Drive Shack Inc.

Good morning. My name is Keith, and I'll be your conference operator today. At this time, I'd like to welcome everyone to DriveShack's third quarter 2021 earnings conference call. Currently, all lines have been placed on mute to prevent any background noise. After the prepared remarks, we will have a question and answer session, and instructions will be given at that time. Today's call is being recorded, and if you should need any operator assistance, please press star zero. At this time, I'd like to hand the call over to Kelly Buckhorn, head of investor relations. Ms. Buckhorn, you may begin.

Thank you, Keith, and good morning, everyone. I'd like to welcome you to DriveShack's third quarter 2021 earnings conference call. Joining me today is our president and chief executive officer, Hannah Corey, and our chief financial officer, Mike Nichols. We've posted the investor supplement on our investor relations website at ir.driveshack.com under the events detail link on the landing page. Please take a moment now to download the presentation if you haven't had a chance to do so already. I'd 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 with that, I'd like to now turn the call over to Hannah.

Good morning, everyone, and thank you for joining our third quarter conference call. The third quarter was a historic quarter for our company with the launch of Puttery, our new competitive socializing and immersive entertainment experience. Our Puttery concept has been in development for more than two years, and we're proud to have debuted our first location in our home market on September 3rd in the Colony, Texas. Guests are responding favorably to our inaugural Puttery, and the feedback on their experience remains overwhelmingly positive. I'm beyond proud of the countless team members that worked hard to deliver our first venue and thank them for their unmatched dedication and commitment to bring our Puttery brand and vision to life. We have learned a lot already with our first venue open, and we're gaining proof of concept. That, along with revenue growth in our core businesses, creates significant opportunities for our future. But before I move further into that discussion, I want to first give a brief update on our financial results. We delivered total company revenue of just over $76 million for the third quarter. This was the highest total quarterly company revenue achieved in the last three years. DriveShack revenue came in at around $10.5 million this quarter, down $1 million from last quarter, which was expected due to seasonality. Q3 revenue for AGC was $65 million at least over last quarter, even with total number of rounds being slightly down, which I'll speak to shortly. And finally, puttery generated total revenue of just under a million in one month of operation for the quarter. While we had an operating loss in Q3 this year that was relatively similar to last year's Q3 operating loss, I want to point out that we had significantly higher pre-opening costs this year versus last year, given our puttery venue openings this year. Additionally, our operating expenses this year are more normalized, including G&A, now that we're beyond the peak COVID impacts from this time last year when we were operating below historic levels. With that, we delivered our fifth consecutive quarter of positive adjusted EBITDA at just about $3 million in this year's third quarter. We ended the quarter with $64 million of unrestricted cash on hand and ample liquidity to fund the development of our first seven puttery venues. Today, we have one puttery open in the Colony, Texas, and we expect to open Charlotte in early December. Behind those, we have D.C., Miami, and Houston currently under development and are planned to open in 2022. Given our current development plans for puttery in 2022 and beyond, we expect to access the debt capital market in early 2022 to secure additional capital to fund our growth plans. I'll discuss more about our development strategy in more detail shortly. Let's quickly now turn to page six for those of you that are new to our story. Over the past three-plus years, DriveShack, Inc. has undergone a significant transformation from a traditional golf business to an entertainment operating company. During this time, we sold a majority of our owned course portfolio to fund the growth of our entertainment golf business, namely to fund the development of our DriveShack venues that we operate today. We opened our first DriveShack venue in Orlando in April 2018, which serves as our beta site. We took our learnings from Orlando, specifically technology-related, and opened three Generation 2.0 venues in August, September, and October 2019 in Raleigh, Richmond, and West Palm Beach. These three venues opened strong, significantly outperforming 29 expectations and beating their initial plans that year by 14%. We've since developed a new entertainment golf experience, Puttery, which is indoor, tech-enabled putting within an immersive experience. We opened our first Puttery in the Colony, Texas, just outside of Dallas about two months ago. Our goal is to open a total of 50 Puttery venues by the end of 2024. Let's turn now to our current results and future near-term goals. As I mentioned earlier, and as you'll see on page seven of the supplement, Q3's total revenue of $76 million was the highest quarterly revenue achieved since Q3 of 2018. Our courses and venues have