Golf Entertainment Group Inc. (GLFE) Earnings Call Transcript & Summary

Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to Drive Shack's Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. At this time, I would like to hand the call over to Kelley Buchhorn, Head of Investor Relations. Ms. Buchhorn, you may begin.

Thank you, and good morning, everyone. We'd like to welcome you to our fourth quarter and full year 2020 earnings call. Joining me on the call today is President and Chief Executive Officer, Hana Khouri; and Chief Financial Officer, Mike Nichols. We have posted the investor supplement on our Investor Relations website, and we encourage you to download it now if you have not done 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. With that, I would like to now turn the call over to Hana.

Hi, everyone. Thank you for joining our Q4 and 2020 year-end conference call. As you all know, 2020 was a historic and challenging year faced by many throughout the industry. As we look back almost exactly 1 year later, it is even more clear that the quick actions taken by our team across the entire organization to adapt to the new environment and restabilize the business positioned us to advance our growth priorities throughout the year. The last year, while incredibly challenging, has been very successful for us. We have fully restored and adjusted operations at all of our venues and courses. We began our new venture at Puttery. We completed the sale of Rancho San Joaquin and successfully raised capital through a common stock offering in February, which will allow us the ability to successfully complete the development of our first 7 Puttery venues. To say that I'm incredibly proud of our team and their relentless commitment to the continued success of our business would be a massive understatement. They are actually the real reason we saw such great success during such an uncertain and destabilizing time. Despite all of the challenges of COVID, we also achieved positive total company adjusted EBITDA in Q4 at $5.3 million, which is an increase of $7.4 million versus Q4 of 2019. In Q4, our total company revenue was $60 million, down only 16% versus Q4 of 2019. Our full year total company revenue was $220 million, down only around 19% versus prior year. These are incredible results given the circumstances of COVID. Last quarter, I told you that we had a goal to open Orlando in December, which we did on December 18. We also put forward an initiative to roll out reservations before the end of 2020, which we also did and have seen tremendous success. We're working really hard to find new ways to drive revenue and enhance our guests' competitive and social experiences when they come to visit Drive Shack. As part of this initiative, we rolled out our first Drive Shack tournament in Q4, which allowed players in all venues to compete against one another in teams for both a local and national prize for best scores. This was actually so popular and met with such enthusiasm by our guests that we have a second Drive Shack open tournament coming on March 15. The team has also been working really hard on a new competitive experience called the Monster Hunt Challenge, which I'll discuss in greater detail in just a few minutes. Our focus on Puttery growth and expansion continues, and we are still expecting both venues to open in the summer of this year. In Q4, we also announced a strategic partnership on Puttery with Rory McIlroy, which we're extremely excited about. Before we get started on the deck, I'm pleased to announce that Kim Morris recently joined the Drive Shack leadership team as our Chief Technology Officer. Kim will lead our information systems team in furthering our technology development initiatives. Kim is a seasoned IT executive recently serving as Chief Information Officer for Hollman and has held other senior leadership positions in companies across several industries, including GameStop. We're really happy to have Kim here, and we know she'll just add such extensive knowledge and experience to our team. So I want to turn to the deck now on Page 5 for a summary and time line view of our courses and venues. Across 9 states, we currently hold 1 owned course on the American Golf side of the business, along with 34 leased and 25 managed courses. Our Drive Shack entertainment golf portfolio currently consists of 4 venues in Orlando, Raleigh, Richmond and West Palm, all of which are open and operating in various capacities due to COVID. We're additionally committed to venues in New Orleans and Manhattan and plan to open our Manhattan venue in 2022. On The Puttery side of our business, we're currently committed to venues in Dallas, Texas and Charlotte, North Carolina, with plans to open both of those this summer. Behind those, we have a robust pipeline in 24 prioritized markets across the U.S. that we are exploring for future Puttery venues. I'll go into more detail on our plan for those shortly. If you turn to Page 6, as I mentioned earlier, we recently announced a strategic partnership between Rory McIlroy and our new entertainment golf experience Puttery. We're excited to partner with Rory as we near the launch of our first Puttery venue in Dallas this summer. Rory is a highly regarded member of both the European and PGA tours. He's a 2-time FedExCup winner with PGA 2019 Player of the Year and has spent 106 weeks as the #1 in the Official World Golf Ranking. Rory has remained really highly engaged and committed to investing in the future expansion and success of Puttery since our first meeting. His experience and viewpoint that he'll bring to Puttery will be invaluable and really help further fuel our success as we grow and expand. We know he'll be a great partner, and we really can't think of anyone else we'd rather collaborate with for this project. Turning to an update on our operations on Page 8. On the entertainment golf side of the business, our 4 Drive Shack venues generated $7.2 million of total revenue in Q4, which is a decrease of $5.7 million compared to Q4 of last year. Event revenue drove around $4 million of this decline, which continues to be impacted by COVID limitations on capacity restrictions and group sizes at our venues. As I mentioned earlier, Orlando opened very late in the quarter on December 18. As such, our 3 Gen 2 venues in Raleigh, Richmond and West Palm generated the majority of our total Drive Shack revenue that you're seeing here in Q4 at $7 million. Total Gen 2 revenue in Q4 averaged 78% of Q1 revenue levels, with walk-in revenue making up most of this total, averaging about 90% of Q1 revenue levels. We remain focused on creating innovative ways to drive traffic and generate revenue in our venues, which I'll spend some more time talking about