|Shares Out. (in M):||65||P/E||54||29|
|Market Cap (in M):||1,169||P/FCF||70||21|
|Net Debt (in M):||992||EBIT||110||139|
|Borrow Cost:||Available 0-15% cost|
We believe MYCC is an attractive short. Although recently written up as a VIC long, we have a different view on the capital intensity of the business and the ability to generate net ROI. Given the recent write up did a good job of covering business background, this piece will cut to the chase.
ClubCorp operates and manages golf & country clubs (GCCs) and business, sports & alumni clubs (BSAs). The company is rolling up GCCs.
GCCs are not good businesses. The returns on investment are low. MYCC has masked this reality through acquisitions. Reality and lack of free cash flow will become evident.
MYCC is priced at 9.8x 2015 consensus EBITDA and 10.7x my view of true economic 2015 EBITDA. MYCC will generate 2015 levered FCF of ~4% yield (3.5% on normalized numbers).
MYCC’s need for continued reinvestment to maintain membership in the face of 15% annual churn should become apparent over the next year, driving revaluation.
MYCC holds a portfolio of 206 owned or operated clubs with ~185k memberships and ~430k individual members. The portfolio includes 158 GCCs (148 owned) and 48 BSAs. MYCC is the largest owner of private GCCs in the U.S. and holds the underlying real estate for 124 of the clubs. The portfolio is concentrated in Georgia (Atlanta, 33 clubs) and Texas (Houston, 19 & Dallas, 17).
MYCC was founded in 1957 by the Dedman family. The current company is the residual of almost 20 years of private equity activity. In 1999, The Cypress Group backed the Dedman family with $300mm of expansion capital. In 2006, KSL Capital acquired MYCC for ~$1.5bn, which at the time included several resorts (the Dedmans kept Pinehurst while KSL took The Homestead and Barton Creek). In 2013, KSL sold the resorts to Omni Hotels and IPOed the GCC/BSA business. The IPO priced at $14/share (net $13.12 to KSL), below the $16-$18 range.
KSL sold 19% of its position in the IPO and another 20% during summer 2014. In August 2014, MYCC announced the acquisition of Sequoia Golf, expanding the GCC portfolio by ~40%. KSL acquired Sequoia from Parthenon Capital, a private equity firm that had held Sequoia for eleven years. In the wake of the Sequoia deal, KSL exited the remainder of its investment with the last sale October 20, 2015. The Sequoia acquisition drove reported growth, enabling KSL to monetize its investment. MYCC’s financials should normalize over 1H16, highlighting underlying business performance.
Does MYCC’s strategy make financial sense? Are GCCs attractive assets? Can the company generate FCF to support its current valuation?
What is MYCC’s required level of capex to maintain its current business?
Does MYCC’s strategy make financial sense? Are GCCs attractive assets? Can the company generate FCF to support its current valuation?
GCCs face secular headwinds
Net golf course closures every year since 2005
Number of golfers has been declining, along with rounds played – some recent moderation
Demographic and cultural challenges given aging of golf population and attention span of Millennials
Lack of EBITDA margin expansion
Revenue up >40% since 2010, while reported adjusted EBITDA margins remain ~22%
With 15% membership churn, MYCC must refill memberships from a limited geographic area, a challenge without constant reinvestment and marketing spin
Despite recent significant “reinvention capex,” YTD same-store membership down 10bps, not a good signal
Low-quality reported EBITDA with consistent impairments
Touted margins appear fundamentally overstated
Company only reports adjusted EBITDA per segment, ~30% for GCC – stands against ~21% GCC EBITDA margins for pre-KSL reporting (2003-2005)
Pre-KSL aggregate EBITDA margin averaged 16% (2003-2005), which is consistent with current pre-adjustment EBITDA margins
If roll-up strategy is accretive, why did KSL wait until post-IPO to execute?
