Drive Shack Inc.

Good morning. My name is Gretchen, and I will be your conference operator today. At this time, I would like to welcome everyone to DriveShack's second quarter 2022 earnings conference call. Currently, all lines have been placed on mute to prevent any background noise. After the prepared remarks, you'll 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, CFO. Ms. Buckhorn, you may begin.

Thank you, Gretchen, and good morning, everyone. I'd like to welcome you to DriveShack, Inc.' 's second 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 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, and 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.

Thanks, Kelly. Good morning, everyone. Thanks for joining us today. Our sales results this quarter reflect the strong momentum we continue to see across our entire brand portfolio. We delivered nearly $87 million in total company revenue, up $13 million or 17% compared to Q2 last year. Our core business remains solid, with our 53 American golf courses delivering $71 million in total revenue, coming in at $8.5 million above last year's same quarter, driven by a strong demand for events. Our four drive shack venues delivered total revenue of just over $11 million, and while down just slightly versus last year, they drove a strong events business with over $3 million in event revenue this quarter. We continue to gain proof of concept with Puttery, which continues to deliver results in line with our expectations. For Q2, our two venues in the Colony and Charlotte generated combined total revenue of $4.4 million. Our newest puttery, located in D.C.' 's Penn Quarter, opened to the public on June 21st and generated just above $100K for the few days it was open in the second quarter. Total event revenue in Q2 was $14 million and is up significantly at over $10 million to last year, with more than $7 million of the increase coming from private event sales at American Golf. We've seen the demand for future events across both the corporate and social categories continue to rise, which will translate into strong revenue results in the back half of this year. Adjusted EBITDA for the quarter was $4.6 million, which was $3 million below last year's second quarter, which was expected with the strategic investments in headcount and other related expenses we've made to support the development and growth in putter rates. We have a strong foundation in our core business with our drive shack venues and American golf courses, and each continues to deliver exceptional results. We are extremely pleased with the performance of our two puttery venues, the Colony, which has been open now for 11 months, and Charlotte, which has been open for eight. Our proof of concept is clear with these two venues, both delivering sales results slightly ahead of their plan and generating profitability margins well within the expected unit economic range. There's a large addressable market in the venue-based entertainment business. We continue to invest capital towards the development of new venues as Puttery represents the best path forward for near-term growth. We now expect a total of four additional new Puttery openings by the end of 2022, with Houston opening in Q3 and Chicago in early Q4. Behind these, Pittsburgh and Kansas City are planned to open in late Q4. We will end 2022 with a total of seven Puttery venues open and operating. Unexpected delays of permitting, zoning, and licensing have pushed both the Miami and Manhattan opening dates to early 2023. We have recently partnered with a new national broker, and together we are aggressively pursuing new leases for venue openings in 2023 and beyond. I'll speak more to this in just a few moments. As a reminder, we made the decision last quarter to no longer pursue the development of our drive shack venue in New Orleans. During Q2 of this year, we entered into a lease termination agreement with the landlord, effective June 30, 2022, and we no longer have rights to use the premises. With that, we've removed the right of use asset and liabilities associated with this site from our balance sheet, and when coupled with the fees associated to exit the lease, we recorded a $2 million net loss on lease terminations this quarter. We plan to continue developing our DriveShack venue on Randall's Island in Manhattan and believe it will deliver sales and EBITDA margins well above any of our current DriveShack venues. So turning to the deck, as you will see on page six, DriveShack Inc has undergone a significant transformation from traditional golf business to an entertainment operating company during the last four years. During this time, we sold the majority of our own course portfolio, converting a number of them into managed courses. and using the proceeds to help fund the growth and development of our DriveShack Entertainment Golf business with the four venues that we operate today in Raleigh, Richmond, West Palm Beach, and Orlando. We've since developed our newest entertainment golf experience, Puttery, opening our first Puttery in the Colony just outside of Dallas in September of last year. Our second venue opened in Charlotte in mid-December of 2021, and most recently in Penn Quarter, D.C.' 's premier entertainment zone, a few weeks ago in late June. We are underway to meeting our goal to open a total of 50 puttery venues by the end of 2024. Turning now to page 7 for a summary and timeline view of our courses and venues. On the American golf side of our business, we held 53 courses across nine states at the end of Q2, with one owned, 32 leased, and 20 managed courses. As I just mentioned, we currently have four DriveShack Entertainment golf venues located in Orlando, Raleigh, Richmond, and West Palm. We 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 three venues today located in the Colony, Charlotte, and D.C. Behind these, we have committed to eight additional leases with four of those planned to open in Houston, Chicago, Pittsburgh, and Kansas City later this year. The remaining four venues are expected to open in 2023 early and include our Manhattan venue located in the Meatpacking District, as well as Miami, Philadelphia, and our newest venue announced earlier this morning in Minneapolis. There's a large addressable market for the venue-based entertainment business. 