now. On Page 9, I'm really pleased with the recent debut of our single-bay online reservation, which we launched in late December across all 4 of our Drive Shack venues. Approximately 8,500 total reservations were booked online over the first 8-week period after we launched, which has generated a total revenue of over $625,000. We've been averaging over 1,000 reservations per week at around $75 a reservation. And just to be clear, these reservations are only for the game of golf and do not include additional F&B sales once our guests are in the venue. Prior to launching online reservations, advanced bookings were really only offered as part of event packages on a call-ahead basis and with a 2-day minimum. Those were successful, but we did see our guests want a single-bay reservation platform, which we did roll out successfully. Today, this platform allows for bookings for up to 6 guests in a single bay. And as you can see by the example screenshot of our actual online reservation page, our guests can seamlessly make a reservation for any day and time of their choosing within a 7-day window as long as there's availability. If we turn to Page 10. As part of our ongoing initiatives to create ways to drive revenue during COVID, we launched the 2-bay package in mid-September to cater to groups of 10 or less that really wanted to play and experience. The package includes a 2-bay reservation, a $200 food and beverage credit and 2 hours of play for $400 to $500, depending on the venue and the time of day. Since launching, our event revenue has increased significantly in these venues and is up nearly 4x versus prelaunch. I briefly discussed earlier the success we saw in December with our first ever Drive Shack Open. I'm on Page 11 now. The idea behind the Drive Shack Open was to really find ways to generate revenue during our less popular times while also giving our guests a new challenge and a safe way to compete and socialize during COVID. We saw success with the launch of this event, with revenue up over 100% the Monday night of the tournament versus the revenue on Monday's prior. The open is geared towards the more competitive avid golfer who's looking for a challenge, teams of 4 playing 18 hole, best ball on one of our virtual professional golf courses for both local and national prizes. The cost per team is $225 and does not include food and beverage. We're also looking forward to launching the first ever Monster Hunt Challenge. We spoke a little bit about this last quarter as well. The goal of the Monster Hunt Challenge is to increase engagement and spend per visit while giving the guests more diversified experiences that encourage competition. The game is built for quick competition, with guests across our 4 venues competing for the highest score to win a cash prize at the end of the tournament. Guests will be asked to opt in for $5 per entry, and there are unlimited entries. We're expecting to roll that out in Q2. So switching gears now to the traditional golf arm of our business on Page 12. We continue to see strong demand and momentum with our American Golf business. AGC's outstanding results continue to highlight the unwavering demand for traditional golf. In comparison to Q4 of 2019 and Q4 of 2020, our public courses saw revenue from green and cart fees up 44% despite a reduction in available tee times, while daily fee rounds were up 27%. On the private side, member sales were up 20% and total private rounds were up 22%. Moving again to -- back to Puttery. This has been one of our largest initiatives and focuses across the business. Page 14 has a couple of illustrative renderings of the building facade and an interior course that you can reference. So Puttery is our version of modern mini golf. It's tech forward and will use innovative auto scoring technology. It's an adult-focused, high-energy atmosphere where we care deeply about making sure our guests have an incredible time. We're also very focused on not only the gaming experience, but also on the food and beverage experience. We're excited to debut our first 2 Puttery venues in Dallas and Charlotte this summer, and we expect another 5 venues to be open or near completion by the end of the year. Despite the disruption and uncertainty COVID caused earlier this year, we've remained -- earlier last year, I'm sorry, we remained extremely focused on advancing the critical path items to keep The Puttery venues on track. Construction is progressing nicely here in The Colony and is on schedule, with the heavier construction such as framing, HVAC and electrical well underway. The Charlotte venue permit has been approved, and we expect the construction process to begin in the coming days. We believe that Puttery is the best path forward for near-term growth. This is illustrated on Page 15. Here, we've laid out a side-by-side comparison on the unit economics that we expect for Drive Shack venue versus The Puttery venue. Drive Shack venues take around 18 to 24 months to become operational, cost around $25 million to $40 million to build and generate EBITDAs of around $4 million to $6 million. This generates a development yield of around 10% to 20%. These are really great numbers. In comparison, we expect The Puttery venue will take 6 to 9 months to become operational, cost $7 million to $11 million gross and generate an EBITDA return of $2 million to $3 million. Development yield here is 25% to 40%, and we believe those could be even higher with learned efficiencies over time and given the generous TI packages that landlords in the retail space are giving right now. So while the figures for Drive Shack are great, Puttery numbers are even more compelling. Puttery generates faster and higher returns with less capital risk. For all of these reasons and many others, we believe Puttery is a real path to growth for us in this business. By the end of 2022, we expect to operate 22 venues, 5 large-format Drive Shack venues and 17 small-format Puttery venues. Page 16 lays out our development plan through the end of 2022. Again, we plan on being near completion of 7 Puttery venues by the end of 2021 or fully open for which we have secured funds for, both through the previous sale of Rancho as well as through the common stock offering we completed in February. In 2022, we plan on opening our Randall's Island location and 10 additional Puttery venues. The development cost to complete our 2022 goals is about $110 million, which we expect to fund primarily by accessing the debt capital market. By the end of 2022, when you look at our portfolio, we expect to have a total of 17 Puttery venues and 5 Drive Shack venues. So with that, I will now hand it off to Mike to go through the financial results for both the fourth quarter and the full year.

