What the mega deals mean for golf

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By Steve Ekovich

The golf industry’s landscape changed forever thanks to several mega-deals that brough in an estimated billion dollars into the golf industry. mMany have asked what caused the mega golf trades and many have guested at answers. Our view from the investor side is this: The transactions were completed for different reasons relating to yield, fund terminations, low cost of capital and opportunity capital buying at a discount.  

When ClubCorp went public, Wall Street could see that margins in golf were real and sustainable. (The IPO was at $18/share and went as high as $20 and is settled in at $18 after 9 months.) It allowed Eric Affeldt, CEO of ClubCorp, to take a stagnant company and revitalize it with growth projections in earnings and assets. They now had the funds to both acquire opportunities that will provide cost reduction and efficiencies while providing cap-ex funds to revitalize aging clubs. Consequently, when Joe Guerra, CEO of Sequoia, was looking for financing, ClubCorp saw an opportunity to accelerate growth, bring accretive earnings to the table, while cutting $6-$8M of duplicate costs.

Arcis acquired CNL’s portfolio with a book value of $555 million as referenced in most recent annual report which did not take into consideration depreciation and additional owner investment. They reset the basis at $306M or 55 percent of the original acquisition cost. Arcis, lead by industry veteran Blake Walker, has yield upside built into the acquisition already and based on a number of initiatives that are confidential, will yield significant returns to the Equity Fund in the near future.

New Castle bought American Golf, but it was really the Mezzanine holder of the debt, so they restructured their existing debt in National Golf Properties for $49M in which they were the $47 million senior loan holder and paid only $2M of equity. (This was hailed as a sale but it was like a second note holder foreclosing on their interest of $49M and giving the mortgagor $2M to not fight the foreclosure.)

C-Bons bought the Walton Street Portfolio, (We can’t divulge the price as it is not public yet) and received 26 golf assets. They are being managed by Century Golf. Jim Hinckley who incidentally is the CEO of Century is also the new CEO of American Golf that is owned by New Castle time.

Troon’s new equity partner, Kohlberg and Co infused capital that will enable Troon to continue to grow its third party management business. They already are the largest management company in the world at 207 courses.

What this means to you as a golf stake holder is almost a billion dollars of investment flooded into golf in one year. The firms that participated have management companies with core competencies in running golf, they have economy of scale, they have reduced basis’s and lower costs of capital. Those advantages translate into higher returns for these companies. They also gained the ability to finance the courses while maintaining healthy cash on cash returns.  In addition, they have the balance sheets to inject capital into cap-ex projects that have been neglected or to make-over courses for the millennial generation to come.

Operations

A good year in golf after all the bad years is one with a little down and a little up, one without an appreciable decline. According to Performance Trak, rounds year to date in October are down 1.2 percent. The  Pellucid Report indicates golf playable days are down 1 percent and over-all golf revenue is up 1.4% percent. If playable days are down 1 percent and rounds are down 1 percent they go hand in hand and that makes sense. So the huge desertion of golfers from our industry is not as bad as some suggest or if we are losing golfers, the people that are playing golf are playing more.

There have been dire predictions by both the media and some of golf’s pundits that golf’s participation could drop to 16M if you follow the tennis historical curve and that we are over-built by as much as 20 percent or about 3,000 courses. Based on the math, the numbers could be right. However, I have been in the brokerage business since 1985 and saw the S&L crisis unfold and listened to industry pundits say that vacant office space in the country would take 20 years to fill up if you follow the math. I don’t believe you can look at just the math. The recession that started in 1989 was over in 1993 and in 1995 we had virtually a healthy office market. The math pundits were off by 16 to 18 years. What the last two years of positive or stable operating numbers are telling us, what the mega transactions foretell, what the increase in values seems to suggest and what the lenders reentering the golf airspace albeit slowly indicates is that there is a belief that golf will be healthy in the future.

A lot of educated people who are stakeholders in the industry are putting their money where their mouths are. What I have seen in the last 25 years is that all extraneous circumstances can’t be accounted for in the math models. Sometimes you have to add into the forecast non-math influences like what you can learn from other industry historical events, major events that affect an industry not already known,(i.e. demographic shifts a young new golfer that stimulates and excites new golf interest, new inventions that make playing golf more fun like skate boards on the course or hover crafts, millennials whose careers are becoming more stable, and the 70 million baby boomers retiring. There are a billion new reasons to bet on the golf industry and I am not being Pollyanna and saying we don’t have issues because they are well documented, but in the end with all the things we discussed in this article along with the repurposing of 150 or so courses a year, it seems and feels like the industry is healthier after 2014 and 2013. In the end it is the law of the jungle that prevails, the strong will win and the weak golf courses will become, parks, cemeteries, farm land and housing developments and we need them too!

Steve Ekovich will moderate the first day keynote on Why invest in golf? For more information on golf courses for sale or golf research information click on any of the links: www.leisurepropertiesgrup.com .

This report is an excerpt from our semi-annual Golf & Resort Investment Report. For more information or for the full report go to www. leisurepropertiesgroup.com .

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