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. I'll speak more to our development plans and updated timeline in a few moments. Let's turn now to our financial strategy on page eight. Our near-term growth strategy to develop new pottery venues in DriveShack Randall's Island is capital intensive. We will balance the need to retain a strong balance sheet while funding the future development and growth of pottery. Based on the current level of operations and anticipated growth, we expect that cash flows from operations, combined with other financing alternatives available, will be sufficient to meet our working capital and capital expenditure requirements. We expect to fund our current pipeline through debt financing and continue to actively explore the capital markets to meet our liquidity needs. Our objectives include diversifying financial sources through optimizing new debt financing, as well as strategically monetizing our remaining real estate securities. And under the right circumstances, the potential for asset sales where it makes sense. We continue to actively pursue a path that enables us to meet our growth objectives while maintaining a healthy balance sheet. We look forward to providing you an update as soon as we have more information to share. Moving now to an update on the operations of our business, starting with puttery on page 10 of the deck, we currently have three puttery venues open. It's hard to believe that our first venue in the colony is about a month away from celebrating its one-year anniversary. Charlotte has been open for nearly eight months now, and our most recent venue that opened in DC's Penn Quarter is about 45 days in. Given that DC was only open for a handful of days in the quarter, we are not providing their full results here. As you see on this slide, even with their market differences, both the Colony and Charlotte continue to perform relatively in line with one another. On a year-to-date basis through Q2, they're each generating over $4 million in total revenue and delivering venue EBITDA margins of 29%, which is in line with our expectations to date. It's important to note here that the EBITDA margin declines in Q2 are a direct result of a one-time inventory true-up recorded this quarter for both the Colony and Charlotte. The adjustment was directly related to how our point-of-sale system was feeding cost-of-sales information into our inventory system for event sales. We've identified the root cause and have since made the appropriate correction in our point of sale system, which took effect in Q3. Again, I want to reiterate that this is only related to how event sales are being captured in the point of sale and had no impact to our walk-in sales as this process is performing as designed. I'll give a quick update on our DC location in a few moments, but let me quickly recap the quarter for both the Colony and Charlotte. The colony delivered Q2 total revenue of $2.4 million, driven largely by their walk-in business at $1.9 million. Events were half a million, which is ahead of their Q1 business, as our teams continue to convert prospects into booked events. The colony continues to leverage variable operating expenses, including payroll, now that their business is normalizing. Charlotte delivered total revenue of $2 million, with $1.5 million in walk-in business, which continues to drive a higher FMV spend per visit than the colony. Charlotte's event revenue was also 0.5 million this quarter with higher lead conversions versus Q1. Taking a closer look at the life-to-date breakdown of the revenue mix between our Dallas and Charlotte venues, we continue to see similar trends across both locations as was outlined on page 11. Walking guests who plan their visit in advance via our online reservation platform continue to hold at around 60% at each venue. For online reservations that have been booked in advance to date, we are seeing that over 10% have been from repeat guest reservations. We believe this number is likely even higher, given that we only require one name and one email per reservation currently. Likewise, guests who may visit us for the first time via an event will show up as a new guest when they return with family and friends as a first-time online reservation. To date, liquor, beer, and wine sales comprise close to 80% of the total F&B revenue. The Colony continues to trend around 28% higher on walk-in visitors to date than Charlotte. Charlotte's total spend to date per visit is around 15% higher than the Colony, which is largely driven by higher F&B spend per guest. Gameplay at the Colony has held relatively steady at an average of just over 30 minutes to play one of their four nine-hole courses, the Library Lodge, Rooftop, or Illusion. Charlotte has turned it up to 36 minutes to play one of their two nine-hole courses, the library or conservatory. Again, we were intentional about the size and number of courses in our first handful of venues so that we could prove out our concepts for FORMA across venues of different sizes as well as number of courses. The venue-based entertainment business is a huge addressable market, and we're experimenting with the best mix of venue size and numbers of courses that will optimize margin and profitability returns. The solid performance to date in both the Colony and Charlotte fully support the venue economics we put forward over two years ago, giving us even more confidence today that future pottery venues will deliver similar, if not better, results as we learn and build to scale. We are gaining a clear proof of concept for our pottery brand and know it presents the best path forward to our near-term growth and profitability. We opened our newest puttery in D.C.' 's Penn Quarter near the end of June, and while they've only been open for just over a month now, I want to share some early metrics with you. Looking at the graphic on page 12, D.C. has generated around $700K in total revenue for their first 30-plus days, with 55% from beverage and alcohol sales alone. We are seeing very similar trends to the Colony in Charlotte, with online reservations trending at 60% for those who plan their visit in advance. Alcohol liquor sales are at 78% of total F&B spend and an average game time of just under 30 minutes to play one of their three courses, the Art Museum, Conservatory, and Illusion. Puttery, D.C. is in a beautiful historic building and is the former home of the International Spy Museum. As with any historic building, we were limited to the core structure of the site. Our design teams did an amazing job laying out the flow of the venue with plenty of seating and lounge areas throughout. The building has very unique characteristics, which blends incredibly well throughout the venue and integrates nicely with our design elements. You definitely feel the vibe from the moment you step through the door. We've shown a few pictures here for you, including the inside and the outside view of the building, as well as showcasing our newest themed course, the Art Museum. If you get the opportunity to visit the DC area in the future, please carve out time to visit this venue