103 GCCs at IPO (2013) versus 99 GCCs at acquisition (2006)
The skeptic in me is suspicious acquisitions were geared toward driving growth through the PNL, murking the underlying fundamentals, and facilitating KSL’s exit from the investment
Management touts 10 to 15% “cash-on-cash” returns on new investments – not that attractive
“Cash-on-cash” utilizes adjusted EBITDA in the numerator . . . not a good starting point
Taking midpoint of 12.5% less 3% maintenance capex taxed at 40% = 5.7% unlevered FCF
These are low returns against a business that is macro-sensitive and facing secular headwinds. With a 4.5% cost of debt, the spread here is tenuous and doesn’t work on higher rates.
MYCC EBITDA multiples are high
Multiple industry conversations suggest courses/clubs trade in the 7x to 8x range
Sequoia acquisition at 10.8x
12.5x inclusive of $30mm reinvestment capital – i.e., MYCC was not acquiring fully-invested courses/clubs
MYCC valued at 10x to 11x
A 2x multiple reduction, suggests equity value of ~$10 to 12/share
Can MYCC generate FCF sufficient to support its current valuation? What is the company’s required level of capex?
3-4% FCF yield on 2015 numbers – too low for a challenged, macro-sensitive business
Management claims maintenance capex of $50mm, which it utilizes to report “FCF” – implies maintenance capex ~$220k/GCC.
Industry conversations suggest real capex necessary to maintain memberships is ~2x management’s number
In reality, current capex reflects maintenance capex
Income statement D&A accurate marker, making net income a fair proxy for FCF
2004/2005 pre-KSL reported GCC maintenance capex estimated at $30mm, which would equate to $400k/GCC in 2015 dollars, roughly meshing with maintenance capex being 2x reported numbers
Other investment considerations
Implied per GCC market valuation too high
Assuming 7x for BSA segment, suggests market valuation of $13mm/GCC. This stands against 2014/2015 portfolio acquisitions at $5 to $7mm per GCC
Alternatively, industry conversations suggest GCCs worth signficantly less than replacement cost. MYCC balance sheet suggests $13mm/GCC replacement cost, implying market valuation too high
Member initiation deposits - although not an acute driver of stress, a relevant consideration in a recession scenario
$135mm redeemable in over next 12 months
$339mm total liability
$20mm of annual accretion included within interest expense
Texas exposure - 23% of GCC portfolio in Houston & Dallas - derivative energy exposure
Telling quotes from founder
Dallas Business Journal, February 2000
DBJ: What's the catalyst for all of this consolidation?
Robert H. Dedman: It's a tough business to make money in. It's both people-intensive and capital-intensive. Golfers demand a lot from the experience.
Sports Illustrated, June 1999
Robert H. Dedman: We will never stop acquiring. In this business you acquire or perish.
Insider selling - beyond KSL’s exit, management is consistently 10b5’ing shares into the market
We downward adjust EBITDA by ~$20mm versus management’s numbers. Management’s adjustments (shown above) average ~$40mm per year, so we're giving them half credit for the add-backs.
On 2016 EBITDA of $244mm, MYCC would generate ~4.7% FCF to equity.
Our essential view is this is a fundamentally challenged business with significant macro-exposure. Requiring a 7% to 8% FCF yield suggests equity value ~$12/share.
MYCC – Where’s the Operating Leverage?
MYCC – Material Churn That Has to be Refilled from Same Geographic Area; Declining SS Memberships Despite Recent “Reinvention Capex”
MYCC – GCC Historic Margins
As company laps Sequoia transaction and underlying organic membership trends and FCF profile become apparent, shares re-rate.
The company may well execute further acquisitions, driving shares higher. We would view this as an attractive opportunity to add to the short given our view of the underlying fundamentals of the business. At 4.3x leverage with a 5.0x cap, there is not the opportunity for a Sequoia-scale transaction, but we do anticipate incremental M&A.
|Subject||Re: slight correction|
|Entry||11/18/2015 05:13 PM|
Thanks for the heads up. Apologies.
|Entry||12/07/2015 12:43 PM|
Last week MYCC annouced it was shopping a $400mm tranche of 2023 senior notes and negotiating a new 7-year term loan ($625mm down from current $901mm) and 5-year revolver ($175mm up from $135mm current with $47mm drawn).
