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spk02: Thank you. Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. Good morning. My name is Brandi, and I will be your conference operator today. At this time, I would like to welcome everyone to the DriveShack's third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be 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 Kelly Buckhorn, Head of Investor Relations. Ms. Buckhorn, you may begin.
spk01: Thank you, Brandi, and good morning, everyone. I would like to welcome you to DriveShack's third quarter 2020 earnings call. Joining me today is Chief Executive Officer Hannah Corey and Chief Financial Officer Mike Nichols. We have posted an investor supplement on our IR website, and we encourage you to download it now if you have not done so already. 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. With that, I would like to now turn the call over to Hannah.
spk00: Thanks, Kelly. Good morning, everyone. Thanks for joining us today. Before we get going, I'd like to introduce you all to a couple of people we've recently added to the team. First is Mike Nichols, our new CFO. We're really happy to have Mike on board and know he's going to add quite a bit of knowledge and experience to the team. Also here, as you've heard, is Kelly Buckhorn, our newly appointed head of investor relations. Kelly brings a lot of great experience with her, most recently running investor relations for JCPenney. We've also recently added Chuck Smith, who's come on board as our new head of HR for both DriveShack and American Golf. All of these individuals bring a great deal of experience and knowledge to the team, and we're really happy to have them with us. So Q3 was a pivotal quarter for our company, not only from a people perspective, but also from a business standpoint. It was the first quarter since March that our courses and venues, with the exception of Orlando, were open for a full quarter. Our company performed very well in Q3, with total revenue of 66 million, down only 11% to Q3 of 2019, driven mainly by a decline in event revenue. We delivered on completing one of our major strategic funding goals with the sale of Rancho San Joaquin for $33.6 million in net cash proceeds. This brought our current liquidity as of 10-31 to $44 million, and this has given us the ability to restart other strategic initiatives that were previously on hold as it relates to development and operations. I'm also pleased to announce that we are on a path to reopen Orlando with the target date of December. So I'll turn to the deck first to our venues on page four. On the American golf side of our business, we now own one course, lease 34, and manage 25. On the entertainment golf side, we currently operate four drive shack venues in Orlando, Raleigh, Richmond, and West Palm Beach. We are committed to leases in New Orleans and Randall's Island for our entertainment golf venues and in Dallas and Charlotte for our puttery venues. Additionally, we've developed a pipeline of over 60 targets that we are exploring for future puttery venues. I'll go into more detail on our plan for puttery shortly. Turning to page five now, as we've navigated through the COVID-19 disruption, it's clear that we've emerged as an industry leader in our space. COVID-19 really brought about a shift in consumer preference for outdoor activities that have very limited overlap with other guests. What we provide at both Drive Shack and AGC is outdoor open-air format and partitioned suite-style bays at our Drive Shack facilities. Also, American golf courses have natural limited on-course guest overlap. This has led us to really outrank our competitors by offering something that is both a physical activity and social distancing. So people have really been able to get to our venues and golf courses and feel that they can do so safely. Turning to page six, I want to discuss how we've executed our growth priorities in the new COVID environment. As a reminder, for the majority of Q2, substantially all of our venues and courses were closed. We reported having only 12 million of unrestricted cash on hand as of July 31st. As a response to the COVID crisis, we focused on two broad-reaching measures to really get us through COVID. which were to focus on preserving and generating liquidity, and then on being able to re-stabilize the business in order to carry out our future business plan. The first of these measures was all about preserving and generating liquidity, which we have successfully accomplished and continue to maintain. Since the closures in March, we took a very thoughtful but very aggressive approach when implementing measures to preserve liquidity. Over the last five months, we worked diligently to identify ways to reduce spending without sacrificing our ability to operate our venues safely and effectively. we significantly reduced expenses and capital expenditures and focused on lowering our fixed costs, lowering field fixed labor costs across AGC and DriveShack by around 40% versus Q3 of last year. As mentioned, we also closed the sale of Rancho in October, which generated approximately $34 million of net cash proceeds. So then the second response measure was to re-stabilize our business, adjusting to the current environment and positioning ourselves to execute our growth priorities. We focused on advancing critical path deliverables for new venue openings, like our financing plan, which our new CFO Mike is developing. At the venue level, we continue to focus on innovative ways to drive traffic and increase revenue. This includes launching single bay reservations, along with new event packages and promotions, which I'll discuss in greater detail shortly. As a result of these actions taken over the last several months, we believe that we are poised to advance our plans for growth in 2021. After reopening all closed courses last quarter, this quarter marked continued momentum for our American golf business, which you can see on page 8. AGC's exceptional results highlight the unwavering demand for traditional golf and reinforce it as a top leisure activity in the COVID environment. Compared to Q3 of last year, in Q3 of this year, our public courses saw revenue from green and cart fees up 15% despite a reduction in available tee times and daily fee rounds up 10%. On the private