in person. You definitely won't be disappointed. Moving now to our DriveShack business on page 13, our four venues generated just over $11 million in total revenue in Q2 of this year, down $400K versus Q2 of last year. We saw strong demand for events this quarter with revenue of $3.2 million, up $1.6 million or double compared to event revenue in Q2 of last year. All four venues posted higher event revenue in this year versus the same quarter last year. However, in total, it was just not quite enough to fully offset the $2 million decline in walk-in revenue. Raleigh continues to lead and outperform all of our venues driven this quarter by a strong events business. Separately, we continue to see a pullback in Richmond's walk-in business. We've been assessing the market dynamics and have a team dedicated to implementing initiatives to drive increased brand awareness and revenue as we head into the back half of the year. We continue to monitor this closely and will provide results and updates on future calls. Dry Shack total venue EBITDA for Q2 was 3.7 million or 33% of sales compared to 4.6 million or 40% of sales in Q2 of last year. On a year-to-date basis, combined venue EBITDA was 6.4 million, down just 200K versus the year-to-date period last year. Raleigh once again led the group with West Palm Wright behind. Orlando continues to perform well and year to date with revenue up 200K and EBITDA up 100K versus the same period last year. Our drive shack 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 run rate projections. Our American Gulf business continues to be a very strong and stable business as well, which continues to generate profitable earnings and returns year over year. As you can see here on page 14, American Golf's total revenue for Q2 was just over $55 million, excluding management fee revenue, and was up 12% to last year's second quarter. The momentum in our events business continues, with the event revenue up over 300% or $7 million versus Q2 of last year. The increase came primarily from higher events, driven in large part from the focused work our events team is doing to increase conversion rates across our courses. Tournaments also remain in high demand, and we see this as an opportunity for continued growth. Our walk-in business in Q2 of this year was 46 million, down slightly at 1.1 million below last year's Q2 levels. While our public and private courses were just below last year's levels across all metrics, we were up against a relatively 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 a high membership rate across our private clubs at 98% total capacity. With the solid performance that our courses continue to deliver, we believe the game of golf remains solid with momentum from golfers and non-golfers alike. Let's move now to our development plans. A large addressable market exists for a venue-based entertainment business, and we continue to capitalize on this large-scale opportunity as we maintain our focus and development plans on new puttery venue openings. When you look at page 16, we've laid out a visual representation 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 future puttery locations. Our target coverage includes around 75 markets today under our current strategy, with hundreds of potential new sites across the country to choose. We recently partnered with a new national broker that is highly experienced and knowledgeable across the country, Together, we've developed an enhanced strategy that will allow us to be more nimble in the site review and selection process, enabling us to identify low-barrier markets to ensure development goals for future openings are met. With the vast availability of potential new sites, we continue to experiment 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 two courses. Both are generating similar returns to one another, and soon we will have clear data from our recently opened venue in D.C., which is a slightly larger venue than the Colony, but with one less course at three. It does have more seating and lounge areas, though. We are clearly gaining 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. Turning now to page 17 to discuss our new venue opening timeline. We are currently least committed to 11 total puttery venues with three open today. We expect to open an additional four new puttery venues throughout the remainder of 2022, with Houston opening next month, followed by Chicago in early Q4 and Pittsburgh in Kansas City later this year. That will bring us to a total of five new puttery venue openings in 2022, ending the year with a total of seven. We've recently experienced unexpected zoning, licensing, and permitting challenges outside of our control, causing slight delays in the opening schedule of the couple of venues originally planned to open this year. As such, both Manhattan and Miami will now open in early 2023. We expect 18 puttery venue openings in 2023, ending next year with a total of 25 venues open. We are aggressively pursuing new leases for openings in 2023 and beyond. We are in active discussions with landlords on several sites today and expect those will finalize in the coming weeks. Behind these, we have an active and expanding pipeline with a significant number of identified sites in various stages of market analysis. In partnership with our new national broker, we are identifying both low barrier and traditional markets for future sites, ensuring our development goals in 2023 are met. As I discussed last quarter, 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 and making adjustments where needed given the current market conditions. While the obstacles presented by the strain on supply chain and GC labor are still present, and most recently in zoning and permitting hurdles, we are working ahead of the challenges where possible to keep our development timeline on track. When you 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. Page 18 outlines very clearly the illustrative venue-level economics for both our drive-check and Puttery Entertainment golf venues. Puttery is in 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 drive shack venue. As a reminder, we expect to spend between $7 and $11 million to build each puttery 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. Again, we are gaining a clear proof of concept as a result we are generating in our two puttery venues are ahead of our expectations. Both the Colony and Charlotte are providing proof with real results that are well within the unit economic ranges seen here. We remain confident that our DC venue will also deliver revenue and EBITDA results well within these ranges. I will now turn it over to Kelly to give you a brief update on our Q2 financial results.