Today MYCC announced the senior note offering closed at $350mm at 8.25%. Proceeds for general corporate, repaying secured facilities and acquisitions.
Given the intent to reduce the TLF by $275mm, the bulk of the note offering should go to retiring the TLF. All else equal, this move trades 4.25% TLF leverage for 8.25% senior note leverage. The incremental 4% equates to additional interest expense of $14mm. Relative to 2015 numbers, $14mm equals around one-third of my FCF estimate. Moreover, if I'm right that these assets generate 5% to 6% unlevered FCFs, then 8% debt doesn't work over the long-term.
|Entry||12/14/2015 12:13 PM|
This is supposed to close tomorrow. Any sense on whether it will, given what has been happening in the High Yield market? thx
|Subject||Re: Re: Refinancing|
|Entry||12/15/2015 10:01 AM|
No read on the issue, MrSox.
|Subject||Re: New (Small) Acquisition|
|Entry||12/18/2015 02:18 PM|
It seems to me they have to keep doing deals to obfuscate the reality of the organic situation and the ROIs.
To your point regarding the latest debt issuance, if these assets produce 5 to 6% unlevered CFROI (my belief), obviously 8.25% debt doesn't work.
|Subject||Re: Re: New (Small) Acquisition|
|Entry||12/19/2015 11:19 AM|
I'd add too - I spoke with a sell-side analyst who has MYCC as his top 2016 pick within the space. I walked through the math.
12.5% return reduced by 2.5% capex. 10% return taxed at 40% equals 6% unlevered FCF.
Senior notes just priced at 8.25%. Total cost of capital clearly above 10%.
I fail to see how this math works. FWIW, the sell-side analyst agreed with the framework and offered no pushback.
|Subject||stock worth single digits - dividend could be cut|
|Entry||01/26/2016 11:15 AM|
This has been a terrific idea and we suspect that it is only getting better for shorts. Our field research at some of the top private clubs points to customer attrition running at around 5% of annual revenues. (ie at one high end club that MYCC has tried to buy, members comprising $350,000 in dues resigned at year-end. That’s on $6-7 million of revenues). This attrition level was about right relative to other clubs in the region. Members are resigning not due to financial issues, simply “lifestyle change” ie kids are out of the house and the family isn’t using the club enough to warrant the expense. We equate this type of resignation to the quiet damage of this ongoing economic softening. As evidenced by MYCC's release today, the Company is on the hook (whether implicitly or explicitly) to continue pouring capex into properites with the hope of getting some incremental ROI. Given the state of the debt markets, the inherent problems of any roll-up strategy are now exacerbated against a backdrop of softening in an asset that wasn't all great to begin with. The current cap structure coupled with the Company's cap ex + acquisition plan does not support the continued dividend at these levels in our view.
|Subject||Re: Re: stock worth single digits - dividend could be cut|
|Entry||01/26/2016 01:14 PM|
The market is split into three types of clubs.
The best/most prestigious clubs: never for sale at any price
The worst clubs: you don't want to own these at any price
The middle of the road clubs: this is where MYCC plays.
MYCC sends an army of young hungry guys out to hunt in that middle ground. What ends up happening is, by default, they end up with the worst of the lot ie clubs that only agree to sell because they are in need of capital for a project and they don't want to have to ask the membership to pony up the money.
MYCC convinces the owners that they will, for example, buy the club and finance the roof repair of the Clubhouse. MYCC hopes to take an EBITDA flat to negative businesses and turn it profitable via labor and food savings plus drive an increase in members. These are very local businesses, naturally, and the distance that a member will go to play at a club is limited. Plus, golf clubs don't want a ton of members as it creates locker room and tee time crowds. Thus. there is a natural cap to how many folks you can recruit, unlike an Equinox gym with a few hundred treadmills.