largely returned to pre-COVID levels, this even with our events business still slightly down from prior periods, yet we continue to see demand for this business continue to increase, which I'll speak to more in a few moments. We currently expect to finish out 2021 with a goal of $280 million in total company revenue for the year and around $17 million in total course and venue EBITDA contribution, both of which would be milestone records for the company since our transformation into an entertainment operating company. Looking ahead into 2022, we're projecting total revenue of $320 million, or an increase of $40 million versus our 21 goal of the $280 million I just mentioned. The revenue increase mainly comes from the growth in new puttery venues, which we are currently targeting to have 15 operational by the end of next year, including the Colony and Charlotte opening this year, and 13 additional venues opened in 2022. I'll speak more to those development plans here shortly. With that, and given the attractive putter unit economics, we expect our course and venue contribution and EBITDA goals to be significantly higher in 2022 and 2023, as you'll see on the chart on page 8. Our fiscal 2022 total course and venue EBITDA goal is $33 million, which is double the course and venue contribution we expect this year. As a reminder, we view our AGC business as a cash contributor to our core entertainment business. Looking ahead, we plan to aggressively develop and open new puttery venues over the next two to three years. Given our current venue opening projections, our total run rate course in venue EBITDA is modeling around $60 million in 2022 and $105 million in 2022, a significant earnings growth trajectory over the next two years. As such, we're planning to access the debt capital market in early 2022 to secure approximately $85 million to fund our near-term development plans. We also expect to access the debt capital market again in 2023 to secure additional capital for future openings. Turning now to page nine for a summary and timeline view of our courses and venues. On the American Golf side of our business, we held 56 courses across nine states in Q3, with one owned, 33 leased, and 22 managed courses. With our DriveShack Entertainment Golf business, we currently have four venues in Orlando, Raleigh, Richmond, and West Palm. We are additionally committed to leases in New Orleans and Manhattan. With Puttery, we've now opened in the colony, Texas, and plan to open Charlotte in December. We're also currently committed to venues in Washington, D.C., Miami, and Houston, all of which will open in 2022. Behind these five locations, we have three additional sites that are currently in or nearing lease execution. Taking a step back, I just want to address we previously targeted to open seven puttery venues in 2021. As you all know, we did not meet that goal for a wide variety of reasons, including COVID and supply chain-related impacts. While it appears we are moving a bit more slowly than expected, we're really taking the time to incorporate learnings from the first puttery to improve those that follow. We know from investor feedback that gaining proof of concept is important, and we need to get it right early on, and that's what we plan on doing. Having said that, we will have two venues open by the end of 2021 in Charlotte. The five additional sites we promised in 2021 will be delivered and opened in 2022. These include D.C., Miami, Houston, and two future sites. On top of that, we plan to open eight additional locations in 2022, bringing us to a total of 13 new openings in 2022 and ending the year with 15 total putteries. We have a robust pipeline of future puttery locations we are actively pursuing in prioritized markets across the U.S. for 2022 and beyond. We're in active lease negotiation on three additional locations in major markets and remain actively engaged with landlords and brokers in multiple markets across the U.S. I'll speak more to our development plans and timeline in a few moments. So Puttery, the newest brand in our portfolio, and as we've described on page 11, it's an adult-focused modern spin on putting, redefining the game and creating an immersive experience supported by innovative technology and really focused on competitive socializing. We're very focused on not only the gaming experience, but also on the food and beverage experience. With a high-energy atmosphere, we've curated exceptional culinary offerings and inventive craft cocktails that are all centered around a lively bar with great music. Our guests can relax and enjoy their evening before, during, and after their tea times. We've included actual images, not renderings, of the interior of our venue in the Colony, Texas to show the incredible vibe and experience that we've created. So as mentioned earlier, we debuted our first puttery venue on September 3rd in the Colony, Texas, just outside of Dallas. While we've only been open for just over two months, the guest response to the overall experience continues to be overwhelmingly positive. This particular venue is just under 21,000 square feet, spanning two floors, with four nine-hole uniquely themed golf courses. Those are Rooftop Lodge, Library, and Illusion. We have three bars, a patio terrace, multiple lounges, and seating areas throughout the space. We're pleased with the early results we've seen so far, and when you take a look at page 12 in