance sheet.

During the quarter, we terminated one unprofitable golf fleas and converted another at least to a management agreement.

These transactions provide an annual $500000 recurring benefit to our business and the impact of these transactions to the Q2 financials, resulting in net gain on lease termination of approximately $3 million and removed at least liability from a balance sheet.

Additionally, under GAAP accounting rules, we impaired and investment of an underlying commercial real estate development project due to the pandemic. This resulted a noncash charge of $24 million.

And my final point on liquidity in response to the pandemic and to manage our existing cash balances, we reduce spending and layered on cost when necessary disciplined manner as we open courses and venues.

We reported $40 million of unrestricted cash in May and now we have about $12 million unrestricted cash as of July 30, Onest Santa mentioned.

We're currently evaluating or options for new capital to resumed development and we'll report once we have definitive terms and with that I'll turn it back to Hannah for closing remarks.

Thanks, Larry and I, just like to see thank you to all of our employees across our business I couldn't be more grateful for employees. It go try shack and American golf, they've worked tirelessly over the last several months both in the field and at our corporate offices to keep our businesses going Thank you for sticking with US we really could not do what we do.

Without each of you so with that and I think I'd like to turn it over to the operator for questions.

Thank you the floor is now open for questions. If you wish to ask a question at this time simply press Star then the number one on your telephone keypad. If at any point. Your question has been answered and you wish to remove yourself from the Q press the pound key.

[noise]. Our first question comes from one of Aaron Heck of JMP Securities.

Good morning, obviously, the Newport Agency Pago developments removed from the future lives.

Wondering why those were prioritize the over.

And then add more new Orleans in terms of.

Reallocation of capital given the potteries are being prioritize on their high returns.

Aaron how are Ya.

Yes.

And yeah, Great question, New Orleans, we actually had already begun construction on and we had to pause it due to cobot 19 in Q1. So we were further down the line width and with our New Orleans build than we were with Chicago when we looked at the.

Use of capital and and really said, Okay. We in 2021, our goal is to get Chicago open and and we would need to for several reasons. It just it became.

Very clear to us that it would be bad in our best interest to to go ahead and for go that venue in terms of Newport Beach and.

Newport Beach was a little bit further out, but as we kind of works through the due diligence process and at that venue. It became more and more clear that the costs were going to be can and nearly unmanageable and I know that sounds a bit dramatic but there were so many different nuances that.

Particular site that we're driving the cost to build up on a weekly basis. So.

While we were looking for efficiencies in our in our build costs. We were faced with seeing Newport Beach is as a place where we really couldn't find any efficiencies for this year factor. The way we had two to build the building and we have to dig into the into the ground.

Very quite far actually so you would essentially be at you you'd be I guess underground for lack of a better way to say, it and upward and and that was due to the height of the net poles and other complexities and there that you know it it just became because they came very challenging to contend with.

And I think in a situation where.

We did not have a liquidity strain or concerns about liquidity and and to be quite Frank competition between where we were going to spend our capital and it it might have made sense to continue it but.

For <unk> for us it didn't at this point.

No that makes sense, obviously environment.

Unique and and difficult deal for you guys and you talked about.

Your liquidity and where you're going to place.

Capital is our their baseline that you'd be willing to share in terms of.

What you need to see financially over the next you know couple of quarters next year.

Yeah, the targets that you're talking about long term.

Involvement.

And drives jacks and.

Then.

But it's been dwindling Oh orders and it makes sense.

Yes, it I think what we focused on indeed in the presentation and what we've been focusing on collectively as our business plan for the next 18 months, we have a business plan. Obviously you want to open 50 potteries by the end of 2024, along bad and.

The dry shacks in New Orleans, and Manhattan, So, there's and there's a plan behind that that scale, the business and by 10 or 15, or so potteries a year.

Because of all of the uncertainty in the current environment, we really chose to focus on the next 12 to 18 months and in the next 12 to 18 months, we really want to build.

Finish and open New Orleans, as well as and get the first two pottery locations that we already have open and hopefully Q1 or <unk> or the beginning of Q2, and then a five additional potteries that would bring us to seven so to do all of that we were estimating that we need $100 million in capital.

But before or by the end of next year in order to accomplish those goals in terms of laying it out monthly that's not something that we've we've disclosed we certainly habit and are using that as we and as we evaluate different opportunities in the financing space.

Gotcha, and then last one.

Obviously the.

Cost of running retail I'll do change over the last couple of mines.

