Drive Shack's Downward Slide
Drive Shack voluntarily delisted from the NYSE last year.
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Today At A Glance:
Drive Shack pivoted from their core business of American Golf in 2017. Their share price has gone from $5.53 to $.29 since the decision causing Drive Shack to delist from the New York Stock Exchange voluntarily. Today’s newsletter breaks down the history of Drive Shack and where they find themselves today.
Read Time: 6 minutes.
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The reality is the institutional fundraising environment remains challenging. And those that are well capitalized have been waiting for valuations to drop.
However, as good companies are increasingly forced to market, funds with dry powder should be positioned to capitalize.
“Founders were operating in an environment where an unlimited ability to secure funding was almost a given over the past couple years,” Lyle Ayes (founder and CEO Verance Capital) said. "But rationality has started to enter the market, and there are good deals out there now that valuations have been reset."
Click here to dive into the whole piece.
Hey Golfers —
Drive Shack announced they voluntarily delisted from the New York Stock Exchange at the end of 2022. The company received notice its securities were not in compliance with the continued listing standards of the NYSE — and the Board opted to delist voluntarily.
Being delisted from an exchange can happen for a variety of reasons. One of the most common is share price — a share price of under $1 for an extended period of time increases the risk of not following the standards. Drive Shack’s share price dipped below $1 in September of 2022 and remained under that level until they were delisted.
Why does being delisted matter? Access to capital becomes more difficult. And as Drive Shack continues to build out Puttery — capital is extremely important.
The golf industry has never been stronger. Yet Drive Shack can’t seem to find success.
As a refresher, before we dive into it — Drive Shack has three business units today.
Puttery
Drive Shack
American Golf
Drive Shack’s story is interesting — with many twists and turns in ownership and strategy along the way.
Let’s break it down.
Drive Shack’s story started 50 years ago. California attorney, David Price, purchased three golf courses from his boss in the early 1970s. After overcoming the initial obstacles of owning golf courses — Mr. Price found success, and the three golf courses were profitable within five years. American Golf Corporation was born.
Mr. Price believed his business model could be applied to other golf courses — he began targeting municipal golf courses. American Golf would start managing golf courses — and in turn, would split the revenue with the municipality.
In the late 1980s, it was believed American Golf managed around $300 million in revenue — with earnings being about 10% of that figure.
And in the early 1990s — American Golf managed around 80 public and private golf courses in 20 states. Then they shifted their business model to purchasing golf courses. American Golf spent hundreds of millions of dollars buying country clubs. David Price then formed National Golf as a publicly traded real estate investment trust for the golf courses it owned.
National Golf then leased its golf courses to American Golf. As National Golf purchased golf courses — they would lease them to American Golf.
In the mid-1990s — American Golf operated over 250 golf courses, and National Golf owned over 100 golf courses.
Both companies continued to grow and eventually sold to an investment group led by Goldman Sachs for $1.1 billion in the early 2000s. The companies were a golf powerhouse. Mr. Price did well.
Goldman Sachs held American Golf for 11 years, selling golf courses and terminating underperforming contracts. At the end of the ownership period with Goldman Sachs — American Golf owned and operated around 100 golf courses.
Newcastle Investments purchased American Golf in 2013. Interestingly — Newcastle was a subsidiary of Fortress Investment Group. Fortress manages over $45 billion today. Fortress co-founder, Wes Edens, owns the Milwaukee Bucks and sits on the Drive Shack board today.
In 2017 Newcastle pivoted the American Golf business.
Newcastle changed its name to Drive Shack and moved the business to a C-Corp. The strategy was to move into golf entertainment and compete with Topgolf. Drive Shack announced five locations in 2017 and would self-fund the transformation with $182 million in cash on hand and by selling its American Golf portfolio golf courses. Drive Shack sold over 20 of its golf courses for approximately $170 million by the end of 2019.
For some added perspective — Drive Shack shares traded a $5.53 at the end of 2017.
Drive Shack opened one venue in 2018 and three in 2019 — they haven’t opened a venue since. And nearly a year ago, they fully exited plans to build a venue in New Orleans and terminated its lease at a loss.
Drive Shack’s 2022 second-quarter revenue declined versus second-quarter revenue in 2021. And EBITDA margins started to slip. For some context — Topgolf grew same venue revenue by 8% in that period.
Drive Shack spent between $25 and $40 million to develop one venue. They invested around $125 million in the four venues. And as of the third quarter of 2022 — their financial performances were declining versus the prior year.
The Drive Shack venues weren’t going as planned.
As of September 30th, 2022, Drive Shack had $11.6 million in cash. Compare that to December 31st, 2021; they had $58.3 million in cash.
American Golf only owns one golf course. They lease 32 golf courses and manage another 20.
But Drive Shack has hope. And that hope is Puttery — golf entertainment in the form of mini-golf.
Drive Shack rolled out two Puttery locations in 2021 and three in 2022. Puttery has six locations now.
Dallas, Texas
Houston, Texas
Chicago, Illinois
Washington D.C.
Pittsburg, Pennsylvania
Charlotte, North Carolina
Puttery makes sense for Drive Shack. The development cost is between $7 million and $11 million. They are quicker to build and provide a better EBITDA margin than Drive Shack venues.
But the problem with the Puttery business plan is the lack of cash.
After Drive Shack was delisted from the New York Stock Exchange, they listed on the OTC Markets under the ticker symbol DSHK. Their share price is 29 cents.
OTC Markets don’t require a company to release quarterly and annual financial information. This is why we have to go back to the third quarter of 2022 for Drive Shack’s most recent financial information. OTC Markets are not as heavily traded as the New York Stock Exchange — making it more challenging to raise capital.
Drive Shack recently announced a $26.5 million loan to fund its Puttery development. They borrowed $16 million in March and can pull the remaining $10.5 million before September 1st.
Drive Shack is fighting hard. The next six months will be crucial as they plan to roll out more Puttery locations.
I recently read a book titled The Alchemy of Growth — the book talks about building your business for the future but also protecting the core. Drive Shack sold a majority of its core to fund its Drive Shack venues. It’s always easy to critique a business when you aren’t in the room involved in specific business discussions. But you have to wonder if Drive Shack moved too fast to roll out Drive Shack venues.
American Golf represented a large portion of Drive Shack revenue — over 60% as of September 2022. American Golf was up 10% in the third quarter of 2022 versus 2021 — while Drive Shack venues were down 4% in that same period.
American Golf was once involved in an acquisition that valued National Golf and American Golf at $1.1 billion. Drive Shack’s market cap is $27.2 million today — that includes the American Golf business unit.
And one of the craziest things about Drive Shack’s saga is their Drive Shack venues compete against Topgolf. And their Puttery venues compete against Puttshack. Puttshack is founded by Topgolf’s founders.
Have yourself a great Monday. Talk to you next week!
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Drive Shack? Puttshack? Jeez, you’d think these guys could hire someone to come up with better names. Awful.