Drive Shack Inc.

Good morning. My name is Chelsea and I will be your conference operator today. At this time, I would like to welcome everyone to DriveShack's first quarter 2022 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. Instructions will be given at that time. Today's call is being recorded. If you should need any operator assistance, please press star zero. At this time, I would like to hand the call over to Kelly Buckhorn, Interim Chief Financial Officer. Ms. Buckhorn, you may begin.

Thanks, Chelsea, and good morning, everyone. I'd like to welcome you to DriveShack's first quarter 2022 earnings call. Joining me on the call today is President and Chief Executive Officer Hannah Corey. We've posted the investor supplement to our investor relations website at ir.driveshack.com. Please take a moment to download the presentation now if you have not 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. Thanks for joining us today. 2022 is off to an incredible start. For the first quarter, we delivered $69 million in total company revenue, up $8 million or 13% compared to Q1 last year. Our core business remains solid with four drive shack venues and 55 American golf courses delivering sales results above last year's same quarter. Our two puttery venues located in the Colony, Texas and Charlotte, North Carolina exceeded our expectations and generating a combined $4.4 million in total revenue. Our walk-in business has largely normalized, and we continue to experience strong momentum at our venues and courses. Total event revenue in Q1 this year was $6.4 million and is up over $5 million to last year, with more than $3 million of the increase coming from private event sales at American Golf. Demand for future events remains exceptionally strong across our entire brand portfolio, including corporate, social, and private events. Adjusted EBITDA for the quarter was $1 million and in line with our expectations. While it did come in below last year's first quarter, it was expected, given we exited five of our traditional golf courses after Q1 last year, which together contributed $1.3 million in course EBITDA in Q1. We also made strategic investments in headcount and other related expenses throughout 2021 to support the development and growth of our puttery business. With that, roughly $1 million of incremental expense related to these investments was realized in Q1 this year that had yet to be incurred in Q1 of last year. Including our Q1 results, we remain on track to deliver our goal of $18 million in adjusted EBITDA for full year 22. We have a strong core business foundation with both our drive shack venues and American golf courses. As I mentioned, our walk-in business has normalized and demand for events is accelerating. We are gaining a clear proof of concept with our two puttery venues, both delivering sales results slightly ahead of their plan and generating profitability margins ahead of our expectations. There's a large addressable market in the venue-based entertainment business. We are investing our capital towards the development of new puttery venues as puttery presents the best path forward for our near-term growth. We are on track to open seven locations by the end of 2022, with our next venue planned to open in Washington, D.C.' 's Penn Quarter next month, followed by our Houston and Chicago locations, which are planned to open in the third quarter. We are aggressively pursuing new leases for venue openings in 2023 and are currently in active discussion with landlords on multiple sites across the country. I'll speak to this in a few moments, speak more to this in a few moments. With that, we've made the tough decision to suspend any future development of our DriveShack New Orleans location. The incremental capital required to complete the project is well in excess of $25 million, and we are redirecting any further capital spent for this project into future puttery builds where the economics and investment returns are more compelling. We are currently pursuing alternatives for a New Orleans site, and we will update you when we have more to share. With this decision, we took an impairment charge in Q1 for the costs incurred to date for the building and the fixed assets, which totaled $11.3 million. At this time, we plan to continue developing our drive shack venue on Randall's Island in Manhattan. We believe this venue will deliver sales and EBITDA margins well above any of our current drive shack venues, with its over 4 million visitors to the island each year. So turning to the deck, we've again included a brief history on our company on page six of the deck for those of you who are new to our story. Over the past four plus years, DriveShack Inc. has undergone a significant transformation from a traditional golf business to an entertainment operating company. During this time, we sold the majority of our owned course portfolio and converted a number of them into managed courses, mainly to fund the growth and development of our DriveShack entertainment golf business with the four venues that we operate today. We opened our first DriveShack venue in Orlando in April of 2018. We took our learnings from Orlando, specifically around technology, and opened three Generation 2.0 venues in August, September, and October of 2019 in Raleigh, Richmond, and West Palm Beach. These three venues opened strong, significantly outperforming our 2019 expectations and beating their initial plans that year by 14%. We've since developed a new entertainment golf experience, Puttery, which is an immersive indoor putting experience. We opened our first Puttery in the Colony just outside of Dallas in September of last year, followed by the opening of our Charlotte location three months later in mid-December of 2021. We are underway to meeting our goal to open a total of 50 Puttery venues by the end of 2024. Turning now to page seven for a summary and timeline view of our courses and venues. On the American golf side of our business, we held 55 courses across nine states at the end of Q1, with