What are you seeing it on cautiousness recoveries.

And if that was only very chain, how does that kind of routine change your pro forma.

Projections, there I'm not that hasn't changed and just wondering.

Okay, Great question and what we're seeing right now is obviously there.

It's unfortunate what has happened over over the last several months and retail is incredibly distressed right now and and we're going into retail faced with the pottery. So what we have seen.

It's a larger inclination for landlords to want to work with us, they're giving more generous and tenet incentives. There also more flexible are tending to be a little bit more flexible on and when the rent payments began and putting in you know different nuances and any.

Agreement for coated and other things so what that does to our pro forma for the pottery is it actually makes it a lot better we have not changed it we've always kind of said, we think it'll take between seven and 11 million Bucks to build.

I estimate I always use six and a half million because it's a it's a good number for me and I I think that that's on average what it will let it will be and I expect that number to be even lower with some of these.

With some of these newer pottery venues that would be going into two more distressed retail spaces.

So so I expect us to be able to save save a lot of money there.

Gotcha, that's all for me personally.

Thank you so much.

Our next question comes from one of Peter Slate of B T G.

Great. Thanks, Thanks for taking my question I'm not sure if I missed this but what is the plan for Orlando the the drive shack in Orlando that.

Planning to reopen and if so are there any opportunities to reduce.

The rents there given the overall environment to improve the economics of the Orlando a facility.

Hi, there great question and thanks for asking I did not touch on its in the presentation. Some I'm grateful to have an opportunity to talk about it now.

Orlando and has remained closed right now given the fact that it's our beta site and we had.

Do you see some issues with with getting traffic in our visit numbers and our visit counts up which we were working and on prior to two co bid we have not reopened that facility yet, but we plan on reopening it and this isn't going to be a permanent closure. We're looking we're actively looking at ways in stride.

Gee internally right now where we can.

In this new environment and increase our visit counts and as well as obviously our revenue.

To your question about rent, we are actually and not paying rent and Orlando. So we have looked at several other levers that we could potentially pool and those are the same lever is set to be quite honest, we've looked at across our business as as a whole and SGN, a and fixed cost expense overhead in and out.

Other things and where we're looking in Orlando a bit differently at this point and and trying to figure out if there is.

Away to kind of increase our our guest count numbers, there and one thing we've thrown around and is because Orlando is our beta site potentially putting some version of this patrie and in or around the Orlando venue add to help us and <unk> also help us gather.

Data, but to also help us drive traffic in that in that location.

Great and then just.

On the.

And on in the past together discussed the potential to sell some remaining golf courses to.

Well, maybe reinvest back into either the pottery or their core Driveshafts, where do you guys stand on that is that still in the plan or you guys plan on holding onto the to remain in golf courses, what's the what's the update there.

Great question, there are two and golf courses or Rancho say Mccain and Tantahuatay. We still do have the is and we are we're currently looking at all opportunities and to increase our cash balance and we would certainly be open into selling either of those properties.

But we're also aggressively looking at and potentially getting financing against the pool of our assets into intandemone being two of those.

Understood. Okay last for me on the DNA.

The <unk> the current level of DNA is this what we should expect for you guys going forward or do you plan on adding back more gen $8 no food in the second half of the or.

There's probably going to be it very very modest increase and the reason that I say that its and because as our venues ramp up and as we as we work to open the pottery towards opening the pottery, we will need to bring back on and several folks. However, we should never.

Were expected to reach the levels that it did and you know say this time last year and.

We are anticipating or as teenage to hover around the the $20 million marks for at four drive shack.

Got it. Thank you very much at all I got.

You're welcome thank you.

Our next question comes from a lot of Eric Wold of B. Riley.

Thank you good morning.

Few questions.

I guess, one can you talk a little more about the mix of business you saw with the drive shack conclusions when they.

We opened in terms of.

Play you won't be rentals versus food and beverage clearly.

A lot of capacity restrictions Remy interior food beverage options. The bars, you maybe how you worked around that help consumers going to war drama.

Yeah hair next year from you and Great question, what what we found is I think to answer the first part of your question.

We've found that guests are definitely coming out to our drive shack locations and we've seen a slightly different trend based on on the location in terms of ramp and and how those locations have ramped up they've all done so that they've all done so just slightly differently to one another I guess given their there the differences in their location.

And in terms of the food and beverage.

One of the main drivers of of our revenue being and what it is today is the fact that our food beverage is is down across the board, that's mainly driven by events and.