This is an extremely difficult business that faces macro and financing headwinds. There is $50-$60m in annual interest expense + large capital committments.
Comments on CapEx from the Oct 2015 Conference Call:
"With respect to capital expenditures, in 2015 we have invested approximately $56 million for the acquisition of eight properties and year-to-date we've invested $35 million in ROI and expansion capital. For the balance of this year, we anticipate investing approximately $25 million on reinvention capital. This includes investment in the remaining 13 clubs that are still undergoing reinvention this year.
Total 2015 ROI and expansion capital of $60 million includes approximately $10 million of accelerated investment in Sequoia clubs that Eric mentioned before. Additionally, year-to-date we've spent $41.1 million on maintenance capital and for the balance of this year we anticipate spending approximately $9 million on maintenance capital."
At the current EV, investors are paying $10,344 per club member. (Roughly $1.8b EV / 174,000 members). This includes all members, golf + sports.
Annualizing the last quarter's results, we get to $5,862 in revenue per member. (Roughly $1.02b in annualized revenue / 174,000 members).
|Subject||5 Bay Area Golf Courses Close in the Last Year|
|Entry||01/27/2016 10:52 AM|
|Entry||01/28/2016 10:17 AM|
Would be interested to get others' takes. I'm traveling so can't do the needed work at this point, but upon initial review there appeared to be extra add-backs to "adjusted EBITDA" to conincidentally reach consensus "EBITDA" numbers. The footnotes around the add-backs were amazing - I don't think I've ever seen so many add-backs, and some are clearly just part of running this business on a day-to-day basis.
|Subject||Re: 2015 Pre-Release - issued at 10.30pm !|
|Entry||01/28/2016 11:56 AM|
The pre release is an absolute mess and is an obvious response to the panic in the stock as it was issued at 10.30pm. We agree that the addbacks are insane, as is the DB report that tried to prop up the shares this morning. This is a gift to shorts to get in at better prices. There is naturally going to be some lag in the TX membership base falling off. In addition, they stop short of providing any outlook and fail to tell us about membership.
|Subject||Re: stock worth single digits - dividend could be cut|
|Entry||02/01/2016 12:03 PM|
Sox - appreciate your commentary. Would you please offer your napkin math on the dividend coverage issue?
|Subject||Re: Re: stock worth single digits - dividend could be cut|
|Entry||02/05/2016 11:41 AM|
I look at it like this:
"real" EBITDA: $175 if they are lucky
less interest: ($60m)
= $115m before capex
the dividend costs $35m/yr
that gives them $80m to spend in capex, which is hardly enough based their plans.
|Subject||ClubCorp's latest purchase is owned by shrewed FL developer - politically connected developer|
|Entry||02/05/2016 02:52 PM|
MYCC's just spent $4.5m on Marsh Creek, a club owned by PARC Group / Roger O' Steen. O' Steen is a well known FL developer and political insider - in 2010 he was recorded on tape admitting that he cut a deal with the commissioner of St. Johns County for below market airplane rental. If O' Steen is a seller, odds are you are not getting a great deal.
|Subject||Re: Author Exit Recommendation|
|Entry||02/10/2016 10:14 AM|
There may be more downside here given a fundamental mismatch between returns on and cost of capital. Moreover, membership and dues/member may decelerate. However, these are all incremental to my original thesis around what I considered patent overvaluation. In my view, that thesis has largely played out.
|Subject||Re: Re: Author Exit Recommendation|
|Entry||02/10/2016 10:21 AM|
Congrats TR. In hindsight, this outcome seems to have been inevitable, and I am kicking myself for not putting the trade on myself.
|Subject||Re: Re: Re: Author Exit Recommendation|
|Entry||02/12/2016 01:48 PM|
We covered some but are hanging around for the dividend cut. The leverage here could sink them as all new acquisitions require large up front capex, makign the purchase prices misleading.
|Subject||no margin for error - a gift for shorts|
|Entry||02/25/2016 11:11 AM|
MYCC released earnings last night and gave the shorts a gift to increase their position. The math simply does not work and the share price leaves no margin for error. Business and Sports Club Memebers are also shrinking.