side, member sales were up 48%, and total private rounds were up 25%. We're really, really proud of these results. Thus far, Q3 has produced stronger results than any quarter in 2020 across each category I just mentioned. On the entertainment golf side of the business, despite official limitations on venue capacity and group sizes, our drive shack venues generated $6.2 million of revenue. We've given you both Q1 and Q2 results to look at for comparison on page nine. You can really see the upward revenue trend for our DriveShack venues across the quarters of this year. Total revenue is at 70% of Q1 revenue levels. Walk-in revenue made up most of this total, averaging around 88% of Q1 levels. Our team has been very focused on creating innovative ways to drive traffic into our venues, which directly contributed to our success this quarter. I'll discuss these initiatives in greater detail later in the presentation. I want to turn your attention now to the safety standards we've developed across our DriveShack venues on page 10. These have evolved since COVID began, and we've enhanced our already rigorous safety protocols and have put additional measures in place, like the bay dividers shown on this page, in order to make sure that our guests feel safe. DriveShack is partially outdoor, open air, and climate controlled, which is a notable differentiation for many of our competitors. Unlike traditional bars or arcades, our active games give guests the opportunity to get out, get moving, and be physically active. Even through COVID, we have been able to provide a safe space for social interaction, which has been a scarcity in the current environment. Moving to page 11 now, we've had a good number of inquiries asking when Orlando would open, and I'm happy to say that day is coming soon. We're targeting an opening date in December. As we gear up to reopen, we focused on launching initiatives that will increase brand awareness and visits to the venues, along with various revenue-driving promotions and events. We're partnering with the developer of the 17-square-mile master-planned city that surrounds our venue to further integrate with the local community. We also plan to offer new promotions and experiences, including a gameplay pass for the local residents, live music featuring local artists, and new special event packages, as well as discounts for Orlando Airport employees. We believe that a big key to success in Orlando will be integrating with the community, which we're excited to be able to do now. We do plan on launching Orlando with similar, if not identical, promotions that we currently have programmed in our other venues. I spoke about driving event revenue in a COVID environment, which we've had recent success doing with one of our latest promotions that you can see outlined on page 12. Our teams have been hyper-focused on developing new offers targeting smaller group gatherings to help drive traffic and generate increased revenue. We launched our new two-bay package in mid-September to encourage small event bookings across our DriveShack locations. This special lets groups of 10 guests reserve two bays in advance with a food and beverage minimum spend. We've seen very positive results from this promotion so far, with event revenue increasing four times since launching the initiative. Our focus will continue to be on creating new ways to innovate our event offerings in a COVID environment by focusing on ways to entertain smaller groups safely. As part of our ongoing efforts to constantly improve and evolve the guest experience, we are very excited to announce that we plan to launch our new online booking platform for single-bay reservations in December. To date, advanced bookings have only been offered as part of event packages on a call-ahead basis and with a two-bay minimum. While these packages have been very successful, they don't really solve the need for single-bay, smaller group reservations. Rolling out reservations will provide a more seamless experience for our guests, and will allow them to avoid long wait times. Also, having visibility to our reservation bookings will enhance the predictability of our labor needs. I'm moving to page 14 now in the supplement. A big focus for us this quarter has been on innovating new ways for our guests to compete and engage. We're currently developing a new repeatable tournament model for use at all DriveShack locations, which will initially launch with two competitions, the Drive Shack Open, which is going to target competitive and more avid golfers, then the Monster Hunt Challenge, which is really geared towards less serious players and non-golfers. We're also in the early stages of planning technology that will allow for in-venue competition between different groups of guests. We really want to offer our guests new ways to engage socially and competitively by providing new and fun competitive experiences. So I want to switch gears now to speak in greater detail about our venues and our development plan. First, I'd like to talk about the puttery. Turning to page 16, we're excited to announce the progress we've made with the puttery. We've included some high resolution renderings that no one has seen publicly before that are in the appendix. Just to remind everyone, we designed the puttery format for urban cores where a drive shack venue wouldn't fit. This format will expand national store potential due to the vast availability of real estate, shorter development times, less capital risk, and higher development yields. Despite the disruption and uncertainty COVID has caused, we've been extremely focused on advancing the critical path items to keep the pottery venues on track to debut next year. The Charlotte construction documents are near completion, and we plan to begin the permitting process soon. In Dallas, the shell building is complete and permitting is underway. On page 17, you'll see that we outline our full development plan with future venues in New Orleans and Manhattan, as well as the two puttery venues we are committed to in Dallas and Charlotte with an intention of opening five more puttery in 2021. At this time, we plan on leaving New Orleans in on-hold status so that we can reallocate our capital to getting the first two puttery venues built. This will allow us to establish proof of concept with no