Thanks, Hana, and good morning, everyone. For those following our presentation, I'll start off on Page 18. All AGC courses and Gen 2 Drive Shack venues were open for the entire fourth quarter. And as Hana mentioned earlier, we opened our Orlando venue in mid-December. On a total company basis, we generated revenue of $60.3 million for the quarter. This represents an $11.5 million decrease or 16% reduction compared to Q4 2019. The revenue decline was driven primarily by COVID-related restrictions at both Drive Shack and American Golf, resulting in reduced event and F&B revenue. However, total company adjusted EBITDA came in at $5.3 million, which was up $7.4 million versus Q4 2019, the result of strong expense control efforts across our operations. At the business unit level, our entertainment golf segment generated $7.2 million of revenue, including Orlando. Revenue was down 44% or $5.7 million versus Q4 2019 driven largely by reduced event and F&B revenue as a result of COVID-related restrictions. Our Gen 2 venues generated revenue of approximately $7 million, with walk-in revenue averaging roughly 90% of Q1 2020 levels. However, Gen 2 total revenue averaged approximately 78% 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 do not have same venue results versus prior year to report. On the traditional golf side, we generated $53.1 million of revenue, including managed course reimbursements of $13.3 million, which is down $5.8 million or 10% compared to Q4 2019. This was driven largely by the 96% or $9.5 million decrease in event revenue compared to Q4 2019, again, primarily as a result of reduced event and F&B revenue due to COVID-related restrictions. This was partially offset by a surge in golf demand, which saw green and cart fee revenue increase to $3.9 million compared to Q4 2019. For the full year, total company revenue was $220 million, down 19% or $52.1 million against 2019. Total company adjusted EBITDA generated a loss of $3.1 million, which was an $8.8 million or 74% improvement over 2019. Again, this improvement is a result of the focus on expense control efforts across our operations. While full year results at the business unit level show entertainment golf revenue of $25.2 million, up 27% versus 2019, the figures are not directly comparable given that Gen 2 venues were not all open until partway through Q4 2019. For traditional golf, full year revenue was $194.8 million, including managed course reimbursements of $50.3 million, down 23% against 2019. While private member sales and rounds were up and public green and cart fees were up year-over-year, they were offset by course closures from March to June and an 86% or $34 million decline in event revenue as a result of large group restrictions due to COVID. I also want to briefly address liquidity. To preserve our cash during the pandemic shutdown, we significantly reduced spending and continued our efforts to sell our remaining traditional golf course assets. We reported $44 million of unrestricted cash in October 2020. And at the end of February, we had $86 million of unrestricted cash. The increase in cash on hand was primarily the result of approximately $54 million of net proceeds from our follow-on common stock offering that settled in February. This cash provides the capital we need to execute our 2021 growth plans for The Puttery. Finally, I am pleased to announce the Drive Shack Board declared dividends on the company's preferred stock for the quarterly period ending April 30, 2021. The dividends are payable on April 30, 2021, to holders of record on April 1, 2021. With that, I'll turn it back to Hana for closing remarks.