Accoring to Company + analyst estimates, 2017 looks like this:
Our target of $8.00 is based on 6.5x 2017e EBITDA of $235m.
|Entry||04/07/2016 09:36 AM|
Kerrisdale issued a report agreeing with the shorts today, available here: kerr.co/mycc. Happy to discuss more.
|Entry||09/23/2016 02:17 PM|
In the wake of the recent shareholder letter, I revisited MYCC to update thinking.
My view of this business - and I would submit the actual financial performance of this business - are divorced from the description contained in the shareholder letter.
There are two primary issues as I see it: (a) the divergence between adjusted EBITDA (with a whole multitude of add-backs) and actual financials and (b) defining true maintenance capex. These two issues create a material difference between reported FCF and real FCF. In addition, there are other considerations that adversely affect company valuation.
Management-touted adjusted EBITDA is a difficult number to assess given all the acquisitions and add-backs. Suffice it to say, however, the reported number does not mesh with the actual cash flows of the business or historical margins.
In 2015, MYCC produced $152mm of CFO. Adding back $45mm of cash interest and $11mm of cash taxes, equals $208mm of pre-tax and pre-interest operating cash flow versus $233mm of adjusted EBITDA, a $25mm or 11% delta. Likewise, for 2016, I estimate around $160mm of CFO, plus $51mm cash interest and $11mm cash taxes for $222mm of pre-tax and pre-interest operating cash flow, versus $249 of consensus adjusted EBITDA, a $27mm or 11% delta. This $25-$27mm delta is generally consistent with my own normalization of the EBITDA add-backs for which I'd be willing to actually give the company credit. At 8x, this differential alone reduces equity value by ~$3/share, not immaterial.
From a margin perspective, management's adjusted EBITDA would suggest around 23% for 2016. When I compare this margin profile to 2002-2004 reported margins (which were prior to the roll-up noise and management's vast array of add-backs) I arrive at significantly different margins. GCC operated at ~21% segment margins and BSA at ~14% segment margins. Utilizing these segment margins and an assumption of corporate EBITDA losses, suggests ~$162mm of EBITDA or ~15% margins, which is slightly above 2002-2004 aggregate margins.
Management-reported EBITDA doesn't smell right.
Management claims maintenance capital intensity of 3.5% to 5% of total revenue. This contrasts with actual capex of 7.5% to 10% over the past three fiscal years. So what's maintenance capex versus growth capex? I submit that the company's operating results as well as my own diligence suggests MYCC's actual total capex is reflective of maintenance capex.
As a starting point, membership is not materially growing. Total organic membership appears to be roughly flat. This is after a much-touted period of significant "reinvention" / growth capital investment. Logic would suggest one would see some membership bump on the heels of such an acclaimed investment program.
Moreover, management's claimed maintenance capex doesn't mesh with primary diligence around the cost to adequately maintain a country club. Management's number of $60mm for 2016 equates to ~$270k to $320k per country club (assuming (a) 150 country clubs and (b) non-GCC capex of $20mm, with the range depending upon how much of this other capex one wants to assume is maintenance capex). My industry conversations and experience with golf indicate ~$300k of capex is not sufficient to adequately maintain a country club for the long-term - golf course, pool facilities, tennis courts, dining, etc. I estimate the real capex number at $500k to $750k per country club, which equates to an incremental $30mm to $68mm of annual capex, or $0.50 to $1.00 per share. This important difference likely swings equity value by $6 to $12/share.
Between adjusted EBITDA and management's maintenance capex, there is quite a chasm between reported FCF and real FCF.