additional capital requirements. The numbers behind the pivot to the puttery format are compelling and are laid out on page 18. To remind everyone, the puttery will cost around $7 to $11 million to build, and after TI, we believe that cost could be even lower. EBITDAs are expected to be between $2 and $3 million per store. With an estimated build time of six to nine months, we start generating revenue really quickly. DriveShack stores cost substantially more, around $25 to $40 million, with EBITDAs ranging from $4 to $6 million. While still great numbers, these venues take much longer to become revenue generating, and with the higher overhead and build costs, the returns are much slower. Moving now to page 19, our liquidity position has grown substantially better with the sale of Rancho. As of October 31st, we had $44 million of unrestricted cash on hand. By leaving New Orleans on hold, we eliminate the need for an additional capital raise in order to get proof of concept on the puttery experience. From there, in order to fund our plan to build the remaining five puttery venues in 2021, we will need to secure $45 million of new capital, which will get us to our plan of seven puttery venues. While in a normalized world, we have meaningful sources of liquidity in the value of our assets, we are currently exploring various options for new capital funding in 2021. Before I hand it over to Mike, I want to quickly recap how this comes together over the next 12 months as we advance our plans for growth in 2021 with our puttery experience. I'm on page 20 now. As I mentioned earlier, our goal is to open seven puttery stores by the end of 2021. We expect the total cost of the project to run approximately $50 million, and with the growth plan I've laid out, along with the projected economics of our puttery venues, we expect to generate around $30 million of 2021 run rate EBITDA. Out of 15 times multiple, this produces an enterprise value of just over $435 million. We believe the path we are advancing for our puttery experience provides a growth trajectory that is both achievable and highly profitable. With that, I will hand it over to Mike to go through our results.
spk04: Thanks, Hannah, and good morning, everyone. For those following our presentation, I'll start off on page 22. All AGC courses and Gen 2 drive shack venues were open for the entire third quarter, and the financial results on both sides of the business showed some very positive trends with momentum building throughout Q3. On a total company basis, we generated revenue of $66 million. This represents an $8 million decrease or 11% reduction compared to Q3 2019, which was expected given the unique circumstances. At the business unit level, our entertainment golf segment generated $6.2 million of revenue from our Gen 2 venues with walk-in revenue, averaging 88% of Q1 2020 levels. However, Gen 2 total revenue averaged 70% of Q1 levels, highlighting the impact of reduced event revenue. As a reminder, our Gen 2 venues were not open for the full quarter during 2019, so we did not have same venue results versus prior year to report. On the traditional golf side, we generated $45 million of revenue, excluding managed course reimbursements of approximately $15 million, which is down 10 million or 19% compared to Q3 2019. This is driven largely by the 95% or $10.5 million decrease in event revenue compared to Q3 2019. On the corporate side, total company SG&A came in at 8 million, a decrease of 38% or 5 million from Q3 2019. This is an increase of 17% from Q2 of this year, largely the result of lower compensation expense in Q2 during the pandemic shutdown and an increase in Q3 compensation expense as our operations emerged from the pandemic shutdown. Year-to-date SG&A of $19 million represents approximately $11 million of savings year over year as we realigned our team and implemented cost reduction measures. I want to make one final point on liquidity. To preserve our cash during the pandemic shutdown, we significantly reduced spending and continued our efforts to sell our remaining golf course assets. We reported 12 million of unrestricted cash in July, and at the end of October, we had 44 million of unrestricted cash. The increase in cash on hand was primarily the result of 33.6 million of net sale proceeds from our divestment of Rancho San Joaquin in October. As Hannah mentioned, we are currently evaluating our options for new capital to complete our development plans, and we'll report on that once we have definitive terms. With that, I'll turn it back to Hannah for closing remarks.
spk00: Thanks, Mike. And thank you all for joining us today. With that, I'd love to turn it over to the operator for questions.
spk02: Thank you. And at this time, to ask an audio question, please press star 1 on your telephone keypad. And your first question comes from the line of Eric Wold of B Reilly.
spk03: Thank you. Good morning. Couple questions just on kind of financing in New Orleans, I guess initially. One, if I heard you correctly, Hannah, you mentioned that the funding from the sale of the Irvine Golf Course gets you into the first couple puttery locations in next year, and you need another $45 million to get through the back half of 21. Would that also, would that additional funding also include New Orleans, or would that be something separate? And then... When does financing for 2022 openings come into play?
spk00: Hey, Eric. How are you? Thanks for the question. To answer your first question, I'll take a stab at this and I'll turn it over to Mike for additional comments. The additional $45 million raise would be to complete the other five putteries that we have in the pipeline. That does not include any type of financing number for New Orleans. So you are correct that where we're sitting today, we will absolutely be able to get through our first two puttery venues, get proof of concept. The additional $45 million would then be for the other five. So that does not include New Orleans. In terms of your 2022 question, I know we're looking at a lot of different opportunities right now in terms of ways we can fund and finance the business. Mike's been on board for... I don't know, a few weeks now, and has been working really hard at looking at various opportunities for us. I don't know if you have anything to add to that, Mike.
