April 13, 2017 - 4:11pm EST by
2017 2018
Price: 4.02 EPS .49 .41
Shares Out. (in M): 69 P/E 8 10
Market Cap (in $M): 270 P/FCF 25 25
Net Debt (in $M): -30 EBIT 20 20
TEV ($): 240 TEV/EBIT 12 12

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Drive Shack, Inc.
Some VIC readers are already somewhat familiar with Drive Shack (DS) because it up into
recently was known as Newcastle Investment Corp. Newcastle started out as a mortgage REIT
managed by Fortress Investment Group. Newcastle cratered during the financial crisis and
slowly worked its way back. Starting in 2013, Newcastle begun to spin assets off into more
focused companies. They include New Residential (NRZ), New Media (NEWM) and New
Senior (SNR). Assets now left at Newcastle include real estate debt and American Golf, a golf
course owner and operator. In December of 2016 Newcastle converted to a C. Corp., in order to
more efficiently invest in growth, and changed its name to Drive Shack. It has been selling its
real estate debt assets and will be largely out of that business this year. The company will then
be solely focused on golf.
I think the company is fairly valued today based on private market values for golf course assets
and net cash on the balance sheet (assuming liquidation of debt assets and liabilities) While
there is likely some opportunity to continue to create shareholder value in the traditional golf
course business through management and opportunistic purchases, I don’t think that in itself is a
compelling enough investment opportunity at this price. The larger value creation opportunity
likely lies with a new golf related concept that is part of DS’s growth plan.
Drive Shack Concept
Some may be familiar with Top Golf. DS plans to roll out a similar concept. Top Golf, a
concept born in England in 2000, is a modified driving range with a restaurant and bar. The
driving range extends roughly 200 yards and has various targets. People are able to play games
against each other, similar to say bowling. The balls have chips that allow shots to be scored
automatically. Top Golf has 33 locations with another 10 plus under development. Some of the
more interesting statistics are that 45% of guests play traditional golf once a year or less and 68%
of guests are 34 years of age or younger. This concept has proven to appeal to a younger
demographic at a much higher rate than traditional golf and to golfers and non golfers alike.
The economics of the facilities are very compelling. The cost to develop ranges from $15 to $25
million and they generate in the range of $3 million to $6 million in EBITDA. Not many retail
concepts today have economics this good. We can get an idea of the value creation at Top Golf
through looking at Callaway (ELY) a public golf equipment manufacturer. Starting in 2006
ELY invested $55 million in Top Golf for approximately a 20% stake. In 2015 Providence
Equity Partners acquired a minority stake in Top Golf that valued the company at $1.4 billion,
which marked ELY’s stake at approximately $280 million or 5X its original investment.
You can become more familiar with the concept here:
Drive Shack has a current pipeline of 25 sites and its first location is under construction in
Orlando, FL. The 66,000 square foot dining and entertainment complex is located in the 300
acre Sports and Performance district. It will have 90 outdoor driving bays, a restaurant, bar,
shops, lounge and a rentable event space. The facility is scheduled to open in late this year.
American Golf
Newcastle Investments made a $110 million debt investment into American Golf in 2006. In
December 2013 it restructured the company's debt and as a part of that acquired the equity in the
company. Since its acquisition in late 2013, EBITDA is up 50%. American Golf operates 78
golf courses across thirteen states with the majority of the courses (52) being in California. It
owns 27, leases 41 and manages 10 courses. Current EBITDA is approximately $28 million
with management projecting a 9% increase for 2017.
American Golf’s owned/leased properties include 19 private courses and 48 public courses. The
private courses are operating at about 82% capacity (membership), which has increased each
year since the purchase. American Golf created a “Players Club” for the public courses and
membership has doubled over the last year to 38,000 members. Each member pays $35 per
month to have access to the courses. This program has helped drive the improvement in the
bottom line over the past couple years and should continue to into the near future.
Golf went through a period of overbuilding in the 2000’s that resulted in overcapacity. Over the
last several years the number of courses has declined from a peak of 16,200 in 2006 to 15,300
today. Meanwhile, rounds played peaked in 2000 at 518 million but has stabilized in the range
of 460 million over the last several years. Certainly the trend toward fewer courses and stable
play is a decent backdrop for continued moderate improvement in this side of the business.
Additionally, there may be opportunities to purchase, lease or manage new courses and improve
cash flows like they have done running the existing portfolio since 2013.
Capital Structure
When DS fully liquidates its remaining debt assets it will have approximately $250 million in
cash. Debt will consist of $102 million term loan at labor plus 4.70% with matures in June 2019
with two one year extension options available, a $52 million in junior subordinated note and $62
million in several preferred stock issues with a coupons averaging in the range of 8.5%. The
current market cap is $270 million. Debt plus equity minus the cash puts the current EV at $236
million. With $250 million of cash on the balance sheet, DS will have plenty of pre-funded
ability to grow the Drive Shack concept over the next several years.
Future Potential Value
Let’s look at what DS might look like in five years.
American Golf - The existing golf business generated $28 million in EBITDA in 2016 and is
projected to generate around $30 million this year. Golf course companies trade in the private
market for 8X to 9X EBITDA, putting the value around $255 million. To be a bit conservative
we will hold that value at that level for the five year analysis and only add free cash flow to the
future value, which for a five year period we put at $40 million.
Drive Shack Concept - Making the assumption that the Drive Shack economics are as forecast by
the company, in five years I’ll assume they have ten units up and running using $200 million of
the current cash (existing and soon to be converted). Using the lower range of management
estimates I’ll assume these units generate an average of $3.5 million run rate each of EBIDTA
for a total of $35 million. Given the economics and growth profile I give this business a multiple
of 12.5X, for a value of $440 million.
So in total, $255 for American Golf, $440 million for the Drive Shack business and $130 million
in cash ($50 million of original cash, $40 million in free cash from American Golf and $40
million in free cash from Drive Shack, equaling a total asset value of $825 million, less $216
million in debt and preferred stock, leaves an equity value of $609 million ($8.70 a share)
compared with a value today of $270 million ($4.00 a share) a return of 117%.
Fortress Investment Group (FIG) controls DS through at management agreement. Wes Eden’s
the founder of Fortress, has purchased 7% of DS in the open market since December 2016. This
is not a large part of his net worth by any means but does signal his interest in the DS concept. It
could be said that the management agreement is favorable to Fortress. They were paid $10
million in 2016. The management agreement however does have a cancellation provision, so
engaged shareholders could have some opportunity to negotiate better terms or a change
From the 10K - Drive Shack Inc. is party to a Management Agreement with FIG, LLC, its
Manager and an affiliate of Fortress, which provides for automatically renewing one-year terms
subject to certain termination rights. The Manager’s performance is reviewed annually and the
Management Agreement may be terminated by Drive Shack Inc. by payment of a termination
fee, as defined in the Management Agreement, equal to the amount of management fees earned
by the Manager during the 12 consecutive calendar months immediately preceding the
termination, upon the affirmative vote of at least two-thirds of the independent directors, or by a
majority vote of the holders of common stock.
As the balance sheet get further cleaned up over the next year as the remaining debt assets are
sold the company will present a more easy to follow picture financially and a cleaner narrative.
That along with new strategy, focus and potential buzz and good results surrounding the opening
of the first Drive Shack could provide a boost to the stock. Longer term, incremental gains in the
traditional golf course business along with a high growth Drive Shack business could result in a
very good return (100% plus) over the next five years.


I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Opening of the first Drive Shack in Orlando, FL in late 2017

Transition to a balance sheet soley related to golf.

Growth of Drive Shack concept

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