To begin, even management's adulterated FCF metric is not growing and the guide is for 2016 to approximate LTM.
More relevantly, MYCC's actual cash flow statement tells a very different story, assuming you do not believe management's maintenance capex number:
I would offer that on a highly-leveraged company operating within a secularly-challenged and cyclical industry, this equates to $9 to $11/share of value.
Other Valuation Considerations
Refundable initiation deposits. MYCC has $357mm, present value, of refundable initiation deposit liabilities. $153mm of these obligations are current liabilities. That equates to $5.50/share and $2.35/share of equity value, respectively. Viewed differently the $20mm ($0.31/share) of interest expense accretion attributable to this liability should not be blindly excluded from FCF (as suggested by management). While there should probably be some discount applied to these liabilities, they are real liabilities. They shouldn't be ignored, and certainly affect equity value. The company previously disclosed 20 states were actively conducting escheatment investigations with respect to these deposits while the company now simply offers "ongoing communication with several states." In any event, this liability reduces equity value in some amount.
Asset sale losses and impairments. MYCC's consistent losses and impairments related to asset sales raise questions about both "adjusted" EBITDA validity and the company's acquisition strategy / marking of acquired assets.
So how does this all shake out from a valuation perspective? Well, there is a range of outcomes depending on the various assumptions - real EBITDA, real required capex, real liability associated with refundable deposits - and the valuation multiple utilized. On the latter front, industry conversations suggest private market multiples of 7.5 to 8x EBITDA less capex, while I also received input of 6 to 8x EBITDA. I view these comparable metrics as much more apposite than theme parks and casinos. In any event, I'll throw a few alternatives out there.
Taking management numbers at face value and ignoring the netting of capex against EBITDA (i.e., this is generous):
Taking management numbers at face value and netting capex against EBITDA (. . . still generous):
Utilizing 2002-2004 margins and grossing up corporate EBITDA for assumed add-backs of $5mm:
Finally, some napkin math. Let's assume 2016 real EBITDA is $230mm (allowing for some add-backs but not all management would have you accept). Let's then assume $100mm is the right capex number. That leaves $130mm unlevered, pre-tax FCF to the enterprise. At 8%, that's $9/share of equity value. At 10%, that's $4/share of equity value. Discounting the NPV of refundable deposits by 50%, further reduces equity value by $2.75/share. Net-net call it $1.25/share to $6.25/share of equity.
MYCC is quite levered so the various assumptions make a big difference. I'm not sure exactly how much it weighs, but I'm pretty sure it's a lot less than $16.
|Entry||10/13/2016 07:56 AM|
Company now plans to delever - will be the true test of what types of returns 'reinvention capex' are truly producing.
|Subject||Re: Lowered Guidance|
|Entry||10/14/2016 02:20 PM|
Not a homer of a Q.
2017 should be interesting. If MYCC really ratchets back capex to $60mm and has flat GCC unit counts, the short thesis should get a real test: what is the capex necessary to retain current member counts and revenue?
MYCC plan: deleverage via reduced capex, dialed back acquisitions and asset sales. I got a kick out of management's repeated call references to this not being a change of strategy.
I also liked this answer with respect to the reason for no 3Q16 share repurchases: "due to where the stock price was." What? So the stock doesn't represent an attractive investment at $14 to $15?
Lastly, given updated capital allocation strategy, let's remember the words of ClubCorp's founder, Mr. Robert H. Dedman, "We will never stop acquiring. In this business you acquire or perish."
|Subject||Re: Re: Make America golf again|
|Entry||11/10/2016 02:54 PM|
I haven't been following too closely, but here are 2 theories I'd offer up for the heck of it.
1) Lower tax rates should benefit the purchase of the ultimate discretionary item, a country club membership.
2) Years ago (pre-1994 it appears) some corporate and individual private club membership dues were tax deductible. Given that The Donald owns a bunch of private clubs, perhaps his tax simplification plan would roll this back as well.