the presentation, you'll see that we delivered 800K in total revenue for just one month of operation in the quarter. While it might be tempting to annualize that result for a yearly revenue number, there is seasonality at play in our venues, and puttery is no exception. We do expect holidays to be busy, Januaries to be slower, etc. So in short, we really expect puttery to follow the seasonality trends that the rest of the indoor hospitality and entertainment space has, at least loosely. The colony opening itself was a huge success with lots of lessons learned, as we expected. Over the $800K in total revenue, our revenue mix consisted of gameplay at around 40%, alcohol at around 40%, food at 12%, and events at 8%. The data we've collected so far indicates that over 60% of our walk-in guests plan their visit in advance, mainly through online reservations with gameplay. We're seeing that they're spending around two hours on average in our venue, and that Saturday late evening is the highest traffic day and time of the week. We know our guests look to us as an experiential bar, and with that comes the opportunity to improve in a couple of areas to further drive revenue opportunities. We have an incredible food menu today, which we'll continue to highlight in the future in order to raise our food revenue. We also know there is room for improvement in the events revenue mix, here as well as in our other brands. While we intentionally did not pre-sell events at the Colony in our first month of operations, I'm extremely proud of the sales and event teams to deliver 8% of our total revenue and events in our first month open. While we're still early in our grand opening phase, we do expect momentum to continue and look forward to the future success, not only here in the colony, but also in all of our puttery venues to come. When we look at the projected venue-level economics that we put forward several quarters ago, we remain confident that puttery was and will continue to be the best path of growth for our company. As you'll see on page 13, both drive shack and puttery venues have very desirable economics. Puttery is an adjacency to our current business and gives us the ability to grow quickly with less capital risk and higher returns than a big box drive shack venue. Drive shack venues are quite large. They require about 12 to 15 acres of land with an 18 to 24 month development timeline due in part to the complexities of building a venue from the ground up. The development cost is between $35 and $40 million, with each drive shack venue generating site-level EBITDAs of between $4 and $6 million. While these are great numbers, these venues require quite a bit of time and capital to get to revenue-generating status. In contrast, puttery venues require around 20,000 square feet of existing retail space. Development time is between six and nine months, and development cost is between $7 and $11 million, with expected EBITDA returns of $2 to $3 million. Puttery is a path forward for our company to generate more revenue on a faster timeline with less capital risk. We're pleased to report that our actual venue-level economics for Puttery are currently in line with our projections to date. Turning now to a deeper discussion on our Puttery portfolio, the development timeline and process for Puttery is really critical to our future success and valuation. As you can see on page 14, we provided a different view of our development timeline to better convey the end-to-end development process of a puttery venue. First, as you can see on the timeline chart on the left side of the page, well, in 2021, with the two venues open in Dallas and Charlotte, the Colony, as you know, is already open, and we expect Charlotte will open by the beginning of December in time for the holiday season. In 2022, we expect to open a total of 13 new puttery venues. We currently have three least committed venues in development, D.C., Miami, and Houston, all of which will open in 2022. Behind those, we currently have 12 additional sites that are currently in active LOI status or in active lease negotiation with landlords. From this phase, these additional sites being negotiated would move into lease signing and construction phase. We expect another seven leases by Q1 or early Q2 of next year, which would give us time to successfully open a total of 13 venues next year for a total of 15 venues by the end of 2022. As you will see by the development timeline chart on the right side of the page, our 2022 venue opening target is supported by a very robust and expanding pipeline of available locations. These potential sites are in key priority markets across the U.S., and the number of available sites to evaluate continually increases as new leads are identified. Looking at the chart, we have 22 potential sites today that are either in evaluation or have been identified as a prime location for a new puttery venue. On top of that, we have 12 additional sites that I just spoke to that are currently in active LOI or in active lease negotiation with landlords. We are confident that we will secure leases and begin development in the coming months to deliver the remaining sites for our 2022 venue opening goals. Finally, in order to complete our development and venue opening plan for 2022, we will need to secure around $85 million in funding by the end of Q1 of next year. We currently plan to access the debt market and are confident we