Thanks, Mike. 2020 was truly a landmark year for our company. I want to again thank all of our hardworking employees across our businesses that really fueled our success. Thank you all for joining us today. And I'd like to now turn the call back to the operator to open the line for questions.

[Operator Instructions] Our first question comes from the line of Peter Saleh of BTIG.

Great. And congrats on a great quarter, given the overall environment. Hana, I wanted to ask, or Mike, maybe on the cost controls, I mean, it seems like your operating expense is down pretty significantly year-over-year and G&A as well. Can you just give us a sense on how much of that -- of those 2 buckets on costs are maybe permanent cuts versus how much do you think it's going to have to come back as the economy reopens and business gets back on track?

Peter, I don't know that I have a percentage breakdown, but a substantial portion of them are permanent cuts in the field and on the SG&A side, and that is really a wholesale review of our staffing levels and really ensuring that we are operating from an optimal streamline standpoint with regard to how much staff we have in the field and at the corporate level. So we're really taking a close look at that. I can certainly come back to you later on perhaps percentage numbers. I don't have those at the moment, but it's really -- a good portion of that is permanent. Some of this is on the operating expense side, is a reduction in F&B cost of sales. Some of it is a reduction of cost of event expenses such as tent rental or tables and banquet support, things like that, that will come back, along with the revenue associated with it as COVID restrictions ease and things ramp up. But again, a good chunk of this is permanent.

Okay. Just following up on that. Do you feel like the cuts, the expense cuts and G&A cuts are completed? Or do you feel like there is more reductions in overall cost that can still come out of the business?

Peter, it's Hana. I think I'll just kind of follow up with what Mike said. Most of the cuts that we made were obviously, very strategic in nature and as a result of COVID, just -- it was a necessity. But what COVID has forced us to do over the last year, I can't believe it's been a year, is really kind of helped us look at our business in a different way and really helped us streamline some of our operations processes and even some of our corporate processes. So I do think that some of the G&A will come back, not a lot. But obviously, as we grow the business, we will definitely need additional support to ensure that we're able to execute on these development plans that we're putting in front of you guys, and we want to do that really well. I don't anticipate any further reductions being made. At this time, I just -- I think that's a great thing because it feels like we're starting to come out of this a bit, out of the COVID environment a bit. And as events come back on both the AGC side and the Drive Shack side, we'll have to add some of that labor back versus cut.

Great. Very helpful. Hana, just shifting to The Puttery for a second. I know you discussed Dallas and then Charlotte shortly thereafter. The remaining 5 that you were discussing or getting to 7 by the end of this year, maybe early next year, can you give us a sense, maybe what cities or regions of the country you guys are thinking of at this point?

We kept our cards pretty close to our chest on this one. But -- and I think we'll continue to do that. We will issue press releases as we sign leases. And I can tell you, we are very close on a couple that we're just kind of wrapping up some final comments and hope to be able to issue releases in the coming few days. I can tell you that we are looking very strategically at where we're going next. So as an example, I'll give you like the LA market. Any place on the West Coast is a great market, and it's a market that we will go into. But we likely won't look at that for our first year because of timing. We kind of want to make it as easy on ourselves as possible to get these things open and operational in the time line that we've set forward. So we're trying to cluster and group them so that we don't have people flying crisscrossing all across the country. And we're trying to be smart in that way. That said, if we had an opportunity come up this year that was just fantastic, and it was West Coast or somewhere we might not have originally been thinking of, we would certainly entertain it and be open to it.

At this time, I'm showing no further questions. I would like to turn the call back over to Kelley for closing remarks.

Thank you. And again, we'd like to thank everybody for dialing in and joining us on our call today. We look forward to catching up with you next quarter, if not before then. Thanks again. Have a great day.

And thank you, everyone. This does conclude today's conference call. You may now disconnect.