one owned, 32 leased, and 22 managed courses. With our Dry Shack Entertainment golf business, we currently have four venues in Orlando, Raleigh, Richmond, and West Palm, and are committed to one additional lease in Manhattan on Randall's Island, which we expect to open in late 2023. With Puttery, we currently operate two venues located in the Colony, Texas and Charlotte, North Carolina. Behind these, we've committed to eight additional leases with seven of these planned to open this year in DC, Houston, Chicago, Philadelphia, Miami, Pittsburgh, and Kansas City. Our Manhattan venue located in the Meatpacking District is expected to open in early 2023. We have a robust pipeline of future puttery locations we are aggressively pursuing in several markets across the U.S. for openings in 2023 and beyond. We are currently in active discussions with landlords on multiple sites across the country. I'll speak more to our development plans and timeline in a few moments. Moving now to an update on the operations of our business, let's start with our newest brand puttery on page nine. Today, again, we have two puttery venues open. Our first puttery in the colony has been open for a little over eight months now, and our most recent venue in Charlotte has been open for about four and a half months. Even with their market differences, one urban and one suburban, both venues are relatively in line with one another and are performing slightly ahead of our expectations. For Q1, they each generated total revenue of just over $2 million, and both delivered venue EBITDA margins of 38%. We are gaining a clear proof of concept for our PutterE brand, and while we continue to analyze our month-over-month trends in each venue, the performance in these two venues to date fully supports the venue economics we put forward over two years ago, giving us even more confidence today that PutterE is our best path forward for near-term growth. Let me quickly recap the quarter for each venue. The Colony delivered Q1 total revenue of $2.2 million, driven largely by walk-in business. We're more effectively leveraging our variable operating expenses now as our business is stabilized, which helped lead to a 38% EBITDA margin this quarter. With Charlotte, while we provided their Q4 results here, it's a bit more difficult to compare the results as they were only open for the last two weeks in 2021. With that, Charlotte also delivered 2.2 million in total revenue, which was also driven by a strong walk-in business and led by a higher F&B spend per visit than the Colony. As a reminder, the Colony is in a sub-urban market just outside of Dallas with a little under 21,000 square feet and four nine-hole golf courses. Charlotte is in a more urban market with around 15,000 square feet and two nine-hole courses. When you turn to page 10, you'll see a breakdown of the Q1 revenue mix between these venues that shows the differences between the two a bit more clearly. For reference, the Colony had nearly 25% more walk-in visitors than Charlotte during Q1. While both generated the same revenue this quarter at 2.2 million each, the Colony generated a higher percentage of their revenue through game play, while Charlotte had a higher percentage of revenue through beverage sales, mainly alcohol, specifically liquor. And as I mentioned earlier, they generated a much higher F&B spend per visit in Q1 than the Colony. Walking guests who plan their visit in advance via our online reservation platform is holding at around 60% for each venue. Alcohol sales comprise around 80% of the total F&B revenue per venue, and each nine-hole course is taking an average of just over 30 minutes to play. We were intentional about the size and number of courses in our first handful of venues so that we could prove out our concepts pro forma across venues of different sizes with different numbers of courses. Even with the differences in the square footage and the number of courses at each of these venues, we continue to observe similar trends across both, and guest response remains very positive. We are extremely pleased with the strong performance and success from our first two venues to date, particularly with each generating positive venue-level EBITDA results that are well within the projected venue-level economics. I can't say this enough. Our proof of concept is becoming very clear with each passing month, and we expect that our future puttery venues will deliver similar results. The venue-based entertainment business is a huge, accessible market. Golf is a fun and easy-to-access activity, and we know that our experience at Puttery is no exception. We're experimenting with the best mix of venue size and number of courses that will optimize the greatest returns on our investment. In fact, we're doing that today with the Colony in Charlotte and very soon with our D.C. venue, which will have three nine-hole courses inside a 22,000-square-foot historic building in Penn Quarter. We have dozens of potential new sites in the pipeline across the country and are working with landlords today on several locations that we expect we will finalize in the coming weeks. More on this in a few moments. Moving now to our drive shack business on page 11. For the quarter, our four venues generated nearly $10 million in total revenue. That's up nearly 20% to Q1 of last year. Of the 1.6 million increase, 1.3 million was driven by higher event sales, which was up 160% versus Q1 of last year. And while we saw strong event demand across all of our venues, just under half of the dollar increase came from Raleigh, which continues to perform exceptionally well. Our guest traffic has largely returned to normalized levels and delivered a 3% increase in walk-in revenue to last year, again led by Raleigh. Our drive shack venues delivered a combined EBITDA margin of 27% or $2.6 million in Q1 this year compared to an EBITDA margin of 24% or $2 million in Q1 of last year. Raleigh once again led the group with West Palm right behind. Orlando broke even in Q1 compared to an EBITDA loss of $200K in Q1 