spk04: Well, certainly 2022 is going to require an additional look. Part of that financing will come from the cash flows generated from the putteries that we opened in 2021. So really the answer is it's going to be a combination of new capital and cash flow financing.
spk03: Perfect. And then just one follow-up is – New Orleans on hold solely for financing reasons, or is there a chance that that does not continue? Is there a deadline at which you would need to restart construction for kind of your agreement with the city?
spk00: You know, so great questions. It is on hold right now because we have really seen the need to really get proof of concept for these puttery locations. In the world we're living in today with COVID, Obviously, there's a level of uncertainty that we're all living with right now that is hopefully going away sometime soon, but we're operating as if it is not. So given that, we wanted to reallocate that capital over to the first two puttery venues, given the fact that we're largely pivoting our business model to opening upwards of 50 of them by 2024. Really important for us to get proof of concept. So yes, partially financial, partially strategic. In terms of, I think your second question, Eric, was is there a timeline on when we would need to restart construction? And the answer internally right now is no. We intend to do so. We would like to really focus on getting these first two putteries up and running and then reevaluate it at that time.
spk03: Perfect. And nice job getting this quarter with everything going on. Great results.
spk00: Thanks. Thanks to our team. They did a great job. Thanks, Eric.
spk02: Your next question comes from Peter Saleh of BTIG.
spk05: Great. Thanks. Thanks for taking the question. I wanted to ask about the, just to start off, the launch of the two-bay package. It looks like you had some success with that. at least in the month of September. Can you comment a little bit on what you're seeing, maybe what you saw in October, if that success kind of continued, any sort of details around that? What do you expect the impact to be from this launch on the margins for the venues?
spk00: Hi, Peter. Great questions. I'm very, very pleased with the launch of these packages. So obviously people are not really congregating in large groups nowadays, and some of the corporate events have kind of fallen by the wayside, not necessarily because corporations don't want to do them, but so many businesses are remote. And, you know, they're just not comfortable in many cases. So we launched this. We've seen tremendous success. We have seen continued success with these packages to answer your first question. We are continuing to try to innovate other ways that we can offer events without them necessarily being large scale events. But we've seen a lot of success with this and we expect it to have a significant impact on our revenue in Q4 given the fact that a lot of folks want to go out during the holidays. Great success so far. We expect it to continue, and we should expect to see further innovation in this area from us.
spk05: Can you talk at all about what you expect the run rate unit volumes to be maybe as we exit 2020 on at least the three units that have been open and operational?
spk04: From a revenue standpoint?
spk05: Yes.
spk04: Well, I think from a revenue standpoint, you'll see that the venues in total are running at a little over $6 million in revenue for the quarter. We expect that to ramp up as we emerge from COVID completely. So I think you can take Q3 numbers based at their percentage of run rate against Q1 and extrapolate those out as we go forward.
spk00: And, Peter, if I'm understanding your question correctly, you're asking for 2021 run rate numbers. We've included Orlando in that, considering we are opening sometime in December. It's a modest amount, but we have included it. And we're expecting about 13 million run rates in EBITDA from our venues next year.
spk05: Okay. All right. So can we just talk a little bit about Orlando and maybe just give a little bit more details around what's changed? Is your expectation that Orlando will be cash flow positive, you know, a year from now? Or is this still expected that, you know, Orlando will be more of a cash neutral type of venue?
spk00: Yeah, you know, obviously we want it to be cash flow positive and we're working very, very hard to get there. Right now we're expecting a very modest amount to be in the green, positive. But, you know, not too far over the break-even point is what I'll say. Now, we're obviously working towards that and we've put a lot of things into place and we're in the process of putting even more into place prior to our opening in December. And we'll continue to kind of revisit it to see what we can do and change and what levers we can pull in order to make that venue more successful. We're also anticipating putting some form of these mini golf holes into Orlando as an additional draw. However, we haven't committed to a date to do that yet. We want to get open first. see how everything is going before we funnel more capital into it.
spk05: All right. Thank you very much. Of course.
spk02: Again, to ask an audio question, please press star 1 on your telephone keypad. At this time, I'm showing no further questions. I would now like to turn the call back over to Kelly. I'm sorry. Do you have another question? Okay, at this time, I'd like to turn the call back over to Kelly Buckhorn for any closing remarks.
spk01: Thank you, Brandi. And we'd like to thank everybody for dialing in and joining us today, and we look forward to catching up with you next quarter. Thank you.
spk02: Thank you. That does conclude today's conference call. You may now disconnect.
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