can obtain the necessary funding to complete our plan, especially as Charlotte comes online before then and our proof of concept will be further supported. Mike will speak to this more in a few moments. Moving now to our DriveShack venues, which have had some major wins in Q3, with those venues delivering another quarter of strong results. As you'll see on page 15, total revenue for Q3 was $10.5 million, with walk-in revenue up 42% versus the same quarter last year, and generated $3 million in EBITDA versus about $1 million a year ago. While revenues have largely returned to pre-COVID levels, our events business is still down but rebounding quickly. I also want to point out that Orlando once again broke even in Q3, which is the second consecutive quarter of break even, and we still expect them to be even to positive for a full fiscal year, for the first full fiscal year ever in 2021, since they opened nearly four years ago. The teams are doing an incredible job there, and as the Lake Nona community where they are located continues to grow and fully develop in the coming years, we know our Orlando venue will continue to thrive. You can see by the chart on page 16 how well our entertainment venues performed this quarter. Our total walk-in business was 81% of total venue revenue for the quarter and over 25% higher or roughly $1.5 million better than last year's third quarter. Our events business continues to gain momentum and sequentially was over 30% higher or roughly $500K higher than last year. We have a growing events pipeline that we feel confident will continue to improve. More on that in a moment. Turning now to page 17, our new development team has done some incredible work on reimagining our gaming technology and improving the aesthetics of our gaming package graphics. These improvements have led to not only superior graphics, but also better accuracy of the game and more reliable performance. We continue to utilize TrackMan technology across all of our proprietary game packages, such as darts, Shack Jack, Monster Hunt, and all of our pro golf courses. While our software development team has done a great job to enhance the gaming experience, they've also been hard at work setting the foundation for quarterly game refreshes by seasonalizing some of our games. We recently introduced new pumpkin graphics, monsters, and our monster hunt game for the Halloween time period, and we'll soon introduce snowman building as we enter the winter and holiday season. I'm extremely proud of this team and know they'll continue to deliver unique tech-forward initiatives to keep content new and fresh for our guests. Moving now to the traditional golf arm of our business on page 18. American Golf continues to deliver strong results versus their pre-COVID levels. For Q3, AGC delivered $65 million in total, driven largely by a 7% increase in revenue from green and cart fees at our public courses, as well as private course membership levels held at 99% of their max capacity. We did see a slight decline of 8% daily fee rounds on our public courses, mainly due to construction and wildfires at or near three of our public courses. The 6% decline in total rounds at our private courses was fully impacted by a planned private club renovation that was ongoing for the duration of the quarter. Traditional golf is still seen as a safe outdoor activity since the onset of COVID. Our American Golf team continues to do a tremendous job in delivering strong results quarter after quarter, and we expect to continue delivering great results, especially as our events business begins to return closer to pre-COVID levels. Speaking of events, and as you have seen throughout, we're seeing demand across three of our brands strengthening. We know this is in large part due to the recent restructure of our sales and events team to help facilitate the increase in events demand and to enhance more direct and timely engagement with guests and businesses. As you'll see on slide 19, to further support this, we hired a new head of national sales position at the corporate level in August to help manage our sales nationally across AGC, DriveShack, and Puttery. Tyree Thomas joined us in this position at the beginning of Q3. She was most recently running national sales at City Winery, and prior to that, she held national sales roles across Barton G., Fatina Restaurant Group, and Hard Rock International. She's been an incredible asset to the team and has already produced measurable results with her teams across the country at our properties. We expect this trend to continue, especially with her tenured support and direction. Under Tyree's leadership with the teams, we have a very active and growing events pipeline across all three of our brands. We have multiple leads in the 2021 pipeline for November and December, and we expect many more leads before the end of the year for these months, as many leads are booked as events within days of inquiring. Additionally, we also have a strong 2022 event pipeline, which is currently exceeding our full-year 2020 total event revenue. While this is expected, given the impact from COVID that year, we do expect that 2022 event revenue will be significantly higher in the year in 2021, given the strength we see in next year's pipeline. You can see that in the graph illustrated on page 19. So with that, I'll now hand it off to Mike to go through the detailed financial results for the quarter. Mike?