of last year. While our venues delivered revenue results in line with their plan, their EBITDA contribution exceeded our expectations. Our teams are doing a fantastic job of managing costs and leveraging controllable expenses to give us better than expected returns this quarter. Our DriveShack venues are a strong, stable business for us, and with the increasing demand and events, we expect them to continue delivering at or above their rent rate projections. The demand for traditional golf remains solid. We have a very strong and stable business with American Golf, which continues to generate profitable earnings and returns year over year. As you'll see on page 12, American Golf's total revenue for Q1 was just under $42 million, excluding management fee revenue, and was up 6% to last year's first quarter. This quarter, we saw an exceptionally strong demand for events, which drove $3.6 million in event revenue this year, up an impressive 3.3 million or 1,300% to last year. The increase came primarily from higher private events driven in a large part from the focused work our events team is doing to increase conversion rates across all of our courses. While our Q1 walk-in business this year was just slightly below last year's performance, our public and private courses neared last year's levels across all metrics, and were up against an exceptionally strong quarter last year when demand for outdoor traditional golf was extremely high given the COVID restrictions that were still in place for indoor activities. We continue to maintain 99% capacity at all of our private clubs. With the solid performance that our courses continue to deliver, the game of golf is here to stay and will only continue to gain momentum with golfers and non-golfers alike. Let's move on now to our development plans. We know that a large addressable market exists for a venue-based entertainment business, and we intend to continue capitalizing on this large-scale opportunity as we maintain our focus and development plans on new puttery venue openings. When you look at page 14, we've laid out a visual presentation of the states across the country where we have an existing entertainment golf location, as well as where we believe near-term opportunity exists for puttery locations in the future. Our target coverage includes well over 60 markets today and under our current strategy with hundreds of potential new sites across the country to choose. With the vast availability of potential new sites, we are experimenting with different layouts to determine the best mix of venue size and number of courses to optimize margin and profitability returns. We have real data from the Colony, a larger venue with four courses, and data from Charlotte, a smaller venue with fewer courses. Both are generating similar returns to one another, and soon we will add a third venue, which will open in our DC location, where we have a slightly larger venue than the colony, but one less course with three. Again, we're clearly gaining a proof of concept in a huge market and are confident that we will continue to deliver within the expected ranges for sales and margin returns. Moving now to page 15, where we've provided an overview of our new venue opening timeline. We are currently least committed to 10 total pottery venues, with two open today in the colony in Charlotte. We expect to open an additional seven new pottery venues throughout 2022, starting in DC next month, followed by Houston and Chicago in the third quarter. Philadelphia, Pittsburgh, Miami, and Kansas City are all currently slated to open in Q4. Additionally, we plan to open a pottery venue in Manhattan's Meatpacking District in early 2023. Our plans include the opening of 16 new pottery venues in 2023, including Manhattan. As I've said throughout today's call, we are aggressively pursuing new leases for openings in 2023 and beyond. We are currently in active discussions with landlords on multiple sites that we expect will finalize in the coming weeks. Behind these, we have an active and expanding pipeline with a significant number of identified sites continually under review. We plan to continue executing new operating leases throughout 2022 for openings in 2023 and beyond. We will continue to be very clear and as transparent as possible when it comes to communicating the number of venues we expect to open and when we expect to open them. We are taking the appropriate amount of time between builds and openings to remain thoughtful with our strategy and approach given the current market conditions. While the obstacles presented by the strain on supply chain and GC labor are still present, we are working ahead of the challenges wherever possible to keep our development timeline on track. We are very confident that the seven venues planned to open in 2022 is attainable and realistic. In looking back 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. For those who have not seen our projections, page 16 outlines the illustrative venue-level economics for both our DriveShack and Puttery Entertainment golf venues. Puttery is an adjacency to our current business, and as you can see here, gives us the ability to grow quickly with less capital risk and higher returns than a big-box DriveShack venue. With puttery, we expect to spend between $7 and $11 million to build each venue, taking approximately six to nine months to physically construct and plan to generate venue-level EBITDA of between $2 and $3 million each. Compare that to a drive shack venue where we expect to spend between $25 and $40 million to build each venue, which takes approximately 18 to 24 months to complete and generates venue EBITDA of between $4 and $6 million each. Again, we're gaining clear proof of concept as the results we are generating in our two puttery venues are ahead of our expectations. But the Colony and Charlotte are providing proof with real results that we are well within the unit economic ranges seen here. So I'll now turn it over to Kelly to take you through our capital strategy and financial results.