If you look at our AG sea food and beverage and revenue is down and they're not they're they're not doing any events and because it's just the natures of Corona virus and the regulations and obviously, what we want to provide a safe environment drive shack is very much in the same boat I would say.

That when people come to drive shack now, they're actually eating a little bit more <unk> and then they are ordering more I should say then they were previously to simply due to the fact that I think you know people are tired of cooking [laughter], they're tired of being at home and they're they they just want to go out and had a good time and not really a worry too much about things so our facility.

As such that the food is actually brought out to the individuals and at drive shack in their bay is weve in some facilities closed our bar service. So we don't have walkup service to the bars, there's not any ability for them to like walk up to the bar in order food and they have to do that they have to do that from their table that their sat at apps.

Side.

And for our Golf course, our golf courses at AG see most of that SMB is grab and go at this point and their 60 courses. So they're all doing something a bit different based on their local municipality, but by and large what we're seeing is and if the grab and go SMB model there.

Perfect and then.

As you think about restarting construction on the pottery and completing.

New Orleans, and then move forward Manhattan, how do you think incorporate I'm going to the proven 19 restrictions into those construction plans and the assumption that.

Lobbies, you're just talking to them remain in place for some time or you flexible construction going to move back to maybe in a pretty cold environment when it becomes.

There are option anything about the.

It's great question I'm in terms of New Orleans and.

And Manhattan.

Eric just to be clear or you are you asking if we're going to make any kind of physical modifications to the to these builds in order to in order to accommodate for co head is that is that your question.

Sort of I think it.

Yeah.

It's important to drive shack, you've made what could be temporary changes with the.

I mean, if once you guys et cetera, but potteries, a little more indoor yeah, Dan Drudge I guess.

Yeah, Okay, I just want to make sure I understand you correctly. Thank you for clarifying and as far as just first the drive shack vineyards and we don't see need to really change our our building model and mostly given the fact that we are partially outdoors and what we have been doing so far is working if we are still in.

Covert situation by the time these venues open.

We would just institute the same types of physical barriers that we've put in our current existing vineyards in Raleigh, Richmond in West Palm because we see network incredibly well and that I don't think that we would opt to make any kind of physical changes to those two buildings in terms of the pottery, it's a great question and something that Weve.

Kind of talked about a lot.

You know, we we all hope that there's a vaccine for Corona virus that it's you know eradicated by sometime late this year early next year and.

In the chance it it's not we had done with our design team several adjustments that we can make both in the Preconstruction phase.

And in the form of temporary implementation.

In the Preconstruction phase that would be things like adjusting large group fix ceding tables to be made into like multiple smaller tables that media aren't so fixed creating partitions that we could eventually you know remove but that would be permanent and changing around or insurance is having a server only entrants spreading things.

Out some temporary implementations and we could you know change our furniture to kind of accommodate and it's been the need for flexing capacities and we have talked about creating clear barriers around the course bars, removing the ability for walkup trying.

It's actions from guests and obviously, adding the sanitation stations and then we have a list of some operational and considerations that are probably going to be in place, whether we have cobot still or not and those are things like.

Digital ordering alternate alternating start times on the course touchless payment systems things that we don't really have it drive shack quite yet but that are good to have whether you know we're in a cobot environment or not.

[noise] from it and it's like was it for me.

Where are you on the other side.

You should do you want to open next year in terms of site selection negotiation.

And before Corona virus. The great question, we had an active pipeline of over 60 sites.

This point in time, we are due to the fact that we are kind of running on a skeleton crew here, we have an art or person who's heading up a development going coming back through those those vineyards and he's remain engaged with our brokers and as well as the landlord and to be honest some of the.

Things that some of the sites that we thought would have been top contenders in February and are not anymore I simply because there's better deals out there we've been approached by several different cities that have some great incentives that were previously thought of as potentially too expensive or too cost prohibitive.

And for Us to go into for our for you know a five videos and so we are reevaluating that now and we will we will move quickly ticket is locked in and I buy the ended the quarter given the fact that there's five additional and we have two already selected we had and a good amount of time to be able.

So to take our time and identifying those additional five given that are pipeline. So large.

Got it thank you very much.

Thank you.

Thank you that was our final question.

At this time I would like to turn the call back over to Austin Pruitt for closing remarks.

Thank you all for participating in today's conference call. We look forward to updating you after Q3.

And thank you ladies and gentleman.

This concludes today's conference call you may now disconnect.

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